McCombs Knowledge To Go

February 9, 2010

Hot Topics from theFinancial Markets

by Professor Sanford J. Leeds, Esq., CFASandy.leeds@mccombs.utexas.edu

www.leedsonfinance.com

Please note:

All slides that list a source were either pulled from The Wall Street Journal,

The New York Times or the The Financial Times

Federal Debt

Federal Government Debt

Over the last decade, the outlook for U.S. government finances has deteriorated sharply. Projections for the U.S. public debt as a share of an annual economic output from March 2001, June 2008, and now.

Tidal Wave

Total amount of gross issuance for Treasury notes and bonds, in

trillions

State Deficits• Fiscal Years 2009-2011:

• $256 billion gap

California has the worst problems: $20 billion

Fitch affirmed the AAA rating of the U.S. Their argument was that “the near term risk to the…

AAA status is minimal given its exceptional financing and economic flexibility and the U.S. dollar’s fole as the world’s predominant reserve currency.”

Moody’s comments on the U.S. debt “Unless further measures are taken to reduce the

budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the AAA government bond rating.”

Sovereign Debt Issues Greece Portugal Spain Japan

Rising Risk The annual premium of insuring Greek government debt

against default for five years:

Downgrade Drama Greece’s stock market rose Tuesday after Moody’s lowered the

country’s debt rating by only one notch rather than two. Since October, downgrades have sent the Athens stock market on a tumultuous course.

In 2004, Alan Greenspan, then the chairman, said the rise in home values was “not enough in our judgment to raise major concerns.”

In 2005, Mr. Bernanke – then a Bush administration official – said a housing bubble was “a pretty unlikely possibility.”

As late as May 2007, Mr. Bernanke said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

Source: NY Times (January 5, 2010)

Adjusted Monetary Base Percent change from a year ago

How They Stack Up China’s GDP has more than quadrupled in the past decade, leaving it

poised to surpass Japan as the world’s second largest economy.

Trade’s Horse Race The global economic crisis, which has hurt China’s low-end exports

less that it has high-tech German goods, allowed China to pass Germany as the world’s largest exporter in 2009.

Exports in trillions of dollars:

A Lender Steps Back Percentage of net new U.S.

debt brought by China: Net new U.S. government

borrowing:

Percentage of Outstanding U.S. Treasury Securities Owned by China

Country Indicators for Foreign Policy Human Rights Rankings

Afghanistan: 173 Iran: 177 Cuba: 180 Iraq: 183

Source: Tarleton University, 2007

China China is ranked 185 The only countries below China are:

Burma Sudan North Korea

Top Currencies by Foreign Exchange Turnover April 2007

Renminbi is not among the most traded currencies

Up, Up and Away: A Look at China’s Property Indicators

New construction is booming at an unprecedented rate… New floor space started, year-

to-year percent change:

As prices surge at their fastest pace in two years… National average property

prices, annualized percentage change:

Housing in Big Cities Housing is increasingly unaffordable in big cities Years of income required to buy a 100 square-meter apartment:

Compensation GS: $16.2 billion JPM: $26.9 billion C: $25 billion

Why is Banker Compensation So High?1. They take inordinate risks which are not

fully reflected in the calculation of profitability

2. Because what they do is not properly competitive

3. Because they take advantage of inside knowledge, stemming from their involvement in umpteen related financial activities

What about shareholders?

Daily Trading Net Revenues GS – Fiscal 3q08

Daily Trading Net Revenues GS – Fiscal 3q09

Do You Trust This Home Price? Other neighbors are waiting to sell – that the

supply is small. The home sold for $180K, but the buyer’s

uncle told the buyer that he would give him $8K under one condition – that he buys a house.

The buyer’s other uncle runs a bank and gave the buyer a below-market-rate mortgage.

Public Assistance Share of FHA-backed loans in total mortgage market:

Looming Trouble Mortgages insured by the FHA during the financial crisis are souring

more quickly, eating into the agency’s loan-loss reserves.

Percentage of mortgages 60 days or more past due, by year of origination:

Loan-loss reserves, as percentage of loans outstanding:

Home Sweet Home

Unemployment Rate

Household Data

Unemployment, Labor Force Participation & Employment Rates

Duration of Unemployment

Duration of Unemployment

Household Data

Consumer Sentiment

Source: University of Michigan

Industrial Production & Institute for Supply Management (ISM) Indexes

Real Durables Consumption & Vehicle Sales

Total Loans & Leases in Bank Credit at Commercial Banks

Contributions to Real GDP Growth Rate

Real Final Sales & GDP

Slower Pace U.S. health spending grew slower in 2008 than it has in decades, but

spending continued to outpace GDP growth.

National health expenditures, change: from previous year:

National health expenditures, as share: of GDP:

Growing Role Public programs are expected to account for more than half of all

health spending by next year.

Unit Labor Costs

A Look Ahead What will the future look like without:

Cash-for-Clunkers Home Tax Credit Fed Purchase of $1.25 Trillion of MBA China’s High Growth

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