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Five Things You Need to Know: Retail Sal...oops; Deutsche Bank Suggests Subprime Woes NOT Well Contained; Hey Buddy, We Got $7 Bln in Subprime Bonds in Section 637A; Oh, You Mean Food Inflation; China: Now Fake Weather!


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. Retail Sal...oops

A day after a number of retail chains reported better than expected same store sales, Retail Sales tracked by the Commerce Department fell by the most in nearly two years. What gives?

  • Retail Sales declined 0.9% in the "headline number" and a worse-than-expected 0.4% excluding automobiles.
  • Digging inside the data (the Commerce Department breaks the Retail Sales figures down into 14 separate categories ranging from Motor Vehicles and Parts to Building Materials, Gasoline Stations and Sporting Goods) there were a number of standout areas worth highlighting:
    - Furniture sales declined 3%, and have been down in four of the past seven months... by far this has been the worst performance by category even as we are told continually - almost desperately - that housing is "well contained"
    - Electronics sales declined 1.4%
    - Building Materials were down 2.3%
    - Health and Personal Care showed a 1.2% increase
    - Non-Store Retailers increased 1.2%
  • Retail Sales account for almost half of all consumer spending, while consumer spending accounts for nearly two-thirds of the overall U.S. economy.
  • Now, back to the discrepancy between yesterday's Same Store Sales figures today's Retail Sales - why the difference?
  • The industry-reported figures yesterday account for only about 17% of total retail purchases, according to Bloomberg.
  • Therefore, they rarely correlate well with the government compiled Retail Sales figures.
  • With housing prices actually declining, making home equity withdrawals more difficult, watch for Consumer Credit figures - next released on August 7 - to show continued outsized increases, particularly in the credit card segment.
  • When those Consumer Credit increases begin to dry up, that's when the market will begin to take notice.
  • Until then? Carry on.

2. Deutsche Bank Suggests Subprime Woes NOT Well Contained

We had to go across the pond to dig it up, but we finally found someone willing to discard the "well contained" mantra and raise the possibility that problems in the subprime sector have consequences for the broader economy.

  • Karen Weaver, global head of securitization research at Deutsche Bank (DB), speaking at an industry conference on derivatives in Barcelona, said "[Subprime fallout] can be a very slow-moving train and it still has a long way to run," according to the Financial Times.
  • "The important thing is what it does to the overall housing market. When many borrowers become forced sellers, it reprices the entire housing stock," she said.
  • Meanwhile, scanning the headlines for our daily subprime datapoints:
    - General Electric (GE) said it will sell WMC Mortgage, its subprime and Alt-A mortgage unit, after the unit posted a $182 mln loss in the second quarter. The company "divested" (a more polite euphemism for "dumped") $3.7 billion of WMC's loans in the period, according to Bloomberg. That still leaves it with more than $1 bln, however.
    - Issuance of subprime mortgage securities declined 41% last quarter from a year earlier to $74 bln, while sales of Alt A home-loans bonds fell 2.7% to $100.9 billion, the newsletter Inside MBS & ABS said.
    - The Wall Street Journal's Fund Track column this morning mentions a number of prominent mutual funds with significant subprime mortgage investments: Franklin Resources Inc.'s $257 mln Strategic Mortgage Portfolio has 19% of its assets in securities linked to subprime mortgages; Principal Investors Bond & Mortgage Securities Fund and the $113 mln Schroder Enhanced Income Fund each have 15% of their portfolios in subprime mortgages.
    - Fitch Ratings said it may downgrade $7.1 bln of bonds because of rising delinquencies and defaults on subprime mortgages.
    - Moody's and S&P have already downgraded similar bonds, or are in the process of doing so. Better late than never.
  • Finally, in the Who Ya Gonna Believe Department: Fitch Ratings this morning said major U.S. housing metrics will continue to sharply decrease this year with no apparent relief in the short term for homebuilders, while Lehman Brothers (LEH) (they just happen to be the biggest underwriter of mortgage bonds - "underwriter" being a fancy Wall Street word for "salesperson") says the worst is over and "much of the pain has been squeezed out."

3. Hey Buddy, We Got $7 Bln in Subprime Bonds in Section 637A

Meanwhile, as if nothing in today's Number Two, above, is even happening, U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing trying to persuade the Chinese central bank to buy more mortgage-backed securities.

  • China's $1.33 trln of foreign-currency reserves is the world's largest, so Jackson is in Beijing making the case for the central bank to invest a portion of those reserves in U.S. mortgage-backed-securities.
  • Jackson met with central bank Governor Zhou Xiaochuan and Minister of Construction Wang Guangtao in the nation's capital this week.
  • held $107.5 bln in U.S. mortgage-backed securities as of June 2006, up from $3 bln three years earlier, according to Bloomberg citing HUD's Web site.
  • "Mortgage-backed securities yield a higher rate of return than a traditional U.S. Treasury bond with (the) same credit risk," HUD's Jackson said.
  • Somehow this makes it all seem like one big ticket scalping operation.

4. Oh, You Mean Food Inflation

Inflation remains well contained as long as you aren't eating. According to the latest American Farm Bureau Federation Marketbasket Survey, food inflation is up about 4% in the second quarter, and nearly 8% year-over-year. 1).jpg" width="187" align="right" />

  • The "informal survey" by the American Farm Bureau Federation showed the total cost of the 16 basic grocery items tracked was up about 4% from the first quarter of 2007.
  • The overall cost for the marketbasket items showed an increase of about 8% year-over-year.
  • Regular whole milk showed the largest quarter-to-quarter price increase.
  • Only Russet potatoes dropped for the quarter.
  • Bacon was unchanged.
  • AFBF Economist Jim Sartwelle said, "As energy costs have increased, it has become more expensive to process, package, and transport food items for retail sale."
  • Fortunately, the Fed strips food and energy out of their inflation measures - the net result being low inflation, except in things that are going up in price.

5. China: Now Fake Weather!

Pranda handbags, pork buns made of cardboard, Rolox watches, Mercedes Bends cars... now fake weather!?!

  • It's true.
  • China is running what amounts to the world's largest Weather Modification Program, according to the Asia Times.
  • That means they're making "fake" weather.
  • According to Wang Guanghe, director of the Weather Modification Department under the Chinese Academy of Meteorological Sciences, each of China's more than 30 provinces and province-level municipalities today boast a weather-modification base, employing more than 32,000 people, 7,100 anti-aircraft guns, 4,991 special rocket launchers and 30-odd aircraft across the country, the Asia Times said.
  • The annual nationwide budget for weather modification is between US$60 million and $90 million.
  • Meanwhile, we're sitting here sweating like a... person... who is... like... sweating... a whole lot... or something.
  • How come our government doesn't have a top secret Weather Modification Department?
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