Sunday, July 26, 2009

Weekend reading.

All my old colleagues on Wall Street are in an upbeat mood having been awarded great mid-year bonuses. With a recession underway demand for loans has fallen and banks are having to park their money somewhere .The Q2 returns on trading equities has clearly been the right place to put their TARP funds and the stellar returns since April have been a big help in repairing some of the balance sheet damage incurred in 2008. Institutions that have been sitting long of cash have recently started to pile into the markets afraid of missing out on further strength at the end of Q3. Amid all this wild optimism I thought it might be useful to jot down a few comments from the Sunday papers to put current market valuations in perspective:

The total number of vacant properties in the US has reached 18.7 million as of June 2009. Assuming four people in a family this is enough surplus housing to resettle the entire population of the UK and Israel in America.

In the UK home ownership levels have fallen back to rates last seen in Q2 2000 erasing most of the much touted gains in homeownership over the last decade.

The number of households in America is decreasing as extended families move in together and new graduates opt to live at home in the poor economic climate.

Operating income for companies on the S&P 500 that have reported their Q2 numbers have been 29% lower than last year and 80% lower than 2007.

The 'funding gap' of the big UK banks - the difference between customer loans and deposits was estimated at £800 billion last year. This gap has been largely filled by government support but the Bank of England cautions that UK banks may need to downsize their balance sheets by £500 billion between now and 2013.

The latest survey by accounting firm Deloiites shows that companies are not looking to banks for finance.Equity is currently the most popular form of finance and bank borrowing the least popular. This is the exact opposite to the survey conducted in June 2007.

The UK economy fell again in Q2 and has now shrunk 5.7% from its peak in Q1 2008. The downturn in the early eighties saw output shrinking by 4.6% over five quarters so this is now officially the worst downturn since WWII.

The National Institute for Economic and Social Research expects growth in the UK to be 1% next year and expects it to be the autumn of 2012 before the economy reaches the output levels recorded at this time last year. Living standards are not expected to recover to 2008 levels until 2014.

British Airways Chairman thinks it will be at least five years before demand for business class travel recovers to the rate seen in 2008 .

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