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Five Things You Need to Know: U.S. Finds $20 Bill in National Pants; Billion Dollar Breakup; Case-Shiller Index; Paulson: "Keep a Lid on This China Thing"; How the U.S. Is "Keeping a Lid on This China Thing"


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. U.S. Finds $20 Bill in National Pants

Consumer spending in the U.S. increased in June at the slowest pace in nine months, according to the Commerce Department.

  • Consumer spending, which accounts for more than two-thirds of the economy, rose just 0.1% in June, the Commerce Department reported.
  • That's the smallest increase since last September.
  • Meanwhile, the PCE price index excluding food and energy, or core PCE, rose 0.1% for the fourth straight month during June.
  • The core PCE price index, year over year, rose 1.9% in June, down slightly from 2.0% in May.
  • That's the Fed's "preferred" measure for inflation... because it doesn't really ever show any.
  • Also noteworthy, personal saving as a percentage of disposable personal income was 0.6% in June, and was revised to 0.4% in May.
  • Remember how the Personal Savings rate had been negative as of May for 26 consecutive months?
  • You know, all this time when we thought we weren't saving? According to the Commerce Department, we really were saving.
  • A "data revision" by the Commerce Department now shows Personal Savings was actually positive for most of the past two years, with only the third quarter of 2005 showing a negative personal savings rate.
  • This is great news for consumers since it must mean banks are going to be putting all that "savings" back into our accounts!
  • In other words, the U.S. found a $20 bill in its national pants.

2. Billion Dollar Breakup

Banks led by Citigroup (C) are considering whether they should pay a $1 billion break-up fee in order to get out of a deal to buy Texas Utilities (TXU) Thomson Financial is reporting.

  • Why the cold feet?
  • According to Thomson the lenders want to avoid being stuck with $37.2 billion in
    debt to fund the purchase of TXU by Kohlberg Kravis Roberts & Co. and TPG.
  • Goldman Sachs (GS), JPMorgan Chase (JPM), Lehman (LEH) and Morgan Stanley (MS) had also committed to provide the debt financing for the acquisition.
  • Yikes! But $1 billion just to get out of a financing arrangement? Pretty steep, no?
  • Yes, it is pretty steep. But, according to Thomson, apparently not as steep as the current losses of upwards of 10% on traded loans and bonds of recent buyouts.
  • According to First Data (FDC), there's an estimated $300 billion of total debt for buyouts that still need to be funded.
  • Among the deals still pending, Blackstone's (BX) leveraged buyout of Hilton Hotels (HLT).
  • A separate article by Bloomberg this morning said banks led by Bank of America (BAC) have agreed to provide as much as $21 billion of debt financing to fund the buyout... at least for now.

3. Case-Shiller Index

The S&P/Case-Shiller Index of home prices in 20 metropolitan areas declined 2.8% in May from a year earlier, according to Standard & Poor's and MacroMarkets LLC which release the report.

  • The 2.8% year-over-year decline was the largest in at least six years and marked the fifth consecutive year-over-year drop for the index.
  • The narrower S&P/Case-Shiller Index of 10 metropolitan areas fell 3.4%, the most since 1991, the report said.
  • Although narrower, that index has a longer history.

    The S&P/Case-Shiller index of home prices in 20 metropolitan areas dropped 2.8 percent in May from a year ago.

4. Paulson: "Keep a Lid on This China Thing"

In Beijing yesterday, China brushed off pressure for a faster rise in the yuan from visiting U.S. Treasury Secretary Henry Paulson, saying that it is still "poor" and "poses no threat to anyone."

  • On Monday Paulson said he believes faster currency reform will do more to promote security and stability in China than that country's current, slow-moving approach.
  • In response, Vice Premier Wu Yi brushed aside Paulson's request, saying, China is just a "poor country."
  • "China still has 23 million people living in poverty," Wu said. "Who could we threaten? We don't have the ability."
  • Now Paulson could have noted that the United States census counts 37 million Americans living in poverty - 62% more people than the number of Chinese Wu cited in the Washington Post today - but, according to the Post, "he is aware that China does not like to be lectured by outsiders."
  • Yes, of course. Clearly, Paulson wouldn't want to lecture the Chinese on poverty, something the U.S. is quickly becoming expert in. Nobody likes a know-it-all.
  • "I don't want China to become an increasingly big political issue in the U.S.," Paulson told reporters Monday.
  • Shhhhh. (Keep this to yourself, but we don't want this China thing to be a big political issue.)
  • See, that right there is good thinking. That's what they mean when they say, "Goldman Sachs thinking." That is why they pay him the big bucks.
  • We gotta keep a lid on this China thing!

5. How the U.S. Is "Keeping a Lid on This China Thing"

Look here, when the Treasury Secretary speaks, we listen... unlike China. So let's all step back, take a deep breath, and put this China issue in perspective. The last thing we want to do is to blow this whole China growth episode into some of kind front-page, in-your-face, political hullabaloo.

Oops. Don't tell Paulson. We were supposed to keep a lid on this thing!

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