Saturday, May 9, 2009

Weekly Market Update (5/8/09)‏


Nonfarm payroll employment declined by 539,000 in April and the unemployment rate rose from 8.5 to 8.9%, the Bureau of Labor Statistics (BLS) reported today. more...

Treasury yields continued to head higher this week, with demand abating as investors favor other sectors. more...

Large-Cap Equities
The stock market soared higher as the results of the government stress tests and better-than-expected economic data signaled signs of an economic stabilization. more...

Corporate Bonds
Investment grade primary activity finally shifted gears and issuers released a wide range of paper this week. more...

Mortgage-Backed Securities
The wild ride in US Treasuries failed to spoil the party in agency mortgages. Although Treasury yields soared on another round of economic 'green shoots', mortgage prices oscillated in a narrow range. more...

Municipal Bonds
Although AAA-rated general obligation (GO) municipal bond yields were unchanged over the last week, the sell-off in Treasuries pushed municipal/Treasury yield ratios back toward historical norms (i.e., well under 100%). more...

The high yield market continued its momentum of April in May 2009. The trend remained similar, with the lower-quality, CCC-rated end of the market rallying strong. . more...

Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were basic resources (+14.0%) and banks (+11.6%). more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +11.4% this week, while the Russian stock index RTS went up +12.7%. more...

Global Bonds and Currencies
With equity markets continuing to rise and confidence mounting that the worst of the global recession has passed, major non-US government bond markets weakened in line with their US counterparts in the past week. . more...

Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened by 58 bps this week. more...

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Friday, May 8, 2009

Investment strategy and a prediction

Predictions don't figure in my investment strategy. Instead, I compound our money. We collect the safest income-paying stocks in the market, augment our income by selling covered calls, and protect our capital with stop losses. The stock market's short-term fluctuations have no bearing on our decision-making. That said, sometimes I can't help myself...

I think we're seeing a classic bear-market rally in the stock market, for three reasons. First, the "junkiest" stocks are leading the rally. If this were a new bull market, I'd expect leadership from a new and exciting batch of stocks... not the dogs of the old bubble, like leveraged real estate companies and bloated banks.

Big Inflation coming

I am more convinced than ever before that the government's efforts to stimulate the economy have gone way too far.
There will be a period of rampant inflation.
There will be price controls.
There will be currency controls.
There will be shortages.
You would think the wealthiest nation on Earth would understand the basics of economics and avoid these pitfalls… but politics rule our country, not economics.

It will be a long time before policymakers react appropriately by raising interest rates significantly.

This gives us plenty of time to rack up very large gains in equities.

I hope you've taken my warnings seriously. It's coming.

The Great Re-Leveraging

It's time to buy.

Over the last 30 days, a new wave of liquidity has hit Wall Street. Real estate companies are suddenly able to raise new equity at attractive prices. And big banks, which the government says need billions in additional capital, have seen their share prices rally substantially - a sign that plenty of money is now available. That clearly shows the government's efforts to stimulate the economy and provide more liquidity to the market is now working.

Stress Test and MetLife, an odd reult

So much for my MetLife short... It's among the six institutions the stress-test results indicate won't need to raise new capital.

Why MetLife rallied is beyond me. It's holding more than $30 billion in commercial real estate exposure – half of all its loans are commercial real estate.

Commercial real estate deals are defaulting at a rate of more than $200 billion a year. And get this: Subprime, the straw that broke the banking system's back, was about a $1.3 trillion market when it started blowing up. Commercial real estate loans total more than $3.5 trillion and are probably in even worse shape. The worst is yet to come.

I find it difficult to believe MetLife will remain untouched. And by passing the stress test, it'll probably get complacent and not raise the capital it'll need once the commercial deals start becoming OTTI: "other than temporary impairments." That'll take time because nobody wants to sell at current prices, which indicate impairments of 50%-65%. They'd rather hang on as long as possible and be forced into bankruptcy.

On Tuesday, I watched a scary presentation by Igor Lotsvin of Soma Asset Management. Igor says 25% of commercial real estate in Nevada is impaired... and when 25% is impaired, the entire market is impaired.

Stress from the "stress test"

A friend called late yesterday to ask me what I thought about the "stress test." I told him it seemed to be working, I was pretty stressed out by the market thanks to the carnival act we call the Treasury and Fed.

Top short seller: Short bank stocks now

From Newsmax:

Hedge fund manager Doug Kass said he is selectively shorting U.S. financial stocks, which have more than doubled since bottoming in early March, on the belief that they have been "priced to perfection" ahead of the banks' stress test results later on Thursday.

"From my perch, investors should sober up and reduce their holdings in financials now," Kass said in a note to clients. "Financial stocks are now priced to perfection."

Treasury bond yields soar this week... inflationary boom coming

Bond bear market watch: U.S. Treasury bond yields soared yesterday after few eager buyers showed up to bid on the latest round of debt.

As the FT reports: The 30-year Treasury yield rose to 4.30 per cent on Thursday from 4.10 per cent the day before after bids at the government auction came at lower prices than expected. The 30-year Treasury is now at its highest level since last November. The rise in bond yields has raised questions about whether the Federal Reserve will step up efforts - which began in March - to keep yields down through direct purchases of government bonds.

The funny money printing crew in Washington is starting to lose control...

Market Reflections 5/7/2009

Thursday was a wild session. Volatility and volumes were extreme, making traders, who were very busy executing orders, refer back fondly to last summer's market peaks. The only fundamentals at play are expectations that the global economy, fueled by new improvement in the U.S. and China, will emerge from recession in the months ahead.

Oil put on a show, breaking out suddenly to new 2009 highs over $58 then just as suddenly breaking back to $55 before ending at $56.50. Sidelined money from around the globe is pouring into commodities including grains and industrial metals. Sidelined money is also pouring back into the stock market which also put on a show, rising sharply at the opening before sliding to end at its lows with a 1.3% drop on the S&P 500 to 907.

It was near the close that the only economic data that moved the markets was posted -- the sharpest fall in consumer credit since early in World War II for stunning confirmation that consumers are taking cover. Chain stores, benefiting from the Easter shift, posted strong sales in April but probably no stronger than anticipated by Commerce Department adjustments.

There weren't any fireworks in the dollar which ended little changed at $1.3388 against the euro. But there was action in the Treasury market where the 30-year bond auction, due to buyer exhaustion after a week of auctions, proved a messy flop. The yield on the 30-year jumped 21 basis points to 4.29 percent.

Thursday, May 7, 2009

Freddie Mac could be exposed for hiding accounting‏

Freddie Macs' (FRE) regulator pressed the company to withhold information related to the proposal from a federal filing, concerned that this seemingly arcane discussion of accounting practices could add billions of dollars to the government's cost of bailing out financial firms, according to sources. The Washington Post reports that the company's executives refused and that could expose them to accusations that they hid required details from regulators.

Stocks yield less than U.S. gov't bonds!

From Bespoke Investment Group:
Since the March 9th low, the indicated dividend yield of the S&P 500 has dropped from 4.12% to 3.12%. At the same time, the yield on the "risk-free" 10-Year Treasury Note has risen from a low of just over 2% to its current level of 3.15%.

Global Crisis ‘Vastly Worse’ Than 1930s, Taleb Says (Update1)

By Shiyin Chen and Liza Lin

May 7 (Bloomberg) -- The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent, “Black Swan” author Nassim Nicholas Taleb said.

“This is the most difficult period of humanity that we’re going through today because governments have no control,” Taleb, 49, told a conference in Singapore today. “Navigating the world is much harder than in the 1930s.”

The International Monetary Fund last month slashed its world economic growth forecasts and said the global recession will be deeper than previously predicted as financial markets take longer to stabilize. Nouriel Roubini, 51, the New York University professor who predicted the crisis, told Bloomberg News yesterday that analysts expecting the U.S. economy to rebound in the third and fourth quarter were “too optimistic.”

“Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters,” Roubini said. “We are going to have negative growth to the end of the year and next year the recovery is going to be weak.”

Federal Reserve Chairman Ben S. Bernanke told lawmakers May 5 that the central bank expects U.S. economic activity “to bottom out, then to turn up later this year.” Another shock to the financial system would undercut that forecast, he added.

‘Big Deflation’

The global economy is facing “big deflation,” though the risks of inflation are also increasing as governments print more money, Taleb told the conference organized by Bank of America- Merrill Lynch. Gold and copper may “rally massively” as a result, he added.

Taleb, a professor of risk engineering at New York University and adviser to Santa Monica, California-based Universa Investments LP, said the current global slump is the worst since the Great Depression that followed Wall Street’s 1929 crash.

The Great Depression saw an increase in global trade barriers and was only overcome after President Franklin D. Roosevelt’s New Deal policies helped revive the U.S. economy.

The world’s largest economy may need additional fiscal stimulus to emerge from its current recession, Kenneth Rogoff, former chief economist at the International Monetary Fund, told Bloomberg News yesterday.

“We’re going to get to the point where recovery is just not soaring and they’re going to do the same again,” he said. “We’re going to have a very slow recovery from here.”

Fiscal Stimulus

The U.S. economy plunged at a 6.1 percent annual pace in the first quarter, making this the worst recession in at least half a century. President Barack Obama signed a $787 billion stimulus plan into law in February that included increases in spending on infrastructure projects and a reduction in taxes.

Gold, copper and other assets “that China will like” are the best investment bets as currencies including the dollar and euro face pressures, Taleb said. The IMF expects the global economy to shrink 1.3 percent this year.

Gold, which jumped to a record $1,032.70 an ounce March 17, 2008, is up 3.6 percent this year. Copper for three-month delivery on the London Metal Exchange has surged 55 percent this year on speculation demand will rebound as the global economy recovers from its worst recession since World War II.

Commodity prices are also gaining amid signs that China’s 4 trillion yuan ($585 billion) stimulus package is beginning to work in Asia’s second-largest economy. Quarter-on-quarter growth improved significantly in the first three months of 2009, the Chinese central bank said yesterday, without giving figures.

Credit Derivatives

China will avoid a recession this year, though it will not be able to pull Asia out of its economic slump as the region still depends on U.S. demand, New York University’s Roubini said.

Equity investments are preferable to debt, a contributor to the current financial crisis, Taleb said. Deflation in an equity bubble will have smaller repercussions for the global financial system, he added.

“Debt pressurizes the system and it has to be replaced with equity,” he said. “Bonds appear stable but have a lot of hidden risks. Equity is volatile, but what you see is what you get.”

Currency and credit derivatives will cause additional losses for companies that hold more than $500 trillion of the securities worldwide, Templeton Asset Management Ltd.’s Mark Mobius told the same Singapore conference today.

“There are going to be more and more losses on the part of companies that have credit derivatives, those who have currency derivatives,” Mobius, who helps oversee $20 billion in emerging-market assets at Templeton, said at the conference. “This is something we’re going to have to watch very, very carefully.”

Taleb is best known for his book “The Black Swan: The Impact of the Highly Improbable.” The book, named after rare and unforeseen events known as “black swans,” was published in 2007, just before the collapse of the subprime market roiled global financial institutions.

To contact the reporters on this story: Chen Shiyin in Singapore at; Liza Lin in Singapore at

Last Updated: May 7, 2009 05:35 EDT

Time for caution: 200 day moving averages reached

The DOW: The rally since early March has almost reached its 200-day moving average. That could be a possible target for the rally to end.
The S&P 500: has virtually reached reached its 200-day moving average.
The Nasdaq has risen slightly above its 200-day moving average.
A time for caution? I think so, yes indeed. I dont see anything implying a devestating setback is about to occur. But this flirting with the 200-day moving average is not exactly a message from the Angels. Since the Bear market began,the Nasdaq composite has touched the 200-day moving average three times and has been turned back each time. This is now the fourth touch.
The S&P 500 has only touched the 200-day MA once and been repelld. This would be touch no 2. Same for the DOW.
For all four major averages,the current rally has retraced a higher percentage of the preceeding weakness than achiebed by any rally so farin this bear market.
That suggests a market that has been expecting good news according to Don Worden (

Market Reflections 5/6/2009

In a memorable, if not predictable, mis-handling of information, the results of the government's stress tests were released en masse a day early, apparently by the individual financial firms involved. A burst of midday headlines saw differing news outlets issuing reports on separate banks, raising questions, later denied, that government officials were orchestrating a piece-by-piece dissemination. But the bottom line is that fewer financial firms than expected will be forced to raise capital. For the ones that do, a group that includes Citigroup and Bank of America, it's still uncertain how much capital they will have to raise. Momentum accounts flooded the financial sector where the Financial SPDR ended 7.6 percent higher at $12.44. By day's end, the Treasury was still sticking to its previously revised schedule, holding the official results until after tomorrow's close. But who knows?

Economic data included improved job readings from ADP and Challenger, results that point to smaller-than-expected job losses on Friday. Stocks ended near their highs with the S&P 500 up 1.7 percent at 919.47. Improving economic data both here and in China tripped a big move into commodities especially copper which ended at $2.17/lb, up 10 cents on the day. Silver was another big gainer, up 68 cents at $13.71 as it played catch up to copper. Gold ended firmer at $910 with oil, tracking the stock market, adding $2 to just over $56.

The dollar was little changed at $1.3331 against the euro. Treasury yields were also little changed despite a strong 10-year note auction. Tomorrow the Treasury will auction 30-year bonds which ended Wednesday at a yield of 4.08 percent.

Wednesday, May 6, 2009

U.S. Stocks: How Long Will the Rally Last?

Markets are getting very close to being irrationally exuberant. Although there are some positive indicators, like the narrowing of credit spreads, and some stock market rebound from the March 2009 lows maybe justified by potential green shoots of economic recovery, other indicators paint a much bleaker picture. The rise in oil prices, and the significant rebound in banking stocks may prove in hindsight to be overly optimistic (Breakingviews)
The stock market’s latest “dead cat bounce” may last a while longer, but three factors will, in due course, lead it to turn south again. First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast as the consensus expects. Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures, and surging defaults on corporate bonds will limit firms’ pricing power and keep profit margins low. Third, financial shocks will be worse than expected (Nouriel Roubini)

Banks to lose further $216bil by end 2010

As part of the bank stress tests, the Fed is projecting losses of up to 12% on commercial real estate loans over two years. If the Fed is right, the country's banks, which hold $1.8 trillion of commercial real estate debt, would lose $216 billion by the end of 2010.

The ominous forecast isn't news to Sam Zell, who liquidated his enormous commercial real estate holdings in early 2007. According to Zell, "Very few '03 to '07 financings are above water... You have more debt than you have value." As a result, the market for commercial property is frozen. REITs won't sell a property with negative equity... They'd only have to contribute more equity to cover the loan. So troubled REITs are holding out as long as they can, hoping the government's actions will "reflate" property values and rents, helping them cover ballooning interest payments.

So... we have a race between the government's efforts to reflate the property bubble and the coming maturities of commercial real estate loans. Some of the stronger REITs, like Simon Property Group and Kimco Realty, are raising equity hoping to take advantage of the coming bankruptcy sales.

Few escape blame over subprime explosion

These are largely the same people in Congress who are now trying to "fix" the mess they created and must surely carry a good measure of the blame!

Published in the Financial Times (the Pink Paper)
By Edward Luce

Published: May 6 2009 05:02 | Last updated: May 6 2009 05:02

Chronicling the explosion of subprime mortgages is a bit like reading Murder on the Orient Express. As in the novel, in which everyone is revealed to have had a hand in the murder, America’s subprime story implicates almost every power centre – including the Bush administration, the Federal Reserve and the Democratic party.

Take Roland Arnall, founder and chief executive of Ameriquest Mortgage Co, the California-based company that made more than $80bn in subprime mortgages between 2005 and 2007.

Ameriquest was repeatedly held up by regulators and courts for abusive lending practices, most recently in 2006 when it agreed to pay a $325m fine after it was shown it had misled borrowers, falsified documents and pressed appraisers to inflate home values.

The company, which has since closed, gave $263,000 to George W. Bush in campaign contributions. Mr Arnall, who died last year, went on to become Mr Bush’s ambassador to the Netherlands. To keep things even-handed, his company donated $1.57m to the Democratic party.

Between 2005 and 2007, which was the peak of subprime lending, the top 25 subprime originators made almost $1,000bn in loans to more than 5m borrowers, many of whom have had their homes repossessed, says the Center for Public Integrity, a Washington-based journalistic watchdog.

CPI contacted the chief executives or former CEOs of all of the 25 originators. Most did not respond. Of those that did, Goldman Sachs said in a statement: “As an industry, we collectively neglected to raise enough questions about whether some of the trends and practices that became commonplace really served the public’s long-term interest.”

Those loans lit the fuse that led to the global financial meltdown. The Fed, which refused to tighten regulation of these non-bank companies, since it is charged only with direct regulation of banks, told Congress it would be too expensive to provide oversight.

Last October Alan Greenspan, former Fed chairman, told a congressional committee: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief.” But resistance to regulation went deeper than Mr Greenspan’s ideological objections.

The CPI investigation shows most originators spent millions of dollars lobbying Washington in the mid-1990s, much of it to prevent new legislation that would tighten restrictions on subprime lending.

The financial sector has spent $3.5bn in the past decade lobbying in Washington and made $2.2bn in campaign donations, says the Center for Responsive Politics, an independent watchdog.

The CPI investigation shows that at least 21 of the 25 top subprime originators, most of which are bankrupt, were either owned or financed by the biggest recipients of troubled asset relief funds, including Citibank, Bank of America, Wells Fargo and JPMorgan – also the largest political donors in Washington.

HSBC, the British bank, is listed as the eighth largest subprime originator because of its purchase of Decision One in 1999 and Household International in 2003. From 1999 to 2008 HSBC donated more than $6.4m and spent $21m on lobbying activities in Washington.

“The largest American and European banks made the bubble in subprime lending possible by financing it on the front end, so they could reap the huge rewards from securitising and selling mortgage-backed securities on the back end,” says Bill Buzenberg, who led the investigation. “Washington was warned repeatedly over the last decade that these high-cost loans represented a systemic risk to the economy. It is hard to believe the major banks were unaware of what was going on, or what the consequences might ultimately be.”

Among the other top originators were New Century Financial Corp, which was alleged by investigators in its 2007 bankruptcy proceedings to have had an “aggressive manner that elevated the risks to dangerous and ultimately fatal levels”. Its largest financial backer was Goldman Sachs, which has received $10bn in Tarp bail-out funds.

One of the few to remain in business is Wells Fargo Financial, which is owned by the bank, which made $51bn in subprime loans between 2005 and 2007 and which spent almost $18m on election donations and lobbying – again almost equally between Democrats and Republicans. Barack Obama was its largest individual recipient with $201,000 in election expenses.

According to the CPI, all the laws that helped fuel the subprime crisis remain. Since the late 1990s there have been attempts to tighten up regulation through legislation. But each time it was shot down.

The report highlights a new bill, sponsored by Barney Frank, a Democratic congressman, which would create “assignee liability provisions” that would make mortgage securitisers res-ponsible for abuses in the original mortgages.

If such a law had been on the books earlier, says CPI, the subprime crisis might never have happened.
Copyright The Financial Times Limited 2009

The Price of Things

Resource Last 1 Week Ago 3 Months Ago 1 Year Ago
Gold 898.00 893.90 916.00 873.10
Silver 13.33 12.48 12.89 16.71
Platinum 1127.00 1087.00 975.00 1924.00
Palladium 220.00 214.00 201.00 424.00
Copper 2.06 1.89 1.49 3.87
Nickel 5.32 4.87 5.07 12.72
Zinc 0.50 0.50 0.50 0.98
Uranium 44.00 42.00 48.00 65.00
Oil 54.27 49.62 47.97 118.17
Gas 3.61 3.32 4.65 11.19

Long Bond Yield Rising: Problem times a coming

The "long bond" is the nickname for the 30-year Treasury bond.

Long-bond prices are plummeting right now. They have just broken down to new five-month lows... and the selling pressure is so strong, not even the Fed's printing press can hold prices up.

When the long bond falls in price, its interest rate rises... The long bond's yield was as low as 2.5% in December. It has now risen past 4%. This could be a huge problem for income investors.

The government is going broke... and to delay the inevitable, the Federal Reserve will likely start buying Treasuries. If the Federal Reserve steps in - which Marc Faber says is a certainty - it will add liquidity to the government bond market, keep yields low (allowing the government to continue funding worthless bailout projects), and eventually cause massive inflation.

"Yields have already backed up pretty substantially and I tell you, I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high," says Faber.
But there will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.

"So we'll go into high inflation rates one day," Faber said

The long bond competes with other income investments for investor capital. So a rise in the long bond's interest rate can crush certain income investments. Let me explain...

If the long bond's yield rises from 4% to 8%, the yield on all other income investments must also rise by 4%. A 12% junk bond would become a 16% junk bond. A 14% dividend payer would have to become an 18% dividend payer.

Here's the problem: For yields to rise that much, prices must fall – a lot.

So right now, as long-bond rates rise, buying income investments is a treacherous proposition.

The "junkiest" bonds and high-yield stocks will suffer the most from a long-bond bear market. Avoid risky income investments that use debt and financial engineering to pay large dividends. Stick with only the best-quality, high-cash-flow businesses that relentlessly raise their dividends.

Goldman Sachs Updates Its Conviction Buy List

Here's the caveat with this coverage: We don't normally place a ton of weight on individual analyst calls and upgrades/downgrades. That said, we are very cognizant that Goldman often moves markets and has to at least be monitored. As such, we've covered Goldman Sachs' (GS) list because for whatever reason, everyone loves a "V.I.P." or "Best of" and "Worst of" list. So, Goldman's lists are essentially the cream of the crop in either direction. If Goldman adds it to its Conviction Buy List, then it loves it, and if the bank adds it to the Conviction Sell List, it (at least for the moment) hates it. That much is self-explanatory but we just wanted to give a preface for those unaware. Now, to the changes:

Conviction Buy List

The bulk of the recent changes were made to Goldman's Conviction Buy List. As the month of May begins, Goldman has decided to ambush everyone with a ton of changes.

Here are the names it has just recently added to its Conviction Buy List: Liz Claiborne (LIZ), Massey Energy (MEE), Joy Global (JOYG), and Research in Motion (RIMM).

And, here are the names that Goldman has removed from its Conviction Buy List: Mastercard (MA).

U.S. Says BofA Needs $33.9 Billion Cushion

When will this end?
The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, The New York Times’s Louise Story and Eric Dash reported, citing an executive at the bank.

If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.

It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.

But that would make the government one of the bank’s largest shareholders.

Executives at the bank, one of the largest being examined, sparred with the government over the amount, which is higher than executives believed the bank needed.

But J. Steele Alphin, the bank’s chief administrative officer, said Bank of America would have plenty of options to raise the capital on its own before it would have to convert any of the taxpayer money into common stock.

“We’re not happy about it because it’s still a big number,” Mr. Alphin told The Times. “We think it should be a bit less at the end of the day.”

The government’s determination that Bank of America doesn’t need as much capital as it has already received from taxpayers is an indication that even some of the most troubled banks may not need more government money than has been allocated to them.

The Treasury Department declined to comment on Tuesday evening, The Times said.

Citigroup, by contrast, has already decided to allow the government to convert some of its investment into common stock.

Under the arrangement worked out between the Treasury and Citigroup earlier this year, the Treasury will receive mandatory convertible preferred shares, meaning preferred shares that can be converted to voting shares of common stock at the will of the government.

If Bank of America relied on that conversion for the majority of the capital it needs to maintain, the government would become one of the bank’s largest shareholders.

Regulators have told the banks that the common shares would bolster their “tangible common equity,” a measure of capital that places greater emphasis on the resources that a bank has at its disposal than the more traditional measure of “Tier 1” capital.

Citigroup, the largest and most deeply troubled of the banks, is expected to need to raise capital as insurance against any further downturn in the economy.

The government told the bank it would need $50 billion to $55 billion in capital, a requirement that would force it to raise $5 billion to $10 billion in new capital, The Times said, citing people briefed on the final results.

Citigroup executives say the bank can easily cover any shortfall, and is considering several options to close that gap.

The Obama administration plans to publicize the results of stress tests on Thursday.

The results are expected to reveal that a number of them need additional capital, and many banks have negotiated with the government on what the actual capital requirements should be since they learned of the preliminary findings last week.

The tests are also expected to show that several banks, including Bank of New York Mellon, Goldman Sachs and JPMorgan Chase, are healthy enough to repay TARP funds.

Mr. Alphin noted that the $34 billion figure is well below the $45 billion in capital that the government has already allocated to the bank, although he said the bank has plenty of options to raise the capital on its own.

“There are several ways to deal with this,” Mr. Alphin told The Times. “The company is very healthy.”

Bank executives estimate that the company will generate $30 billion a year in income, once a normal environment returns.

The company has faced criticism over its acquisition of Merrill Lynch, the troubled investment bank, and last week, shareholders voted to strip the bank’s chief executive, Kenneth D. Lewis, of his title as chairman of the board. The board said last week that it still unanimously supports Mr. Lewis in his role as chief executive.

Mr. Alphin said since the government figure is less than the $45 billion provided to Bank of America, the bank will now start looking at ways of repaying the $11 billion difference over time to the government.

In the case of Citigroup, which has also received two taxpayer lifelines, executives say the bank can easily cover any shortfall, and is considering several options to close that gap.

Among them are efforts to accelerate the sales of several businesses within Citi Holdings, a holding tank for assets it plans to shed, or to expand its common stock conversion plans to a broader base of private investors who hold Citigroup preferred stock. Both measures would avoid an increase in the government’s expected 36 percent ownership stake.

Taxpayer-supported Banks have been eager to wean themselves from the government’s purview, and many analysts have questioned how useful the stress tests will be in assessing their true health.

Also Tuesday, senior government officials told The Times that the Treasury Department is planning to require taxpayer-supported banks seeking to free themselves from the government’s grip to show that they can repay the lifelines without additional subsidies that have helped them survive the financial crisis.

Banks have had an indirect subsidy adopted by the government last fall that allows them to issue debt cheaply with the backing of the Federal Deposit Insurance Corporation.

The Treasury is expected to announce as early as Wednesday that healthier banks must show that they can issue debt without the guarantees before they are allowed to exit the Troubled Asset Relief Program, or TARP.

The banks also must demonstrate that they will be able to sell stock to private investors and pass a government stress test to show that they are healthy enough to survive without the taxpayer aid.

Go to Article from The New York Times »

Corporate profits bottoming out

Corporate profits bottoming out
Econoday Short Take 5/6/09
By Mark Pender, Senior Financial Writer, Econoday

The first-quarter earnings season has proven to be one of the very best in memory, showing very few negative surprises and helped by major improvement in bank earnings. With about three quarters of the season over, profits for the S&P 500 are down 34.7 percent on the year. That sounds bad of course but it's no surprise, and that's what turns out to be the surprise. During the seven quarters of ongoing profit contraction, final results have routinely come in far below expectations. To what degree current share price gains in the financial sector are tied to the accounting switch to mark-to-model from mark-to-market is uncertain but the switch certainly hasn't hurt. With all the major firms having reported except AIG, financials in the S&P 500 are posting a net $13 billion net profit for the first quarter versus a net $74 billion loss in the fourth quarter of 2008. Two thirds of financial firms are now beating estimates. No wonder bank shares have been rallying strongly over the past three weeks, lifting the whole stock market with them. (Earnings data courtesy of Thomson Reuters unit First Call).

Base effects pending

Profits have been on such a long deep slide that comparisons are now very easy, a factor that looks to make for outsized gains in the quarters ahead. In the graph below, the solid blue bars represent actual year-on-year quarterly profit change over the past six years. The open bars on the right side of the graph are analyst expectations for the coming quarters. The rate of contraction is expected to hold steady in the ongoing quarter and then ease in the third quarter. But against the dreadfully easy comparison of fourth quarter 2008, fourth quarter 2009 profits are expected to jump 165 percent!
The S&P 500 index has really been rallying this year, now holding at 900 and up from a low of 666.79 in early March. That was when word came of income improvements at Citigroup and Bank of America, news that started the whole rally which is now being fed further by the financial sector's actual results. There are plenty of factors behind share values, too long to list. But changes in profits are without a doubt right at the very top.

Profit growth exceeded stock market appreciation through much of 2004 through 2006. Then profit growth slowed and began to contract, this while share prices kept going higher. Note that contraction in S&P profits first appears in third-quarter 2007, preceding the economic recession by more than a full year. For the past year, changes in profits and changes in share prices have been in line. Were the second quarter to end today, profits and share prices would be almost perfectly in line.

Earnings season primer

The two- to three-week approach to an earnings season is often a touchy time for the stock market. Company news is light and the news that is released is often negative as companies who have done poorly come clean in what is known as the confession season. This confession season was actually positive, with the S&P 500 moving from about 780 in late March to over 850 by early April.

The exact dates for an earnings season are difficult to pin down but they're centered in the months immediately following the end of a calendar quarter. The graph below tracks changes in the S&P 500 from the beginning of an earnings season (red bars) to what we'll consider to be the end of the season at month end (gold bars). April 1st may be a day for fools but it also would have been a very good day to have gone long the stock market, as shown on the very right of the graph. The S&P 500 rose 7.6 percent in the month of April and is up 13.3 percent when adding the three trading days of May. But the gain has to be compared against the 11.4 percent loss of January's fourth-quarter 2008 earnings season and the massive 16.6 percent loss in the third-quarter 2008 earnings season of October.

Bottom Line

Profit data definitely support hopes that economic recovery is on the way. But it's important to remember the base effect, namely that the prior contraction has pulled current levels to a much lower level. But levels have stabilized and, as hinted at by the 165 percent gain expected for the fourth quarter, improvement from these levels may very well be something to see. Should profits improve, foreign investment into U.S. equities could become an important factor for the market. Foreigners have been pulling their money out of the U.S. market over the past year-and-a-half. But the emergence of profit growth would no doubt pull foreign money off the sidelines, feeding what could be a very nice rally for U.S. stocks.

Tuesday, May 5, 2009


Released on 5/5/2009 8:55:00 AM For wk5/2, 2009
Previous Actual
Store Sales Y/Y change 0.7 % 0.3 %

Redbook and ICSC-Goldman are offering differing takes on store sales with Redbook, at a year-on-year +0.3% in the May 2 week, indicating strength while ICSC, reported earlier this morning at -0.8%, indicating weakness. Still Redbook's latest reading is down from the prior week, the result it said of swine flu which kept shoppers at home. Redbook estimates that full month April sales, benefiting from this year's Easter shift, rose 1.5 percent compared to March, a result that points to strength for the non-auto non-gas category of the monthly retail sales report. Redbook sees strength continuing, targeting a 0.5 percent month-to-month rise for May.

A weekly measure of sales at chain stores, discounters, and department stores. It is a less consistent indicator of retail sales than the weekly ICSC index. It is also calculated differently than other indicators. For instance, figures for the first week of the month are compared with the average for the entire previous month. When two weeks are available, then these are compared with the average for the previous month, and so on. It might be more useful to compare year-over-year figures since these are indeed compared to the comparable week a year ago. This index is correlated with the general merchandise portion of retail sales covering only about 10 percent of total retail sales
Why Investor's CareConsumer spending accounts for two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Needless to say, that's a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Spending at major retail chains did slow down in tandem with the equity market in 2000 and during the 2001 recession. Sales weakened again in 2008 due to the credit crunch and recession.

The Redbook is one of the more timely indicators of consumer spending, since it is reported every week. It gets extra attention around the holiday season when retailers make most of their profits. It is also a useful indicator when special factors can cause economic activity to momentarily slide. For instance, it was widely watched in the aftermath of Hurricanes Katrina and Rita which hit New Orleans and the Gulf Coast in 2005.


Sometimes for the previous week

A weekly measure of sales at chain stores, discounters, and department stores. It is a less consistent indicator of retail sales than the weekly ICSC index. It is also calculated differently than other indicators. For instance, figures for the first week of the month are compared with the average for the entire previous month. When two weeks are available, then these are compared with the average for the previous month, and so on. It might be more useful to compare year-over-year figures since these are indeed compared to the comparable week a year ago. This index is correlated with the general merchandise portion of retail sales covering only about 10 percent of total retail sales.

Pending Home Sales Index

Released on 5/4/2009 10:00:00 AM For March, 2009
Previous Actual
Pending Home Sales Index - Level 82.1 84.6
Pending Home Sales Index - M/M 2.1 % 3.2 %

Government efforts to push mortgage rates lower in combination with financing incentives and falling home prices may be turning the housing sector around at long last. The pending sales index rose 3.2 percent to 84.6 in March pointing to improvement in existing sales for April and May. Gains were centered in the Midwest and South, but a decline in the West, where the housing collapse is centered, does pose the only bad news in the report. Construction spending for March was also released at 10:00 ET and shows the first increase in six months. Markets showed no reaction to the reports at least initially, though they should give stocks an extra boost through the session and may also raise talk of easing toxic pressures on banks.

The National Association of Realtors developed the pending home sales index as a leading indicator of housing activity. As such, it is a leading indicator of existing home sales, not new home sales. A pending sale is one in which a contract was signed, but not yet closed. It usually takes four to six weeks to close a contracted sale.
2009 Release Schedule
Released On: 1/6 2/3 3/3 4/1 5/4 6/2 7/1 8/4 9/1 10/1 11/2 12/1
Released For: Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Why Investor's Care
This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as the pending home sales index which measures home resales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Even though home resales don't always create new output, once the home is sold, it generates revenues for the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, home resales have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the existing home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.


The National Association of Realtors developed the pending home sales index as a leading indicator of housing activity. As such, it is a leading indicator of existing home sales, not new home sales. A pending sale is one in which a contract was signed, but not yet closed. It usually takes four to six weeks to close a contracted sale.

Construction Spending

Released on 5/4/2009 10:00:00 AM For March, 2009
Previous Consensus Consensus Range Actual
Construction Spending - M/M change -0.9 % -1.0 % -2.0 % to -0.1 % 0.3 %
Construction Spending - Y/Y change -11.1 %

Construction spending in March rebounded unexpectedly but housing is still on a downtrend. Construction outlays posted a 0.3 percent gain in March, following a 1.0 percent decrease the month before. The rise in March was much better than the market forecast for a 1.0 percent fall. The rebound in March was led by private nonresidential outlays which jumped 2.7 percent after a 0.7 increase in February. The public component also advanced 1.1 percent, following a 1.3 percent boost the month before. However, the private residential component continued its downward trend, falling 4.2 percent after a 5.9 percent plunge in February.

Within private residential outlays, the single-family component dropped a monthly 8.6 percent while the multifamily component slipped 1.1 percent in the latest month.

On a year-on-year basis, overall construction outlays weakened to down11.1 percent in March, from down 10.1 percent in February.

Construction outlays in March indicate that businesses may be looking ahead toward the end of recession when increased capacity is needed. And we may be seeing a rising in public construction from fiscal stimulus beginning. But the important housing sector has not yet hit bottom. However, today's pending home sales report was moderately positive, indicating that outlays in this sector could be bottoming soon. Equities rose on the news of improvement in both outlays and pending home sales.

Market Consensus Before Announcement
Construction spending in February fell again but not as much as expected. Construction outlays dropped another 0.9 percent in February, after plunging 3.5 percent in January. Weakness in February was led private residential outlays, which fell 4.3 percent. The single-family subcomponent dropped 10.9 percent while the multifamily portion slipped 2.1 percent. The other two major components actually made partial rebounds. The private nonresidential component rose 0.3 percent after a 4.3 percent drop in January. Public outlays rebounded 0.8 percent, following a 2.4 percent decrease the month before. Looking ahead, the drop in the level of housing starts on average over the last three months indicates that the residential component of outlays will likely continue downward in March, pulling down overall construction spending.

The dollar value of new construction activity on residential, non-residential, and public projects. Data are available in nominal and real (inflation-adjusted) dollars. Why Investors Care

Data Source: Haver Analytics

Over the last year, a decline in residential outlays has pulled down year-on-year growth for overall construction outlays. Nonresidential and public outlays are positive with nonresidential actually strong.
Data Source: Haver Analytics

2009 Release Schedule
Released On: 1/5 2/2 3/2 4/1 5/4 6/1 7/1 8/3 9/1 10/1 11/2 12/1
Released For: Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

ICSC-Goldman Store Sales

Why Investor's Care
Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Needless to say, that's a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Spending at major retail chains did slow down in tandem with the equity market in 2000 and during the 2001 recession. Sales weakened again in 2008 due to the credit crunch and recession.

The ICSC-Goldman index is one of the most timely indicators of consumer spending, since it is reported every week. It gets extra attention around the holiday season when retailers make most of their profits. It is also a useful indicator when special factors can cause economic activity to momentarily slide. For instance, it was widely watched in the aftermath of Hurricanes Katrina and Rita which hit New Orleans and the Gulf Coast in 2005. The ICSC-Goldman Sachs store sales series previously was known as ICSC-UBS before Goldman Sach's involvement with ICSC. The name change took place with the September 30, 2008 release.

Released on 5/5/2009 7:45:00 AM For wk5/2, 2009
Previous Actual
Store Sales - W/W change -0.7 % 0.7 %
Store Sales - Y/Y -1.7 % -0.8 %

ICSC-Goldman said hot weather boosted same-store chain store sales by 0.7 percent in the May 2 week though the year-on-year rate remains negative at -0.8 percent. Redbook is up next.

This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10 percent of total retail sales.

Market Reflections 5/4/2009

A strong purchasing report out of China combined with improvement in U.S. construction spending and pending home sales are lifting the economic outlook, in turn lifting the stock market and a host of commodities in Monday's trade. The S&P rose 3.4% to 907, its highest close since early in January.

Accounts moved out of the safety of the dollar, which lost 1-1/2 cents to $1.3406 against the euro, and moved money into commodities. Copper was a big mover, back near $2.10/lb, but oil was a standout, ending $2 higher to $54.50 for its best level since November. But the gains didn't dent gold which firmed slightly to $900. The easing in swine flu concern didn't help hog prices as June lean hogs fell another 2.8% to 63.78 cents/lb.

Banks were very big gainers in the session with the Financial SPDR jumping 10% to $11.73. News that the White House doesn't expect to ask for more bailout money for the banking sector gave a boost as did speculation that the worst news is already out. A report that regulators are telling Wells Fargo it needs to raise more money did not hurt the bank's shares in the least, jumping 24% to $24.25.