Mish's Global Economic Trend Analysis

Detroit Files Chapter 9 Bankruptcy; Oakland, LA, Others on Deck; Pension Promises vs. Bondholders in Spotlight; The Bright Side
Survey on Impact of Obamacare on Corporate Hiring; Businesses Far More Pessimistic vs. March
Loosen This Tighten That
European Car Sales Plunge to 20-Year low

Detroit Files Chapter 9 Bankruptcy; Oakland, LA, Others on Deck; Pension Promises vs. Bondholders in Spotlight; The Bright Side

Posted: 18 Jul 2013 06:19 PM PDT

In an inevitable, anticlimactic decision today, Detroit files for bankruptcy.

Detroit became the largest US city to ever file for bankruptcy on Thursday, seeking protection from its creditors as it restructures more than $18bn in debt.

Richard Snyder, Michigan's Republican governor, said in a letter included in the filing.

"Detroit simply cannot raise enough revenue to meet its current obligations and that is a situation that is only projected to get worse absent a bankruptcy filing.

Kevyn Orr, who Mr Snyder appointed in March to serve as Detroit's emergency manager, has stirred controversy by putting the claims of holders of general obligation bonds – which are backed by taxes – on the same footing as those of pension funds and retirees.

Holders of the general obligation bonds argue that they should be paid before other unsecured claimants. Pension funds maintain that their rights are constitutionally protected and should have priority.

"To treat holders of general obligation bonds backed by the full faith and credit of a sovereign entity as unsecured and impaired has implications for the municipal market," said Peter Hayes, head of municipal bonds at BlackRock, which owns $25m of Detroit's debt.

Mr Orr said the city's total debt was at least $18bn and could be as much as $20bn – $11bn of which is unsecured. The remaining $9bn that is secured will probably be paid back at 100 cents on the dollar.

Welcome to Chapter 9, Detroit

FT Alphaville says Welcome to Chapter 9, Detroit

Beyond the list of derelict buildings and brownfield sites owned by the city — you'll want to read the approval letter by Michigan Governor Rick Snyder, in Exhibit A.

Here is a link to Detroit's Bankruptcy Filing

Amusing Flashback of the Day

The amusing flashback of the day with a hat tip to ZeroHedge goes to a CBS news headline from October 13, 2012 Obama: I "refused to let Detroit go bankrupt".

Gut Kick

Bloomberg says Detroit 'Gut Kick' Poses New Test for Long Suffering City

The move was inevitable, said Steven Rattner, a New York financier who headed President Barack Obama's auto-industry task force in 2009 that put the predecessors of General Motors Co. and Chrysler Group LLC into bankruptcy reorganizations.

"This will be much messier than the auto companies," he said. "This will go on for a long time."

"You're going to have much bigger haircuts for the workers and that's going to mean much more pain than the workers for the auto companies were asked to bear," Rattner said.

Michel Soucisse, manager of Mudgie's Deli on Porter Street, shares her concern.

"I really fear that Detroit will be cut apart by its creditors and some of our assets will start to be sold off willy-nilly," he said in an interview. "I really hope it means that we get to keep our assets and get help at the same time."

10 Pages of Bankruptcy References on This Blog

I have 10 pages of Detroit Bankruptcy References on this blog. The earliest is in regards to GM and is from 2005.

Here are a few examples:

Clearly this is not a surprise. Nor did the stock market treat it like a surprise.

What's going to be a surprise (but not to Mish readers) is when Oakland, LA, Houston, Baltimore, and numerous other cities declare bankruptcy to escape untenable pension and health-care promises.

The Bright Side

Taxpayers should be fed up with ever-escalating property taxes, sales taxes, and fees to pay ridiculous retirement plans for unappreciative public union employees, especially police, fire, and teachers' unions.

So, look on the bright side.

The Detroit bankruptcy is a good thing, and it will be even better when numerous other cities, bankrupted by public union greed, do exactly the same thing.

If you are desperate for yield and holding questionable municipal bonds, especially long-term municipal bonds, you may wish to reconsider.

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

Survey on Impact of Obamacare on Corporate Hiring; Businesses Far More Pessimistic vs. March

Posted: 18 Jul 2013 03:10 PM PDT

SageWorks conducted an interesting survey on corporate hiring plans of private businesses in March and again recently.

Let's start with a look at results from the June 25 to July 16 survey, collecting responses from 300 accountants.

Sageworks surveyed 300 accounting professionals who work closely with [privately held] firms and found that 66 percent expect the new health care changes will make it less likely that businesses will add new employees in the next year. Sixteen percent said it would have "no impact," and 14 percent of respondents said they were "unsure" about the ultimate impact. Only 2 percent said the Act makes it "more likely" that businesses will add new employees.

Impact of Obamacare on Hiring Plans

"Private companies are performing well, but they're simply not hiring with the same volume and consistency that we'd expect from them at this point in the economic recovery," noted Sageworks Chairman Brian Hamilton. He continued, "The recent delay in the implementation of the Affordable Care Act, and the uncertainty that accompanies such a delay, won't help the employment situation. Private businesses are trying to map out their hiring and investment plans for the next twelve months, and a last minute delay like this will increase the likelihood that companies remain on the fence about hiring."

Businesses More Pessimistic than in March

Let's Compare the Current Survey to March

Current Survey

March Survey

March vs. July

In March, 20.29% of privately held companies expected to increase employees.
By July, only 13% expected to increase employees
In March, only 6.52% of privately held companies expected to reduce employees.
By July, 12% privately held companies expected to reduce employees.

These survey results are not unexpected (by Mish readers), but the results likely are unexpected by economists and mainstream media writers.

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

Loosen This Tighten That

Posted: 18 Jul 2013 10:55 AM PDT

It's hard not to laugh at the ECB's latest attempt to stimulate lending to small and medium-sized entities (SMEs).

Please consider ECB Changes Collateral Rules as It Seeks to Boost Lending.

The Frankfurt-based ECB will reduce the risk premium, or haircut, applicable to asset-backed securities to 10 percent from 16 percent, according to an e-mailed statement today. It'll also lower the quality threshold for six ABS classes that are subject to loan-level reporting requirements to two A- ratings from two AAA ratings. At the same time, the central bank will tighten rules for retained covered bonds so the total effect on eligible collateral will be "overall neutral," it said.

Policy makers will "continue to investigate how to catalyze recent initiatives by European institutions to improve funding conditions" for SMEs, according to today's statement, which marks a biennial review of the bank's risk-control framework. The focus will be on "the possible acceptance of SME-linked ABS guaranteed mezzanine tranches as Eurosystem collateral in line with established guarantee policies," it said.

The central bank also changed the haircuts it applies to sovereign bonds pledged as collateral in refinancing operations. While it reduced the risk premium on most securities rated at least A-, it raised haircuts on bonds rated from BBB+ to BBB-, the lowest three investment grades. That shift will affect banks that use government bonds issued in countries including Italy and Spain.

For starters, I rather doubt that the ECB has a clue as to what is really AAA. Next I point out the absurd assumption that sovereign bonds will not default when there have already been defaults and writedowns in Greece and Cyprus.

I happen to think Spain and Portugal are next, with Italy not too far behind.

Here's the key question: What is the point of lending to SMEs when the main problem is not funding but lack of customers? It seems to me that more lending is a sure path to more bank losses.

And the banks are capital impaired (which of course is precisely why banks are not lending more in the first place). The only reason banks do not appear to be capital impaired is they do not have to mark all their assets to market.

Finally, even if it made sense to stimulate lending to SMEs, is a mere reduction in collateral from 16% to 10% enough? If it is, I suggest it will expose the ECB to losses on its collateral.

"Loosen This Tighten That" as a strategy to stimulate SME lending is ridiculous.

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

European Car Sales Plunge to 20-Year low

Posted: 18 Jul 2013 02:00 AM PDT

Amidst all the happy talk that Europe is on the verge of some sort of recovery, here is yet another counterpoint: European Car Sales Plunge to 20-Year Low

Despite hopes that the European market might have finally bottomed out, car sales for the first half of 2013 plunged to a 20-year low, according to industry data, with little sign that the downturn is about to reverse itself.

According to new data from the European Automobile Manufacturers Association, or ACEA, new vehicle registrations continued to slip with a decline of 6.3% in June, bringing total sales for the first six months of the year to just 6.44 million, a 6.7% drop.

Among the five largest markets, only the U.K. was up, a countervailing 13%, while the other regional powerhouses, Germany and France were down 4.7% and 8.4%, respectively. The United Kingdom, in fact, has been running counter to the downward slide all year, so far gaining 10%.

Among smaller markets, sales plunged 42.7% in Cypress, the latest European country to receive a bailout aimed at helping restructure its lopsided sovereign debt load.

Even the traditionally strongest manufacturers have been struggling this year, Volkswagen AG declining 4.4%, with its high-line Audi brand down 8.8%, according to industry figures. Italy Fiat SpA was off 10% for the first half, with France's Peugeot off 13.3%, one of the worst declines of any major brand and a further worry for a company desperate to reverse mounting, multi-billion dollar losses. Honda was the rare winner among mainstream brands, with a sale gain of 6.4%.

Only a handful of luxury brands bucked the industry downturn, Mercedes up 3.5%, Land Rover rising 10.2%, and Jaguar gaining 15.5%. But BMW was down 7.7%.

As I said yesterday ....

Expect the recovery to be "weaker than expected". Indeed, expect no recovery at all. Rather, expect Germany to contribute in a major way to the pending "unexpected" non-recovery, unless by some miracle European exports to Mars suddenly take off.

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

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Thursday, July 18, 2013

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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