Headlines: scroll down for full stories
1. Is a Bankruptcy Bonanza on the Horizon?
2. Consumer Spending, Durable Goods Orders Rebound
3. Consumers, Investors Not So Confident Before Holidays
4. International Real Estate ETF Launches
1. Is a Bankruptcy Bonanza on the Horizon?
As the saying goes, a rising tide lifts all boats. For the past few years, the
relatively strong economy and low interest rate environment has been buoying
companies that may not have survived in rougher waters. But as the tide turns on
the economy, can these companies keep their heads above water?
According to Forbes, this country is facing a bankruptcy boom. It says many
companies have used the current easy money environment not to repair fundamental
problems in their businesses, but to simply pay creditors.
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"A lot of people aren't fixing the problems they have with their businesses,"
Ingrid Bagby, a partner with law firm Cadwalader, Wickersham & Taft, tells
Forbes. "They're just fixing their liquidity problems."
Lenders have not done their due diligence, says Forbes. They haven't
investigated how the money will be used, leading to a rising risk of
bankruptcies and a lot of bad debt on their hands.
And it's not chump change. Forbes points to a private equity investor who
procured a $10 million investment for one of the companies in his portfolio. The
hedge fund doling out the money never sent a representative to a due diligence
meeting. When asked why, the hedge fund responded, "For a $10 million
investment, it's not worth sending someone."
Forbes points to unsustainably low default rates. According to Moody's the
current default rate for speculative grade bonds is 1.8 percent, well below the
historical average of 5 percent. But many experts say that statistic will
reverse quickly, with estimates averaging in the 2.5 percent to 3 percent range.
Some even say the default rate could explode to around 7 percent or 8 percent.
"The default rates seem unsustainably low, at the same time the volume of
potential candidates has never been higher," Mark Sunshine, CFO of financial
services firm First Capital, tells Forbes.
"I think when [a correction] comes, and it is coming, it's going to be a big
one," warns Jay Goffman, a partner in the corporate restructuring department at
law firm Skadden Arps.
.Editor's Note:
2. Consumer Spending, Durable Goods Orders Rebound
Showing some holiday cheer, consumers boosted their spending in November by the
largest amount in four months, while the nation's manufacturers saw demand for
big-ticket goods rebound.
The latest snapshot of consumer and business activity was contained in a pair of
reports released by the Commerce Department on Friday, with encouraging signs
for the economy.
One report showed consumers increasing their spending by 0.5 percent last month,
up from a 0.3 percent gain and the most since July. Incomes - the fuel for
future spending - rose a modest 0.3 percent for the second month in a row. The
income and spending figures aren't adjusted for inflation.
Another report showed that orders placed with factories for costly manufactured
goods went up 1.9 percent last month. That was a turnaround from the 8.2 percent
plunge registered in October.
On Wall Street, the reports failed to give investors a burst of joy. The Dow
Jones industrials were down 61 points and the Nasdaq was off 9 points in morning
trading.
The spending and income figures were just shy of economists' forecasts. They
were expecting a gain of 0.6 percent in spending and a gain of 0.4 percent for
income. The demand shown in the manufacturing report was stronger than the 1.5
percent gain economists were anticipating.
Together the reports suggest that the economic expansion is not in danger of
fizzling out, despite strains from the deepening housing slump.
The ailing housing market was the main reason why economic growth slowed to a 2
percent pace in the late summer. As troubles linger from housing, more sluggish
performances are expected in the months ahead.
Thus far, though, consumers seem to be holding up fairly well.
In November, consumers boosted spending on big-ticket "durable" goods - such as
cars and appliances expected to last at least three years - by a strong 1.2
percent, the most since July. Spending on "nondurables" such as food and
clothes, rose by a solid 0.7 percent, after a 0.6 percent cut the month before.
Spending on services increased 0.4 percent, following a 0.6 percent rise.
Consumer spending is closely watched by economists because it is a major shaper
of overall economic activity.
With spending growth outpacing income growth, Americans' personal savings rate -
savings as a percentage of after-tax income - dipped to negative 1.0 percent in
November, the worst showing since August.
In the manufacturing report, factories saw new orders rise in November for
computers and communications equipment, as well as cars and airplanes. But
demand for machinery, electrical equipment and primary metals, including steel,
ebbed.
Manufacturers are having to deal with some fallout related to problems in the
housing market as well as the struggling automotive industry.
There was some encouraging news Friday on the inflation front.
An inflation measure tied to the income and spending report showed "core" prices
- excluding food and energy - moderated last month. These prices rose 2.2
percent over the last 12 months ending in November, an improvement from the 2.4
percent gain reported for the 12 months ending in October.
Even with the improvement, core inflation is still higher than the Fed would
like.
Fed chairman Ben Bernanke and his colleagues, however, predict inflation will
continue to ease as the economy slows to a more sustainable pace.
Given that, the central bank has felt comfortable holding interest rates steady
since August. Economists believe the Fed probably will leave rates where they
are well into next year.
© 2006 Associated Press.
Editor's Note:
3. Consumers, Investors Not So Confident Before Holidays
U.S. consumer sentiment slipped in December but was not far from the year's
highs, a report said on Friday, suggesting Americans were guardedly optimistic
about the economy in the holiday season.
The University of Michigan said the final December reading of its consumer
sentiment index declined to 91.7 from 92.1 in November. The drop was less severe
than expected on Wall Street, where the median forecast called for a reading of
90.2.
A measure of current conditions edged up on the month to 108.1 from 106.0 in
November, but expectations about the future deteriorated, to 81.2 from 83.2.
Price expectations over a one-year period, an important guidepost for interest
rate policy, dipped to 2.9 percent, its lowest since February 2005. That index
was at 3.0 percent in November.
The data should provide further encouragement to the Federal Reserve that it may
be able to start cutting interest rates sometime over the next two quarters,
especially if incoming economic reports continue to show weakness.
Another release on Friday showed that a closely watched barometer of consumer
costs eased in November.
Investor Confidence
Investor confidence in the U.S. economy fell slightly in December but still
remained high, responding to rallying stock markets and the shift from a
Republican to a Democratic Congress, according to the UBS/Gallup Index of
Investor Optimism released on Friday.
The UBS/Gallup Index fell 3 points to 90, its second-highest reading of the
year. The index peaked at 93 in January and again in November.
"Although investors have concerns about the real estate market, the continued
rally in the equity markets fueled by solid corporate earnings is driving
investors' positive feelings about the current investment climate," said Robin
Miranda, associate strategist, UBS Wealth Management Research Americas.
Thirty-eight percent of investors believe the shift from a Republican to a
Democratic Congress will positively affect the investment climate, while 28
percent believe the change will have a negative impact. A further 32 percent
believe the change in control will have no impact at all.
The UBS/Gallup survey covers about 800 households from around the United States
with investments of $10,000 or more. Nearly 40 percent of American Households
have at least this amount of savings and investments.
© 2006 Reuters.
Editor's Note:
4. International Real Estate ETF Launches
Investors looking to diversify commercial real estate investments away from the
U.S. now have a way: the StreetTracks Dow Jones Wilshire International Real
Estate Index, which trades under the ticker RWX.
The new ETF allows investors to focus on hot real estate markets like England
for capital appreciation. In addition, investors could use it to hedge against
U.S. real estate investments in the event that the U.S. commercial market breaks
down.
The ETF, introduced by State Street Global Advisors, tracks the Dow Jones
Wilshire Ex-U.S. Real Estate Securities Index, and is the first of its kind. The
ETF is specifically for commercial real estate. Currently, the only way to hedge
against residential real estate is to buy put options on the S&P/Case-Shiller
Home Price Indexes.
"The index has a correlation of about 0.6 with the U.S. real estate market.
Moreover, individual countries globally typically have correlations between
themselves of 0.5 and lower," said Dodd Kittsley, director of ETF Research at
SSGA.
"We're also seeing a lot of U.S. investors that were invested in the U.S. REIT
market taking notice of the global market not only because of the strong
performance, but also (because) the yields between the two markets have become
very close," Kittsley said.
"It's a very targeted, precise market segment. Certainly there are risks
specific to the global real estate market."
Editor's Note:
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Editor's Notes:
