Consumer confidence halted a six-month
slide in July, but barely climbed from its lowest level in more
than a decade, while home prices continued their record decline
The Conference Board said its overall monthly measure of
consumers' mood rose to 51.9 this month -- the first increase
since December -- from an upwardly revised 51.0 in June. Last
month's reading was the lowest in 16 years.
U.S. home prices plunged 15.8 percent on the year in 20
leading metropolitan areas, accelerating their slide from the
previous month, according to the closely watched Standard &
Poor's/Case Shiller report, though the decline was not bad as
Analysts said oil's retreat from record highs gave
confidence a lift. But they warned that the improvement could
be temporary while a sinking job market and the worst housing
slump since the Great Depression still weigh on sentiment.
"We know the consumers are very attuned to gas and oil
prices and they have been coming down," said Robert Brusca,
chief economist at Fact and Opinion Economics in New York.
"It's hard to put a shiny gloss on this confidence report."
On Wall Street, stocks extended their gains on the
confidence report, which confounded expectations of a slight
fall in sentiment, and the dollar also firmed versus the euro
U.S. government bonds, which generally benefit from signs
of economic weakness, extended their losses.
Despite July's slight rise, the consumer confidence index
was still down by more than half since the same month last
year, when it was at 111.90. Since then, housing market
troubles have triggered the most severe credit crisis in at
least a decade.
"Consumers' outlook, while slightly improved from last
month, continues to be very pessimistic," the Conference Board
said in its report.
The consumer confidence index dates back to 1967. It hit
its lowest ever reading at 43.2 in December 1974.
The Conference Board, an industry group, said its gauge of
inflation expectations edged lower, to 7.6 percent, after
hitting a record high of 7.7 percent in May and June. Federal
Reserve policy-makers have expressed concerns about keeping
inflation expectations in check.
The confidence report showed consumers' view of job
prospects deteriorating, with their assessment of jobs being
hard to get rising to the highest in four years and "jobs
plentiful" declining to its lowest since late 2003.
The divergence between the two measure is at the widest in
4-1/2 years, when the job market was emerging from the slump
associated with the recession at the start of this decade.
U.S. employers cut workers for a sixth consecutive month in
June and economists expect data to show this extended to a
seventh month when July figures are reported on Friday.
The S&P/Case Shiller home price report showed each of the
20 regions monitored suffered annual declines for a second
month. The index of 20 metropolitan areas also fell 0.9 percent
in May from April.
Optimists may take heart from the fact that the decline was
slightly less than expected and not as severe on a monthly
basis as in April. Also, seven regions showed increases on a
month-over-month basis, providing a "possible bright spot" for
U.S. housing that otherwise continues to weaken, S&P said.
Still, the good news on housing remains in short supply.
"We are not going to get too excited about the data yet as
it is not seasonally adjusted and prices tend to be higher
during the spring selling season," said Michelle Meyer, an
economist at Lehman Brothers in New York.
Falling prices are seen at the crux of a growing crisis in
foreclosures as homeowners find themselves "underwater," with
the value of their homes less than their loan balances.
(Additional reporting by Richard Leong; Editing by Dan
Citigroup Inc (C.N) may write down
about $8 billion in the third quarter from its exposure to
collateralized debt obligations (CDOs) after Merrill Lynch & Co
(MER.N) agreed to sell its CDOs at a sharp discount, Deutsche
Bank analyst Mike Mayo said.
The analyst also forecast a third-quarter loss and widened
his 2008 loss estimate for Citigroup, the largest U.S. bank by
On Monday, Merrill Lynch agreed to sell $30.6 billion of
CDOs, a kind of repackaged debt, to an affiliate of private
equity fund Lone Star Funds for just $6.7 billion, or about 22
cents on the dollar.
"We do think the CDO sale is large and diversified enough
to be applicable to others with similar exposure and that the
monoline settlements will pave the way for similar enough
transactions," analysts at UBS said.
They said Citigroup has the largest exposure to both CDOs
and monoline bond insurers, and that investors could expect
further incremental write-downs in coming quarters.
On Monday, Merrill also said it would take a $5.7 billion
third-quarter write-down as it unloads huge amounts of risky
debt, and would raise $8.5 billion by selling new stock.
Citigroup has $22.5 billion of net CDO exposure, and based
on Merrill's write-downs the New York-based bank could have
another $7 billion of write-downs, Deutsche Bank's Mayo said.
The bank may also incur a $1 billion loss on its remaining
$2 billion exposure to the bond insurers, Mayo added.
"Citi should still be able to absorb much of these charges
and credit costs in general given an estimated $20 billion of
second-half 2008 pre-provision, pre-tax earnings and the sale
of its German retail business...but the decision about raising
new capital could be closer than we previously thought," Mayo
wrote in a note to clients.
Mayo cut his third-quarter estimate by $1 to a loss of 59
cents a share. For 2008, he expects Citigroup to post a wider
loss of 80 cents a share, from a loss of 66 cents a share.
According to Reuters Estimates, analysts on average expect
Citigroup to earn 26 cents a share in the third quarter. For
2008, they expect the bank to post a loss of 87 cents a share.
Mayo maintained his "hold" rating on the stock.
MERRILL DEAL IMPACT
The fire-sale nature of Merrill's CDO deal will add to
concerns that the global credit crisis, which has already led
to more than $400 billion of write-downs and losses at major
banks, still has a long way to run.
"The read across of the new clearing price on ABS CDO (22
cents on the dollar) is causing stress tests everywhere. Of the
US names we cover this has the largest impact on Citigroup," a
note from a Merrill Lynch stock salesperson said.
Goldman Sachs analyst William Tanona agreed.
"The biggest read across to other firms will be Citigroup
which has been far less aggressive in their marks on CDOs, in
our view," Goldman's Tanona wrote in a note to clients.
He said that if Citigroup were to mark its exposure to a
level similar to that of Merrill, it would imply a $16.2
billion write-down and roughly $2 per share impact.
"Though Citi defends their marks, due to their earlier
vintages and high concentration of commercial paper, we
continue to believe they would struggle to obtain their prices
in the marketplace today," Tanona added.
In a separate report, J.P. Morgan Securities analyst
Kenneth Worthington said Merrill's sale of its CDO portfolio
brings transparency to the market, but means more write-downs
"Given the sale of Merrill's $30.6 billion ABS CDO
portfolio, we expect peers will adjust marks, eliminating an
incentive to hold on to impaired assets," Worthington said. "We
see this a part of the cleansing process and expect increased
liquidity in the CDO market and mortgage markets."
He also expects Goldman Sachs Group Inc (GS.N) and private
equity companies, with excess capital and fund-raising ability,
to be the main beneficiaries from a credit market that appears
in the early stage of being on the mend.
Citigroup shares were up about 2 percent at $17.74 in
afternoon trade on the New York Stock Exchange. Through Monday,
they had fallen 41 percent this year.
Shares of Goldman Sachs were up 4.1 percent at $180.01.
(Editing by Mike Miller)
Their outlook has brightened a bit, even though they remain the most gloomy about the current economy that they have been in 16 years, a private research group said Tuesday.
The New York-based Conference Board said that its Consumer Confidence Index stands at 51.9 for July — about half of what it was a year ago — but the reading was slightly higher than the revised 51.0 in June and a bit better than the reading of 50 predicted by economists surveyed by Thomson/IFR. The slight improvement, which economists say was helped by a little relief in oil prices in recent weeks, also reverses a six-month slide since February.
The Expectations Index, which measures shoppers' outlook over the next six months, increased a bit to 43.0 from 41.4. The Present Situation Index, which measures their current assessment of the economy, was virtually flat at 65.3, compared to 65.4 in June.
"Consumers' assessment of current conditions was little changed, suggesting there has been no significant improvement, nor significant deterioration, in business or labor market conditions," said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement.
She added, however, that while consumers remain grim about short-term prospects, the modest improvement in their outlook provides some glimmer of hope. The slight improvement in the outlook "bears careful watching over the next few months," she said.
Stocks rose Tuesday, rebounding a day after a big tumble, on the improving confidence. In midday trading, the Dow Jones industrial average rose 132.14, or 1.19 percent, to 11,263.22.
The reading comes as the nation's retailers are entering the critical back-to-school season, the most important period behind the holiday season. However, economists — who closely monitor sentiment since consumer spending represents about two-thirds of all economic activity — didn't interpret the slight uptick as a beginning of a rebound in shoppers' mood.
"The rebate checks have just been spent," said Bernard Baumohl, managing director of The Economic Outlook Group. "This is hardly the backdrop normally associated with a rebound in consumer confidence. What we'll see at best is a bounce around at these low levels for the next six to nine months. We are not going to get an improvement unless we get an improvement in housing and the job market sectors."
But there was more bad news about housing Tuesday. Home prices in May tumbled by 15.8 percent, the steepest rate ever, according to The S&P/Case-Shiller 20-city index, a closely watched housing index. The narrower 10-city index plunged 16.9 percent, its biggest decline in its 21-year history.
Another worry is a slowing job market, because job security is key to consumers' willingness to spend. Cautious employers, uncertain about the economy and their own prospects, have cut jobs each month so far this year. Economists are bracing for more job losses when the government releases the employment report for July on Friday.
Economists expect payrolls to drop by 72,000 in July, which would mark deeper cuts than the 62,000 logged in June. The unemployment rate, now at 5.5 percent, probably will climb to 5.6 percent. The jobless rate is expected to keep moving higher this year and next, hitting 6 percent or more early next year.
Baumohl noted that a slight decline in gas prices does have a psychological impact on consumers, but whether they will fall more is uncertain. The latest national survey shows gas prices have dropped a fraction below the $4-dollar mark. The average price of regular gasoline at self-serve stations was $3.996 a gallon Friday, according to the Lundberg Survey of 7,000 gas stations nationwide, released Sunday. Prices are at their lowest level since May 16, but the survey showed that the average U.S. price is $1.11 higher than it was a year ago.
The Consumer Confidence report — derived from responses received through July 22 of a representative sample of 5,000 U.S. households — also showed that consumers' worries about business conditions and jobs aren't going away.
Those saying jobs are "hard to get" edged up to 30.3 percent from 29.7 percent in June, while those claiming jobs are "plentiful" declined to 13.5 percent from 14.1 percent.
Consumers' outlook, while slightly improving from last month, continues to be grim.
Those anticipating business conditions to worsen over the next six months did ease a bit to 32.4 percent from 33.5 percent, while those expecting conditions to improve edged up to 9.3 percent from 8.5 percent in June. But the percent of consumers expecting fewer jobs in the months ahead increased to 37.1 percent from 35.7 percent, while those anticipating more jobs remained virtually unchanged at 8.2 percent.
The Consumer Confidence survey has a margin of error of plus or minus 2.5 percentage points.