September 15, 2011

2011 issue 16

TheBigSwerve
There's a growing concern among even the most optimistic investors, companies and households that the United States has either entered a new recession, or never really emerged fully whole from the last great downturn. There is also a worse scenario and fear that growth going forward could be seriously constrained because of a myriad of overwhelming issues with no quick fix. Even though many of the risks are long-term in scope, enough risks have been elevated in the near term. These concerns are centered on the weakness evident in many key indicators here in the U.S. and also overseas. And they are aggravated by the gauntlet of hurdles facing the euro area this month alone. Whats most disconcerting about the euro stress nightmare is that numerous announcements have already heralded the end of the crisis. Where was all the analysis and the review? Has no one reviewed the reality on the ground in Greece and in the other peripheral European countries at risk? And how deep are the exposures across the major banks? Weakness in a sector such as banking is different than weakness in advertising, for example. Rising vulnerabilities in banking and finance could jeopardize the entire financial system and world economy.

Deposit Flight at European Banks Raises Risks

Moody's cut the credit ratings of two French banks on Wednesday because of their exposure to Greece's debt, highlighting growing risks to Europe's financial sector from a deepening euro zone sovereign debt crisis.

With all the setbacks, is now the time to jump in and buy??

With speech, Obama sought to invigorate economy, presidency

Various surveys showed a much sharper slide than had been expected in consumer confidence in America, Britain and the euro area.
Confidence in the economy among small-business owners tumbled in August, as NFIBs monthly Small-Business Optimism Index dropped. The Index has now been in decline for a full six months. Augusts decline comes in the immediate aftermath of the debt ceiling debate ...
The federal budget deficit reached $1.23 trillion in August. The third straight $1 trillion-plus deficit adds pressure on Congress and the White House to reach agreement on a long-term plan to trim government spending.

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

American financial institutions, seeking to inoculate themselves from the growing EU risks, are increasingly wary of making new short-term loans in some cases and are pulling back from doing business with their European counterparts moves that could exacerbate the funding problems of European banks.

September 15, 2011

The PunchLine...

In This Issue
The Big Swerve
There's a growing concern among even the most optimistic investors, companies and households that the United States has either entered a new recession, or never really emerged fully whole from the last great downturn. There is also a worse scenario and fear that growth going forward could be seriously constrained because of a myriad of overwhelming issues with no quick fix. Even though many of the risks are longterm in scope, enough risks have been elevated in the near term. These concerns are centered on the weakness evident in many key indicators here in the U.S. and also overseas. And they are aggravated by the gauntlet of hurdles facing the euro area this month alone. Whats most disconcerting about the euro stress nightmare is that numerous announcements have already heralded the end of the crisis. Where was all the analysis and the review? Has no one reviewed the reality on the ground in Greece and in the other peripheral European countries at risk? And how deep are the exposures across the major banks? Weakness in a sector such as banking is different than weakness in advertising, for example. Rising vulnerabilities in banking and finance could jeopardize (pg 1) the entire financial system and world economy.

Households?
Numerous questions for the key driver in the US economy. Once a free-spending sector, its housing and mortgage finance machinery have not just collapsed but are severely damaged The previous boom cannot and should not be recreated So where will growth come from? (pg 10)

In This Issue The DNA of Business Engines

(pg 2) (pg 3)

U.S. Job Growth Pumping Iron Tech Complacency in Europe The New Geography of Business Media Clips
Lots of pressure points

(pg 11) (pg 12) (pg 13) (pg 14) (pg 15)

(pg 16) (pg 17) (pg 18)

Real Estate and Construction Will Life Ever be the Same?

Despite being two years into recovery, there remain multiple weak links. It is clear that there will be ongoing repercussions from the recent historic bust, and we worry about the likely contours of this fragile recovery path. Given all the new risks that have emerged recently, its clearly a serious policy challenge and it is international affair (pg 4)

The Return to Normal You Cant Handle the Truth The Likelihood of Unlikely Events... Credit Concerns Dimensions of Risk

(pg 5) (pg 6) (pg 7) (pg 8) (pg 9)

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.

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The PunchLine...

The DNA of Business

Workouts to Define Recovery
CapitalSpendingOutlook

First Investors, Now Customers Lose Confidence in H-P

Hewlett-Packards recent strategic moves have shaken the confidence of investors. Now customers of the technology giant are also getting nervous.

Americas Justice Department filed an antitrust lawsuit to try to block AT&Ts $39 billion proposed takeover of T-Mobile USA, which would create Americas largest mobile-phone carrier by far. Shortly before the lawsuit was made public AT&T offered to return 5,000 callcentre jobs to America, if the government approved its acquisition.

Construction sector considers recession again... Reed Construction Data

The largest U.S. banks will be required to show regulators how they would break up and sell off their assets if they are in danger of failing. The Federal Deposit Insurance Corp. voted 3-0 Tuesday to approve the rules, which were mandated under the financial overhaul passed by Congress last year. They are designed to reduce the chances of another government bailout of Wall Street banks in the event of another financial crisis. The rules require banks with $50 billion or more in assets to submit so-called living wills to the FDIC, the Federal Reserve and the Financial Stability Oversight Council and send revised plans annually. Planes have never been so full. There was barely a spare seat this summer, and the next few months should be the same. To the list of things airlines have taken away -- hot meals, blankets, headphones -- you can add personal space. For airlines and the people who invest in them, it makes sense. Because of consolidation, partnerships and a push to eliminate unprofitable routes, airlines can adjust schedules to match demand and charge more.

McGrawHilltoBreakIntoTwo
McGrawHill, the media conglomerate longknown for its publishing business, announced on Monday plans to split in two parts: a markets business and an education company.

Changing channels: television's insurgents

As consumers pull cable plug, other providers connect Web and TV.

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The PunchLine...

Engine Drivers
The German Engine
German economic growth should accelerate to 0.4% q/q in the third quarter to ensure full year growth of around 3.0%, Germany's economic research institute DIW projected. "Weak growth of just 0.1% in the second quarter was thus just a temporary damper," the institute said in a statement. While times of sharp growth rates may be over, the German economy should enjoy solid growth rates in the second half of the year, the institute said. The German economy should benefit from a boost in construction sector activity over the summer and will continue to be supported by exports even if global economic growth has decelerated, the report said. Europe Struggling Economic morale in the Eurozone eroded more than expected in August, with sharp declines in all main sectors except construction, the European Commission said . After a five-point slide since February, the Commission's sentiment index plunged 4.7 points in August to a 15-month low of 98.3 below even the most pessimist forecasts. Alongside the deterioration in other leading indicators, this points to a further loss of economic momentum since the marked slowdown in 2Q. With headwinds mounting from monetary tightening in many emerging markets and fiscal tightening throughout most of the Eurozone, activity is likely to remain sluggish at best for an extended period. PMI Reports Eurozone GERMANY: FRANCE: ITALY SPAIN Aug 49.0 50.9 49.1 47.0 45.3 July 50.4 52.0 50.5 50.1 45.6

Global Air Market Stagnating, More Weakness Likely

The international air cargo market is stagnating, with traffic shrinking 0.4 percent in July from a year ago and capacity far outstripping demand, said the International Air Transport Association.

Asias economies can weather a Western slowdownbut not prevent it

USnonmanufacturingISM suggestscontinuedexpansion

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The PunchLine...

The Return to Normal !

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The PunchLine...

YouCant Handle the Truth

Let'sTaketheConoutofEconomics
The Swiss National Bank shocked markets by setting an exchange rate cap on the soaring franc to stave off a recession, discouraging investors anxious about flagging global growth from using the currency as a safe haven. Using some of the strongest language from a central bank in the modern era, the SNB said it would no longer tolerate an exchange rate below 1.20 francs to the euro and would defend the target by buying other currencies in unlimited quantities.

Food prices could rise next year because an unseasonably hot summer likely damaged much of this years corn crop.

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The PunchLine...

The Likelihood of Unlikely Events

GREEK DRAMA The European Commission says Greece's budget deficit for 2011 will stand at 9.5 percent of gross domestic product, far higher than the country's original forecast for 7.6 percent. Greece has argued that the deficit targets will have to be revised as the recession is far worse this year than originally predicted. Greece's Recession Deepens
Greece's economy sank deeper into recession in the second quarter than previously forecast, with gross domestic product contracting by 7.3% on the year. ... Plunging domestic consumption was mostly responsible for the steep contraction rate ... With consumers bracing for the implementation of further austerity measures, promised in exchange for a fresh bailout to Greece ... Data showed Thursday that Greece's unemployment fell to 16% in June from 16.6% in May, but remained sharply above the rate of 11.6% a year earlier. ECBs Stark steps down, markets hit

Move said to stem from disagreement over bond-buying program

Juergen Stark, a top official at the European Central Bank, stepped down Friday, with news reports tying the move to disagreements over the banks bond-buying program. Stark was widely reported to be opposed to the resumption of bond purchases last month. Stark quit due to a conflict over the bond program.

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The PunchLine...

Credit Matters-Know Risk

Europes sovereign-debt crisis is constricting the flow of money to its banks

Rating Cut New York's Metropolitan Transportation Authority had the rating on $14.3 billion of revenue bonds cut one level by Fitch Ratings, which cited increasing operating costs and concerns about financial projections. The creditrating company lowered the rating to A, its sixthhighest investment grade, from A+. The outlook is stable. Fitch also lowered its rating on $6.9 billion of debt issued by the MTA's Triborough Bridge and Tunnel subsidiary to AA from AA, and another $1.9 billion of subordinated debt to A+ from AA, citing belowprojected income after toll increases.

China's hidden debt undermines its sermons

The government's stated debt is just 15 percent of GDP. But a gaping pension hole and heavy borrowing by state backed entities could leave Beijing on the hook for debts closer to 130 percent of GDP.
The collapse that tagged the S&P/LSTA Leveraged Loan Index for a 4.4% loss in August the worst drubbing outside of the late-2008 bear market was one for the books. Spooked by the same cocktail of negative news that sent the S&P 500 down 5.4% in August S&Ps downgrade of the U.S., a series of worse-than-expected economic reports, and the ongoing turmoil in Europe retail investors pulled a record $5.5 billion from loan funds, according to Lipper FMI. That was the first net redemption the funds have suffered in two years, and it follows a $1.2 billion inflow in July and an average monthly inflow of $4.2 billion during the first half of the year.

Gird for Greek Default

Der Spiegel magazine reported Saturday that the German Finance Ministry is studying two possible scenarios and preparing for the worst. According to the magazine, the Ministry is considering reintroduction of drachma.

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The PunchLine...

Dimensions of Risk
Distortions, Distortions, Distortions
IMF Spokesman:

Global Economy Slowing, Downside Risks Increasing Still Assessing Impact of SNB Moves on Currency IMF Mission Returns to Greece Mid-Sept to Finish Program Review

Business leaders are glum on the economy

Only 18 percent of U.S. business leaders think the U.S. economy will improve in the next six months, according to a Grant Thornton survey released Thursday, Sept 1 down from 64 percent in February and 45 percent in May. "Confidence in the prospect of an economic recovery has nearly disappeared in the past quarter," Grant Thornton CEO Stephen Chipman said in a statement released with the survey. "Uncertainty about global economic policy and sovereign debt are weighing on the business decisionmaking across the country. Twenty-eight percent of the surveyed leaders said they planned to hire more workers in the next six months, down from 49 percent six months ago. Twenty-five percent plan to lay off workers, up from 10 percent six months ago. And 46 percent believe the economy will get worse, up from 4 percent in February.

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The PunchLine...

Households Brave New World

Consumer Confidence
Release for: August 2011; Source: The Conference Board Index base 1985=100, not seasonally adjusted yr-ago rev prelim Aug-10 Apr-11 May-11 Jun-11 Jul-11 Aug-11 ---------------------------------------------------------------------Cons Confidence Total Index 53.2 66.0 61.7 57.6 59.2 44.5 By Region: New England 50.5 58.2 63.9 50.8 68.1 35.1 Mid-Atlantic 42.4 70.9 49.5 57.6 56.0 47.1 East North Central 46.3 51.9 55.9 49.8 52.9 44.0 West North Central 58.5 72.1 78.4 66.2 69.7 42.2 South Atlantic 51.3 65.9 63.4 54.6 53.2 48.3 East South Central 47.4 59.0 59.9 56.4 49.6 39.9 West South Central 68.6 69.5 78.5 75.5 78.9 62.8 Mountain 55.1 72.6 59.1 50.4 58.9 57.5 Pacific 49.1 67.4 65.5 58.7 55.5 45.8 ---------------------------------------------------------------------Jobs plentiful 4.0 5.1 5.7 5.1 5.1 4.7 Jobs hard to get 45.5 42.4 43.5 43.2 44.8 49.1

With some 3.5 million first-mortgage loans in or near foreclosure and more house price declines likely, it is hard to be enthusiastic about the recoverys prospects. A house is most Americans most important asset; many small-business owners use their homes as collateral for business credit, and local governments rely on property tax revenues tied to housing values.

The presidents housing proposal was one part of his jobs speech that doesnt require Congress. That doesnt mean itll be easy.
US poverty reaches record levels

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The PunchLine...

U.S. Job Growth- Help Wanted!

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The PunchLine...

Pumping Iron - Old Economy New Challenges

US auto sales were basically flat in August from a month earlier, defying forecasts for a big slowdown in a month that began with a plunge on Wall Street and ended with an East Coast hurricane. Detroit automakers posted double-digit percentage gains from year-earlier sales, helped by stronger sales of newer small cars like the Chevrolet Cruze and more fuel-efficient SUVs including the Ford Escape. But shares of both General Motors Co and Ford Motor Co closed lower, and analysts cautioned that the Detroit Three could face a payback in the months ahead as their major Japanese rivals fight to make up for lost ground. Vehicle sales, as reported by Autodata and Bloomberg, fell to 12.1m (saar) in August from 12.2m in July

The Cass Freight Index for U.S. shipments grew 4.4 percent in August over the same month a year ago, the smallest gain in a year-and-a-half and a sign of fragile demand in the American economy. The closely watched measure of industrial freight demand improved 1.9 percent sequentially from July to August after tumbling 3.7 percent in July. Although the August shipment index showed demand gaining, the year-over-year gain was far slower than the 11 percent increase in July and the slimmest Cass has reported since the index contracted in February 2010.

Mixed fortunes of containerlines means overcapacity still threatens trade

Europes car industry will struggle to grow in 2012 as a worsening credit crisis prompts consumers to rein in spending, with Fiat SpA saying it may delay the introduction of new models as a result of a global slowdown. Ford Motor Co. expects industrywide sales in Europe to be little changed at between 14.7 million to 15.3 million units next year,

U.S. July Steel Exports Drop 3%

U.S. exports of all steel products declined for the second straight month and totaled 963,066 metric tons (1,061,597 short tons). This represents a 3.2% decline from the previous month and is 7.2% lower than the 1,037,750 metric tons exported during the month of May 2011.

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The PunchLine...

Tech and the Business Cycle

Sony, Hitachi and Toshiba to Merge LCD Units

The three companies said they would work with a governmentbacked fund to spin off and merge their liquid crystal display businesses, joining forces in the face of rising global competition. Samsung Electronics Co. has shrugged off early court losses in patent disputes with Apple Inc., apparently confident that it will be able to navigate around them. The South Korean company, whose fastrising smartphone business is poised to overtake Apple in unit sales this quarter, on Thursday introduced several new phones and tablet computers based on the Android operating system that is at the heart of 19 lawsuits brewing between Samsung and Apple in nine countries.

The upcoming launch of several new tablet PCs, smartphones and Ultrabook devices will play the key factor in sustaining NAND flash prices in September and the following several months, according to sources at chip and module suppliers. System customers have stepped up their pace of orders in preparation for the launch of new models, the sources claimed. The sources also pinpointed increased demand for SSD and embedded storage applications as other potential factors affecting NAND flash pricing. However, there remains concern about whether demand is strong enough to digest the industry's growing capacity. New 12inch capacities at Samsung Electronics, Toshiba and SanDisk's joint fab and at the Intel Micron Technology joint venture are all set to come online in the fourth quarter of 2011.

A shakeout already may be in the works. After all, while it is cheap to test a product, companies still need funds to expand fast once their business shows promise. In particular, they need to beef up engineering and sales staff, which is getting more expensive as start-ups compete for talent. Yet many venture-capital firms, the traditional source of such funds, have disappeared as they dissolve funds raised during the dotcom boom. And angel investors might not be willing or able to put up the fat sums needed to finance later stages of growth, especially considering volatile markets hitting other parts of their portfolio. The frozen IPO market, which has forced companies like Groupon to delay their offerings, should cause visions of dollar signs to recede among bandwagon jumpers. More patient investors eventually will find terms tilting back in their favor.

Best Buy shares fall after reporting big sales decline Cisco cuts long-term sales growth forecast
Cisco cuts long-term sales forecast, as competition grows and go-go days of growth recede

Google's New Airfare Search Section Takes Off

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The PunchLine...

Complacency in Europe?
EUROPE Business Climate Indicator
Aug11 Jul11 Jun11 May11 Apr11 Mar11 Feb11 Jan11 Dec10 Nov10 Oct10 Sep10 Aug10 Jul10 0.07 0.44 0.95 0.98 1.28 1.43 1.46 1.45 1.27 0.93 0.92 0.75 0.67 0.58 UK Manufacturing PMI Breakdown Further Dims Outlook
The latest manufacturing PMI was a shocker. The headline number dropped to its lowest level in 26 months and the employment index suggested factories are shedding staff. The key sub-components of the survey made for even more dismal reading. The number of new export orders declined sharply with the level of new work received from overseas clients falling at its fastest pace since May 2009.

Must get Spain working again

Eurozone service sector [slowed] and the Purchasing Managers Index figures show services activity slowed to its lowest rate since September 2009.

Spanish industrial production, after seasonal and working day adjustments, fell by 1.0% m/m in July, the fifth successive monthly decline. Hence one might say that the Spanish industrial sector is already in recession. In Q2 Spanish industrial production fell by 1.4% q/q. The July level is down 1.5% vs. the Q2 average, and therefore the latest data imply strongly that Spanish industrial production will have fallen significantly further (particularly since the recent PMI data imply a worsening trend for Spanish IP).

With elections looming, political parties must come up with sensible solutions to tackle a 21 percent unemployment rate. Cutting social security contributions makes sense, but it's harder than it looks.

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The PunchLine...

The New Geography of Business

India Factory Output Growth Slows Sharply In July
BRAZIL - Alexandre Tombini, the president of Banco Central do Brasil, told Brazilian newspaper Valor Economico the central bank anticipates the slowdown in global growth to stretch longer than the one seen in 2008.

TRADE WAR

Brazil Protects Domestic Trade, Slaps Steel Tariff On Chinese Products

Bank of Mexico:

Central banks in EM Asia, the one region of the world where incremental tightening is still occuring, left rates on hold following their Thursday meetings

Balance of Risks on Economy Have Shifted

Inflation Risks Receded as Growth Risks Increased UK The rate of Consumer Prices Index inflation rose to 4.5% in August from 4.4% the month before, official figures show.

The Bank of Japan said on Thursday that growth in industrial production will slow in the final quarter of this year after posting a sharp rebound from the plunge caused by the March earthquake disaster. "Production is expected to continue increasing, albeit at a moderate pace," the BOJ said in its monthly economic report. "As for the production for October-December, the growth pace is expected to slow from the July-September period but the production is likely to continue increasing. The bank warned that uncertainty about overseas demand and the impact of the yen's rise is high, posing a downside risk to domestic production.

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The PunchLine...

Media Clips
Box Office: Slowest Labor Day Weekend in 15 Years
Newspapers Have Had 20 Quarters of Consecutive Ad Rev Declines
Combined online and print newspaper ad revenues fell 6. 9 percent to $5. 9 billion in Q20f this year, marking the 20th consecutive decline for the industry, according to the latest figures from the Newspaper Association of America

Despite a slight increase in summer ticket sales of nearly 5%, according to Hollywood.com, searches on google.com for blockbuster films rose 28%, contributing to the approximate 3% uptick in attendance, compared with the previous year. The move identifies deliberate intent by consumers to tap into online channels before making a decision.

Ad Agencies Register Concern on Economy

On an "are-you-worried-about-the-economy" scale of 1 to 10 (10 being a repeat of the 2008 meltdown), agency chiefs are more worried than not that the glitchy economy will hurt their business through the rest of this year and into the early quarters in 2012.

Barnes & Noble posted another quarterly loss, dragged down by a continuing decline in sales of paper books at its stores. But the book retailers share price soared, as it also reported that its Nook e-reader business was growing rapidly, taking a share of up to 27% of the American market in e-books and cutting into the Kindles dominant position.

Hospitals, health care big ad spenders in 2011

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Real Estate and Construction Outlook

Federal Reserve Beige Book Survey Commercial real estate conditions remained weak or little changed in most Districts, although some improvements were noted by New York, Minneapolis, and Dallas. Commercial real estate activity was sluggish in the Boston, Cleveland, Richmond, Atlanta, Kansas City, and San Francisco Districts. However, San Francisco noted some areas have benefited from technology sector growth, and Boston noted investor demand for prime office buildings remained strong. New York said office vacancy rates declined noticeably in the Buffalo and Rochester metro areas and modestly in Manhattan and Long Island. Lower commercial rents helped push down vacancy rates in the Kansas City District, and the Dallas District noted strong demand for leased space in Houston due to solid energy activity.

Europes biggest shopping centre opens

More than 100,000 shoppers descended on east London on Tuesday for the opening of Westfield Stratford City, the largest urban shopping centre in Europe and a project described by Boris Johnson, mayor of London, as the most regeneration east London has seen since the Middle Ages.

CANADA BUBBLE

The Condo Home front: Speculation is back Multi-unit building intentions are now back to levels not seen since the height of the housing boom in the mid 2000s. This surge in condo building intentions is feeding into a multi-unit market that is already well supplied; clearly speculation is rife in the condo market.

CoreLogic Reports... released Q2 negative equity data showing that 10.9 million, or 22.5 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2011, down very slightly from 22.7 percent in the first quarter. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the second quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide. The new report also shows that nearly three-quarters of homeowners in negative equity situations are also paying higher, abovemarket interest on their mortgages.

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Will Life Ever Be the Same?

This publication is provided to you for information purposes and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its accuracy cannot by guaranteed. The views reflected herein are subject to change without notice. No one connected to this publication accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. This publication may not be reproduced, disseminated, distributed, in whole or in part, for any purpose without express permission from TPL Advisory, LLC. Please cite source when quoting. All rights are reserved.

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