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Five Things You Need to Know: GD...p?, Emerging Victory?, Oh, THAT Contagian, Number 09, Worst Holiday Bonuses


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. GD...p?

The U.S. economy grew at a 2% real seasonally adjusted annual rate in the third quarter, slightly lower than the 2.2% estimated a month ago, the Commerce Department reported.

  • Real gross domestic product, the output of goods and services produced by labor and property located in the U.S., grew at an annual rate of 2% in the third quarter, down from the second quarter's rate of 2.6%.
  • According to the Commerce Department report, the deceleration primarily reflects an increase in imports, a deceleration in residential fixed investments and a deceleration in the Personal Consumption Expenditures (PCE) for services.
  • Residential investments fell at an 18.7% annual rate, a bit worse than the 18% estimate last month and the biggest percentage drop in 15 years.
  • What about the impact of homebuilding on the economy?
  • Homebuilding cut 1.2 percentage points from growth, the largest drag on growth from the sector since 1981, according to Thomson.
  • The report revised lower spending on services, which increased 2.8% rather than the 3.1% earlier estimated.
  • In the true spirit of the Holiday season, however, I'm going to end this note on something "positive."
  • Corporate before-tax profits are up 30.6% in the past year, the fastest growth in profits since 1984.
  • Profits after taxes rose 31% in the past year.
  • Hey, maybe you ain't Goldman Sachs material, but still, don't you think your company should spread around a little more corporate bonus cheer than usual this year?

2. Emerging Victory?

Risk premiums for emerging market bonds equaled their record lows on Wednesday, only two days after Thailand's surprise attempt to implement capital controls.

  • How do we know what "risk premiums" for emerging markets bonds are?
  • Simple, we compare the yields of emerging markets bonds to U.S. Treasuries.
  • Although to read the newspapers it may seem the U.S. is on the brink of total collapse and ruin at any given moment, the reality is that, despite it all, U.S. Treasuries are viewed as the safest debt in all the world.
  • The difference between emerging markets debt yields and U.S. Treasury yields is called the "spread."
  • According to the Financial Times, as measured by JPMorgan's EMBI+ that spread fell on Wednesday to 172 basis points (remember that one basis point is equal to 1/100th of a percentage point) over U.S. Treasuries.
  • The wider the spread, the more "risk premium" is built into the higher-yielding bonds.
  • The spread between U.S. Treasury yields and emerging market yields now equals a record low set... anyone? anyone? anyone?
  • Last May.
  • In one sense, very narrow spreads can potentially be viewed as a contrary indicator, suggesting that speculation and/or the quest for higher-yielding instruments is distorting what "should be" the "real" risk premium.
  • For example, after hitting a record low spread of 172 basis points on May 1, the spread by June 27 had widened to 238 basis points by June 27.
  • However, the other side of that coin is that emerging market countries, thanks in part to heavy exposure to a secular boom in commodities prices, are seeing a long-term structural improvement in credit quality to justify the narrow spreads over Treasuries.
  • You can follow the EMBI+ spread here.

3. Oh, THAT Contagion

The Bank of Korea today reduced the funds it makes available for small business loans for the first time since 2002, Bloomberg reported.

  • Bank of Korea Governor Lee Seung Tae and his six board members today lowered the ceiling on so-called aggregate loans to commercial banks by 1.6 trillion won ($1.7 billion) to 8 trillion won from 2007, Bloomberg reported.
  • Meanwhile, this month South Korea's won hit a nine-year high against the dollar and Japan's yen.
  • The move by the Bank of Korea is an effort to rein in a surging housing market and dampen excessive growth and speculation without raising interest rates, which would put additional upward pressure on the won.
  • Interesting news if you remember that the reason behind Thailand's recent attempt to implement capital controls was to halt the rise of the Thai Baht against the U.S. dollar.

4. Number 09

Late last night Minaynville Professor Jason Roney brought the following analog to our attention.

  • Professor Roney took a look a the Philadelphia Bank Index (BKX) last night and was surprised to discover that it has made nine consecutive higher closes.
  • Below are two charts of the BKX. The chart on the left is the current chart showing where we are now after nine consecutive higher closes. The chart on the right is the only prior occurrence in the BKX of nine consecutive higher closes... and subsequently what happened.

5. Worst Holiday Bonuses

Think your corporate year-end bonus isn't quite what you were expecting this year? You are not alone. Many Americans are finding that, despite corporate before-tax profits set to hit a 20-year high, their employers are not exactly in the giving spirit this holiday season.

Corporate pre-tax profits are at a 20-year high, largely due to employees like you. What was your holiday bonus?

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