BUSINESS INTELLIGENCE BRIEF

January 28, 2010

Housing Market – Part Two – New Home Sales Not so Encouraging

The report from yesterday was almost satisfying as far as the housing sector is concerned. There is spotty
evidence that the market has started to unfreeze in parts of the country but yesterday’s data was sobering and
reminded people that there is much distance to cover in the housing sector before any real improvement can be
noted. The new home sales numbers were unexpectedly grim and this has analysts back in foul mood as
regards the future of the market. Even with this data there is a sense that there will be some improvement
before the year is out but there is also more proof that the recovery will be anything but smooth or universal.
New home sales in December were off by 7.6% from the previous month and this meant that sales for the
year were down by over 22%. The December fall was after an even more precipitous drop in November of
9.3%. There are many factors that are seen at work in this decline. One of the most important is that the
weather was anything but favorable to the new home market in either of these months but there was also the
impact of the rising foreclosure situation and uncertainty over what would become of the tax credit that had
been fueling whatever demand existed.
If one takes the bad news that came yesterday and combines it with the better news that emerged at the start
of the week, one is left with a pretty chaotic picture but one that is consistent with the assessments that
analysts have been making for months now. The overall housing market is making slow progress and looks to
have left much of the worst behind it. There are parts of the country that have started to see real economic
rebound and that has carried over to the housing sector in these areas. At the same time there are parts of the Details on page 4.
country whose economic situation has scarcely improved and that has also carried over into the housings
sector.

Analysis: The drivers remain as they have been for some months. The biggest threat to the new home
market is the cascade of foreclosures that have moved in cycles through the market. Just as the speculative
homes had started to move out of the pool there was the first wave of home owners affected by their
inability to refinance and their inability to handle the higher mortgage rates they faced as their loans
adjusted. Now the third wave is making its way through the system. This is the one that has been caused by
the jobless situation and the fact that many homeowners are now in dire financial distress. This is the wave
that has the most serious implication for the new home builder as each new surge of foreclosed homes on
the market dilutes the base of potential buyers a little more.
The experiences of the home builders have been as divergent as for any other sector in housing. The
recovery has been noted in those parts of the country that saw limited exposure in the bust but there has
also been some movement in states like California as San Diego and San Francisco have seen renewed
interest in new home activity.

What is the State of the Union Anyway?

The reference to “union” may be awkward these days as unity seems to be in very short supply. The divisions within Congress are as
bitter as they have been in years and the talk of bipartisanship has faded to the point that it is only a term used in derision. The GOP has
decided that they will be far better off electorally by positioning themselves as the not-so-loyal opposition and they have been
exceedingly united in their position as critics of the Obama team and its plans. The Democrats have been unwilling to reach out to even
the moderate Republicans as they believed they could run the agenda without them. That calculation changed with the loss of the super
majority in the Senate. Now the focus of the House and a third of the Senate is on the elections later this year and that makes for a
nervous set of politicians.
If one asks the average American what the state of the union is the most likely response will be some utterance of disgust. The signs of
economic recovery may be enough to gladden the hearts of the economists and the analysts in the room but the average person feels beset
by financial attacks. They have watched their investment portfolios deteriorate, their savings evaporate, and their jobs eliminated or
threatened. They worry about the employment situation and they fear future inflation. They want the government to bail out Main Street
but they worry about larger deficits. The sense of angst and anger is profound and the mood of the electorate has soured. The vote that
brought a Republican to the Senate from Massachusetts for the first time in decades was a result of anger, frustration and confusion.

(Continued)

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 Analysis: It was into this maelstrom that President Obama waded last night in his first state of the union address. This is a peculiar
institution that has both too much and too little importance in the political process. It is not important in the sense that nothing
substantial is connected to this other than that the President is speaking to the people. But this is what the President has done in many
other forums and repeatedly as he has been far from an uncommunicative leader. There is no special launch in Congress to coincide
with the speech and no special election that follows it. It is just a speech but yet it isn’t. The state of the union is invested with
importance by the press and by tradition. It is important because we are all agreed that it is and the President uses the “bully pulpit” to
its maximum effect.
The theme last night was the economy and it could be nothing else given the developments of the last few weeks. The polls suggest
that voters are angry at the priorities that have been set by the President and by Congress. Health care is in dire need of reform and
attention but the debate has become far too bloody and complex for most people to digest. It has appeared to most to be much less
about health care and much more about insurance reform. That is an important element of the issue but it is far from the only one.
Time spent on climate change at Copenhagen was considered a waste as nothing resulted from the meeting and the public has been
frustrated with other high profile (but unsuccessful) efforts such as landing the Olympics for Chicago. What the polls reiterate over and
over is that “it is the economy – stupid”. Priority number one to the voter is jobs and that is what the speech focused on. The challenge
is that governments are notoriously bad at making jobs. They can provide them in the short term but the job creating engine in the
country has always been the small to medium sized business – Main Street as opposed to Wall Street. The government efforts thus far
have been weak when it comes to this but according to the speech, that is about to change. There will be a renewed effort to find ways
to help small business answer the call. This will take the form of tax credits for hiring but the details have yet to be worked out. There
will be an expanded presence for the small business administration and the head of that bureaucracy is now point person along with
Treasury Secretary Timothy Geithner. The shift in emphasis for Geithner is designed to give him some exposure that is not connected to
the bail out of Wall Street but there are still many who believe he will be dumped from the team after the elections this November. His
role as key economic advisor to Obama seems to have been usurped by Paul Volcker.
There was attention paid to the populist theme that has been emerging in recent weeks and it didn’t sound as convincing as some of
the other parts of the speech. The development of the “fat cat” banker as the villain of choice may sit well with frustrated voters but the
financial community is unnerved and when Obama launched into those diatribes he sounded far less convincing than when he focused
on the pragmatics. This was a contest all night – between the Obama who was trying to call the nation to arms and the Obama who
wanted to sit down and work out strategies that might actually accomplish something. It remains to be seen which the voter of today
relates to. The speech also tried to rescue the health care plan from its paralysis and it remains to be seen how well that will play with
the voter and with Congress.
The tone of the speech was not as defensive as many expected it to be but it was also not quite as dynamic as some have been. The
fact is that the Democrats have been put on the defensive by the polls and the Massachusetts election. They are not necessarily losing
their interest in Obama but they have returned to their centrist instincts. The GOP response to the speech has been just as partisan as it
has been in the past but that may also have to change in the weeks and months ahead. The public is not united by much when times are
good. This is when the social issues come to dominate and people are more willing to be swayed by more purely ideological issues. But
when times are bad for the economy, the public has a laser like focus. The only things that really matter are jobs and jobs and perhaps
jobs. It is amazing in some respects as even with the current jobless rate there is still a 90% employment rate. The normal rate of
unemployment is 6% so the frenzy is really over 4%. The reason for this concern is that those who still have their jobs are far less secure
during a period of high unemployment. They have seen colleagues and friends lose their jobs and wonder why they have not. That
insecurity makes joblessness everybody’s prime concern and that drives the political debate.

Fed Sticks to the Current Script

The Federal Reserve’s Open Market Committee met this week – not that anybody really noticed. It was only a couple of years ago that
the FOMC meeting caused the press to speak in the hushed tones of a golf tournament. Who could forget CNBC’s Squawk Box trying to
measure Alan Greenspan’s briefcase girth as a signal of what was to come with rates. Now the conversation is as boring as it has been in
decades. The Fed has little reason to push rates up at this juncture and there is no reason to even create the illusion of suspense. Ben
Bernanke has his hands full with the confirmation process but the FOMC as a committee is not so distracted. The only things that analysts
expected might appear is a veiled warning that inflation or the weak dollar might yet cause the Fed to hike rates this year. Those words
did not emerge although it seemed that the assertions of a low interest rate regime were a bit less exuberant.

Analysis: The Fed will at some point raise rates as the threat of inflation will not remain distant forever. The recovery of the economy
will bring commodity price hikes and it will help banks relax enough to release some of the money they have been putting away for a
rainy day. But that day has not yet come and the Fed has not yet signaled they are leaning that way. That is, unless there was some
serious conversation in the meeting itself. This is something we will all find out about once the minutes of the Fed meeting are released.
For now the word is continuity and a focus on recovery. It would have been poor form to raise rates on the day of the SOU speech.
Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

2
 STRATEGIC GLOBAL INTELLIGENCE
January 28, 2010

Debate in Davos Gets Increasingly Heated

The financial community is in a fight for its life according to some at the World Economic Forum. Others think the regulations suggested
are long overdue and will benefit the sector in the long run. The public opinion courted by the politicians has turned decidedly antagonistic
towards banks in general and few are making any distinctions between them. Kit is this broad brush approach that is most irritating to the
likes of Bob Diamond from Barclays Bank. His participation in a panel devoted to the issue was aggressive and pointed – breaking out of
some of the traditional banker’s mode. He blasted the plan that would strip banks of the business of investing their own money and he
defended the actions of Barclay Capital – which he also heads. The bank never sought and never received bail out money from the US or
the UK. He pointed out that it is destructive to impose punitive regulations on all banks due to the mistakes made by some. He is incensed
that his bank managed its position well, emerged from the crisis intact and continues to play a constructive role but still faces attacks. What
is being described by politicians and critics as some kind of systemic problem is not – according to Diamond. If it were, how is it that
Barclays escaped?
The mood of the banking community is sour but the political community is just as upset. The voters are howling for a scapegoat and the
political class doesn’t want to fill that position. The banks are concerned about the loss of one of their most lucrative business but there is
also legitimate concern about what all these restrictions will do to the business community as a whole. The most consistent worry is that
banks will be forced into two unpopular directions. They will either need to become highly conservative and restrictive in their lending or
they will move in a much riskier direction in order to keep their profits up. There is no consensus on what happens from here as some
banks suspect that the end result will be much less restrictive than it currently appears while politicians like Rep. Barney Frank are
predicting the banks will be gutted and left to rot by the end of March.

Analysis: This is the time for hyperbole and there has been plenty of it. The banks are well aware that something has to pass. The voters
in the UK and the US will punish the party in power if there is not some attempt at controlling the banks and holding them accountable.
They are also aware that politicians need them and that many in power understand the risks that draconian measures will evoke. The
political leaders also face a quandary. They have to sound tough and make it appear that the banks and their leaders have been well and
truly chastened. The end result may well be akin to the story of the Bre’r Rabbit who pleaded not to be thrown in the briar patch. The
likely outcome is that some bank regulation will be stiffened but the trading operations will live on in some form or another.
That said, the election year faced by both Britain and the US can create some very unexpected developments. It is altogether possible
that the mood of revenge takes hold and the banks get burned. If one listens to Diamond, he urges that those miscreant banks and their
managers be required to pay the price and the others get left alone. This is the argument that favors the market and the concept of
moral hazard. It would have been Milton Friedman’s assertion that one gets that outcome if the market is allowed to function.
Presumably the Barclays of the world would have survived and the idiots who ran the other banks into the ground would be seeking
some serious retraining opportunities.

Sarkozy Delivers Fiery Speech and Proposals that Will Not Get Far
The opening speech at Davos is often a chance to stake out rhetorical territory. The speech by French President Nicolas Sarkozy did just
that as he reiterated his notion that market capitalism needs an overhaul so that it can “better serve the people”. The specifics of this plan
have always been a little murky and this speech was no exception. His most consistent call was for a new currency system that would
introduce a Bretton Woods like system in place of the current one. France has been furious with the high value of the euro as it makes
French exports harder. He wants a peg that changes that value but there is absolutely no interest in this regime from the US or from China.
It is a non-starter.

Analysis: The notion that capitalism needs a rethink is a consistent theme in France these days but the concept is long on passion and
short on strategy. It has yet to be demonstrated how one maintains open markets while tightening regulation and “purposing” the
financial moves. The power of the banks and large corporations has distorted the political system in many nations but correcting this
situation has been exceedingly frustrating.

Haitian Concerns Now Shift to Housing

The rescue effort is over and the grim reality has set in that anybody who has not been found at this point is dead. Now the crisis is one of
shelter. There are close to 700,000 people without shelter and the hurricane season is not that far away. The next nightmare would be a
major storm lashing the nation while close to a million people live in makeshift shelter.
Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

3
 Road Warrior
The last three days have been spent in travel. Mostly one day visits to cities to make a presentation and then off to another locale. We all
know that travel is not the calm and dignified experienced of yesteryear but this commentary is not a complaint (how unusual). What I
marvel at is how easy it has become to work under these conditions. I write the BIB every day – wherever I am. The fact that the world has
become fully wired for the traveler makes this possible. It goes beyond WiFi. The airport is busy but people are all buried in their own
worlds and that allows me to bury into mine. It is actually quite astonishing given where things were only a few years ago when flying
essentially meant you vanished from the planet for an extended period of time.

Analysis: It makes me wonder what comes next. The airlines are now allowing access in the air but I think it will go beyond that. I am
seeing airports working to set up meeting rooms. I suspect there will be deliberate opportunities established to network on the road – as
in personal networking. All it would take is some version of speed dating at the gate. You know that most on the road are salespeople
anyway and they are always seeking a lead. There are programs now that can find people you know in the crowd and some people are
already using them. The mind boggles. I just want one innovation. I think airports need to rent cats out to passengers that find it hard to
write without feline intervention – or is that just me.

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Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.