| Last | Change | Percent | |
| S&P Futures | 1457.5 | -6.8 | -0.46% |
| Eurostoxx Index | 2701.4 | -13.7 | -0.51% |
| Oil (WTI) | 93.67 | -0.5 | -0.50% |
| LIBOR | 0.303 | -0.001 | -0.33% |
| US Dollar Index (DXY) | 79.65 | 0.158 | 0.20% |
| 10 Year Govt Bond Yield | 1.82% | -0.02% | |
| RPX Composite Real Estate Index | 191.9 | 0.0 |
Futures are deteriorating on fears that Congress won't find a way to raise the debt ceiling. Fitch ratings said that it would put the US credit rating under review for a downgrade if there is a delay in raising the debt ceiling. The Bernank weighed in on the debt ceiling at the University of Michigan yesterday. The producer price index showed inflation remains under control at the wholesale level and Dec retail sales were better than expected. Bonds and MBS are up.
The Empire State Manufacturing Survey indicated that conditions for New York State manufacturers continued to decline at a modest pace. Roughly 20% of businesses surveyed expected to increase payroll, while the same number expect to decrease payroll. Capital Expenditures dropped again to its lowest level since 2009. That said, the outlook for 2013 remained mildly positive.
Lennar reported a profit of 56 cents a share for the 4th quarter and FY12 EPS of $3.11 a share. Revenues were up 42% in Q4, and backlog was up 32%. Margins also increased. The CEO noted that the housing recovery seemed to accelerate in Q4 as low mortgage rates, affordable home prices, lower foreclosures and a compelling rent vs own comparison drove the recovery.
The CoreLogic Market Pulse showed that 2012 was better than expected for the housing market. They raise a good point though, that 2012 had no major economic shocks - no Japanese tsunami, no debt ceiling debate / downgrades, no major blow-ups of big financial entities. They characterize 2012 as "a year in recovery, but not one in which the country has actually recovered." They foresee further recovery next year, but note that supply has been constrained as many move-up buyers have been underwater. As prices rise, those properties will be put back on the market. As the economy recovers, the first-time homebuyer will become in a better position to purchase these properties, which will provide the increased demand to meet the increased supply.
The debt ceiling debate has been getting more confrontational, with the President using hostage-taking metaphors during his speech yesterday. Sen Pat Toomey (R-PA) has introduced a bill to avert default by requiring Treasury to prioritize payments (with interest, SS, and active duty military pay taking precedence) and allowing them to borrow just enough to cover those expenses if revenues aren't enough. My personal belief is that Republicans know the politics aren't there for a debt ceiling standoff, but they will accept the full sequestration cuts. The sequestration cuts were designed to never happen - the cuts were supposed to be unpalatable to both sides. Much to the surprise of Democrats, Republicans are more comfortable with cutting defense than they thought, which means that the roughly $109 billion of spending in 2013 will get left on the cutting room floor.
To put the sequestration into perspective: the 2012 budget was $3.729 trillion. The 2013 budget is $3.803 trillion. The increase is roughly $74 billion. In other words, the actual cut to government spending is $109 billion - $74 billion or about $35 billion. $35 billion is 22 basis points of GDP. We are currently spending 24% of GDP, while the highest taxes as a percent of GDP have ever gotten in a touch over 20%, primarily during the equity bubble when capital gains tax receipts were huge. To get spending down to where we are able to balance the budget under the best of conditions, we would need to lop off $567B from 2012, or about 4% of GDP. Republicans would be wise to give Obama what he wants on the debt ceiling and then force the Administration to explain why cutting spending by 22 basis points of GDP is somehow intolerable. Of course, the Administration has already telegraphed how it will fight this battle (terrorists will run wild, pollution will increase, airplane accidents will happen, we won't be able to deal with natural disasters) so Republicans will be well advised to separate out the necessary functions of the government (basic safety net, FAA, FBI, FDA, etc) from the "nice-to-haves" like foreign aid to places like Egypt, agricultural subsidies, green energy subsidies, etc.
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