Tuesday, April 28, 2009

Newspaper Circulation - Ending March 2009

Lest there be any doubt regarding the decline of the newspaper, check out the latest figures from the Audit Bureau of Circulations. Daily average circulation for the 395 newspapers tracked fell 7.1 percent to 34.4 million from 37.1 million a year earlier. Amongst some of the larger metro newspapers, including the NY Post, Atlanta-Journal Constitution, and Newark Star Ledger declines were in the upper teens. In fact the only major newspaper to experience a year over year increase was the Wall Street Journal. USA Today, the nation's largest paper, saw circulation decline by 7.5% during the period.

Sunday, April 19, 2009

Index of Global House Prices

As demonstrated in the chart below (courtesy of the Economist), house prices across the globe continue to remain well above trend levels, with Spain being the most out of whack. Relative to incomes, the US is starting to approach long-term averages, though I imagine we will continue to overshoot on the downside given excess inventories and rising unemployment. Home prices in Japan look particularly cheap - may be a nice time to look at real estate opportunities in that country, particularly with the Japanese stock market hovering around 25 year lows.

Thursday, April 16, 2009

US Capacity Utilization - Making New Lows

Yesterday's CPI reading, which showed the first year-over-year decline in consumer prices in the last 55 years is hardly suprising given the very low capacity utilization rates of the US economy. As demonstrated below, capacity utilization dropped to 69.3 in March breaching the lows experienced in the deep 1981-1982 recession. After observing such data, it is very clear why the Federal Reserve is so concerned about deflation. This is particularly the case given the rapid deceleration since last summer. However, what I find most striking about the chart is the sharp increase in utilization rates following each of the last three recessions. While deflationary fears give the Fed cover to inject stimulus into the economy, it will be equally as important for them to put on the breaks once evidence of recovery begins to take hold. If not, we could experience inflation rivaling that of the late 70s. Supply destruction across many segments of the economy (energy & commodities in particular) will only exacerbate this inflationary spike.

While I hope Bernake has the foresight to raise rates exiting the current recession, politics and a desire to keep his post beyond 2010 may cloud his better judgement.

Monday, April 13, 2009

Growth in China's Foreign Reserves Slowing

China's foreign reserves grew by only $7.7 billion in Q1 2009 vs. $153.9 billion in the same quarter last year. The country's reserves actually declined by $32.6 billion in Jan and $1.4 billion in Feb before rising by $41.7 billion in March. Despite the slower growth, China's foreign reserves stand at $1.95 trillion, with approximately 2/3 invested in US government and agency-banked securities.

The slowdown in China's reserves has huge implications for the US since we are so reliant on them to help finance our growing deficits. Even if the Chinese remain committed to investing in US government securities, dwindling growth in their reserves suggests they may not have the firepower to do so - certainly not enough to offset the impending supply necessitated to fund our deficits (estimated at nearly $1.8 trillion in 2009 as per the CBO). This could significantly pressure treasuries, which up until now have benefited from very low yields thanks to the recycling of foreign currency reserves back into the US (particularly China). Waning demand for treasuries translates into inflation down the road.

Tuesday, April 7, 2009

IMF Selling Gold

Gold has experienced some near-term weakness as the IMF prepares to sell up to 403 metric tons of gold to fund part of its $50 billion aid program. With 3,217 tons of reserves, the IMF is the world's third-largest official holder of gold behind Germany and the U.S. As such, there actions clearly will have ripple effects throughout the market. Despite the near-term technical issues, the long-term trends for gold remain firmly intact and I would imagine that we will see much higher prices several years from now. Further, countries that remain vastly underinvested in gold stand ready to absorb much of this inventory that hits this market. As noted in prior posts, China is considering increasing its gold reserves from 600 to as much as 4,000 metric tons, which could have signficant long-term implications for the price of gold (not to mention the massive amounts of paper currency being printed by the developed world).

Too Many Restaurants?

Pretty scary chart that shows the significant boom in the restaurant industry over the last 15+ years. Without question, there will be a pretty severe contraction as the current recession gets deeper.

Monday, April 6, 2009

Pricing Revolution in Online Advertising

As demographic profiling and behavioral targeting becoming increasingly more sophisticated, the CPMs (cost per thousand impressions) charged by online publishers should continue to drop (i.e. why pay the WSJ $60 per CPM when you can reach the exact target for $3 per CPM on a less-trafficked website). Google through its acquisition of Doubleclick, Quantcast, Valueclick (VCLK), and ComScore (SCOR) are amongst the best positioned companies to benefit from this evolution in the online media world.

This BusinessWeek article entitled (“A Pricing Revolution Looms in Online Advertising”) describes the phenomenon of “retargeting” whereby web users receive similar ads as they bounce from one website to another. The strategy better targets the advertiser’s ideal customer at a substantially lower cost than the traditional model of buying advertising space on a highly trafficked and specifically targeted website.

Here is a snippet of the article below:
Marketers can use these tools to reduce online ad costs dramatically. Say your company sells "Bidgets," a luxury product. Ordinarily you'd run banner ads on FancyOldSite.com, which reaches your target audience of men and women who earn more than $150,000 a year. The ads are expensive—say $60 per thousand impressions—but they reach your ideal audience.

You might instead embed a snippet of code in the banners that run on FancyOldSite.com. This places so-called cookies on the computers of everyone who sees the ad so you can track them when they visit other Web sites. That's where retargeting kicks in. Every time a former FancyOldSite.com reader who saw your ad visits other Web sites, your Bidget banner ads pop up again. The banner ads reappear because the cookie on that computer flags a retargeting "network" of thousands of sites, saying "This desirable reader is back." These new ads are cheap—$3 CPM—but they reach exactly the same audience.

CBO Analysis of President's Budget

The CBO just released their analysis of the President’s budget vs. their baseline 10-year forecast. The chart below does a nice (but scary!) job summarizing the persistent deficits facing our country. Long story short, the CBO projects the current year deficit to reach 13.1% of GDP based on the President’s proposed budget in 2009, and shrink to about 4-6% through the remaining years of the forecast period. In aggregate, the President’s 10-yr forecast contemplates cumulative deficits of $13.7 trillion.

Saturday, April 4, 2009

Spain Bails Out First Bank

On March 30th, Spain's central bank announced the bail out of Caja de Ahorros Castilla La Mancha (known as CCM), marking the first time a Spanish financial institution has been rescued since the current financial crisis began. The government will provide the regional bank with up to 9 billion euros to keep it afloat.

Although small on an individual basis, I suspect this will the first of many bailouts as the Spanish housing market undergoes a fierce correction. As noted in my January 23th post discussing the recent spike in euro-denominated credit spreads, the bubble in Spain's housing market far exceeded that experienced in the United States. At the peak in 2006, approximately 750,000 homes were built in Spain, nearly half the number built in the US, despite Spain having a population 1/7 ours.

As this Economist article discusses ("The "Mess in La Mancha"), the building boom in Spain cooincided with the growth in cajas, small, mutually owned banks controlled by depositors, employees, and politicians. The cajas grew their market share of loans from 10% to 50% and continued to lend aggressively in 2006 and 2007, even as Spain's larger banks pulled back. As such, up to 20% of the cajas' assets are in the form of construction loans to struggling property developers, with non-performing loans beginning to spike (see chart below).

If problems in Spain's housing market aren't enough, unemployment is now projected to eclipse 20% in 2010, placing further strain on the country's financial institutions. Just as the July 2008 bankruptcy of Martinsa-Fadensa, Spain’s largest property company, served as a canary in the coal mine for the ailing property sector, so should CCM be viewed as a harbinger for more pain for the nation's banks. As such, I remain short Spain and believe that the country's economic struggles have only begun.

Wednesday, April 1, 2009