Punchline May 09

8/3/2019 Punchline May 09

1/21

ABRAHAM GULKOWITZ

[email protected]

2009 issue 8May 11, 2009

Turning the Corner, or Turning a CornerSome seeming stability or improvements in some economic releases have helped unleash a down-in-quality rally, with especially large returns in the h

yielding asset classes. Signs that capital markets were healing helped to boost credit and equity; so did a significant reduction in the various ma

defensive posturing. What we seem to have here is some disproportionate celebration of the financial system and the economy avoiding a train w

Although the stress tests have been touted as an important milestone on the way to economic recovery, too much credence has been attached to

public exercises. While economic stimulus and unprecedented government support has been central to markets finally gaining traction, the outloo

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

international economy, we may witness long-lasting attitudinal shifts in spending and borrowing patterns, intense competitive pressures in any reco

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 a

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.

Japans March exports were down 46%, but that still b

February. Overall, Asian trade figures have bounc

somewhat, suggesting their previous drop resulted froinventories and finance, not a deeper problem. This is not t

end of the recession, but maybe the end of its ugliest stage

Swine flu is last thing

fragile global economy

needs

Investor confidence in financial markets is returningafter 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.

Japan Girds for Record ContractionJapan's economy is expected to shrink 3.3%

in the current fiscal year.

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.

Governments become lenders

and spenders of last resort

GM Shutdowns to Weigh onEcon Data in Months Ahead

As we alter our definitions of valuation,our notions of stress change...stress or

stretch tests.

Auto Sector

Too Many Back-Seat DriversComplex solution will offer no quick fix

Second half inventory bounce

It was a setup Markets jump

as fears ebb about bank 'stress testsThe 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 Out.. The editors at Dow Jones are

hinting what everyone else already knew: G

going to be replaced in the Dow Jones Indu

Average and replaced sooner rather than la

Crude Oil climbs to over $58 ag

Rising bond yields loom over rally


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May 11, 2009

In This Issue

Households?Numerous questions for a once free-spending sector whose housing and

mortgage finance machinery have not just collapsed but are severely dama

The boom cannot and should not be recreated (

You Cant Handle the Truth (p

The DNA of Business (pg

Trust Me on This (p

Dislocations (pg

Credit Concerns (p

The New Geography of Business (p Pumping Iron (p

Real Estate and Construction (p

More Construction Data (p

Media ClipsLots of pressure points (p

Break Down in Europe (p

Will Life Ever be the Same? (p

Turning the Corner, or Turning a CornerSome 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 andequity; 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, toomuch 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 corporatedefaults 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.

(pg 1)

In This Issue (pg 2)

Searching for Bottoms (pg 3)

U.S. Job Picture (pg 4)

DUI (pg 5)

Dimensions of Risk (pg 6)

Since You Asked (pg 7)

Engines of GrowthThere 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

international affair (pg 8)

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.

Contact information:

Abe Gulkowitz

phone: 917-402-9039 email: [email protected]


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May 11, 2009

Searching for Bottoms

The nation's shelves are bare and that could

good news for the economyEven when inventories bottom out, companies are unlikely to g

production boom. Most forecasters expect them only to start cran

merchandise at levels that make sense given an economy with weak

from consumers. There are few signs that consumers are eager to bugoods given the continued weak job market, dysfunctional financial

and steep decline in housing and stock market wealth.

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

The Anti-Debt Mkt Positioning

Technology Stocks Are Favorites in S&P 500 on Zero DebtTechnology 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.

A broad range of macro economic indicators is com

somewhat less negative in recent weeks as compared tNovemberFebruary period, when the economy literall

off a cliff. But any careful investigation into the undenumbers and industry specifics continue to suggesteconomic recovery remains in a very precarious state

recovery path will not be a straightline.

Clearly the recent pace of decline in many indicacan't continue indefinitely; nevertheless, one shonot view slower rates of decline or small upwbounces, in and of themselves, as evidence of a tbottoming.

A world of reduced

counterparty risk

Stimulus policies boost expectations

Taiwan Export Values Fell in April

Standing in contrast to marketenthusiasm over a demand recovery,

April exports missed expectations by

dropping -34.3% YoY in USD terms


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May 11, 2009

U.S Job Picture

A 72,000 jump in government payrolls tempered the ove

jobloss figure. Government employment was bolstered

the hiring of about 60,000 temporary workers in preparafor the 2010 census and U.S. Labor Secretary Hilda Solis this figure would fluctuate in the months ahead. Privsector employment fell by 611,000 in April after a 693,

decline in March, the department said, which curbed soof the optimism over the report. Still, the data was no

bleak as financial markets had expected and offered freshest sign that the intensity of the recession, now in

17th month, was starting to fade.


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May 11, 2009

D-U-IUnder the Influence

Sentiment improves Initiatives by the Federal Reserve and Treasury were

enough to instill confidence that Washington is headed in the right directiontoward 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 andboosting 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

Banking on policy effectivenessMarket sentiment is on the mend and in the short term it

suggesting that we should expect less of a pullback in consum

spending and an end to the freefall in macro stats. The seve

break in economic activity has been met by a wide-ranging avigorous fiscal and monetary response. Much of this stimulus

still in the pipeline, which is a major positive for the outlooHowever, on the downside of this effort, the outlook may yet s

some severe disappointments and serious questions will st

haunt regarding the long-term. This is especially disconcerti

regarding the massive budget obligations that will be slow

recede.

Markets infected by exuberance pandemicMany stocks have erased this years losses. USTreasury yields are above 3%. Killer flu? No worries.Negative growth? Not for long. A kind of flight fromsafety is underway. It shows the medicinal power ofmonetary and fiscal injections. But painful side effectswill follow.

GMAC will provide dealer andcustomer financing, receivingliquidity and capital support fromthe US Government.

JUST BELIEVE

Risk Taking on the ComebackThe 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.


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May 11, 2009

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 conditioremain strained, an April survey of loan officers by

Federal Reserve found a smaller number of banks w

tightening loan standards compared with a few mon

ago. Glimmers of improvement were most notable

commercial lending. The Fed said 40% of the

domestic banks it surveyed between March 31 and Ap

14 said they tightened standards on commercial a

industrial loans, a smaller percentage than the 65% th

said in January that they tightened standards.


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May 11, 2009

Since You Asked... Reality Check !

Top revenue sources forstate and local governmentsSources: U.S. Department of Commerce,

Bureau of Economic Analysis;

Q1 09, compared with the

same period last year:

-----------------------------

Federal grants: 15%

Income taxes: -11%

Property taxes: 2%

Sales taxes: -2%

Other taxes: 2%

Rating agencies downgraded $71bn worth of HY bondsduring the month, bringing cumulative LTM volume of netdowngrades to $712bn or 102% of the HY index size. Thisvolume matches the peak reached in the last credit cycle.Given that we are still in early stages of this cycle, it appearslikely that HY will breach its previous record in months tocome. Separately, rating agencies downgraded $55bn offormer investment grade names into HY, making it the secondmonth in a row of $50bn+ in such crossover downgrades. OnLTM basis, volume of fallen angel transitions reached $234bn,of a third of the HY index size, again reaching the highs of lastcredit cycle. Most notable fallen angels of April included CIT,Macys, JC Penney, US Steel, and Colonial Realty. There wereno rising stars this month.


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May 11, 2009

Engines of Growth

UK Govt to launch oldfornew

vehicle scrap schemeThe 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 Germanyand 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 Private Lending Struggles tMoney into Consumers Ha

Strong China Growth?

But China Power Output LikelyDropped 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.

South Korea surprise it posted a +0.1%

reading in 1Q real GDP, which compared toa consensus view of 0.2% and a big swing

from the 5.1 print in the fourth quarter.

China in Rebound Biz Survey:

Key Index Back Up to Q1 08 LevelsOverall Chinese business conditions posted their strongest showingin April in more than a y ear, led by a sharp improvement in corporatefinancial positions, the results of the April China BusinessSentiment Survey indicate. The headline overall business conditionsindex jumped to 61.51 in April from 54.20 in March, the highest ithas been since March last year.

German economy to shrinkGermany's economy will shrink by 6% this year and continue to contract in2010 according to a forecast from the country's leading economic thinktanks. The estimates, compiled by eight institutes for the German

Economy Ministry, also predicts that the rate of unemployment will hit10% next year. The gloomy forecast chimes with that of the IMF, whichshows the German economy contracting by 5.6% this year. This is fasterthan 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 systemand financial markets, but may see a return to growth

next year, EU Economic and Monetary Affairs

Commissioner Joaquin Almunia said Saturday.

Worst back-to-back US GDP performance in 5 DecadesNot only did 1Q real GDP contract sharply - at a 6.1% ann

rate versus consensus expectations of -4.6%, it followed on theels of a 6.3% decline in the fourth quarter of 2008. Th

marks the worst back-to-back performance in 50 years.

Canada purchasing managersindex jumps to 53.7 in April,a remarkable 10-percentage point jump overMarch's reading and a suggestion that thecountry's beleaguered manufacturing sectoris on the mend.


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May 11, 2009

Households Brave New World

Trauma in Housing California and Flmetropolitan areas led the U.S. in foreclosures in thequarter as unemployment and falling property v

deepened the housing recession, RealtyTrac Inc. said.Vegas had the highest overall rate of foreclosure fiwith 4.5 percent of households receiving a defau

auction notice or being seized by a lender. California hcities among the top 25 with the highest rates. Florida

eight while Nevada and Arizona each had two, accordIrvine, Californiabased RealtyTrac, a seller of default Unemployment is bound to get worse, Stephen M

professor of economics at the University of NevadaVegas, said in an interview. The real issue is when

prices bottom?

Consumer delinquencies on the riAccording to Moodys, the amount of bad US credit card

written off as uncollectible rose to a record high (data b

1989) of 9.3% annualized in March from 8.8% in Feb

Moodys is also reporting that the amount of loan balanwhich a loan balance was 30 days past due rose to

annualized from 4.57% this time last year.

Local taxes Bite

After 14% Water Rate Hike,

Another 12% Increase on HorizonThe 14 percent water rate hike on tap this yearcould be followed by another walletcrunching

12 percent increase in 2010. That wouldrepresent the fourth doubledigit boost since

2007 and would propel the annual water bill fortypical 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

Food stamp participation surgingAnd, as another sign of the stress hitting the consumer sector, we see that

food stamp participation jumped 1.1% in February, continuing a string offour consecutive monthly increases, and is running up 17.4% on a yearoveryear basis. Nearly 15 million US households, or 13% of the total, are

now participating in the food stamp program.

More signs of stress for

high-end consumers


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May 11, 2009

YouCant Handle the Truth

Were US Auto Sales a Bubble? Production Indices to CrashGMs is to shutter production for the balance

of the second quarter; that means 20% of vehicleproduction will be shuttered

Prof. Paul Krugman Worriesabout L-Shaped RecessionThe country may experience some economic growth in

latter half of this year, but don't expect the rate of job losse

abate anytime soon, noted economist and recent Nobel P

laureate Paul Krugman told an audience of economists

area business leaders Friday at the University of Cincin

"There are two kinds of recessions that are bad - those

take place because of financial crises, and those that

synchronized around the world," he said. "In both cases,

recessions tend to last longer and be deeper. Right now, w

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

shaped recession. We level off but we don't get the recov

We hope it isn't, but it has all the markings of it. This lo

like the kind of slump that has all the markings of wh

normal recovery forces are very, very weak.

Why, after all, did bankers take such huge risks? Beca

success offered such gigantic rewards.... Now we're see

similar (outrageous) rewards offered to people who can p

their risky games with federal backing.

GM to Cut 21,000 Jobs, Eliminate Pontiac

Mafia and underworld economy thrives

in global financial meltdown

Firms Warn of China ProtectionismForeign businesses in China are complaining about

rising protectionist policies in new spending.

Support coming from humiliatedand desperate policymakers

For many firms the worst case needsto become the base case scenario

Likely to see more evidence that thebig problems with commercial real loans. But heavy losses on such assetswould cause even deeper misery, andfailure, at small and medium bankamong the giants in the first round "bethey tend to have disproportionatelyexposure."

Public scrutiny blunted reallytough bank stress tests


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May 11, 2009

The DNA of Business

Workouts to Define Recovery

supermarket giant capitalizes

on booming weapons sales

German badbank scheme looks ingeniousBanks get funding to hold toxic assets to maturity, thus avoiding

fire

sales. They only take expected hits as they materialise. Andthe state provides catastrophe insurance, protecting banks in

case things are worse than expected.

GE Exec Says Economic Crisis Resetting CompaniesThe 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.

Just trading down

Discount Retailers Score in Down Economy

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

Low chip and TV sales hit SamsungSouth Korea's Samsung Electronics has reported a 72% drop in quarterly profits aftermore losses at its microchip and LCD television divisions. For the three months to 31March, 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 thegroupwide losses reported for the last three months of 2008. Losses at itssemiconductor unit hit 650bn won between January and March. The loss at the LCDtelevision 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 itsmobile phone handset business rose 2% to 940bn won as sales held up.

G.E.s Breakthrough Can Put 100 DVDs on a DiscGeneral Electric says it has achieved a breakthrough in digital

storage technology that will allow standard-size discs to hold

the equivalent of 100 DVDs.

Newcomers Challenge OfficeSupply StalwartsWith 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.

Record slack in the economy

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.

RETAIL CLOSINGSA 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.

Avon Posts Sluggish SalesAvon reported a 36% drop in qu

profit as weak North American vand the stronger dollar weigh

revenue. Its shares sank.

Moody's cuts Weyerhaeuser'sdebt ratings to junk


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May 11, 2009

Trust Me on This

Bank stress tests shouldntbe open to debateThe 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 outrageFour of the top five highest paid

executives in 2008 ran companieswhose stocks underperformed themarket.

Canadian Dollar Rises to

Highest Since NovemberCanadas 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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May 11, 2009

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 toring 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 ofa bankruptcy have been identified.

Mexican Peso, Markets Tumble

as Swine Flu Outbreak Grows

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 amountof gold it holds to more than 1,000 tons. China has the biggest foreign exchange reserves in theworld, 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

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.


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May 11, 2009

Credit The Big Bluff

Beware part of the Highyield creditindex steepening in price terms can beattributed to a series of defaulted namesexiting the index over the past weeks

The credit market improvements in 09, while real inthe sense of having reopened issuance and improvingliquidity, overstate the degree of fundamental creditrepair as that liquidity rests on an artificial foundationof government intervention rather than a significantreduction in credit risk.

The global default rate rose to 7 percent at th

of March from 4.1 in December, with the nof defaulters the greatest for a single month

the Great Depression, according to Moody New York-based ratings firm expects the

default rate to peak at 14.6 percent in the

quarter of this year, it said earlier this month.

81% of proceeds from HY issuance so far this year wasused to refinance existing indebtedness, primarilyloans. This compares to a normal level of refinancingactivity in the 50% range.

some recent doubledip bankruptcies

show that investing in distressedcompanies isnt foolproof

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, theUS banking system (and the European even more so) willneed more capital still down the road stress tests or not.

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.

FAILURE DOESNT SCARE ME Henry Hu from Texas University pthe empty creditor phenomenon to explain why some lenders prefer to hold

force a bankruptcy seemingly against the companys and thus their own best inteshort, creditors with enough credit default swaps may simultaneously have rights and incentives to cause the debtor firm's value to fall. And if bankruptcy

the empty creditor may undermine proper reorganization, especially if his internoninterests) are not fully disclosed to the bankruptcy court. See: Distresse

Investors Dictate The Terms: How Big An Issue Are 'Empty Creditors' With CDS HDynamics of this kind make defaults more likely and need to be taken into accouforecasting the severity of the current corporate default cycle.


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May 11, 2009

The New Geography of Business

Canada's leading indicators fall againCanada'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.

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 slumpapproached 50 percent. Imports also were down in March, falling36.7 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.

China PickupEconomic 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.

HK Trade UpdateChinas recovery insufficient to offset weakness in the rest of theworld 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 Japandropped 19.5% (13.3% in JanFeb) and those to Germany fell 11.9%

(7.2% in JanFeb). Exports to China fell 19.2%, improving somewhatfrom the 23.5% decline in the first 2 months, but this modest

improvement was not sufficient to offset the weakness in the rest ofthe world.

Shift to China PPG Industries Inc, the worlds secondlargestpaint and coatings maker, expects China sales to maintain doubledigit

growth this year as demand from auto makers grows and it expandsmarket share. The USbased company, which is reducing output andcutting more than 8 percent of its workforce amid weak demand, is counting

on Asia, and China in particular, as its growth engine.

Poland Says Zloty WeaknessMay Force Euro Entry DelayPolands 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 pre-

euro exchange rate mechanism and not on dates, theWarsaw-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 riskRadovan Jelai: Effects of the financialcrisis on Central and Eastern Europe

Speech by Mr Radovan Jelai, Governor of the National Bank of

Serbia, at the "Global Crisis i n 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

Unemployment in Spainjust set a national

record at four million people, a shocking

17% rate. Yet the government isnt even

considering serious reforms of the stultifiedand discriminatory labour market.

The Bank of Japan believes that the natio

potential growth rate likely has fallen -- and

have dropped sharply -- as a result of the impact of the glrecession on the export-dependent economy. L

productivity is still relatively low in Japan, particularly in

non-manufacturing sector, while capital stock is not rising

to cautious business planning, both of which are hold back

nation's potential to grow and limit chances for improving

standard of living. In January, BOJ Governor Mas

Shirakawa estimated Japan's potential, non-inflationary gro

rate had fallen to between 1% and 1.5% from its long-

estimate of 1.5% to 2.0%.


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The PunchLine.

16

May 11, 2009

Pumping Iron - Old Economy

New Challenges

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 therecent 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 weakresulting in additional heavy discounting.

Steel Industry Woes Signal

Shakeout, Price CutsWeak 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.

Chemicals 2009 to be challenging for mostcommodity 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.

MaritimeIdle Box Fleet GrowsIdled 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 AXS-

Alphaliner. The idled vessels represent 10.6 percent of the

world fleet against 10.4 percent on April 13.


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The PunchLine.

17

May 11, 2009

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 infusionsfrom borrowers

Corporate RE Plays New Role in Tough TimesIt'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.

New York City - As many as 90,000 city apartment units could

go into foreclosure as the housing crisis spreads from single-

family homes to rental properties, city officials warned.

Square Feet: New York Office Landlords Go SmallManhattan building owners are trying to make dealsby chopping large spaces into smaller units andfinishing off the space before a tenant is signed.

The time bomb of unfundcommercial mortgagesIts not only buyers and sellers wh

stuck in the dump of the econ

recession. Holders of leveraged pro

are watching their values drop, an

threat of default impacts not jus

propertybut all.

New York Purchasing Managers IndexRelease 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.

Stress Test Results Bode Ill

for Real Estate Finance

REIT spreads continue to rally hard, and more may be on the way o

all of the 1Q09 earnings releases and conference calls are digested.

technical situation remains very favorable as REIT liquidity

completely dried up with exponentially more buyers than sellers at

now tighter levels, stimulated of course by the flood of secon

offerings and other capital moves as REIT management teams do w

they sometimes do well manage risk. The cat is clearly out of the

regarding REIT bonds, and just as we saw an over-reaction on

downside in November and December, we are potentially set up fo

over-reaction on the upside considering still very weak fundame

trends.

CMBS Delinquencies Soar in Q1Late payments on CMBS loans have tripled,

says Reis Inc., while Fitch reports a 500%

gain in the volume of specialserviced

loans.

Across the country, local governments are facingrising complaints about environmental and safety

hazards from stalled construction sites where work tobuild new developments has been halted.


18/21

The PunchLine.

18

May 11, 2009

More U.S. Construction Data


19/21

The PunchLine.

19

May 11, 2009

Media Clips

Monthlies' May Ad PagesAre Again Lousy (-25.97%)Press accounts accompanying last week's

release of Publishers Information Bureau

first-quarter data were full of Armageddon

U.S. Newspapers Decline in Circulation AcceleratesThe decline in U.S. newspaper weekday circulation almost doubled inthe sixmonth period through March as more readers got their newsfrom the Internet, according to the Audit Bureau of Circulations data.

Daily average circulation for 395 newspapers fell 7.1 percent to 34.4million from 37.1 million a year earlier, Schaumburg, Illinoisbased

ABC said today in an email. Circulation fell 3.6 percent in the yearagoperiod. Of the top 10 newspapers, only News Corp.s Wall Street

Journal increased circulation. Gannett Co.s USA Today, the largestU.S. newspaper, lost 7.5 percent and the New York Post had thebiggest slump with 21 percent. Publishers including New York

Times Co. and Gannett have boosted newsstand or subscriptionprices to help offset the circulation declines. Five publishers sought

bankruptcy protection during the period and printed versions of theSeattle PostIntelligencer and Rocky Mountain News were halted.

Sunday paper circulation fell 5.4 percent in thelatest 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 declinesNew York Post drops 20%, while Daily News sees 15% fall off.

Lights out for film firmsGlobal 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

BIA Advisory Services forecasts a 15% drop, or $3 billion in TV stations adver

revenues for 2009. Total local and national spot advertising revenues will land a

billion by year's-end -- down from $20.1 billion in 2008. Although 2008

presidential election and Olympics year, BIA said the marketplace sank 6.6%, cau

the vortex of a rapidly weakening economy. For a two-year period from 2007-2009

notes the industry has seen an overall 21.2% decline in advertising revenues.

According to the researcher TNS Media Intelligence, US ad

spendingremained weak in March after a 9.2% drop in thefourth quarter of 2008. Newspaper ads sank 17%, magazineads fell 14%, and radio advertising dropped 15% accordingto the group.

Good thing Sirius XM Radio resolved thedebt issues that threatened to drag it into

bankruptcy earlier this year; thecompanys clearly got other things to

worry about. Like fleeing subscribers.Reporting a firstquarter net loss of $236.6million, Sirius said that anemic car sales

had led to its firstever decline in netsubscriber additions. And it was a nasty

decline. Sirius added 1,338,961 newcustomers. But it lost 1,743,383.


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The PunchLine.

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May 11, 2009

Breakdown in Europe?

German Institutes See Economy

Shrinking Record 6% This YearGermanys 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.

UK Car Production Plunges; Down 51.3% y/yLONDON - 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 yearand 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%.

Spain's unemployment rate leaps to record highAccording to the country's National Statistics Insti

record high figure of 17.4 per cent were unemplo

the first quarter of the year. Unemployment leap13.9 per cent in the fourth quarter of 2008, the b

quarterly jump since 1976. Joblessness in Spai

almost doubled in a year....

Euro nations told 'cut deficits'The EU orders France, Spain, Ireland

Greece to reduce their budget defi

and take control of public finances.

EU/EMU Confidence & Economic Sentiment IndexRelease for: April 2009; Source: European Commission, BrusselsResults 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

Housing market woes CEE

Now growth of credit to households is reversingThe 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.

Detroit Of Europe' Hit By Slowing Auto ProducCentral Europe had become 'Europes Detroit' in term

high concentration of auto production due to cheap buskilled labor, EU membership, and good transport linthe west

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).

More Pointing to Some

Recovery Even in 2009

Eurozone rates are cut to 1% and the European Central

Bank says it plans to pump about 60bn euros into theregion's economy.


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The PunchLine.May 11, 2009

Will Life Ever Be the Same?

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