Experts Talk New-Home Sales, Durables, Fannie and Freddie

Data from the housing sector continue to provide pleasant surprises for Wall Street and Main Street. An Aug. 26 report showing a jump in U.S. new-home sales for July followed on the heels of reports released the previous day showing a month-over-month increase in a widely followed measure of U.S. home prices in June.

What did market pros have to say about the housing data—and other important market and economic topics—on Aug. 26? BusinessWeek compiled comments from Wall Street economists and strategists:

Michael Englund, Action Economics
U.S. new-home sales posted a hefty 9.6% surge to a 433,000 [unit annual] pace in July, following upwardly revised levels over the prior three months. The figures continue to climb from an unrevised 329,000 cyclical [low point] in January. The sales bounce over the past six months leaves a clear trough for nearly all the major housing measures in the first quarter overall, with a January bottom for this measure that matches most indicators.

Today's sales gain chased last week's similar 7.2% existing-home sales surge to a 5.24 million July rate, which left this sales measure well above the January [low point] of 4.490 million and at its strongest pace since August 2007.

The price data from today's report revealed a tiny 0.1% July median new-home price drop, to $210,100, that followed upward prior revisions that left a 5.0% (revised from 5.8%) June drop to a $210,400 (was $206,200) figure. The July drop allowed a decline in the year-over-year measure to -11.5% from -10.2% (was -12.0%) in June. We are still adhering to a pattern of diminishing price declines from the -14.5% year-over-year cyclical trough in February, despite the July price downtick. Prices are now at the end of their usual spring seasonal bounce, and we expect the median price level to moderate into yearend …

For further supportive news for housing, inventories of new homes fell again, to 271,000 units in July from 280,000 in June, 293,000 in May, and a cyclical peak of 572,000 in July 2006. Though high inventories remain a problem for home builders, the month's supply measure is falling—to 7.5 in July from 8.5 in June, 9.7 in May, and a cycle-high of 12.4 in January. Since the months' supply measure is a ratio that responds to both falling inventories and rising sales during the turn in the cycle, this measure is falling sharply now that sales are bouncing, vs. the stabilizing pattern evident earlier in 2009.

Beth Ann Bovino, Standard & Poor's
U.S. durable goods orders rebounded 4.9% in July, the strongest reading in two years. The number was much better than the 3.0% bounce expected by markets and comes after a 1.3% drop in June (upwardly revised from -2.5%). Transportation orders jumped 18.4%, with civilian aircraft orders surging 107.2%, to explain much of the boost. Excluding transportation orders, orders edged up 0.8%, after a 2.5% increase in June.

Nondefense capital goods orders, excluding aircraft, a leading indicator for future capital spending, edged down 0.3%, but after surging 3.6% in June and 4.3% in May. Shipments were up 2.0% after climbing an upwardly revised 0.7% in June (previously -0.2%). Inventories fell 0.8%, bringing the inventory-shipment ratio to 1.81 from 1.87 in June.

The upbeat data should give further support to stock prices and weigh on Treasuries [on Aug. 26].

Alec Phillips, Goldman Sachs
While the Treasury continues to provide financial support for the GSEs (government-sponsored enterprises Fannie Mae and Freddie Mac), the Administration is likely to develop plans soon for dealing with the GSEs over the longer term. This will probably involve two steps: (1) moving the GSEs onto the federal budget and (2) transitioning the GSEs to a new structure.

Moving the GSEs on budget would increase the share of federal debt as a share of GDP by roughly 10 percentage points, but would not fundamentally change the federal debt burden from where it is today. A new GSE structure seems likely to involve partial nationalization; privatization and a public-utility model are other plausible alternatives.

Bringing the GSEs on budget, if it occurs, is unlikely to happen before next year. Moving the GSEs to a new structure may be proposed next year, but will take several years to implement.

Olympus’s $687 Million Scam Lay Hidden in Cardiff Filing System

Nov. 21 (Bloomberg) -- Olympus Corp. executives including the current head of investor relations signed off on misleading accounts, restated earnings and delayed regulatory filings to help conceal $687 million in fake costs used to hide losses.

Documents filed at Companies House in Cardiff, Wales, reveal gaps in disclosure rules that enabled Olympus to mask the cost of the 2008 takeover of London-listed Gyrus Group Plc for more than three years. Like Enron Corp.’s use of off-balance sheet entities to hide losses, a simple idea underpinned Olympus’s complex deception, said Bruce E. Aronson, a former partner at Hughes Hubbard & Reed LLP in New York.

“The structures may seem sophisticated, but one feature of every scheme is that they pretend a security is still worth full book value,” said Aronson, who is studying comparative corporate governance in Tokyo. The schemes aren’t “a way of hiding losses in the long term.” They’re just “putting off the day of reckoning,” he said.

Olympus on Nov. 8 admitted inflated advisory fees paid in the $2.1 billion acquisition of Gyrus were used to conceal soured investments dating back decades. In a practice known as “tobashi” -- loosely translated as “to make fly away” -- the company used offshore entities to park assets in the hope that a market recovery would erase losses before they had to be accounted for.

A week after Olympus paid $620 million in March 2010 to buy back preference shares given to its advisers as fees, former Chairman Tsuyoshi Kikukawa and two senior aides, who were all serving as Gyrus directors, filed financial statements saying it wasn’t “meaningful to estimate a fair value” for the securities. Gyrus instead booked them at $177 million, the documents show.

KPMG Leaves

Gyrus’s auditor, KPMG Audit Plc, left the role in part because of its client’s accounting for the securities, it said in a letter to directors that was filed to Companies House. Olympus’s investors were never passed the letter or KPMG’s qualified accounts, according to two shareholders who declined to be identified.

The payment to the advisers, Axam Investments Ltd., is part of criminal probes in the U.S., U.K. and Japan.

Akihiro Nambu, the Japanese camera maker’s investor- relations head, signed the 2009 accounts on April 5, 2010. The third Gyrus director, Hisashi Mori, was fired last week as executive vice president over his role in hiding the losses.

Under the U.K.’s Companies Act 2006, it is an offense for directors not to circulate accounts and the auditor’s report to shareholders. Gyrus’s only shareholder is Olympus, and under Japanese law there is no obligation for the three directors of the U.K. company to pass on the report.

Delayed Filing

Repeated attempts to interview Kikukawa, Mori and Nambu and other Olympus officials, including visits to the homes of some, have failed. Tsuyoshi Kitada, a Tokyo-based spokesman, declined to comment on whether Gyrus’s 2009 accounts and the auditor’s report were sent to the full Olympus board.

Olympus executives delayed booking the true cost of the fees until March 2011, nine months after Axam Investments was struck off by the Cayman Islands registrar.

The tax haven’s secrecy rules mean the beneficiary of the payout is not yet known. However, Olympus’s admission the funds were intended to help erase losses suggests the money was to be routed back to the company.

Preference Shares

After they took over Gyrus’s board, Kikukawa, Mori and Nambu on Sept. 30, 2008, authorized the issue of $200 million of preference shares, filings show. The directors also gave themselves the right to allot $176,981,106 of the shares -- only disclosing that these were awarded to Axam more than 18 months later in the Gyrus annual return.

Because of the dividend set on the securities, their fair value was much higher. Olympus agreed to buy back the shares for $620 million, according to two March 22 agreements signed by Kikukawa and Mori, copies of which were given to Bloomberg News. Those agreements, and earlier exchanges with Axam, show Olympus executives knew the eventual payout to Axam would far exceed the nominal value booked in the 2009 accounts.

KPMG approved the 2009 Gyrus financial statement, though it did so with reservations because the company had failed to provide sufficient proof Axam wasn’t a related party. The auditors also took issue with the accounting treatment of the preference shares.

“We consider that there are circumstances connected with our ceasing to hold office that should be brought to the attention of the company’s members or creditors,” KPMG Audit wrote in a letter to Gyrus Group dated April 26, 2010.

‘Incorrectly Recorded’

When the 2010 financial statement was filed a year later, Gyrus revised earnings for 2009 because it had “incorrectly recorded” the preference shares at nominal value. Gyrus booked the securities in its year-end accounts at the same value as paid to Axam on March 31, 2010. The revision knocked about $330 million from Gyrus’s $716 million in net assets.

New auditor Ernst & Young LLC also approved accounts with reservation, citing the lack of information about Axam in a March 21, 2011, filing. Both Gyrus annual reports were submitted more than a year from the end of the reporting period, exceeding the U.K.’s nine-month limit.

“If you see companies producing the numbers late, there’s a problem with the audit procedures,” said Eli Amir, professor of accounting at London Business School. Auditors’ duty “is to the shareholders of the company,” so they may not report their findings to regulators, he said. “They might walk away to decrease their exposure to litigation or other sanctions.”

Failed to Account

Amir said he was speaking in general, and not specifically about Gyrus. KPMG’s London-based spokesman Gavin Houlgate and Ernst & Young spokeswoman Vicky Conybeer declined to comment.

Olympus’s annual report for the 12 months to March 31, 2010, showed a 15.5 billion yen ($201 million) “prior period adjustment” loss related to the purchase of preference shares from a third party. The company added about 13.5 billion yen to goodwill on its balance sheet to account for the purchase, according to a conference call after the earnings.

Olympus didn’t say who the third party was.

Southeastern Asset Management Inc., Olympus’s biggest shareholder, said it raised the issue in an email exchange with the company’s investor-relations department in May last year.

Nambu’s division claimed the purchase was related to financing for the Gyrus acquisition, not payment to an adviser, Southeastern wrote in a letter to the board dated Oct. 20 this year and which was copied to the U.K.’s Serious Fraud Office and Japanese regulators.

Olympus has appointed an independent committee including former judges to probe its acquisitions and hidden losses. The findings are expected by mid-December. Olympus last week said it would publish corrected accounts and its half-year earnings by Dec. 14.

The SFO, which prosecutes white-collar crime, has started a probe into accounting at Olympus, a person familiar with the case said last week, declining to be identified because they weren’t authorized to speak to the media.

--With assistance from Takashi Amano, Naoko Fujimura, Kazuyo Sawa, Yuki Yamaguchi, Chris Cooper and Stuart Biggs in Tokyo, Eijiro Ueno in 東京, Douglas Wong and Ben Richardson in Hong Kong, John Helyar in Atlanta and David Glovin and Greg Farrell in New York. Editors: Ben Richardson, Peter Langan

bussiness: Million-Dollar Taxi Medallions

bussiness: Million-Dollar Taxi Medallions: The sale of two New York City taxi medallions for a record $1 million each in October is sparking investor interest and bolstering shares of...

The Euro: As Good (and Bad) as Gold

Like the gold standard of a century ago, the euro has promoted free trade and investment across borders. The 12-year-old unified currency also shares the gold standard’s greatest flaw: the lack of an escape hatch. If a country runs chronic deficits, it can’t regain competitiveness through the market’s depreciation of its currency. Under the gold standard, exchange rates were fixed, which is to say the escape hatch of depreciation was locked. Under the euro, exchange rates no longer even exist. The escape hatch has been locked, welded shut, and sat on by the leaders of the Continent’s most powerful economies.

What does a country do when it can’t depreciate its currency to lower its prices? Now, as in the 1930s, the only alternative is an internal devaluation, which means cutting wages and other costs, including government benefits. That’s a painful process that creates enormous social stress. In the 1920s and ’30s the impoverishment of the working class led to the rise of Hitler and Mussolini. Even if fascism is averted, punitive austerity can lead to a downward spiral as trade and financing dry up, deflation sets in, debts loom larger, and one country after another gets sucked downward.

Once the euro symbolized common purpose and uplift. But to quote the Depression-era lyricist Lorenz Hart, “When love congeals/It soon reveals/The faint aroma of performing seals.” The seals of 2011 are the hard-money types in Germany, Finland, and other points north who insist that the Greeks, the Italians—and maybe soon the French—must be held to account for their financial transgressions. These calls for fiscal responsibility, and the anger behind them, make emotional sense. But today’s austerity tough guys sound alarmingly like Andrew Mellon, President Herbert Hoover’s Treasury Secretary, who, according to Hoover’s memoirs, said the only way to get the U.S. economy back on track in the 1930s was to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … purge the rottenness out of the system.”

Purging the rottenness nearly killed the patient. In an increasingly relevant 2000 essay called “The Gold Standard and the Great Depression” in Contemporary European History, American economists Barry Eichengreen and Peter Temin wrote that elites were befuddled by a gold standard mentality that “sharply restricted the range of actions they were willing to contemplate.” They added: “The result of this cultural condition was to transform a run-of-the-mill economic contraction into a Great Depression that changed the course of history.”

A gold standard doesn’t have to be deflationary. From the 1870s until World War I, the gold standard more or less worked under the auspices of the Bank of England: Countries that imported more than they exported were forced to make up the difference by shipping gold to their trading partners. Because gold was the ultimate storehouse of value, countries feared losing too much of it. To stanch the outflow of gold, central banks would raise interest rates to push down domestic spending and prices. Meanwhile, the countries that imported gold would see domestic prices rise, which would make them more receptive to cheaper imports and shrink their surpluses. There was discipline and a natural balance.

World War I spoiled the equilibrium. War spending caused inflation, forcing countries to suspend convertibility of their currencies into gold. After the war most countries struggled back onto the gold standard (though not Germany, which suffered hyperinflation). Returning to the old exchange rates required reversing the wartime inflation—namely, imposing punishing deflation. Democracies weren’t as good at imposing austerity as autocracies had been. The rise of labor unions and the introduction of minimum-wage laws made it harder for employers to cut pay, so they cut workers instead.

Goldman Sachs Names 261 Managing Directors, Fewest Since 2008

Nov. 18 (Bloomberg) -- Goldman Sachs Group Inc., the fifth- biggest U.S. bank by assets, named the smallest group of new managing directors since 2008 as the firm cuts jobs and grapples with declining revenue.

The firm appointed 261 people to managing director, the company’s second-highest executive rank, according to an internal memo obtained by Bloomberg News. The number is down 19 percent from last year’s record list of 321 new managing directors and exceeds the 259 promotions in 2008. David Wells, a spokesman for the New York-based company, didn’t reply to an e- mail and two phone messages seeking confirmation of the memo.

Goldman Sachs Chairman and Chief Executive Officer Lloyd C. Blankfein, 57, said this week that the firm is working to remain positioned for a rebound even as it eliminates about 1,000 jobs to contend with a drop in trading revenue. The company set aside $10 billion for employees’ salaries, bonuses and benefits in the first nine months of this year, equivalent to $292,836 per worker.

“The single most important thing we can do to enhance the value of our business is to continue to hire the best and brightest people from around the world,” Blankfein said on Nov. 15, at an investor conference in New York hosted by Bank of America Corp. “And once they get into Goldman Sachs we want to do everything we can to ensure that they have productive and stimulating careers.”

The company names managing directors annually and elects employees to the firm’s partnership, the highest status, in even-numbered years. Managing directors, though typically paid more than junior employees, don’t share in the special bonus pool reserved for the company’s partners.

The following is the list of Goldman Sachs’s “Managing Director Class of 2011.” The employees listed have been invited to become managing directors as of Jan. 1, 2012.

Million-Dollar Taxi Medallions

The sale of two New York City taxi medallions for a record $1 million each in October is sparking investor interest and bolstering shares of Medallion Financial (TAXI), a company that owns medallions and lends money to people who buy them. Investors see the medallions, which confer the right to operate yellow cabs in the city, as “a safe asset,” says Medallion Financial President Andrew M. Murstein. His company owns about 300 and plans to buy “several hundred more” in New York and other cities, he says. “These are little cash cows, constantly taking in fares and spitting out money to the owners.”

While it would take a lot of long rides to run up $1 million on the meter, the return on medallions compares favorably with other investments. Someone who leases a medallion to a driver or garage operator could expect to earn about $2,500 a month, according to Simon Greenbaum, a broker at NYC Medallion Brokers. That’s about a 3 percent return for a $1 million medallion, better than the 2.13 percent effective yield on U.S. AAA rated corporate bonds as of Nov. 7 and the 2.04 percent yield on 10-year Treasuries.

Medallion Financial’s shares—traded on the Nasdaq stock exchange under the ticker symbol TAXI—have been an even better investment. They are up 17 percent since the two $1 million medallions sold on Oct. 19 and 44 percent this year through Nov. 8, compared with a 6.6 percent drop in the Russell 2000 Financial Services Index, according to data compiled by Bloomberg. The shares yield 5.6 percent, after the company boosted its dividend for the fourth time this year on Nov. 2. Medallion Financial shares offer “a pretty nice yield in a low-interest-rate environment right now,” says Justin Akin, a fund manager at River Road Asset Management, in Louisville, which owns about 6 percent of Medallion Financial.

Because the supply is regulated by the state, the value of medallions has climbed faster than stocks, oil, and gold for the past two decades. The New York State assembly and senate have passed a bill that would boost the current pool of 13,237 licenses by 1,500 starting in July. Governor Andrew Cuomo is weighing the legislation. There’s still investment “upside” in New York because of potential fare increases, Murstein says.

There are two types of medallions: individual and corporate. An individual- medallion owner has to spend a minimum of about 200 nine-hour shifts behind the wheel each year, while a corporate owner can lease out the taxi around the clock. The million-dollar medallions were the corporate variety. Prices of individual medallions averaged $694,000 in October.

From 1990 through last month, the cost of corporate and individual medallions increased 637 percent and 440 percent, respectively. The Standard & Poor’s 500-stock index is up 255 percent in that span.

Nat Goldbetter of Queens Medallion Brokerage, who helped arrange the sale of the two $1 million medallions, says potential investors should realize that the price increases may be spurred in part by fleet owners borrowing against the rising value of the medallions they already own to finance new purchases. He has fielded about 15 calls in October—five more than usual—from investors looking to put money into the business. Most lose interest after hearing about the cost of financing and the time it takes to close a sale. “It’s not for everybody,” Goldbetter says. “It’s a good investment for the people in the industry, but to the outside investor it’s a crapshoot.”

The bottom line: A purchaser who spends $1 million on a New York City taxi medallion could expect to earn about 3 percent annually on the investment.

Blackberry Sales In US Drops, As Customers Run For IPhone

 Research In Motion Ltd.’s, Blackberry phone manufacturer, booked found sales in the United States of America slashed 50% last quarter, as American consumers abandoned older BlackBerry phone models for Apple Inc.’s iPhones.

 

Revenue from the U.S. dropped to US$1.11 billion from US$2.22 billion a year earlier, according to a filing released yesterday quoted by Bloomberg.

 

United Kingdom (U.K) sales fell 2.3% to US$419 million, according to the filing. Sales in Canada climbed 7.7% to US$308 million, and sales outside the U.S., Canada and the U.K. (including Asia and Indonesia) jumped 38% to $2.33 billion. 

 

RIM’s share of the global smartphone market dropped to 12% in last quarter from 19% a year earlier, according to Gartner Inc., as customer run for iPhone and handsets that run on Google Inc.’s Android platform.