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Are Gas-Sipping Cars Leaving Hybrids in the Dust?

Tuesday, February 7th, 2012

When Cadillac is staking its comeback on a compact car that boasts fuel economy approaching 40 mpg, what does it mean for hybrid and electric vehicles?  Cadillac’s ATS sedan is one example of how carmakers at the Detroit Auto Show are re-emphasizing small, powerful models with more fuel-efficient engines such as sport-utility vehicles; even, please note that we are talking gas here, hybrids are taking a back seat. Additionally, General Motors’ luxury brand says that the ATS will have a turbo-charged four-cylinder 270-horsepower engine that offers impressive fuel economy. Meanwhile, Ford is dropping plans for a hybrid version of its popular Escape SUV.

Although recent auto shows have been stocked with gas-electric hybrids and SUVs, slow hybrid sales have brought a dose of reality.  Carmakers realize they can give buyers what they want and avoid the expense of electric motors and batteries by making cars smaller and getting significantly improved fuel economy from traditional gas engines.

“The advantages of hybrids are getting harder to justify,” said Scott Corwin, a vice president with consulting firm Booz & Co.  “It’s the cost differential. Consumers are rational and they understand the cost of ownership.”  Hybrid sales slowed in 2011 to just 2.2 percent of auto sales, down from 2.4 percent in 2010, according to researcher LMC Automotive.

Mike Jackson, CEO of Fort Lauderdale, FL-based auto retail chain AutoNation Inc., said that approximately 75 percent of his customers want to talk about hybrids, although they constitute only 2.5 percent of his sales.  “What happens from the 75 percent consideration to the 2.5 percent commitment?” Jackson said. “They look at the price premium for the technology, which is already subsidized and discounted, and say “the payback period is too long; not for me.  It’s a back-of-the envelope conversation on the part of the American consumer.”

After a decade of hybrids and oil hovering near $100 a barrel, consumers still aren’t ready to pay the premium for hybrid models, said Reid Bigland, president of Chrysler Group LLC’s Dodge brand.  “The delta you get in fuel-economy lift with a hybrid is continuing to shrink because of the efficiencies with the internal combustion engine” through direct engine, turbochargers and advanced transmissions, Bigland said. “The pure economics are a tough case.”

The Chevrolet Volt plug-in hybrid lures people into the showroom, said Chris Perry, Chevrolet’s vice president of U.S. marketing. With fewer than 8,000 sales last year, consumers often went to a Chevy dealer to look at the Volt and settled on something else less pricey.

Despite slower-than-anticipated sales, the Obama administration has defended tax incentives for electric vehicles.  Transportation Secretary Ray LaHood said that the program has worked, “It’s real money and people have utilized it.”

The administration is advocating aggressive fuel efficiency mandates for the U.S. fleet to decrease oil dependence, particularly through more electrical vehicles. President Barack Obama would like to see one million electric vehicles on the roads three years from now, a goal that industry insiders say is too optimistic. The industry is simultaneously investing in battery technology while making more affordable gains through improvements in conventional engine and transmission systems.  Administration officials are fighting Congressional and consumer skepticism about the wisdom of the $7,500 tax credit that mainly has benefited more well-heeled buyers, who experts say would have been able to purchase the technology without it.

Jeremy Anwyl, CEO of online consumer research group Edmunds.com, said plug-ins are most popular on the West and East coasts with “early adopters,” or educated consumers passionate about using less gasoline.  “For these folks, affordability is not the issue,” Anwyl said.

Automakers have little choice but to promote more hybrids as they prepare for fuel-efficiency requirements that will require significant increases by 2020. However, advances such as Ford’s EcoBoost technology have raised mileage for gas-powered engines —the new Fusion midsize sedan can get 37 miles to the gallon — though bigger gains are still needed.

That’s why many are bullish on alternative engines.  “Internal combustion can’t get all the way there, so you need an alternative,” said Russell Hensley, a partner with the consulting firm McKinsey & Company. “The only alternative we have at the moment is electrification.”  McKinsey listed “uncertainty around future adoption of hybrid/electric powertrain technology” as one of several challenges facing automakers in coming years. According to McKinsey, hybrids could account for up 25 percent of sales by 2020, with battery-powered cars making up five percent. It confirmed that internal-combustion engines would dominate the industry through at least 2030.

Over at the Rocky Mountain Institute, Randy Essex and Ben Holland point out that when gas-electric hybrids first rolled out in 2000, the Honda Insight and Toyota Prius had sales of just 9,350. Those figures looked anemic at the time, too. But in the ensuing years, the technology caught on and more than two million hybrids have been sold in the United States. If that’s any prologue, it could bode well for future plug-ins.

“But is this comparison apt? On the one hand, the new generation of electric vehicles enjoy a few advantages that Priuses didn’t. Gasoline prices sat below $2 per gallon back in 2000, considerably lower than today. What’s more, the latest round of fuel-economy standards, under which carmakers have to get their fleet averages up to 54.5 miles per gallon by 2025, should give the big auto companies incentive to roll out more plug-in vehicles in the coming years.  But then again, today’s electric cars also face special hurdles that the old hybrids didn’t. For one, there’s ‘range anxiety,’ in which would-be buyers of electric cars sometimes fret that their batteries will run out of juice and leave them stranded.”

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Congress Bids Gabby Giffords a Fond Farewell

Tuesday, January 31st, 2012

A rare glimpse of bi-partisanship was seen today in the House of Representatives as Representative Gabrielle Giffords (D-AZ) officially resigned, slightly one year after being shot in the head at a “Congress on Your Corner” session in her native Tucson.  Giffords, who resigned to devote her time to undergoing intensive rehabilitation, walked with a limp.  With the guidance of her friend, Democratic Debbie Wasserman Schultz (D-FL), Giffords slowly made her way to the well at the front of the House chamber.  Another friend, Representative Jeff Flake (R-AZ), held her hand.  Wasserman Schultz praised her colleague’s strength.  “I am so proud of my friend,” she said.  “It will always be one of the great treasures of my life to have met Gabby Giffords and to have served with her in this body,” the Florida congresswoman said.

According to Giffords’ resignation letter, “Even as I have worked to regain my speech, thank you for your faith in my ability to be your voice.  Everyday, I am working hard.  I will recover and will return, and we will work together again, for Arizona and for all Americans,” she pledged to her former colleagues and constituents.  Giffords, who has promised that she will return to public service when she is fully recovered from her gunshot wound, faces months – even years – of rehabilitation.

One of Giffords’ final actions in her five years in Congress was to vote in favor of a bill that she had co-sponsored and which dealt with smuggling on the United States Mexico border. The measure passed unanimously. The legislation outlaws the use of ultralight aircraft to smuggle drugs.  Giffords’s congressional district includes part of Arizona’s southern border with Mexico.  The legislation, which the Senate is expected to approve quickly, would subject violators to up to 20 years’ imprisonment and a $250,000 fine.

The session was emotional at times. Democratic Minority Whip Representative Steny Hoyer (D-MD) said “The House of Representatives of America has been made proud by this extraordinary daughter of this House, who served so well during her tenure here, who felt so deeply about her constituents and cared so much for her country.  Gabby, we love you. We have missed you.”  Speaker of the House John Boehner (R-OH) was teary-eyed as he formally declared Giffords’ resignation.

Giffords’ husband, Mark Kelly – a retired Navy Captain and former astronaut – summed up his wife’s position.  “She realized she was not going to run for re-election and this point the right thing to do was for her to step down,” Kelly said.  “But I’m more optimistic than anybody else about her future.  She just needs some more time, whether it’s a year or two years or three years, I’m very confident she’s going to have a long and effective career as a public servant.”

Writing in the Tucson Citizen, Carolyn Classen said that “There is a bumper sticker ‘Gabrielle Giffords continues to inspire’ which was placed at the Tucson three impromptu memorials that sprang up after the shooting.  It was a testament of her courage and inspirational fight back to health, which is still ongoing (and the reason for her resignation).  Because the Glock 9mm bullet entered the left side of her brain, Gabby’s right leg, right arm/hand, and speech were affected by the injury, and she now is working in rehab with her aphasia –speech & language difficulties — and reduced physical mobility.  Prior to this shooting, Gabby was an avid hiker, and rode horses, a bicycle, and a motorcycle.  But I know what a healthy, friendly, strong-willed individual she was as a politician and community activist, and I know she will work tirelessly now at age 41 to recover fully from her injury.  She took a bullet in the line of duty as a U.S. Congresswoman and should be praised for her courage and resiliency, and hard work for over 10 years as a state & federal legislator.”

With Giffords’ resignation, Arizona Governor Jan Brewer is required to schedule a special election to fill the term.  The primary is likely to be in April and the general election in June.  The winner will then be up for re-election to a full two-year term in November.

Arizona law requires that the governor act within 72 hours to schedule a special election to fill a vacant U.S. House.  According to Brewer spokesman Matthew Benson, the 72 hours begins Wednesday, January 25, at 5 p.m. because that is when Giffords’ resignation takes effect.

 

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Government Wants to Sell Foreclosed Properties in Bulk as Rentals

Tuesday, January 24th, 2012

The Obama administration plans to work closely with federal regulators, Fannie Mae and Freddie Mac to start a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.

There currently are approximately 250,000 foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), and millions more are expected.  Last year’s foreclosure processing delays created an enormous backlog of properties yet to be processed and are just now being restarted. One of the program’s initiatives is for the federal government to mitigate and manage new foreclosures.  Late-stage delinquencies still number close to two million, according to a report from Lending Processing Services (LPS).  Foreclosure starts are double foreclosure sales and “the trend toward fewer loans becoming delinquent, which dominated 2010 and the 1st quarter of 2011, appears to have halted,” according to LPS.

“I think there is a fair amount of money in the wings waiting to buy, investors doing cash raises to buy properties on a large scale,” said Laurie Goodman of Amherst Securities. “But that means they have to build out a rental organization; it means they build out a management company, because if you’re accumulating a hundred homes in Dallas that’s very different than running a multifamily building.”

This is good advice. The recession began with housing, and is one of the main things holding back the recovery.   The most recent unemployment numbers — which showed that non-farm payrolls grew by 200,000 in December, and the jobless rate declined to 8.5 percent from 8.7 percent  — join other cautious signs of an improving economy, although the housing situation is worsening.  There’s still a serious risk it might put a halt to and not just delay expansion.

“Foreclosed homes are a complex problem. We need some creative thinking and new processes to solve the problem of so many distressed homeowners.  I would love to see the market handle it on its own but what makes sense for a single home is likely to destroy confidence in the housing market in aggregate,” said Jafer Hasnain, Partner at Lifeline Assets.  “Housing distress needs a Michael Dell to think about streamlining process details, and a Steve Jobs to make it elegant and human.”

House prices fell again in October, according to the S&P/Case-Shiller index.  The pipeline of delinquencies and future foreclosures is full, which continues to dim the prospects of a quick recovery.  Efforts so far, such as the Home Affordable Modification Program (HAMP), have helped, but less than hoped.

According to the Federal Reserve, there are no simple answers, but it makes several suggestions that Congress should examine.  One is to encourage conversions from owner-occupied to rental because that market has strengthened in recent months: Rents have risen and vacancies have declined.  A faster conversion rate would hold down rents and ease the pressure of unsold homes on house prices. Fannie, Freddie and the Federal Housing Administration account for about 50 percent of the inventory of foreclosed properties.  Many of these are viable as rentals.  A government-sponsored foreclosure-to-rental program to clear away regulatory hurdles would make a big difference.

A second suggestion is to encourage refinancings.  The administration tweaked the existing HAMP program in October, easing some of the earlier restrictions on eligibility.  Even more could be done, according to the Fed.  One possibility involves the fees that lenders pay to Fannie and Freddie for assuming new risks when loans to distressed borrowers are refinanced. These charges could be cut or eliminated, even though Congress just voted to increase them to help pay for the payroll-tax extension.

Some institutional investors have shown interest in bulk REO deals, but the plan has to incorporate ways to help facilitate financing.  That has been one of the biggest barriers to deals already in the works between hedge funds and the major banks.  There is plenty of cash to buy properties, but creating a management structure for the rentals is costly, and some investors are finding the math doesn’t add up to make it worth their while.

Larger investors want to get real scale in any government program, in the range of 50, 100, 500 properties per deal, or $1 billion-plus in assets. That’s why the government is looking to test several different approaches.  Fannie Mae did a $50 million sale in June, although that was on the small side. Officials are evaluating what larger asset sales would look like.

“We expect several pilots that will involve both local investors and institutional investors. The goal here is to reduce supply by converting foreclosed homes into rental units,” says Jaret Seiberg of Guggenheim Securities. “Less supply – even less fear about a flood of foreclosed homes hitting the market – could stabilize (home) prices.”

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We Deliver – More Slowly – For You

Wednesday, December 21st, 2011

First-class mail is likely the next casualty as the United States Postal Service (USPS) looks for ways to stave off bankruptcy. The USPS is planning to shutter 252 mail processing centers nationally and slow first-class delivery as soon as spring, citing steadily declining mail volume.

According to USPS vice president David Williams, the agency wants to effectively eliminate the likelihood that stamped letters will arrive at their destination the next day.  Williams says the postal service is not “writing off first class mail”; rather, it must respond to changing market realities in which people are turning more to the Internet for email communications and bill payment.  After peaking in 2006, first-class mail volume is now at 78 million.  It is projected to drop by approximately 50 percent by 2020.

The estimated $3 billion in reductions are part of a wide-ranging effort by the cash-strapped USPS to cut costs without receiving any help from Congress.  Although the changes would provide short-term relief, they ultimately could prove counterproductive by moving more business onto the Internet.  The move has the potential to slow everything from check payments to Netflix’s DVDs-by-mail, add costs to mail-order prescription drugs, and threaten the existence of newspapers and time-sensitive magazines.

Ideally, first-class mail would be delivered in two to three days, a change from the current one to three days in the 48 contiguous United States.  But, the postal service said mailers “who properly prepare and enter mail at the processing facility prior to the day’s critical entry time” could have their mail delivered the following delivery day.”  Magazine delivery could take two to nine days.

“It’s a potentially major change, but I don’t think consumers are focused on it and it won’t register until the service goes away,” said Jim Corridore, an analyst with S&P Capital IQ, who tracks the shipping industry.  “Over time, to the extent the customer service experience gets worse, it will only increase the shift away from mail to alternatives.  There’s almost nothing you can’t do online that you can do by mail.”

The post office already has announced a penny increase in first-class mail to 45 cents, whch goes into effect on January 22.  “We have a business model that is failing.  You can’t continue to run red ink and not make changes,” said Patrick Donahoe, Postmaster General.  “We know our business, and we listen to our customers. Customers are looking for affordable and consistent mail service, and they do not want us to take tax money.”

According to Donahoe, “We are in a deep financial crisis today because we have a business model that is tied to the past.  We are expected to operate like a business, but we do not have the flexibility to do so.  Our business model is fundamentally inflexible.  It prevents the postal service from solving problems and being effective in the way a business would.”

Senator Susan Collins, (R-ME), the ranking Republican of the Senate Homeland Security and Governmental Affairs Committee, was unhappy with the USPS’ plans.  “Time and time again in the face of more red ink, the Postal Service puts forward ideas that could well accelerate its death spiral,” Collins said.  “Closing thousands of rural post offices, eliminating Saturday delivery, and slowing first-class mail delivery could harm many businesses and their customers.”

Writing in the Washington Post’s Federal Eye column, Ed O’Keefe commiserates with postal customers, but offers no quick fixes. “And what about those customers who rely on first-class mail to get letters delivered the next day?  Donahoe and other officials hope those customers will switch to Priority or Express Mail, a more expensive option that can guarantee deliveries by a certain date.”

If the plan is approved by the Postal Regulatory Commission, the changes have the potential to save about $3 billion, and allow the Postal Service to cut approximately 28,000 jobs.

According to USPS spokesman Dave Partenheimer, the changes allow increased time between deliveries, clearing the way to close or consolidate mail processing centers across the country.  “It’s no longer a challenge of growth — it’s a challenge of staying ahead of the cost curve,” Partenheimer said.  “The fact of the matter is, our network is too big.”

Sally Davidow, a spokeswoman for the American Postal Workers Union, said the changes will hurt communities and take the Postal Service in the wrong direction.  “They should be trying to speed up and modernize the mail, not slow it down and make it less relevant in the digital age,” she said.

Davidow said the retirement payment mandate and overpayment into the Postal Service’s pension accounts are the main culprits.  She believes that USPS leadership should focus on pressuring Congress to fix them instead of cutting service and jobs.  “Addressing those two things would go a very long way toward resolving the crisis and giving the Postal Service the breathing room and the capital it needs to modernize and to be relevant in the digital age,” Davidow said.

The postmaster general offered his opinion on that.  “The American public pays bills online,” Donahoe concluded.  “We can’t sit back for another five, or six, or 10 years and wait for these changes.”

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The Fed’s Secret Bank Loans Revealed

Wednesday, December 7th, 2011

In a stunning revelation, Bloomberg has obtained 29,000 pages of Federal Reserve documents detailing the largest bailout in American history.  According to an article that will appear in the January issue of Bloomberg Markets magazine, the “Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on December 5, 2008, their single neediest day.  Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy.  And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.”

The $7.77 trillion that the central bank made available stunned even Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009.  According to Stern, he “wasn’t aware of the magnitude.”  It overshadows the Treasury Department’s better-known $700 billion Troubled Asset Relief Program (TARP) program.  When you add up guarantees and lending limits, it becomes clear that the Fed had committed $7.77 trillion as of March, 2009 to rescuing the financial system. That is more than half the value of the U.S. GDP that year.  “TARP at least had some strings attached,” said Representative Brad Miller (D-NC), a member of the House Financial Services Committee.  “With the Fed programs, there was nothing.”

According to Bloomberg’s editors, “Even as they were tapping the Fed for emergency loans at rates as low as 0.01 percent, the banks that were the biggest beneficiaries of the program were assuring investors that their firms were healthy.  Moreover, these banks used money they had received in the bailout to lobby Congress against reforms aimed at preventing the next collapse.  By keeping the details of its activities under wraps, the Fed deprived lawmakers of the essential information they needed to draft those rules. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, was debated and passed by Congress in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival.  Similarly, lawmakers approved the Treasury Department’s $700 billion Troubled Asset Relief Program to rescue the banks without knowing the details of the far larger bailout being run by the Fed.

“The central bank justified its approach by saying that disclosing the information would have signaled to the markets that the financial institutions that received help were in trouble.  That, in turn, would make needy institutions reluctant to use the Fed as a lender of last resort in the next crisis.  Fed officials argue, with some justification, that the program helped avert a much bigger economic cataclysm and that all the loans have now been repaid.”

Derek Thompson, a senior editor at The Atlantic, argues that the Fed’s secret bailout is a sign that it was doing its job.  According to Thompson, “First, you can be furious that the Federal Reserve ‘committed’ $7.7 trillion — a sum of money equal to half of the U.S. economy — to save the financial system.  I understand the shock, but we were at the precipice of catastrophe and that money wasn’t ‘spent’ so much as it was put at risk and subsequently recouped.  The economy has struggled in the three years since, but we avoided meltdown.  The trillions worked.

“Second, you can be furious that the banks made a profit off of their own mistakes — but $13 billion is a small price to pay for staving off Armageddon.  Third, you can be furious that the Federal Reserve went to court to keep this information out of the hands of journalists.  There, I’d agree.  It’s Congress’s job (not the Federal Reserve’s job) to pass laws that govern the banking sector, but Congress needs information to make good decisions about regulating banks and it’s disappointing that the Federal Reserve withheld details about its bailouts while the commission and the Dodd-Frank debate were ongoing.  Fourth, you can be furious that our central bank basically did the right thing when it had to, and its counterpart in Europe won’t — at the risk of a continental meltdown.”

Times’ Massimo Calabresi agrees. According to Calabresi, “But the Fed saved the world economy through all this lending without losing a penny in the process.  And after its initial heavy breathing, the article does give the Fed an opportunity to explain itself.  ‘Supporting financial-market stability in times of extreme stress is a core function of central banks,’ said William B. English, director of the Fed’s Division of Monetary Affairs.  “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.’  In other words, lending money to banks in a crisis is the whole point of the Fed:  saving the world economy by flooding the system with money when it is about to freeze up is exactly what the central bank was created to do.”

The Fed has been lending money to banks since just after it was established in 1913. By the end of 2008, the Fed had created or expanded 11 lending facilities catering to financial firms that were unable to obtain short-term loans from their usual sources.  “Supporting financial-market stability in times of extreme market stress is a core function of central banks,” said William English, director of the Fed’s Division of Monetary Affairs.  “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”

 

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Companies Are Stocking Up on Durable Goods

Wednesday, November 30th, 2011

American companies ordered more heavy machinery, computers and other long-lasting manufactured goods in September, an encouraging sign for the shaky economy.  The increase in demand for these durable goods suggests businesses are staying with investment plans, despite slow growth and a lack of consumer confidence.

Durable goods are products expected to last a minimum of three years.  Core capital goods are products that have nothing to do with defense or aircraft.  The gains are driven by tax breaks given to businesses for investments made this year, an incentive Congress approved last December to boost the lethargic economy.

“Demand for big ticket items seems to be alive and well,” said John Ryding, an analyst at RDQ Economics.  “Outside of the volatile transportation sector, the gains in durable orders were broad based in September, and point to a manufacturing sector that continues to expand at a solid rate.”

“Despite the understandable concern about economic growth, businesses are still investing,” said Jennifer Lee, senior economist at BMO Capital Markets.

Robust demand for core capital goods is a strategic reason why economists expect an annual growth rate of 2.4 percent in the 3rd quarter.  That would be a major improvement from the first six months of the year, when the economy expanded at just 0.9 percent, the worst growth since the recession ended more than two years ago.  A 2.4 percent growth rate could ease fears that the economy is on the verge of sliding back into a recession.  Even so, the growth rate needs to nearly double to make a substantial dent in the unemployment rate, which remained stuck at 9.1 percent in September for the third consecutive month.

“Manufacturing is in pretty decent shape, and this ends the quarter on a high note,” said Brian Jones, a senior U.S. economist at Societe Generale, who accurately forecast demand for non-transportation equipment.  “We’ve got decent momentum going into the 4th quarter.”  Orders for computers and related products jumped as much as six percent.  A Commerce Department report is projected to show the world’s largest economy grew at a 2.5 percent annual pace in the 3rd quarter, an increase of the 1.3 percent rate in the previous three months.  Societe Generale’s Jones said the gain in durable goods demand has the potential to bring GDP growth for last quarter closer to three percent.

Boeing, the largest American aircraft maker, received 59 airplane orders in September, compared with 127 the preceding month.  September’s decline came on the heels of a 25 percent gain in August.  Orders for non-defense capital goods excluding aircraft jumped 17 percent at an annualized rate compared with an 11 percent increase in the previous three months, an indication that business investment is picking up.

Additional indicators show that manufacturing, which accounts for approximately 12 percent of the economy, continues to grow.  The Institute for Supply Management’s factory index rose a full point to 51.6 in September, compared with 50.6 in August.  A level greater than 50 indicates that expansion is taking place.  Industrial production advanced in September on demand for items such as cars and computers, according to the Federal Reserve.

According to Mike Shea, Managing Partner and Trader at Direct Access Partners LLC, “The number wasn’t bad, and having a decent number in durables is far better than having a bad number, since with the overhang of Europe, if we were getting lousy data here, then we wouldn’t have anything to hang our hats on.  If not for what was going on in Europe, this market would be running on all cylinders.  The summit in Europe is the tradable event.  We could have one hundred percent earnings positive surprises today, we could have great economic data come out, all of that could come in rosy domestically, but if the news out of Europe is judged to be bad, none of what happens in the U.S. will matter.  This market will not shrug off a lousy plan coming out of Europe.  It will not shrug off any plan that is not fundamentally based in reality.”

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Companies Are Stocking Up on Durable Goods

Wednesday, November 2nd, 2011

American companies ordered more heavy machinery, computers and other long-lasting manufactured goods in September, an encouraging sign for the shaky economy.  The increase in demand for these durable goods suggests businesses are staying with investment plans, despite slow growth and a lack of consumer confidence.

Durable goods are products expected to last a minimum of three years.  Core capital goods are products that have nothing to do with defense or aircraft.  The gains are driven by tax breaks given to businesses for investments made this year, an incentive Congress approved last December to boost the lethargic economy.

“Demand for big ticket items seems to be alive and well,” said John Ryding, an analyst at RDQ Economics.  “Outside of the volatile transportation sector, the gains in durable orders were broad based in September, and point to a manufacturing sector that continues to expand at a solid rate.”

“Despite the understandable concern about economic growth, businesses are still investing,” said Jennifer Lee, senior economist at BMO Capital Markets.

Robust demand for core capital goods is a strategic reason why economists expect an annual growth rate of 2.4 percent in the 3rd quarter.  That would be a major improvement from the first six months of the year, when the economy expanded at just 0.9 percent, the worst growth since the recession ended more than two years ago.  A 2.4 percent growth rate could ease fears that the economy is on the verge of sliding back into a recession.  Even so, the growth rate needs to nearly double to make a substantial dent in the unemployment rate, which remained stuck at 9.1 percent in September for the third consecutive month.

“Manufacturing is in pretty decent shape, and this ends the quarter on a high note,” said Brian Jones, a senior U.S. economist at Societe Generale, who accurately forecast demand for non-transportation equipment.  “We’ve got decent momentum going into the 4th quarter.”  Orders for computers and related products jumped as much as six percent.  A Commerce Department report is projected to show the world’s largest economy grew at a 2.5 percent annual pace in the 3rd quarter, an increase of the 1.3 percent rate in the previous three months.  Societe Generale’s Jones said the gain in durable goods demand has the potential to bring GDP growth for last quarter closer to three percent.

Boeing, the largest American aircraft maker, received 59 airplane orders in September, compared with 127 the preceding month.  September’s decline came on the heels of a 25 percent gain in August.  Orders for non-defense capital goods excluding aircraft jumped 17 percent at an annualized rate compared with an 11 percent increase in the previous three months, an indication that business investment is picking up.

Additional indicators show that manufacturing, which accounts for approximately 12 percent of the economy, continues to grow.  The Institute for Supply Management’s factory index rose a full point to 51.6 in September, compared with 50.6 in August.  A level greater than 50 indicates that expansion is taking place.  Industrial production advanced in September on demand for items such as cars and computers, according to the Federal Reserve.

According to Mike Shea, Managing Partner and Trader at Direct Access Partners LLC, “The number wasn’t bad, and having a decent number in durables is far better than having a bad number, since with the overhang of Europe, if we were getting lousy data here, then we wouldn’t have anything to hang our hats on.  If not for what was going on in Europe, this market would be running on all cylinders.  The summit in Europe is the tradable event.  We could have one hundred percent earnings positive surprises today, we could have great economic data come out, all of that could come in rosy domestically, but if the news out of Europe is judged to be bad, none of what happens in the U.S. will matter.  This market will not shrug off a lousy plan coming out of Europe.  It will not shrug off any plan that is not fundamentally based in reality.”

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Obama Bypasses Congress to Boost Housing

Monday, October 31st, 2011

President Barack Obama executed an end run around Congress when he announced a significant retooling of a plan designed to help homeowners who are paying their mortgages, but still underwater, refinance their loans at a more affordable interest rate.  Administration officials said the changes will streamline the government’s Home Affordable Refinance Program (HARP) and could dramatically increase the number of borrowers who have refinanced their loans under the program past the current 894,000.  They did not specify how many borrowers might be eligible or likely to participate.  The program, which is voluntary to lenders, will be available only to homeowners whose mortgages were sold to Fannie Mae and Freddie Mac on or before May 31, 2009, and who have a loan-to-value ratio above 80 percent.

The downside is that hundreds of thousands more could not qualify – primarily because of the previous 125 percent loan-to-value limit on the program or because banks refused to take on the risk.  Raising the loan-to-value restrictions may help a limited number of borrowers, according to Jaret Seiberg, an analyst for MF Global Inc.’s Washington Research Group, which analyzes public policy for institutional investors.  The difficulty is that mortgage holders still must be up-to-date on their payments for the past six months — with no more than one missed payment in the past year.  Additionally, they also must qualify for a new loan.

Qualifying homeowners will be able to refinance their mortgages at the current low rates, which are currently near four percent. Obama’s move comes at a time when there is a fast-growing consensus that the nation’s declining housing market is negatively impacting the economic recovery.  Home values are at eight-year lows; and more than 10 million people are underwater, meaning that they owe more than their homes are worth.  “It’s a painful burden for middle-class families,” Obama said.  “And it’s a drag on our economy.”  The administration’s proposal underscores the scale of the problem, as well as the limits of public policy in resolving it.  By cutting monthly payments, the Obama administration hopes to make cash available for consumers to spend elsewhere.

According to housing regulators, one million borrowers might be eligible to participate in the program.  Unfortunately, that is just 10 percent of the number of homeowners who need help.  Although the Obama administration’s estimates say the average homeowner could save $2,500 per year, other projections said savings would be in the range of $312 annually.  This depends on the upfront fees the borrower pays, which can include thousands of dollars in closing costs.

Obama promoted the plan under his “We Can’t Wait” campaign, in which he will use the executive branch’s existing tools to improve the economy while Congress debates further legislation.  “We can’t wait for an increasingly dysfunctional Congress to do its job,” he said.  “Where they won’t act, I will.”

“We know there are many homeowners who are eligible to refinance under HARP and those are the borrowers we want to reach,” said Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), which administers Fannie Mae and Freddie Mac. The program expires at the end of 2013.  “We believe these changes will make it easier for more people to refinance their mortgage,” DeMarco said.  “Breaking this vicious cycle is one of the most pressing issues facing policy makers,” Federal Reserve Bank of New York President William C. Dudley said.  The HARP revamp is part of multiple efforts the government is making to boost home prices and consumer spending.  “It’s the equivalent of a tax cut for these families,” HUD’s Donovan said.

Mortgage lenders are “particularly gratified” at the revised plan, said David H. Stevens, president and chief executive officer of the Mortgage Bankers Association.  “These changes alone should encourage lenders to more actively participate.”

Writing in The Atlantic, Daniel Indiviglio believes that the revised program has potential.  “The administration appears to have accounted for all of the major obstacles to refinancing and eliminated them.  A home’s value no longer matters.  The cost should be less prohibitive to borrowers.  Much legal red tape has been cut.  Other loans tied to the home won’t stand in the way.  Ample time to refinance is provided.  This should help to allow at least a million Americans to refinance who haven’t had the opportunity to do so in the past.  If this works as hoped, then those consumers will have more money in their pockets each month.  Borrowers who see their mortgage interest rates drop from five percent or six percent to near four percent will often have a few hundred dollars more per month to spend or save.  If they spend that money, then it will stimulate the economy and create jobs.  If they save it or pay down their current debt, then their personal balance sheets will be healthier sooner and their spending will rise sooner than it would have otherwise.  The effort may even prevent some strategic defaults, as underwater borrowers won’t feel as bad about their mortgages if their payment is reduced significantly,” Indiviglio said.

Felix Salmon, writing in Reuters, could not disagree more. “For many reasons, it is very difficult to project the number of mortgages that may be refinanced under the enhancements to HARP, including the future path of interest rates, borrower willingness to undertake a refinance transaction and the number of lenders and servicers who choose to offer the program.  Given current market interest rates, our best estimate is that by the end of 2013 HARP refinances may roughly double or more from their current amount but such forward-looking projections are inherently uncertain.  First, by the end of 2013?  Never mind mortgage relief now, we’ll try and get you mortgage relief in two years’ time?  Secondly, the current pace of HARP refinancing is pathetic.  We’ve been managing to do less than 30,000 HARP refinancing a month.  And in the 28-month history of HARP, we’ve managed a grand total of 894,000 HARP refinancing, which works out to about 32,000 per month.  The FHFA is projecting that the pace of HARP refinancing won’t increase at all as a result of this plan. We’ll still average out at about 30,000 per month — maybe a bit more, maybe a bit less, but you’re never going to make a dent in the mountain of 11 million underwater mortgages at that rate.”

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Renewable Energy Industry Meets Challenges Head On

Thursday, October 27th, 2011

The renewable energy industry is facing serious challenges from competition subsidized by foreign governments and restrictive regulations on the home front.  This was the consensus at the recent Solar Exchange East 2011, attended by academics, solar entrepreneurs, engineers, investors, supporters and government officials at the McKimmon Center at North Carolina State University in Raleigh.

Larry Shirley, director of the Green Economy program at the North Carolina Department of Commerce’s Energy Division, said that “Policies and incentives are the building blocks” for the solar industry.  Participants generally called for an end to government preference for fossil fuels, while critics believe the traditional means of letting private investors and the market dictate the industry’s direction is the optimal policy.

“Subsidies are basically a waste of taxpayers’ money, a form of corporate welfare,” said Roy Cordato, the John Locke Foundation’s vice president for research and resident scholar and one of the critics.  “These (renewable energy ventures) are grossly inefficient.  If they weren’t, they wouldn’t need government subsidies.”

“This is a robust environment,” said Rick Myers, director of the Solar Vertical Market Management program for Siemens.  “The U.S. solar market grew 67 percent, from $3.6 billion in 2009 to $6 billion in 2010.  Solar electric installation In 2010 totaled 956 megawatts.  There’s no doubt the U.S. government needs to get more involved in this effort from a policy standpoint.  The solar panels are 50 percent of the cost for installation and these prices are going way down.  The fact of the matter is the competition is extremely difficult in that area.  It’s coming from the Pacific Rim and China.”

In a related move that boosts renewable energy, a U.S. Treasury Department grant program that pays for up to 30 percent of a solar project’s costs would add 37,394 jobs to the economy in 2012 has been extended for one year, according to the Solar Energy Industries Association (SEIA).  The program, part of the 2009 economic stimulus package, was due to expire at the end of 2011 after an initial one-year extension was passed by Congress last December.  A second extension will boost solar jobs by 12 percent as developers increase installations by 2,000 megawatts, or enough for about 400,000 homes.  More than 100,000 Americans currently work in the solar industry, double the number in 2009, said Rhone Resch, SEIA’s chief executive officer.  “Much of the jobs and industry growth has come out of that program,” Resch said.  “The last thing the government should do in a fragile economy is eliminate a tax break that creates jobs.”

With the grant program, developers can obtain the equivalent amount in cash and write off assets more quickly.  The solar industry has received more money from the grant program than any other renewable energy sectors with the sole exception of wind.  “The (program) has been the most effective policy in driving economic and job growth in the past two years,” Resch said.  “As we continue to slog through a sluggish economy, the tax equity market remains in a much smaller capacity than where it was in 2007.”

Writing for Renewable Energy World.com, Elisa Wood says that “We hear a lot about the job-building benefits of renewable energy when it draws manufacturers and developers to local communities.  Less talked about are those who arrive well before the shovels, steel, factories and jobs.  These are the green-energy entrepreneurs – the creative thinkers and risk takers responsible for the rise of clean energy ventures over the last decade.  Others entering the industry are veterans of energy, finance, agriculture, telecommunications, high tech, science, transportation, construction, nanotechnology and commerce, all drawn by enormous opportunity, as the largest economies in the world spend an expected $2.3 trillion over the next decade to revamp industrial-age energy apparatus into cutting-edge technology.  Green energy entrepreneurs emerge from throughout North America, Europe and Asia, but they tend to congregate in high-tech regions such as Silicon Valley, an area of California becoming as much about energy as it is the internet.  ‘You can’t throw a softball around here without hitting another solar company,’ says Dan Shugar, one of the solar industry’s early pioneers and now chief operating officer of Solaria, a Fremont, CA-based company that makes silicon photovoltaic products.”

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A Lifeline for Underwater Homeowners?

Wednesday, October 26th, 2011

Federal officials and some of the nation’s largest banks are collaborating on a plan that would make refinancing available to some borrowers whose houses are worth less than their loans, with the caveat that they must be up-to-date on mortgage payments.  Typically, these borrowers can’t refinance because they don’t have enough equity in their homes.  The plan would apply only to bank-owned mortgages.

Federal officials have been trying to negotiate a deal with the five largest mortgage servicers – Ally Financial, Inc, Bank of America, Citigroup Inc, J.P. Morgan Chase and Wells Fargo & Co.  Officials favor a plan that would break a legal impasse with big banks over alleged foreclosure abuses such as robo signing and ease problems in the housing market.  Discussions are still underway and the final outcome is not yet known.

Pressure is building in Washington, D.C., to help underwater homeowners with a generous refinance plan.  President Barack Obama told Congress that he wants to help “responsible homeowners” refinance, saying it would “give a lift to an economy still burdened by the drop in housing prices.”  A bipartisan coalition of 16 senators wrote to the administration urging swift action on a refinance plan.

“A huge floodgate would open up” if underwater refinancing were broadly available, said Fif Ghobadian, a broker at Guarantee Mortgage in San Francisco.  “It would provide the help that lowering interest rates cannot do alone.  Someone who’s been making payments at 7.5 percent religiously but cannot qualify to refi – boy, would that four percent make a huge difference in their life.”

A program has existed for some time that provides guidelines to lenders for refinancing some Fannie Mae- and Freddie Mac-backed underwater mortgages.  The program is called HARP (Home Affordable Refinance Program), it’s two years old and has resulted in approximately 800,000 refinances, far short of the five million originally envisioned.  Only a fraction of those homeowners were deeply underwater.  HARP’s main impediment has been the lenders themselves.  Concerns about issues such as being forced to take responsibility for refinances that default (known in the industry as “buybacks”) has made lenders reluctant to issue HARP mortgages.  The proposed new plan would likely expand HARP to make it more acceptable to lenders and more usable by a broader swath of homeowners.  “Changes (being contemplated) would address several HARP obstacles,” said Erin Lantz, director of the mortgage marketplace for Zillow.  “The industry now makes it hard for people to qualify.  The process would be more streamlined.”

According to a recent Harvard study, approximately 11 million homeowners with mortgages are underwater.  This accounts for roughly one-fourth of all homes with mortgages in the nation.  An additional five percent have near-negative equity (<five percent home equity).

Writing for Reuters, Felix Salmon doesn’t think much of the potential mortgage plan.  “It’s pretty weak tea: under the terms of the deal, if (a) you’re underwater on your mortgage, and (b) you’re current on your mortgage payments, and (c) your mortgage is owned by the bank outright, rather than having been securitized, then you would be given the opportunity to refinance your mortgage at prevailing market rates.  It’s worth remembering, at this point, that mortgages are by their nature pre-payable.  When you write a fixed-rate mortgage, you make a general assumption that if mortgage rates fall substantially, the borrower is going to pay you off and refinance.  The underwater questions we’re talking about here were written during the housing boom, when banks simply assumed that house prices always went up; those banks cared massively about prepayment risk at the time, and spent huge amounts of money and effort trying to hedge it.  As it happened, mortgage rates did fall substantially — with the result that the banks’ hedges paid off.  But then the banks realized that they could make money on both legs of the deal — that they could collect on their mortgage-rate hedges, without having to worry about prepayment.  Because now the borrowers are underwater, they’re not allowed to refinance. So the banks continue to cash above-market mortgage payments every month — something they never expected that they would be able to do.

“It’s not inconceivable at all.  In fact, wholesale mortgage refinance for underwater borrowers is a major part of Barack Obama’s jobs bill, and the Congressional Budget Office (CBO) has been costing it in various ways.  At heart, it’s a way of rectifying a market failure, and thus makes perfect sense.  But that’s precisely why I don’t think that this plan deserves a place in the mortgage-settlement talks.  For one thing, it’s downright unfair and invidious to allow 20 percent of underwater homeowners to refinance while ignoring the other 80 percent.  More to the point, giving homeowners the ability to refinance their mortgages is what you do, if you’re a bank.  It’s not some kind of gruesome punishment.”

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