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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"

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

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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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