Archive for July, 2011

What About the CDS for USA Debt?

July 27, 2011

Fer-Get-Aboud The Debt Ceiling. Focus on the inversion in credit default swaps on the U.S.A.  As you know, Sovereign CDS typically pay on a credit event which would include a delayed payment. 

Brown Advisory’s Tom Graff ISDA said that a delay on Treasury bonds of more than 3 days would be considered a default, although he says that is unofficial.  Mr. Graff noted the big question is why is it trading “inverted” (i.e., shorter-termed CDS contracts have a wider spread than longer-term contracts)?  A Regular said, “So right now, you can buy protection against the USA at 80bps for 1 year. We know that if we haven’t defaulted in 1 year, odds are we won’t default at all. So if you buy a “cheaper” 5-year contract at 55bps, you’ll have to close out the contract. You assume that the contract spread would have tightened, and therefore you’d have to close out the contract at a loss. By buying the 1-year contract, you just pay the 80bps deal spread and it expires. That’s it.”

FT’s Alpaville noted that Pollack from Markit actually pointed out that the curve has now been inverted for a few weeks, though there’s been a particularly convincing move in the last week.

Lack of FAA Funding Halts Construction Projects

July 25, 2011

Contractors have been told to stop work on critical airport modernization projects around the country after Congress failed to pass legislation on Friday giving the FAA the authority necessary for work to continue. Dozens of “stop work orders” have been issued for major projects designed to build and modernize control towers and other aviation infrastructure from coast to coast.

Smith’s Research & Gradings has assigned Smith’s NEGATIVE (-1) event risk gradings to airports with material exposure to the stop work orders.  However, Smith’s Gradings and Smith’s Recovery Gradings are unchanged, at this time.
“Construction workers across America will lose their jobs and local communities will be hurt the longer this goes on. Congress needs to pass an FAA bill to prevent further economic damage,” said Transportation Secretary Ray LaHood. “This is no way to run the best aviation system in the world.”
“Unless Congress acts quickly, more work on projects critical to our nation’s aviation system will come to a halt. Work is stopping on construction and planning projects, NextGen system testing, and airport certification.  The list goes on and on and this is just the beginning,” said FAA Administrator Randy Babbitt.

Construction workers, engineers and planners were told not to come to worksites across the country after the FAA was forced to issue stop work orders on projects ranging from the construction of new air traffic control towers to the rehabilitation and modernization of air traffic facilities.  Nearly 4,000 FAA personnel, many needed to oversee various aspects of these projects, were furloughed on Saturday.  Stopping work on these projects could significantly increase the ultimate costs of construction for taxpayers.

Some of these projects include:

  • Las Vegas, Nevada: A more than $43 million project to build a new air traffic control tower at McCarran International Airport.  Contractor: Archer Western Contractors.
  • Palm Springs, California: A $24.5 million project to build a new air traffic control tower at Palm Springs International Airport.  Contractors: Swinterton Builders.
  • Oakland, California: A $31 million project to build a new air traffic control tower at Oakland International Airport.  Contractor: Devcon Construction. 
  • Wilkes-Barre, Pennsylvania: A more than $18 million project to build a new air traffic control tower at Wilkes-Barre/Scranton International Airport. Contractor: Donald J. Keating Co.
  • Kalamazoo, Michigan: A more than $14 million project to build a new air traffic control tower at Battle Creek International Airport. Contractor: Skanska.
  • Gulfport, Mississippi: A nearly $12 million project to build a new air traffic control tower at Gulfport-Biloxi International Airport. Contractor: Flintco, Inc.
  • Queens, NY: A more than $6 million project to demolish the old air traffic control tower at LaGuardia Airport. Work was supposed to begin on Saturday.  Contractor: Paul J. Scariano Inc.

Additionally, the FAA has issued stop work orders for $370 million in contracts with Jacobs Engineering of Pasadena, California.  The company is contracted to do all the architect, design, engineering and planning services for existing and future air traffic facilities. To view a list of projects where “stop work orders” have been issued click here.  This list will be continually updated until Congress passes an FAA bill.

Before last Friday, the FAA was also prepared to award contracts for new air traffic control towers in Cleveland, Ohio and Fort Lauderdale, Florida but was forced to suspend that process because the agency was no longer authorized to access the Airport and Airway Trust Fund.

In addition to the FAA’s work on the construction of aviation facilities such as control towers, it is a primary funding source for other airport projects through the Airport Improvement Program.  The program is also unable to operate without congressional authorization and as a result the FAA is unable to get roughly $2.5 billion out the door for airport projects in all 50 states that could put thousands of people to work in good paying jobs

Nearly 4,000 FAA employees in 35 states, and the District of Columbia and Puerto Rico, have been furloughed and forced to go without pay. Large numbers of employees in New Jersey, New York, California, Georgia, Oklahoma, Texas, Washington, Illinois and the District of Columbia are being affected. This includes many of the FAA’s engineers, scientists, research analysts, administrative assistants, computer specialists, program managers and analysts, environmental protection specialists, and community planners.

While this lapse in FAA’s authorization affects thousands of public and private sector jobs, it is important to note that the safety of the flying public will not be compromised.

Should We Use More Than One Unemployment Number?

July 22, 2011


The US Economy is showing signs of recessionary pressures. The trend in the unemployment rate is up to 9.2% from 8.8% in March. And, we at Smith’s Research are focusing on the Department of Labor’s Bureau of Statistics and the Unemployment number being used by the markets.  Of course, the Bureau of Statistics actually publishes a whole range of unemployment numbers, ranging from U-1 to U-6.  The unemployment number quoted in the press is U-3, which measures the number of people who are out of work but actively seeking employment as a percentage of the total labor force. The U-3 is part of the Current Population Survey (CPS), which is a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics.  Smith’s Research continues to examine the growing relevance of U-4, which includes all of the U-3 workers plus those who are “discouraged” and are unemployed because they have stopped looking for work. Prior to the recession, the median number of weeks that a person was unemployed was five weeks, but the latest CPS had a median job search of 10 weeks. Unemployment duration has also increased for those who eventually quit looking for work. The Bureau of Labor said, “Unemployed individuals were jobless for 20 weeks in 2010 before giving-up and leaving the labor force. Whereas in 2007, those who were not successful in their job search had been unemployed for 8.5 weeks.” As James Trapp, who is a level 5 gradings analyst here at Smith’s Research, asked, “Where do people go when they leave the labor force?”   Indeed.  A closer look at the numbers found that 11% of the people who found jobs last month had been out of work for more than 12 months.  In other words, these people had left the labor force (according to the Department of Labor) so they must have “found” (i.e. stumbled upon) jobs because the people had grown discouraged and stopped looking.  So, we are starting to look at the U-4 number, too.