About that "Beat the Street" GDP Number

GDP beat second quarter estimates of 1 percent easily. However, the BEA revised first quarter growth down from 1.7% to 1.1%.

Is this a good thing, a bad thing, or nonsense?

The correct answer is "nonsense". One look at BEA GDP Release is all it takes to determine the answer.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.3 percent in the second quarter, compared with an increase of 1.2 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 0.8 percent in the second quarter compared with 1.4 percent in the first.

How Convenient

My friend "BC" says

How convenient, otherwise real GDP would have printed at 0.8%, prices constant. 

Yet, the yoy rate of real final sales per capita is below 1% for the second quarter in a row, whereas the second quarter annualized rate is near contracting. Had the deflator been reported at the rate in Q1, the yoy and 2-qtr. annualized real final sales per capita rates would have been reported as contracting.

Doug Short at Advisor Perspectives came up with similar conclusions via email.

Doug writes

• Official GDP with the BEA’s GDP deflator (0.71% which is rounded in the popular press to 0.7%) gives us the official GDP of 1.67%,  which rounds to 1.7%
• GDP with a hypothetical 1.6% deflator (as forecast by Briefing.com) would have been 0.78%, which rounds to 0.8%. 
• GDP with the average deflator over the past 14 quarters (which is 1.75%) would have been 0.64%, which rounds to 0.6%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Economic Recovery in Spain? Tax Collections, Retail Sales Prove Otherwise

In an attempt to distract voters from all the political scandals in his administration, Prime Minister Mariano Rajoy is talking about the pending economic recovery in Spain. Don't believe it.

Huky Guru at Guru's Blog in Spain takes a good look at numbers that prove Rajoy is disingenuous.

Via Mish-modified Google translation, please consider Debt Remains Uncontrolled, €40 Billion Deficit in First Half

First Half Deficit 3.81% of GDP

The government deficit totaled €40 billion in the first six months of the year in terms of national accounts, 3.81% of GDP, according to data released Tuesday by the Ministry of Finance and Public Administration.

The figure represents a decline of 8.2% compared to the same period last year, although an increase of 19.9% ​​compared to the figure recorded until May, which was around €33.3 billion.

The result of the shortfall until June due to an income reached €49.528 billion euros (+12%) and expenditure of €89.529 billion euros, up 2%.

Revenues Drop 7.1%

Cumulative to June, revenues fell by 7.1% and non-financial payments fall by 1%. What's worse, is that for nearly every euro that enters government coffers, it is burning one euro in cash.

VAT Shows Decline in Economic Activity

State revenue from indirect taxes, with €36.221 billion, an increase of 5.1%. But remember the VAT went from 18% to 21%, an increase of 17%, so that a rise of only 5.6% in revenue means that economic activity or the collection capacity of the tax has diminished.

Expenditures

On the expenditure side, the financial payments made by the State stood at €82.921 billion euros, up 1%. This result has been influenced by higher financial expenses and personnel, but were offset by declines in other chapters.

Personnel expenses stood at €13.892 billion euros, representing an increase of 1.3%, while collecting 1.9% decline in wages and salaries, to €6.798 billion euros. Social benefits grew by 5.6% on account of an increasing number of pensioners and 1% increase of pensions.

Transfer payments current until June totaled €50.551 billion, representing a decrease of 0.8%. Finally, payments for real investments, with €2.116 billion euro, fell 6.4%, while the capital transfer payments decreased by 2% to €1.961 billion euros due.

Spain's Retail Sales Decline 36th Month

Reuters reports Spain's retail sales slump stretches to three years, hampering recovery

Spanish retail sales fell for the thirty-sixth month running in June, offering a snapshot of the shrinking consumer spending that is hampering a long-awaited economic recovery.

With Spain increasingly reliant on exports to generate growth, its current account - the broadest measure of a country's terms of trade - turned to a surplus in May.

The recession has lasted since the end of 2011, though economic output fell just 0.1 percent between April and June, leading the government to state the slump was over.

Calendar-adjusted retail sales fell 5.1 percent year-on-year in June, according to National Statistics Institute data on Wednesday, while the Bank of Spain said the current account posted a 2.4 billion euro surplus in the previous month.

Spain's unemployment rate is above 26 percent. That has impeded spending on the high street, as have the high budget gaps that have forced the government of Prime Minister Mariano Rajoy to cut expenditure and hike taxes.

"Whenever the economy starts breathing, you'll have additional pressure to start cutting the deficit, so we get in to additional austerity and spending will fall. It's going to be a choppy ride," Moec said.

"Of the IBEX companies, practically the only thing carrying them are contracts and business volume out of Spain," said Pedro Alvarez, trader at Banco Sabadell.

"If you look at (Spain's largest department store) Corte Ingles, which is having problems, you get a good idea of how things are going in the country."

Spain finally met its revised-four-times-lower deficit targets. Don't mistake that for an economic recovery.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Creating the Perfect Marketing Campaign

Originally posted on CUInsight.com

Marketing sometimes feels like divining wine.  You have to get the right offer with the right messaging in front of the right people at the right time.  But you don’t need a crystal ball in order to create the perfect marketing campaign. 

• Set a goal!  If your lending manager says, “we need more loans,” ask him or her for some specifics so you have an end goal in mind.  For example, $10 million in new loans.  This will help you determine how many loans you will need to capture in this example.
• Find your inner journalist.  Creating the perfect marketing campaign is only possible if you have all the right information.  A good journalist asks the “Five W’s”: who, what, when, where, and why.  This is where you’ll determine the target market and strategy for your campaign.
• Who?  Male or female (or both)?  Age?  Household income?  Homeowner or renter?  Members or non-members?  Do they live near one of your branches?  These are great, specific examples of information that will help you determine your perfect target market.  If your credit union has an MCIF system, work with the appropriate person to get good, specific data about the group(s) who statistically would be good candidates for this offer.  If you don’t have access to MCIF data, consider contacting one of the three credit bureaus to get credit histories on your members in order to take a deeper look for opportunities.  Is your goal to acquire new business from non-members?  Take the same approach as outlined above and look for a reputable firm that generates lead lists based on the information you want to know and target.  Remember – the more specific the group, the more targeted the message will be, which will yield better results. 
• What?  This is very straightforward: what is the offer, and what is your messaging about the offer?  For example, $10 million in auto loans.  What other specials might your credit union offer to accompany the loan?  Rate isn’t the only thing to consider here.  People make decisions based on emotion.  What emotions can you appeal to in your messaging?
• When?  Make sure your offer has a time limit on it to create urgency, or that postcard, newspaper ad, or whatever form of message you deliver will make its way to the bottom of their priority list.  Example $10 million in new loans by August 31.
• Where?  Using the specific information outlined in “a” above, how are you going to reach those people?  Perform a communications audit on your current messaging mediums compared to everything that is available.  Which ones are a good fit for this particular campaign that also fit into the budget?  This is your strategy.  Even look outside of the credit union industry to see what kinds of guerilla tactics have worked well for other companies.  You never know what will catch peoples’ attention. 
• Why?  This is huge.  Why would someone want a membership/loan/account [insert offer here] from your credit union?  This is called your differentiator.  Give them a reason to come to you for this product or service.  If you don’t have a “Why,” get your team together and do some brainstorming.  Here is a great book to get you started.  Your “Why” is not only important for marketing, but it is the foundation of your credit union and why you do business differently than anywhere else. 
• Ask for the business!  Do you know how often credit unions miss opportunities because they either don’t regularly ask for their members’ business, or they assume their members already know they do mortgages, financial planning, car loans, etc. etc.?  All. The. Time.  For the purposes of a marketing campaign, this is known as your Call to Action.  Our example says $10 million in new auto loans by August 31.  What are you going to say that is going to get your perfect target audience up off their seats to get a loan with your credit union by August 31?  Remember your differentiator and the specific details of your campaign.  Those go into consideration in this phase of marketing campaign development.
• Is your campaign “on brand?”  Does your messaging match your brand voice?  Is the creative consistent with the design elements and colors of your brand?  Putting your marketing initiatives through a brand filter is crucial to growing brand awareness and loyalty. 
• Capture the leads.  Make sure that you have systems in place to find out who is interested in your offer, and then follow up with those people.  Your individual strategies and delivery channels will determine the mechanisms for capturing leads.  In addition, outline a follow-up strategy for your sales team or front-line staff. 
• Measure.  Measure.  Measure.  Did I say measure?  You want to be able to go to your lending manager, CEO, and/or board with concrete data on the marketing investment versus how many new loans were generated.  This is important not only for knowing who responded to your offers and through what mediums so future marketing campaigns are successful, but also for justifying future marketing investments. 
• Be agile.  Throughout the campaign period, be sure to leave yourself the flexibility to make adjustments if certain elements are doing better than others.  The earlier you find out what works, the more success you will have. 

Ready?  Put down that crystal ball, get out your dry erase markers, and start creating your next marketing campaign.  Follow the steps above, and you’ll be on your way to exceeding your strategic marketing goals in no time.

Amanda

We bring these marketing philosophies to credit unions and community banks all across the country.
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The Race to Define Yourself

I roll to the red light as my engine settles to a low rumble. Glancing to my right, a perfect stranger ... now a 2-wheeled, mortal enemy ... who gives me an ever-so-slight nod of the head and rev of an engine. I return my own rev of approval. My pulse quickens. A bead of sweet sweat forms on my temple.

Our focus turns to our electronic taskmaster while we await its permission to unleash hell. When the cross light clickers from green to yellow I can sense our combined muscles tense, like TNT anticipating a lit fuse. I shift into first and back off the clutch as much as possible to shed precious milliseconds. 

The cross light flickers from yellow to red ... it's time. My hand tightens on the gear shift. My feet, light on the pedals. 

At green, our tandem of engines scream with excitement, like thoroughbreds released from their gate. My smaller, lighter foe pulls ahead with ease and I imagine his cocky, confident smirk just feet in front of me. My car, Sunny, and I are one as I listen and wait for just the right tone. When the engine hits that perfect note, I tap the clutch - scarcely long enough to slide into second gear. I pull even and sense my prey's smirk turn to scowl as he torques his throttle beyond its limits.

Our dance continues from second to third to fourth gear. Though Sunny and I are smooth through to shifts and united in our desire, we simply can't keep up. The Vespa scooter pulls away, not even looking in his rearview as he offers a triumphant wave.

With a sigh, I pat Sunny's dash in our own sense of victory. We putt down the road with the satisfaction that we've helped yet another person smile with this bright yellow classic convertible VW bug.

Sunny will never win any races with her 78 horsepower, 35 year old engine. She'll never take the prize in a car show with her dented trim and ripped rag top. But I've found in the year that I've owned her that she has a gift. When I pull her alongside the faster, flashier, more expensive machines at the local Friday night car show - she draws the crowd. More importantly, she demands smiles. Every single time I take her out, people point and flash a grin.

To be honest, Sunny fits me. She reflects my personal brand. Don't get me wrong, I'd much rather see myself as a drop-top '67 Camaro SS or a '63 split-window Corvette. From a running perspective, I can make a case for being a Jeep Wrangler - at home in the solitude of nature, ducking under fallen trees and splashing through rocky creek beds (heck, I wrote this blog on last night's trail run). But that's just me for a few hours a week. Every minute of every day, I'm quirky. More interested in having fun than being flashy or high-performance. Looking to make people smile. That's my '78 bug. We know who we are and we own it. Voluntarily trading trophies and ribbons for smiles and waves.

So, that's the branding challenge, isn't it? To set aside a Corvette dream that may not really fit you or a cooler Jeep persona that doesn't truly define you. There are hideous cars that win countless races and show-stoppers that spend more time on tow trucks than pavement. For yourself and your organization, know who you are, what you do naturally well, how it separates you, where that fits in the grand plan and work it like there's no tomorrow. 

Your brand isn't built in your imagination or in your Board room. It erupts from your soul.

We bring these marketing philosophies to credit unions and community banks nationwide, and would love to bring them to your institution too. Contact us to see how.

With more than 250,000 visits worldwide, we hope that you enjoy this blog.  If you find it helpful, please share it with your colleagues. Also, check out our YouTube Channel for short video blogs about financial marketing.  

MarketMatch is also a nationally and internationally requested speaker. Contact us to bring our marketing ideas to your next conference.

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"Tax Nightmare" of Eminent Domain Mortgage Seizures

Gayle McLaughlin, mayor of Richmond, California is hell-bent on her plan to seize mortgages via eminent domain, then provide "mortgage forgiveness" for the homeowners.

I smacked the idea from a legal standpoint in Illegal Public Seizure of Mortgages Via Eminent Domain in the Spotlight.

Tax Nightmare

Legalities aside, there are also huge tax consequences to consider.

A local attorney and real estate broker posting under the name "davecherr" commented on the problem of debt forgiveness.

There is a massive and thus-far unremarked upon problem with this ED scheme: it would result in a MASSIVE INCOME TAX BILL FOR THE HOMEOWNER. Under the tax code, discharge of indebtedness is counted as income. There is a safe harbor for people who lose their primary residence to foreclosure, but it would not apply to these Richmond residents, since they would keep their house with magically reduced debt.

That debt reduction would NOT be tax-free. If a homeowner's mortgage goes from $400K to $190K under the proposed scheme, they would owe taxes on $210K of discharged debt (it would likely be much more, because all missed payments, late fees, and missed property tax and insurance payment, and interest on all of that, would be folded into principal -- such costs can easily drive principal from $400K to $500K over the course of 1-2 years of non-payment).

The federal taxes on that would be around $50K, and the state taxes $15K, for a total tax bill of $65K, or around $7K per year on a 15 year payment plan. As a local, I can tell you that most residents of Richmond do not have an extra $7K/year of income to pay such a bill. 

Who will tell the people of Richmond, and their craven politicians, that their scheme will lead to tax nightmares exploding all across their fair city?

Mortgage Forgiveness Act of 2007 Expires

Sure enough, "davecherr" is correct. Details can be found in the IRS publication Home Foreclosure and Debt Cancellation.

Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

1. What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
• Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
• Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences

Conclusions

It's safe to say this is not 2012. And even if the law was extended, there may still be huge tax consequences.

There is no bankruptcy, proving insolvency can be problematic, these are not farm debts, and the paragraph on non-recourse loans does not apply because there is no default.

The very purpose of the eminent domain seizure is to prevent default.

Bankrate has more on the insolvency issue in What does it mean to claim insolvency?

Q: Dear Tax Talk ...Can you explain what insolvency is? Is our 401(k) balance included in our assets? Thank you. -- Beverly

A: Dear Beverly, While your creditors may not have access to your retirement accounts, the IRS does. The general rule is that if you have a debt that is forgiven, you recognize income. Exceptions exist for primary home debt forgiven as well as debts forgiven in bankruptcy proceedings and when a taxpayer is insolvent.

The cancellation of your primary home debt is not considered income provided that the debt was used to purchase the home and was not increased by a cash-out refinance.

For many years, the tax law has given bankrupt and insolvent taxpayers a break when it comes to forgiven debt. It's pretty well established that if you enter into bankruptcy, certain assets, depending on your state of residency, are exempt from creditor claims. Generally, these assets are homestead property, insurance products and retirement accounts. What had not been clear is how these assets were treated in the case of insolvency; neither the law, IRS regulations, announcements or rulings explained it.

Prior to the real estate crisis, the IRS took a taxpayer's claim of insolvency to tax court. The taxpayers sought to exclude assets exempt from creditor's claims when measuring insolvency. The theory being that if the assets are exempt in bankruptcy proceedings, the taxpayer shouldn't be forced into bankruptcy just for the favorable tax consequences. The IRS and the U.S. Tax Court couldn't have disagreed more.

Hence, in determining the extent of your insolvency, you will have to count your 401(k) as an asset. I recommend you have your tax adviser work out the consequences more concisely so that you can measure the benefit of declaring bankruptcy.

For those who are not careful, this ill-conceived socialist wealth redistribution scheme of Mortgage Resolution Partners LLC will leave unsuspecting recipients with huge tax bills should it erroneously survive court challenges that are surely coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Illegal Public Seizure of Mortgages Via Eminent Domain in the Spotlight

Bloomberg reports Richmond Escalates Eminent Domain Plan With Loan Offers.

Richmond, California, is backing a plan to buy mortgages in low-income areas for as little as 25 cents on the dollar and may force the sales under eminent domain laws, moving forward with a controversial program that would potentially seize control of home loans from investors.

Richmond is the farthest along in a plan advocated by Steven Gluckstern’s Mortgage Resolution Partners LLC for U.S. cities to confiscate mortgages and write them down in an effort to help homeowners escape oversized debt burdens. The idea has drawn opposition from bondholders such as Pacific Investment Management Co. and DoubleLine Capital LP and at least 18 trade groups representing the finance industry, homebuilders and real estate firms. 

None of the 32 servicer and bond trustees that oversee the loans will likely sell willingly, Chris Killian, head of the securitization group for the Securities Industry and Financial Markets Association, Wall Street’s largest lobbying group, said in a phone interview.

“You just can’t really sell performing loans out of securitizations,” Killian said. “Additionally, everybody we talk to in the industry thinks this is a bad idea that will be bad for the mortgage markets.”

Eminent Domain

Eminent domain (confiscation of private property for the public good), have been upheld time and time again, most recently in the infamous US Supreme Court decision Kelo v. City of New London.

Kelo v. City of New London, 545 U.S. 469 (2005) was a case decided by the Supreme Court of the United States involving the use of eminent domain to transfer land from one private owner to another private owner to further economic development. In a 5–4 decision, the Court held that the general benefits a community enjoyed from economic growth qualified private redevelopment plans as a permissible "public use" under the Takings Clause of the Fifth Amendment.

The case arose in the context of condemnation by the city of New London, Connecticut, of privately owned real property, so that it could be used as part of a “comprehensive redevelopment plan.” However, the private developer was unable to obtain financing and abandoned the redevelopment project, leaving the land as an empty lot, which was eventually turned into a temporary dump.

Public reaction to the decision was highly unfavorable. Much of the public viewed the outcome as a gross violation of property rights and as a misinterpretation of the Fifth Amendment, the consequence of which would be to benefit large corporations at the expense of individual homeowners and local communities. Some in the legal profession construed the public's outrage as being directed not at the interpretation of legal principles involved in the case, but at the broad moral principles of the general outcome. Federal appeals court judge Richard Posner wrote that the political response to Kelo is "evidence of [the decision's] pragmatic soundness." Judicial action would be unnecessary, Posner suggested, because the political process could take care of the problem."

Prior to Kelo, seven states specifically prohibited the use of eminent domain for economic development except to eliminate blight: Arkansas, Florida, Kansas, Kentucky, Maine, New Hampshire, South Carolina and Washington. As of June 2012, 44 states had enacted some type of reform legislation in response to the Kelo decision. Of those states, 22 enacted laws that severely inhibited the takings allowed by the Kelo decision, while the rest enacted laws that place some limits on the power of municipalities to invoke eminent domain for economic development. The remaining eight states have not passed laws to limit the power of eminent domain for economic development.

End Result of Seizure: A Dump

There you have it. The result of the seizure (whose intent was a mall), turned useful tax-payer property into a vacant lot, then a dump when the developer could not get financing.

44 states passed laws restricting eminent domain as a response to that poor US supreme court decision. One of those states was California.

Proposition 99

California passed Proposition 99 in 2008.

Summary Prepared by the Attorney General

• Bars state and local governments from using eminent domain to acquire an owner-occupied residence, as defined, for conveyance to a private person or business entity.
• Creates exceptions for public work or improvement, public health and safety protection, and crime prevention.

Ridiculously Broad Interpretations

What constitutes "public work or improvement, public health and safety protection, and crime prevention"?

The statement is so broad as to be 100% meaningless. Was that the intent of Prop 99 all along?

Non-Fair Value Seizures

The law requires the owner to receive "fair value" for the seizure. Of course it is the state that gets to define "fair value".

Richmond does not even want to pay fair value for the mortgages. Please consider these additional details in the New York Times article A City Invokes Seizure Laws to Save Homes.

On Monday, the city sent a round of letters to the owners and servicers of the loans, offering to buy 626 underwater loans. In some cases, the homeowner is already behind on the payments. Others are considered to be at risk of default, mainly because home values have fallen so much that the homeowner has little incentive to keep paying.

Many cities, particularly those where minority residents were steered into predatory loans, face a situation similar to that in Richmond, which is largely black and Hispanic. About two dozen other local and state governments, including Newark, Seattle and a handful of cities in California, are looking at the eminent domain strategy, according to a count by Robert Hockett, a Cornell University law professor and one of the plan’s chief proponents. Irvington, N.J., passed a resolution supporting its use in July. North Las Vegas will consider an eminent domain proposal in August, and El Monte, Calif., is poised to act after hearing out the opposition this week.

 The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.

Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.

All of the loans in question are tied up in what are called private label securities, meaning they were bundled and sold to private investors. Such loans are generally the most unfavorable to borrowers and the most likely to default, Mr. Gluckstern said. But they are also the most difficult to modify because they are controlled by loan servicers and trustees for the investors, not the investors themselves.

Sappy Details

The Times article disclosed the sappy details of a person who paid $420,000 for a home now worth $125,000.

To what extent should government intervene in such affairs?

The obvious answer is "none". The homeowner can walk away is he wants, and if he doesn't want, then he can keep paying the mortgage.

Questionable Details

As long as someone is willing to keep paying the mortgage, then the value of the loan is more than the alleged "fair value" offered by the city.

And note the $30,000 difference to the city and the new investors in the proposed scheme.

In essence, the city wants to confiscate private property not for the "public good" but for the good of its own finances, for the good of new lenders, for the good of one set of private persons, at the expense of another set of private persons, at a very questionable "fair value" price.

I contend this is not only morally wrong, but blatantly illegal.

Should this socialist wealth redistribution scheme actually be upheld by the courts, it will unleash a torrent of increasingly ridiculous schemes, while further undermining property ownership rights, the very thing governments ought to protect.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Retail Sales Rise in Germany and France, Decline in Italy; Margin Squeeze in Germany and France

It's a mixed bag of retail PMI news in Europe today (assuming of course one believes that spending is good).

Italy: Sharpest drop in retail sales since April

In Italy, Markit reports Sharpest drop in retail sales since April

Key points

• Rate of decline in retail sales accelerates for second straight month
• Stocks levels fall amid sharp drop in retailers’ purchasing activity
• Purchase price inflation dips to modest rate

Summary

The downturn in Italy’s retail sector gained further momentum in July. The level of trade fell at a faster rate, leading to an accelerated decline in retailers’ purchasing activity and contributing to a deterioration in business sentiment. There were also further notable reductions in profitability, employment and inventory levels on the month.

July saw an acceleration in the month-on-month rate of decline in Italian retail sales, as highlighted by a drop in the headline Markit Italy Retail PMI® from 40.7 in June to 38.2. This was its lowest reading since April, and one that was indicative of a sharp pace of contraction overall. The level of trade has fallen continuously on a monthly basis for almost two-and-a-half years.

The gap between actual and planned sales was the widest for four months in July, as almost half of businesses missed their targets. Firms attributed their underperformance to a combination of uncertainty and pessimism among consumers.

Germany: strongest sales growth for two-and-a-half years

In Germany, Retail PMI indicates strongest sales growth for two-and-a-half years.

Key points

• Retail PMI hits highest level since January 2011
• New job creation maintained in July
• Wholesale price inflation eases since June

Summary

The seasonally adjusted Germany Retail PMI – which measures month-on-month sales on a like-for-like basis – registered above the 50.0 nochange mark for the third consecutive month in July. At 56.0, up from 55.3 in June, the latest reading signalled the strongest month-on-month increase in sales since the start of 2011.

Margins decrease again in July

German retailers pointed to a reduction in their gross operating margins for the thirty-second consecutive month, with the rate of decline little changed since June. Survey respondents widely suggested that higher cost burdens had offset the boost to margins from increased sales during July.

Latest data signalled a steep rate of input price inflation, although it was the second-slowest since September 2012. Some retailers commented on higher food costs, especially for fresh fruit and vegetables.

Comments

Commenting on the Markit Germany Retail PMI® survey data, Tim Moore, senior economist at Markit and author of the report said:

“July data shows a continuing improvement in German retail sector performance, as month-on-month sales growth hit a two-and-a-half year high. More favourable weather conditions and signs of rising consumer confidence helped underpin the acceleration in retail sales. Margins nonetheless remain under pressure as retailers indicated that they were forced to absorb sharp increases in their cost burdens during the latest survey period.”

France: Retail Sales Rise for First Time in 16 Months

In France, the Markit PMI shows Retail Sales Rise for First Time in 16 Months

Key Points

• Slight expansion of sales recorded in July
• Slowest fall in employment for over a year
• Further reduction in purchasing activity

Summary

French retailers signalled a return to growth in sales during July. Although modest, the month-on-month increase was the first recorded since March 2012. Sales were also marginally higher on an annual basis. Employment continued to fall, but the rate of job shedding eased to a marginal pace. Retailers’ margins remained under considerable pressure, despite a weaker rise in purchasing costs.

The headline Retail PMI registered 51.0 in July, up from 48.9 in June and above the 50.0 threshold for the first time in 16 months. Anecdotal evidence suggested that sales growth was supported by improved demand conditions and promotional offers.

When compared with previously set plans, actual like-for-like sales once again fell short in July. However, the degree to which sales disappointed was the least marked since January.

Comment

Jack Kennedy, Senior Economist at Markit and author of the France Retail PMI, said:

“The French retail sector finally snapped out of its extended downturn in July. Although sales were up only slightly, it was the first growth in 16 months, amid reports of firmer demand conditions. However, retailers were again faced with a considerable squeeze on their margins, as they competed to offer discounts in a bid to stimulate sales. Meanwhile, the slowest drop in employment for over a year points to an easing of the gloom that has enveloped the retail sector in recent times.”

Europe Synopsis 

• The economic depression lingers in Italy.
• Germany is back in growth mode but with strong inflation and inability of retailers to pass on input cost increases.
• France, is barely back in expansion, but only after strong discount promotions. French retailers also suffer from a margin squeeze. Employment is still shrinking, albeit at a slow pace.

These imbalances highlight the structural problem of one centrally-planned Euro-interest rate across widely varying economic conditions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Municipal Bonds an "Outrageous Bargain"? Compared to What? Shifting Sands of Muni Bond Market; Three Bad Assumptions

David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer believes Municipals Cheap After Detroit Filing

Municipal bonds are an “outrageous bargain” in the wake of Detroit’s bankruptcy filing, according to David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer.

Kotok bases his arguments on a comparison on General Obligation Yields to US Treasuries.

Muni vs. Treasury Yields



More on Munis

In a followup guest post on the Big Picture blog, Kotok offers More on Munis, Detroit, Bloomberg, Whitney & Wilson.

In our recent commentary on municipal bonds and Detroit, we argued in favor of buying the highest-grade AAA tax-free municipal bond It currently yields more than the corresponding taxable US Treasury obligation.

Meredith Whitney, Muni Cassandra emeritus (ae?), weighed in against Munis (FT) and used the Detroit default to say her version of “I told you so.” Bloomberg reported both sides of the argument.

Readers may seek Whitney’s positions and her history of Muni-forecasting on their own. Our position is clear: do the research and buy the bonds that make sense. There are many of them. This is an idiosyncratic market of $3.8 trillion; painting it with a broad brush is a mistake.

We took the position that the default history of the true AAA-rated tax-free municipal bond has the same default history as the US Treasury bond: neither has ever defaulted.

Remember, we are referring to the natural rating of the bond. We are not referring to those bonds that were insured by various bond insurers and thus elevated to an AAA rating because of the bond insurance. Bonds that were rated AAA only because of the insurance have defaulted, but the underlying ratings of those insured bonds always fell below AAA. No true AAA credit ever needed bond insurance to sell a new issue.

Our bottom line: high grade, tax-free bonds are really cheap and their credit support is improving. Score one for Munis; score zero for Detroit; score evenhandedness for Bloomberg media in reporting. We will leave the Whitney scoring to our readers.

The Muni Market's Shifting Sands

Writer, Mark J. Grant, author of Out of the Box expresses a different viewpoint in The Muni Market's Shifting Sands, a guest post on ZeroHedge.

I began my career in this space. Fresh off my internship I was assigned to cover small banks in Missouri and Kansas and sell them Municipal Bonds. My fondest recollection was of a small bank in western Kansas that said he couldn't buy bonds now because, "There are green bugs in the milo." I had no idea what green bugs were then and wasn't too sure about milo.

Almost forty years later and having supervised the municipal trading/sales and banking areas at four different investment banks I still am on the watch for the green bugs in the milo.

Detroit is now teaching us several lessons and you can feel the sand shifting yet again. The normal credit analysis performed by many money managers is insufficient in my estimation and because of this losses will be taken. The issue here is the pension funds that may have priority over the general obligation bonds. This is made clear, as an example, in the Michigan State laws and I am expecting new laws and new State and Federal regulations to be passed to guarantee this priority. Pensions will trump the bond holders and General Obligation bonds must now be viewed in the light of a subordinated position. This may shift ratings but it will certainly shift the appreciation of risk in Municipal Bonds and will most probably cause them to widen against both Treasuries and other forms of debt.

General Obligation bonds no longer have the first call on assets.

Specifically, if you are analyzing a Municipal credit, you should look carefully at the size of their pension obligations and calculate the ratio for pension obligations divided by their G.O. debt. Then you should examine the unfunded pension liabilities, add them to their pension obligations and divide that number by their G.O. debt. These calculations will help you get a more realistic handle on the risk that you are assuming when buying the G.O. debt of a municipality. It is not enough, any longer, to examine a Municipal credit in the same way that you examine a corporate credit because Detroit is setting a new standard where pension obligations have the first call on assets and General Obligation bonds have been pushed into a secondary position.

The psychology of the Municipal market is also shifting in the sand. It was once a widely held belief that the State would stand behind any large Municipal credit in its domain. Detroit is proving this to be an inaccurate observation. There was even the notion that if the Municipal credit was large and systemic enough that the Federal government might step in to help. Detroit is exemplifying that this was a second mistake in thinking. We are now learning that each Municipal credit is a stand-alone situation which is a break from the traditional thinking of days past.

I think it is true that Municipalities can meander along longer than corporate credits and certainly than mortgage credits because they can increase their taxes and/or increase what is taxed. So the time-line is longer when a credit is in trouble but, if a Municipal credit falls over the edge, the consequences for debt holders have now become more severe. Detroit brings Chicago to mind and then my caution widens as you look at other large cities. Greater care must now be exercised and I would suggest that many of you should begin a re-examination of what you own and whether you wish to keep owning it.

Expect More Fallout

The fallout in Detroit is not over. There will be more Detroits for sure.

However, we have not seen the final ruling from bankruptcy court. To what extent, if any, will courts rule "General Obligation bonds no longer have the first call on assets"?

I don't know and no one else does either. Yet, I suspect that both bondholders and pensioners will take a decent-sized hit. A friend emailed a commonsense point of view earlier today.

"Fairness of the pension level is irrelevant. It's what the debtor can afford. And Detroit can't afford much. In municipalities, as in private employment, the cost of getting a pension package your employer can't afford is ultimately that you don't have a pension package. This will be much tougher than private bankruptcies, though, because the PBGC does not cover municipal employee plans. So the estate of Detroit will have to pay something, because it is intolerable that old policemen and firemen suddenly resort to complete welfare. But it can't pay much. This will be brutal."

Three Bad Assumptions

Kotok points out that no AAA rated GO bond has ever defaulted. OK, but have we ever had a pension crisis before? 

Please consider three widely-held assumptions on GO bonds.

1. Bondholders have first call on obligations
2. Taxes can always be raised
3. The state or federal government will bail out the municipality

All three of those assumptions are false. And how many bonds are rated AAA because of those assumptions?

Definition of "Cheap"


The top chart shows that munis are cheap compared to treasuries (assuming no defaults). But does that make them cheap?

This is not a position I endorse, but for the moment let's assume that Kotok is correct.  That AAA rated bonds will not default.

Are they cheap? Compared to what?

It depends on the definition of cheap. What if treasuries are not "cheap"?  After all, the same chart Kotok showed a few days ago would have shown the same thing at the beginning of May.

10-Year Treasury Yield



Yield on the 10-year treasury rose over 100 basis points since the beginning of May. US treasuries were not cheap then. Thus, the notion of something is cheap compared to something else is a false dichotomy.

At the beginning of May, neither treasuries nor munis were cheap. And what if neither is still cheap? What if the pension crisis shifted the sands? What if widely-held assumptions about AAA and defaults are invalid?

As you can see, it's not as simple as Kotok's "GO's will not default so buy them because they are cheap compared to treasuries" point of view.

Things changed, sands shifted, and right now, we really do not know by how much. So it's quite the stretch, for numerous reasons, to say munis are an "Outrageous Bargain".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Checking and Loan CSI - Know the Clues.

Bank of America, Citi, Chase and Wells Fargo hold about 39% of US deposits.  Seriously?  

With these guys holding the market share cards, if your community bank or credit union isn't showing account growth ... it's a crime.

But, if Gil Grissom has taught me anything, it's that ANY crime can be solved (usually in less than 45 minutes).

Lets take an Account CSI course on 2 key product areas - without the messy finger print powder or blood spatter.

Loans

To a certain extent, lending is a numbers game. Increase applications and all is well, right? Heck no!

Here’s an example: We had a one-branch client a few years ago where we conducted a loan promotion to the neighborhoods surrounding the branch. The campaign was successful in attracting interest and apps, but few were approvable – even though we used household income as a qualifier. What we really did was generate more work … not more loans.

Recently, a very close friend of mine said that, as a lender, her job is to read people. Totally true! Every time we fund a loan, we’re pushing our poker chips on the table. But, if you don't push chips out, you can never rake chips back in and build your stacks.

For lending, like poker, you need to be able to read the signs. If you're not seeing the loan results you want, of course you'll want to increase apps – but you MUST make sure you’re getting the most from each one. 

Lending CSI is about finding the clues in your process and patching the leaks:

• What is the trending in your applications?
• Number of apps?
• Dollar amounts?
• For which products?
• How many are you approving?
• Of those denied ... Why? How much opportunity are you missing?
• What were the credit scores of those denied? Are there ancillary circumstances?
• What would it take to approve 5-10% of those denied?
• What can we learn from this segment to better target next time?
• Of those approved, how many are funded? If not, why?
• This is often where the missed opportunities are hidden.

Checking

According to a 2011 FDIC Survey of un and underbanked, about 10% of US households do not have a checking account. Glass half full ... that means you have 90% checking penetration, right?!? Why not?!?

The "checking account" is your customer's access account. It's the lifeline to everything from their monthly bills to their morning skinny mocha latte - extra espresso. If you don't have it, someone else does.

Checking CSI is about finding clues that your customers and members leave:

• Awareness: It sounds a bit crazy from our side of the desk, but do your customers even think of you for checking? You'd be shocked and hurt by the answer most of the time. If they don't have an account with you it's often that easy.
• Competition/differentiation: You need to, at minimum, keeping up with the Jones'. Remember, this is an Access Account. It's more important for you to have all of the access tools than to offer rewards or even interest. How do you stack up against the other institutions?
• We sell trust: Every positive interaction should include a message about checking. Every product sold should be tied to checking. Build on your happy experiences.
• You cannot over communicate: The cliché     says that the only 2 sure things are death and taxes. My friends, there is a 3rd ... some day, in the not-to-distant future the big banks will tick-off their customers. When they do, you need to be top of mind. That doesn't mean planning quarterly campaigns ... it means drowning them in checking messages at the front line and at home. Just when you think you're over communicating - you're probably just starting to do it right.

Once you have the accounts, you need to keep them. There are almost always clues to who will leave you:

• Balance trends: Rarely will someone walk into a branch and simply close their account. There is typically a balance bleed off period prior to the closing. If you can, watch for balance decrease triggers and react with a phone call to make sure the customer is satisfied.
• Transaction trends: Having an account is one thing ... using it is something MUCH more important. Communicate with those inactive accounts.
• What access is connected?: The more the better. You don't typically ask if a customer would like checks with their checking account, right? So, why are we asking about debit cards? We need to assume some basic access points and ask the right questions to see how a customer prefers to use the product. Mobile? Online? Text? You don't know what to discuss until you know how they prefer to use it. Watch out for those checking accounts with few access tools.
• Analyze your attrition by account: You may not be getting folks into the right account type or you may need to consider making some product changes if one account stands out here.

You don't need to look good in a white lab coat or have a corny one-liner right before each commercial break to do this stuff. Simply determine what crime is being committed against your growth and look for the clues. Then cue the Who music and get to work.

We bring these marketing philosophies to credit unions and community banks nationwide, and would love to bring them to your institution too. Contact us to see how.

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