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Five Things You Need to Know: Immediately, Bank Shot, Real Estate Seeping Into Broader Economy, O Canada!, Department of Impossible to Make Up: "Liquor Store Typified Good Will"


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Five Things You Need to Know Immediately

First off, below are Five Things You Need to Know Immediately.

  • One: The ADP National Employment Report showed private employment grew in October by 128,000.
    Bottom Line: Modest rebound in hiring suggests virtually nothing about Friday's nonfarm payrolls given this newcomer's record. ADP report enthusiasts praise report's very data-like appearance.
  • Two: ISM Manufacturing Index for October came in at 51.2 vs. 53 consensus.
    Bottom Line: The prices paid component fell to 47 from 61, a 14% decline. Is it possible to squeeze an inflationary spin out of the decline? Yes. Reams of paper spent explaining away price decline expected to ratchet up raw pulp and paper prices next month.
  • Three: Construction Spending for Sep. came in at -0.3% vs. +0.1% expected.
    Bottom Line: Even spending on federal construction projects dropped by 1.5% in September. Market cries "Uncle (Sam)!" Silence deafening.
  • Four: Pending Home Sales came in at -1.1% vs. -0.9% expected.
    Bottom Line: Real estate "Stabilizers" cite surprising strength in home sales report's typeface and bold face font as quite positive, reflecting stability.
  • Five: October Auto Sales later this afternoon.
    Bottom Line: After the temporary boost to GDP provided by the auto sector last month, look for October sales to signal special "back to reality" moment.

2. Bank Shot

New rules governing how much of a capital cushion big banks must maintain has touched off a dispute among U.S. regulators and angered banking titans Citigroup (C), Wachovia (WB) and J.P. Morgan Chase (JPM), the Wall Street Journal reported.

  • Why does it matter, and why might it impact the stocks of these financials?
  • First, what is a bank's capital? A bank's capital is basically its last line of defense against collapse and is calculated by subtracting liabilities from assets.
  • For example, if a bank has $100 million in loans, financed by $90 million in deposits its capital would equal 10% of assets.
  • That capital would obviously absorb losses up to $10 million but anything exceeding that would threaten the bank's ability to repay depositors.
  • At issue now are new rules are designed to implement an international agreement known as Basel II.
  • Basel is the Swiss city where global banking regulators renegotiated the pact to replace an earlier set of rules, which as you might expect was called Basel I.
  • The agreement is intended to streamline oversight of the world's biggest and most sophisticated banks with similar world-wide rules, the Wall Street Journal says.
  • What has the big banks up in arms is that while overseas regulators are implementing the pact in a way that lets banks keep less capital on hand than they do now, U.S. regulators added stringent standards that could wipe out almost all benefits the big banks had expected to receive from Basel II.
  • While the U.S. has delayed starting to put its rules in force until 2008, rules implementing the pact go into effect in Europe, Asia and other parts of the world in January, the WSJ said.
  • Why might this impact the stocks of the banks? Because the greater the capital requirement the lower the amount of loans other profit-generating activities the banks can engage in.

3. Real Estate Seeping Into Broader Economy

How does deflation spread? Exactly like this: "Lenders are beginning to emphasize price, service and stronger customer relationships in the face of slowing loan volume," according to the Wall Street Journal.

  • With competition for home loans increasing, Bank of America (BAC) is encouraging customers to apply for a mortgage with the bank and then shop around, according to the Wall Street Journal.
  • If they decide to get their home loan elsewhere, Bank of America will write a $250 check to cover a portion of their closing costs.
  • The bank is not alone. Last week, Charles Schwab (SCH) said it would give most of its bank and brokerage customers a 0.25 percentage point discount on the rate for a new adjustable-rate mortgage or home-equity loan and a 0.125 percentage point discount on the rate for a fixed-rate mortgage.
  • Mortgage originations fell 29% in the third quarter compared with the same period last year, according to the Mortgage Bankers Association.
  • And so this is how the "cooling" real estate market begins to seep into other areas of the economy.
  • Every boom contains the seeds of its own destruction. Why should real estate be any different?

4. O Canada!

Canadian Finance Minister Jim Flaherty announced late yesterday that the government will impose a tax on income trust distributions, according to the National Post.

  • The tax will be introduced in two phases. Distributions from existing trusts will not face charges until 2011, giving them four years to adjust to the change, the article said. But distributions from new trusts would be taxed beginning in 2007.
  • That is key, the Post noted, because two of Canada's biggest corporations, Telus Corp. and BCE Inc. announced this fall they would convert their multibillion-dollar operations into tax-friendly trusts, a move that had been well received by financial markets.
  • "This could mean virtually the end of the trust market in Canada," Jack Mintz, a professor at the Joseph L. Rotman School of Management at the University of Toronto, told the National Post.
  • Income trusts have become popular in recent years as more and more corporations work to reduce their taxes by passing along most of their profits to investors in the form of cash distributions.
  • Meanwhile, the Canadian dollar dropped the most in three weeks on the tax news.
  • And Canadian Royalty Trusts are getting crushed on this news today. Among the casualties:
  • Advantage Energy Income (AAV) - 9.1%
    Baytex Energy Trust (BTE) - 12.9%
    Canetic Resources Trust (CNE) - 11.5%
    Enerplus Resources Fund (ERF) - 10.8%
    Harvest Energy (HTE) - 12.1%
    Pengrowth Energy Trust (PGH) - 9%
  • Worse, many of these U.S. listed Canadian Royalty Trusts have been popular with investors since the yield-starved days of 2003-2004, with some offering dividend payouts anywhere from 15 to 20%.

5. Department of Impossible to Make Up: "Liquor Store Typified Good Will"

That's a real headline from the Lexington Herald-Leader. .

  • Starting early in the morning yesterday, a stream of friends and longtime customers -- white, black, Hispanic --stopped by to say so long to Fresh Liquor after 35 years in business, the Lexington Herald-Leader reported.
  • It's one of the oldest liquor stores in Lexington, and one of the remaining few with a drive-through window.
  • Yes, a drive-through window. You know, for when you are driving somewhere and want to buy liquor without having to park the car.
  • "It's more than a liquor store. There's a lot of community here," said Aaron Hutson, according to the article.
  • "It really is a community center," said John Witt, the newspaper said.
  • "We all might be alcoholics, but we depend on this store to be open at 7 a.m.," said Tim Barnes, who comes by every day to buy beer. "There are a lot of dedicated customers."
  • I knew leaving Lexington was a horrible mistake. I'm missing out on so much community!
  • Only an opium den would have more people hanging out all day being a "part of the community."

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