Saturday, April 4, 2009

Weekly Market Update (4/3/09)‏

Payden & Rygel (paydenrygel@payden-rygel.com)
HEADLINE NEWS WEEK ENDING 4/3/09

Overview
The US labor market continues to deteriorate at an alarming rate. According to the latest figures from the Bureau of Labor Statistics, the US economy shed 663,000 jobs in March and the unemployment rate rose to a 25-year high of 8.5% during the month. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

US MARKETS
Treasury/Economics
US Treasuries traded within a very narrow range this week showing a tendency towards higher yields. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Large-Cap Equities
The stock market rallied for the fourth consecutive week due to positive news from the Group of 20 (G-20) meeting in London and the relaxing of mark-to-market accounting rules. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Corporate Bonds
Investment grade primary issuance slowed down considerably this week as economic data and the automakers ruled the headlines. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Mortgage-Backed Securities
Agency mortgages outperformed Treasuries as yields drifted higher and the focus shifted from agency products to the credit sensitive asset classes. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Municipal Bonds
AAA-rated bond yields were 10 to 12 bps lower in the 2-5 year maturity range over the last week. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

High-Yield
The high yield market finished the month of March in solid form, despite mixed economic data towards month end and continuing uncertainty about the eventual fate of two high yield companies: General Motors and Chrysler Automotive. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were construction and materials (+11.8%) and travel and leisure (+11.8%). more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +10.0% this week, while the Russian stock index RTS went up by +3.4%. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Global Bonds and Currencies
Major sovereign bond markets declined over the past week, mainly on the view that the G-20’s stimulus package would prove sufficient to stabilize the global economy. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week. The constructive outcome of the G-20 summit and a US $1 trillion commitment to IMF reserves resulted in a continuation of the positive tone in risk markets seen over the past few weeks. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

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Have a great weekend!



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Friday, April 3, 2009

Very bearish: World's largest gold buyer halts imports

India, the world's largest buyer of gold, has stopped importing the precious metal as residents are scrapping jewelry and coins to take advantage of high prices.

Dealers said there were no gold imports in February or March.

Even in January - the middle of the gift-giving wedding season - India imported just 1.8 million tonnes, down nearly 90 percent from a level of 14 tonnes a year earlier, industry data showed.

Jobs Jamboree Friday

It's A Jobs Jamboree Friday! But before we go there... Let's recap this week's employment numbers leading up to the Jobs Jamboree, eh? First we had the ADP report show 742K jobs were lost in March... Then yesterday we had the Weekly Initial Jobless Claims show that 669K new claims were filed, and that the previous week's 630K figure was revised up to 672K... What's really scary here folks is that the 4-week moving average is now up to 649.5K... All the King's Men and all the King's Horses that believe the Humpty Dumpty economy will be recovering by the end of this year, might want to look over those forecasts and come clean on what they really think, not what the Gov't wants them to say, to make it look like everything will be right on the night, because... These unemployment numbers are not shaping up to be anything close to a recovering economy!

There is not much good news in the March employment report, and that is not surprising. Payrolls fell 663,000. That was in-line with an expected 650,000 decline.

There were widespread losses by employment category. Education and health care managed an 8,000 increase, but manufacturing dropped 161,000 jobs.

The unemployment rate shot to 8.5% from 8.1%. It is now already well above the average 8.1% average for 2009 as forecast in the Obama budget presented just weeks ago. The trend in employment suggests that the projected deficit is thus already no longer operative.

The other components of the release also reflected weakness. The average workweek fell 0.1 to 33.2 hours. The workweek tends to lead payroll changes, as employers adjust hours before payrolls.

The manufacturing workweek fell 0.2 to 39.3. This suggests a significant reduction in industrial production in March.

Average hourly earnings rose 0.2%. The year-over-year change is 3.4%.

The data can be considered about as expected, but are also clearly very weak. The market has been anticipating an improved economic environment, and payrolls lag demand, so the degree to which this undermines the recent optimism is uncertain.

Commercial meltdown: Companies dumped 25 million square feet

How the commercial real estate meltdown will destroy the insurance industry... Your policies could be at risk.

From Calculated Risk:

Companies struggling to cut costs dumped a near-record 25 million square feet of office space in the first quarter, driving vacancy up and rents down, according to data to be released today by Reis Inc.

The office vacancy rate nationwide rose to 15.2% from 14.5% in the previous quarter, and likely will surpass 19.3% over the next year, according to Reis, a New York firm that tracks commercial property. That would put the vacancy rate above the level during the real-estate bust of the early 1990s, the worst on record.

April 2009, Zacks Economic Report‏

April 2nd, 2009

After ruminating on the rally we saw in March, it is time to shift our focus on to the remaining 9 months of the year. Now, more than ever, investors are asking their advisors if we did indeed reach the market bottom in early March. It is best to recognize "exact market timing" as a myth, and instead recognize when opportunities present themselves and invest accordingly.

As the market re-tested its lows, and enjoyed a nice rally, sentiment on the street seemed to turn from a smile to a smirk as the market raged on. Continued weakness in the economy is expected, but this weakness is already priced into the market. To assist you better understanding the current economic conditions, we are pleased to bring you highlights from the most recent Zacks Economic Report.

The Outlook in Brief



Despite a recent upturn in equity markets, the earlier implosion, and other signs of weakness, especially abroad, darkened an already-dismal economic landscape. Expected near-term declines in GDP were deepened, and the projected upturn starting in the second half has been trimmed back significantly. GDP is now expected to decline at a 5.5% pace in the first quarter, and fall at a 0.5% rate in the second quarter. In the second half, GDP is projected to grow at just a 1.4% pace.



This forecast assumes that equities decline 22% (at a quarterly rate) in the first quarter, versus a 5% decline expected last month, and carving an additional $2.1 trillion from household net worth. This decline significantly restrains consumer spending relative to last month's forecast in the second half

of this year and in the first half of 2010.

Every major component of final sales, save government spending, is significantly weaker in the first half of 2009 in this forecast than last month. Overall final sales are expected to decline at nearly a 4% pace in the first quarter before flattening (0.0%) in the second quarter. The downward revisions in

capital spending components were especially sharp, as the credit-market dysfunction and growing pessimism begin to weigh heavily on this sector.



GDP is now expected to decline 0.9% in 2009 and to rise 3.5% in 2010, both 0.6 percentage point less than we expected last month. As a result, the unemployment rate is expected to peak at 9.4% early next year and to decline to just 8.1% by the end of 2011.?? With considerable slack emerging in the economy, inflation quickly falls to near zero, and by 2011 moves into a period of mild deflation. Core consumer inflation (excludes food and energy prices) is projected to rise 0.4% in 2009, remain flat in 2010, and decline 0.2% in 2011.



The federal funds rate target remains pinned near zero into late 2011, and the Federal Reserve's unconventional policies will be pursued aggressively to promote easier credit conditions. The Fed will continue to emphasize its conditional commitment to keep the federal funds rate near zero, will

expand its credit facilities, and begin the purchase of longer-term Treasury securities in order to ease credit conditions.

Zacks Investment Management

Taxing Mutual Funds

These are taxing times for mutual-fund shareholders, indeed.

Not only are stock-fund investors facing stiff losses from 2008, those in taxable accounts also received a bill from the IRS. That's because their fund managers sold appreciated securities to meet redemptions and rescue performance in last year's meltdown. Investors were left with capital gains taxes to pay -- but nothing to show for it.

Shareholders who reinvest distributions are hit hardest. Owing tax when you haven't sold a single share is one of the rougher edges of fund investing, in good markets or bad.

Individual stockholders don't have that problem; they pay capital gains taxes only when they sell. If fund shareholders could do the same, money siphoned for taxes could instead be invested and grow over time.

Some reform-minded lawmakers in Congress have tried over the past decade to give fund investors an even tax break, but with no luck. A new session of Congress offers yet another chance to level the playing field, but for now the score is still IRS: 1; Shareholders: 0.

-- Jonathan Burton , assistant personal finance editor, Morningstar

Market Reflections 4/2/2009

The U.S. Financial Accounting Standards Board (FASB) offered new guidance that immediately gives companies more leeway on mark-to-market valuations, news that triggered an inflow into the stock market where the S&P 500 rose 2.9 percent to 834.38. News out of the G-20 also boosted the stock market. World leaders pledged more than $1 trillion in emergency aid for undeveloped countries.

The dollar fell 2-1/2 cents after the ECB defied both expectations and G-20 calls for stimulus and cut rates by an incremental 25 basis points, half of what was expected.

Commodities were mostly lower especially gold which had been benefiting from the scramble of stimulus efforts, all of which as some warn are certain to lead to inflation down the road. Gold fell about $15 to end at $905 after briefly dipping below $900. Oil ended above $52.

Money moved into the stock market and out of the Treasury market where yields backed up from 7 to 10 basis points with the belly of the curve hit by the most selling. The yield on the 3-year note rose 10 basis points to 1.23 percent.

Thursday, April 2, 2009

Bailout scorecard: Adding up the dollars Total: $10.5 trillion allocated $2.6 trillion spent

If you are getting dizzy from all the government rescue attempts and trying to get your arms around what has been
committed and how much is out the door, then you might find the following table I found on CNNMoney as a good
reference or starting point.

The government is engaged in an unprecedented - and expensive - effort to rescue the economy. Here are all the elements of the bailouts.

Date Bailout Allocated Spent
December 2007 Term Auction Facility
Lending program that allows commercial banks to unload hard-to-sell assets, including mortgage-backed securities: Fed takes assets as collateral and banks get cash. $600 billion $468.6 billion
February 2008 Economic Stimulus Act of 2008
Tax rebates of up to $600 for individual filers and $1,200 for couples in effort to boost the economy. Businesses received more than $60 billion in tax breaks. $168 billion $168 billion
March 2008 Bear Stearns bailout
Program to guarantee potential losses on Bear Stearns' portfolio; smoothed the way for JPMorgan Chase to buy the failed investment bank. $29 billion $26.2 billion
March 2008 Term Securities Lending Facility
Federal Reserve facility that loans Treasurys to banks against hard-to-sell collateral like mortgage-backed securities. $200 billion $88.6 billion
March 2008 Primary Dealer Credit Facility
Long-time lending facility for commercial banks that was opened to investment banks for first time in March 2008. n/a $61.3 billion
May 2008 Student loan guarantees
Program to purchase federal student loans from private lenders. Aim is to provide financing to companies that provide student loans. $130 billion $9 billion
September 2008 Fannie Mae and Freddie Mac bailout
Cost to the government of taking the mortgage finance companies into conservatorship. $400 billion1 $59.8 billion
September 2008 Foreign exchange dollar swaps
Exchange of dollars to 13 foreign central banks for collateral. Aim is to provide liquidity to foreign financial institutions. Unlimited $327.8 billion
October 2008 FHA housing rescue
Funding set aside for insurance of new 30-year fixed-rate mortgages for at-risk borrowers, tax credits for first-time home buyers and assistance to states and municipalities. $320 billion $20 billion +2
October 2008 Auto industry energy efficiency loans
Low-interest loans to help speed the industry's transition to more fuel-efficient vehicles. $25 billion $0
October 2008 Troubled Asset Relief Program
Financial rescue plan aimed at restoring liquidity to the financial markets. Funds thus far allocated for capital purchases in banks and emergency bailouts. $700 billion $323.4 billion
October 2008 Bank capital investments $218 billion $198.6 billion

November 2008 Citigroup capital investment
Emergency funding to keep bank afloat; in addition to previous $25 billion capital investment. $20 billion $20 billion
November 2008 Asset Guarantee Program
Funds set aside to backstop potential losses to Treasury from Citigroup and Bank of America loans. $12.5 billion $0
November 2008 TALF loss provisions
Funds set aside to backstop potential losses to Treasury from purchases of consumer loan-backed securities and mortgage-backed securities. $35 billion $0
December 2008 Auto industry bailout
Program that will provide capital on a case-by-case basis to systemically significant institutions that are at substantial risk of failure. $29.8 billion $24.8 billion
December 2008 General Motors
Government bailout of automaker to keep company afloat and help it achieve viability for the future. Last $4 billion subject to congressional approval $13.4 billion $13.4 billion
December 2008 Chrysler
Government bailout of automaker to keep company afloat and help it achieve viability for the future. Last $4 billion subject to congressional approval $4 billion $4 billion
December 2008 GMAC
Government bailout of auto finance company to which Federal Reserve granted bank holding company status. $5 billion went to GMAC directly and $1 billion to GM to make an investment in the company. $5.9 billion $5.9 billion
January 2009 Chrysler Financial
Government bailout of auto finance company to which Federal Reserve granted bank holding company status. $1.5 billion $1.5 billion
March 2009 Auto Supplier Support Program
Program to help stabilize auto suppliers by guaranteeing debt owed to them for shipped products, and providing financing to continue operations. $5 billion $0

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January 2009 Bank of America capital investment
Emergency funding to aid Merrill Lynch transaction; in addition to previous $25 billion capital investment. $20 billion $20 billion
February 2009 Foreclosure prevention
$50 billion4 $0
February 2009 Public-private investment fund
Taxpayer funds used in partnership with private investment that will buy up at least $500 billion of toxic assets from financial institutions. $100 billion $0
March 2009 AIG common stock investment
Money to help troubled insurer pay off now defunct lending facility set up by Fed in the initial version of the company's bailout. $40 billion $40 billion
March 2009 TALF investment $20 billion $20 billion
March 2009 AIG preferred capital investment $30 billion $0
March 2009 Small business loan-backed securities purchasesFunds to purchase securities backed by SBA loans in effort to unlock credit for small businesses $15 billion $0
n/a Estimated capital investment payback
-$25 billion n/a
n/a Funds left unallocated
$134.5 billion n/a


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October 2008 Money market guarantees
Four programs to help money market funds by insuring against losses; financing bank purchases of debt from funds; buying funds’ debt; and lending to funds directly. $659 billion $15 billion
October 2008 Commercial Paper Funding Facility
Purchases of short-term corporate debt aimed at boosting the struggling market and providing critical three-month financing to businesses. $1.4 trillion $241.3 billion
November 2008 Unemployment benefit extensions
Funds to help states expand unemployment benefits. $8 billion $8 billion
November 2008 Citigroup loan-loss backstop
Funds set aside to insure against losses from bank’s mortgage-backed securities investments. $245 billion $0
November 2008 Term Asset-Backed Securities Loan Facility
Program to buy consumer loan-backed securities. Aim is to revive the securitization market for consumer loans like credit cards and auto loans. $1 trillion $4.7 billion
November 2008 GSE mortgage-backed securities purchases
Program to buy mortgage-backed securities held by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans. $1.25 trillion $236.2 billion
November 2008 GSE debt purchases
Program to buy debt issued by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans. $100 billion $50.4 billion
November 2008 FDIC Temporary Liquidity Guarantee Program
Guarantees on newly issued bank bonds with maturities of more than three months. Aim is to restore liquidity to the corporate bond market and provide long-term financing to banks. $1.5 trillion $297.1 billion
2008 FDIC bank takeovers
Cost to FDIC fund that insures losses depositors suffer when a bank fails. n/a $18.5 billion

January 2009 Bank of America loan-loss backstop
Funds set aside to insure against losses from bank’s Merrill Lynch merger. $97 billion $0
January 2009 Credit Union deposit insurance guarantees
$80 billion $0
January 2009 U.S. Central Federal Credit Union capital injection
$1 billion $1 billion
February 2009 American Recovery and Reinvestment Act
Infrastructure spending, funding for states, help for the needy and tax cuts for individuals and businesses to stimulate the economy. $787.2 billion n/a3
February 2009 Tax cuts for individuals and businesses $212 billion n/a
February 2009 Direct spending $267 billion n/a
February 2009 Appropriations spending $308.3 billion n/a

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February 2009 Foreclosure prevention $25 billion4 $0
March 2009 AIG
Multifaceted bailout to help insurer through restructuring, minimize the need to post collateral and get rid of toxic assets from its balance sheet. $182 billion5 $129.3 billion5
November 2008 Bridge loan
Financing to help company through its restructuring process as it spins off non-core businesses. $60 billion6 $43.2 billion
November 2008 Collateralized debt obligation purchases
Facility to buy private investors' loans on which AIG sold insurance. As the value of loans plummeted, AIG was forced to post more collateral to back up the insurance contracts, known as credit default swap agreements. $30 billion $27.6 billion
November 2008 Mortgage-backed securities purchases
Facility to buy company’s securities backed by residential loans. $22.5 billion $18.4 billion
March 2009 Treasury preferred capital investment
Loan to help pay off a now defunct lending facility set up by the Fed in the initial version of the company’s bailout. $30 billion $0
March 2009 Investment in ALICO and AIA life insurance units $26 billion $0
March 2009 Purchases of life insurance-backed securities $8.5 billion $0
March 2009 Treasury common stock investment $40 billion $40 billion

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March 2009 U.S. government bond purchases
Federal Reserve will buy up to $300 billion of U.S. debt to support Treasury market and help keep interest rates down for consumer loans. $300 billion $15 billion
2009 FDIC bank takeovers
Cost to FDIC fund that insures losses depositors suffer when a bank fails. n/a $2.3 billion

Total: $10.5 trillion $2.6 trillion

1$200 billion set aside in September 2008; $200 billion additional in February 2009
2At least $20 billion
3Estimated budget impact for 2009 is $120 billion
4Making Home Affordable foreclosure prevention program will get $50 billion from Treasury, $20 billion from GSEs and $5 billion from HUD.
5Includes $70 billion from TARP
6Bridge loan allocation to be reduced to not less than $25 billion once government takes stakes in life insurance units

Sources: Federal Reserve, Treasury, FDIC, CBO
Note: Figures as of April 1, 2009

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING


1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!

2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.

3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.

6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.

7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.

8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.

9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.

10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!

11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”

12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.

13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.

14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.

15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.

16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.

Another reason weve seen the market low for now

About a year ago I wrote about how the stock market resembles a dog on a leash. Prices fluctuate from the trend, sometimes in extreme spikes which mark important inflection points.

I thought I’d revisit the idea by taking a long term look at the S&P 500 and comparing how it has fared to its own long term (200 moving average). To equalize things and make it comparable over time, I expressed the divergence from the mean as a percentage:



Looking at the data from 1950 to present, here are the rare times when the S&P 500 Index (SPX) traded at an extreme relative to its simple 200 day moving average:

July 26th 1962 -22.62%
May 26th 1970 -23.18%
October 4th 1974 -28.58%
October 19th 1987 -24.75%
Sept 21st 2001 -22.11%
July 23rd 2002 -26.98%
October 7th, 2002 -23.84%
November 20th 2008 -39.79%
March 9th 2009 -36.53%
The dates should be easily recognizable since they correspond to almost every single major turning point in recent market history. The numbers represent the percentage relative to the long term moving average. So on July 26th, 1962 the S&P 500 traded 22.62% below its simple 200 day moving average.

Looking at the data this way, you easily gain perspective on just how epic the recent market action has been. Not since 1929 has the market veered off so dramatically from its long term path. Put another way, if the November 2008 low doesn’t mark a significant inflection point, it will be the first time.

A quick back-of-the-envelope calculation shows that 60 trading days after these dates shown above the market is always higher, sometimes significantly:

7.95%
10.03%
12.93%
10.72%
6.14%
9.54%
8.3%
20.9%
I’ll revisit this when 60 days have passed from March 9th, 2009
Even if we assume that the November lows will indeed mark a significant low for the S&P 500, there is no reason to believe that prices would simply climb higher from here onward. We could enter a protracted sideways market, or we could also slowly drip lower, revisiting the previous lows. But it is difficult to argue that what we have just witnessed isn’t but a monumental and rare market event that has characterized important turning points in the past.

The biggest names on Wall Street expect stocks to soar this year!!!

Contrarians take note: Wall Street's average end of year price target is 956.5. This is around 20% higher that where we are today.

In other words, big firms like Goldman Sachs, UBS, and Credit Suisse expect stocks to soar in the next nine months. If you're feeling bullish, then you're smack dab in the middle of the crowd.

War on poor Southerners

Barack Obama got elected for two reasons

1. It felt so good to so many people to vote against Bush & Co.

And...

2. He promised the world to people who like to believe you can get something for nothing.

Everyone who believes this nonsense will eventually get what they deserve. But smokers who believe are going to "get it" immediately. Obama's massive cigarette tax increase - put into effect today - is going straight for the pocketbooks of smokers. Most smokers are poor, so it's basically a tax on poor people.

The tax increase will also depress cigarette sales... which is particularly harmful to Southern states with low cigarette tax rates. It greatly increases the amount per pack a Southerner will pay for his smokes.

You asked for it America... here come the taxes.

Commercial real estate much worse than thought

Yesterday's sale of the John Hancock Tower to Normandy was an interesting market test, with media reports claiming it implied either nothing much or only good things about CRE and CMBS recoveries. A contrarian (and realistic) analysis on the transaction out of Morgan Stanley implies that based on this deal, not all is good in CRE land.
In a foreclosure auction today, the John Hancock Tower - a marquee building in Boston - traded at $660MM to Normandy Real Estate Partners. That same property was appraised for $1.3BN in 2006 and traded for $935MM in 2003. This is VERY negative for commercial real estate. At face, it looks like even top quality assets are down 50% from their peak, but that forgets the value of the financing that Normandy now gets to assume. There will still be a $640.5MM mortgage on the property at a rate of 5.6%.


**The main takeaway: property values are down A LOT more than people think, especially when considering the implied value of financing. Caveat Emptor.**

More big bank trouble ahead

It’s a widespread misconception that banks have marked most of their assets to market. The mark to market rules generally apply only to securities, not whole loans. Whole loans are carried at original face value, less any impairment (i.e., provisions for loan losses) judged appropriate by management, with input from auditors.

So the big banks have marked only a small fraction of their assets to market. In crushing all of the big bank stocks until the March 10 bottom, the market was discounting massive increases in loan loss provisions. The banks have already increased their provisions dramatically (in line with delinquencies and other indicators of impairment), but they still have a long way to go to offset the enormous potential losses on whole loans.

Banks repay TARP money

Four different banks paid back their TARP loans yesterday, the first of the lot to do so. Signature Bank of New York; Old National Bancorp of Evansville, Ind.; Iberiabank down in Lafayette, La.; and California’s Bank of Marin paid back a collective $338 million, mostly by repurchasing the shares Uncle Sam bartered in exchange for the capital.

“It became apparent that we should return these funds to the Treasury,” said Signature’s CEO Joseph J. DePaolo. “The return of these funds allows us to continue to execute our business model, which includes the successful recruitment and retention of highly talented banking professionals throughout the metropolitan New York area.”

DePaolo went on to say TARP pressures and restrictions “adversely affected our business model.” In other words, the feds had forced him to borrow taxpayer cash and then hamstrung his ability to pay employees.

If small banks are starting to walk without a government crutch, should we expect those that are “too big to fail” to follow? Heh… not quite yet.

1st Quarter 2009 results

You’d think with a large portion of the Western world’s retirement funds vaporized over the past 18 months -- there’d be a lot more blue hairs in the streets. The Dow and S&P 500 closed out the first quarter yesterday with an 11% loss. That’s the sixth quarter of losses in a row, the longest streak since 1970.

Market Reflections 4/1/2009

The ISM manufacturing report shows a second month of improvement with new orders showing a much shallower rate of contraction, results which are raising talk that the worst may be over for the economy. The results are also giving a lift to risk taking, evident by the inflow into the stock market where the S&P 500 index ended at its highs, up 1.6 percent at 810.26. Helping the market's late rally was month-to-month strength in vehicle sales, results that offer hope for a third month of strength for retail sales. But not all the news was good as ADP is calling for a massive, larger-than-expected decline in Friday's employment report.

The dollar firmed about 1/2 cent to $1.3221 against the euro. Steady firmness in the dollar is feeding talk that the currency may be set to make a move toward the $1.2000 area especially if this weekend's G-20 plays down prospects for a world currency or a gold standard. The $1.2000 area was the high range prior to the Fed's eventful announcement two weeks ago that is was buying long-dated Treasuries, news that triggered a massive but apparently limited run on the dollar. Treasuries and gold were little changed.

Oil was not little changed, falling about 50 cents to $48.50 for May WTI following surprising builds in weekly inventory data including a giant build in gasoline stocks that is hitting at the same time that gasoline demand, due to high pump prices and the weak economy, is now thinning.

Wednesday, April 1, 2009

Market Reflections

Stocks recovered about half of Monday's deep losses, not in reaction to news but on bargain hunting and hopes that the worst is past. The S&P 500 rose 1.3 percent to 797.87 to close out a very strong month, but a month benefiting from an easy comparison against a very weak February. The index was up 8.5 percent in March but down 12 percent on the quarter. Tuesday's economic data included a Conference Board report that shows consumer confidence holding quietly at record lows. Company news included a warning from steel-fastener maker Ingersoll Rand, the latest in a rush of negative company news out of the industrial sector. The dollar gave back some of its recent gains, down slightly against the euro to end at $1.3268. Treasuries were mixed though money did ease out of the front end of the curve, reflected in a weak 4-week note auction and a more than 5 basis point rise in the 3-month rate to 0.20 percent. Oil, at $49, and gold, at $920, were little changed.

Tuesday, March 31, 2009

Market Reflections 3/30/2009

President Obama's removal of GM's chairman is raising talk of widening economic nationalization but also talk that the government will not keep losing firms afloat, at least losing firms outside the financial sector. The news sent a chill through the markets which, taking their cues from the administration, now expect both GM and Chrysler to fall into bankruptcy. Yet bankruptcy or not, the future extent of the government's involvement with the domestic auto sector appears expansive, with the president saying the government will offer incentives to consumers, will stand by warranties and that the U.S. will lead the world in building the next generation of cars.

After jumping 20 percent over the past two weeks, stocks were ready to fall back and fall back they did, ending near their lows at 787.53 on the S&P 500 for a 3.5 percent plunge. Money moved into the safety of the dollar, which rose 1 cent against the euro to end at $1.3193. Money also moved into the safety of Treasuries, especially front-end Treasuries where the 3-month bill ended at 0.130 percent -- a key indication that demand for safety has once again turned intense.

Losses in oil were steep, more than $3 for May WTI which ended just under $49. Like the stock market, recent gains in oil have been strong and not altogether backed by indications of improvement in underlying fundamentals -- setting up today's profit taking. But gold, benefiting from its own safe-haven demand, held little changed near $925 despite the gain in the dollar.