Saturday, March 7, 2009

Weekly Market Review

Courtesy Payden & Rygel


The US economy shed 651,000 jobs in February and has lost a total of 4.4 million jobs since the recession began in December 2007. more:

Treasury yields headed lower this week as investors placed more credence on deteriorating fundamental data than on supply and funding concerns.

Large-Cap Equities
The stock market dropped for the fourth consecutive week and reached new lows for the year due to worsening economic conditions and further losses in the financial sector.

Corporate Bonds
Investment grade primary activity continued despite the slide in equities. New issue concession has dwindled slightly over the year.

Mortgage-Backed Securities
Agency mortgages kept pace with Treasuries in the bond market rally and outperformed credit and equity markets.

Municipal Bonds
This week’s municipal bond market theme: “indigestion”. While 2-year AAA-rated general obligation (GO) bond yields were up just 2 bps, to 1.22%, 5-year yields jumped 14 bps to 2.30%, 7-year yields jumped 22 bps to 2.74% and 10-year yields up 21 to 3.29%.

The preponderance of weak economic data (low consumer confidence and growing global unemployment) combined with free-falling equity markets have taken much of the strength out of the high yield market.

Western European Equities
Stocks in Western Europe lost ground over the past week. The stocks with the worst performance were banks (-17.6%) and insurance (-17.5%).

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +2.3% this week, while the Russian stock index RTS went up by +5.8%.

Global Bonds and Currencies
Most major sovereign markets strengthened over the past week as stock markets hit multi-year lows and the Bank of England (BoE) and the European Central Bank (ECB) reduced rates.

Emerging-Market Bonds
Emerging market dollar-pay debt spreads widened this week. Risk aversion once again dominated markets, as reflected in new multi-year lows being reached in major equity indices.

Next week, the economic data calendar will lighten up in the United States. Thursday’s report on retail sales will likely garner the most attention as investors and economists seek to gauge the impact of the deterioration in the labor market on consumer spending.

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Have a great weekend!

Beige Book calls for extended recession

seems that the Fed may be more honest than we want about the economy. For weeks, we’ve been getting just gloomy outlooks for the near term. And the latest Beige Book was not an exception. The Beige Book prepared for the March 17-18 FOMC meeting confirmed recent statements from Fed officials that the recession is worsening in the first quarter—but about as was expected at this point. The standout statement is that no significant recovery is seen before the end of this year or early 2010. It seems that forecasts for recovery in late 2009 now have been hedged with the rebound date also including the possibility of early 2010.

"Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010."

The Beige Book indicated that manufacturing has worsened, consumer spending is still sluggish but slightly firmed from December, residential real estate remains stagnant, and unemployment is rising. Basically, economic deterioration is broad-based but essentially as expected.

It was no surprise that consumer spending habits have changed sharply during the recession – and discounters are the beneficiaries.

"As reported by Richmond, Chicago, and San Francisco, discount chains fared much better than traditional department stores and specialized retailers, recording sales gains in many cases as consumers continued to switch away from discretionary spending and luxury items and toward basic necessities."

The Beige Book also notes that price pressures have eased—including for wages.

"Upward price pressures continued to ease across a broad spectrum of final goods and services. This was largely associated with lower prices for energy and assorted raw materials compared with earlier periods, but also with weak final demand more generally, which spurred price discounting for items other than energy and food."

On the critical issue of housing stabilizing, there are few signs of that. Residential real estate activity remains depressed and house prices continue to fall. The bottom line is that the recession is worsening but there were no unexpected bombs from the latest Beige Book. We are still on track for a longer and deeper than average recession.

The bottom line

The recession clearly has worsened in the first quarter. The good news is that inflation has eased sharply, leaving the Fed much leeway to continue its credit easing. But there are yet no signs of the recession bottoming. This is why equities continue to drift down as fiscal stimulus has not yet kicked in and banks are not doing much lending. These are reasons why the Fed’s TALF facility may be critical to boosting consumer and small business credit to get the economy moving.

Market Reflections

February's jobs report was a disaster but at least it was a disaster that was expected. In fact, the markets already expect the unemployment rate to move to 9 percent sometime about mid-year, though the 5-tenth single-month jump in February to 8.1 percent is definitely steep. Payroll data so far this year show numbing declines approaching 700,000 each month, but better days, thanks to stimulus, are expected ahead. Stocks rose in reaction to the report, only to reverse and then rebound in late trading to end 0.1 percent higher at 683.38 on the S&P 500. The early rally in stocks pulled money out of the safety of the dollar and Treasuries. The dollar fell about 1 cent against the euro to $1.3651 while the 2-year yield rose 7 basis points to 0.96 percent. Crude firmed to end at $45.76 for April WTI while gold firmed slightly to end just under $940.

Friday, March 6, 2009

Jobless Rate Jumps to 8.1%; Nonfarm Payrolls Drop 651,000‏

NEWS ALERTfrom The Wall Street Journal March 6, 2009 U.S. nonfarm payrolls dropped 651,000 in February, almost right on expectations of a 652,000 loss. The unemployment rate rose to 8.1%, from 7.6% in January. The jobless rate is the highest since 1983. The economy has now shed 4.4 million jobs since the recession began in December 2007, with almost half of those losses occurring in the last three months alone. For more information, see:

Unemployment is now clearly on trajectory to achieve 10% or higher by year end, as I predicted.

This recession began in December 2007 and got worse in 2008. Obama was nominated in late 2008 and elected in November 2008 on a platform of change. The media thought that this would be change for the better.

Ask yourself: "Are you better off now than November 2008?"

Only the naieve could answer yes in the face of the facts of life:

1.Foreclosures and real estate collapse have accelerated DRAMATICALLY in the last quarter
2. Bankruptcies have accelerated dramatically in the last quarter
3. GDP has shrunk and continues to shrink
4 Congress has passed the largest boondoggle spending bill under the lie of "Stimulus". We dont have the money to pay for this. Nor do our children.
5 Obama promised to eliminate "earmarks". Watch his lips. He lied. He signed the above bill into law complete with 8000+ earmarks untouched.
6 Credit card defaults have accelerated and credit card interest charges have hit the roof...Citibank (you know the bankrupt bank we the taxpayer own) has raised everyones interest rate on credit cards to 29.99% cause they can as long as they tell you in advance that they will do this. They hid this notice in your monthly bill. A clear violation of fair dealing. Attorneys general countrywide are ignoring this.Why? Is it rational to expect strapped citizens to pay more interest! why are the politicians not doing something about this?
7. Congress is trying to run businesses!!! Which is why Citi is bankrupt, AIG is bankrupt and insolvent, GM and Chrysler too and of course add in Fredie Mac and Fannie Mae and it is obvious that the patient will soon bleed to death.


Where is the hope for the future? No jobs, higher taxes, massive systemic unemployment, financial losses everywhere....and thats just at home.

In foreign policy, you know, where Government is supposed to keep us safe...Iran has won and will start up a nuclear power plant if it hasnt already done so and our Government dosent know or worse wont tell us.

We have destroyed our European allies confidence in our support by offering to trade off Baltic states security (giving up missile defences aimed at IRAN)and begging Russia to stop supporting IRAN. Of course Russia's Medvedev contemptiously rejected this. Obama failed that test. But then who cares about the Baltic states(where are they anyway).

Our government promises to close a prison housing the worst enemies of our state (where they are treated better than our own convicted murderers) without a plan to dispose of accused and confessed jihadists (no credible PROOF they were tortured) who have publically vowed to take up arms against us as soon as they can. It is proven... we let some go and they did just this!! You feel safer now?You didnt know? Ask your congressperson if they know.

We have told everyone that we will stop combat operations in Iraq in 19 months. Bravo. We won. No more need for combat. Iraq is a sucess at governing itself. You heard Al Qaeda say the same thing? Feel an impending sense of doom? Are your kids some of the 50,000 soldiers we will leave in Iraq to become targets without the ability to continue "combat operation"? Remember Vietnam? Same thing only no carpet bombing. Talk about again turning victory into defeat!!

And the doozy of them all: Gaza/Hamas/Israel. We are sending billions to a failed political administration that used the last billions we gave them to send rockets to kill anything that moves in Israel and vows to continue to do so. Nobody lifted a finger worldwide when Israel, a soverign democracy, exercised its right of self defense and retaliated. Now Hilary (presumably with O's approval) plans to give billions to rebuild the destroyed infrastructure and AGAIN make it possible for contemptuous terrorists to continue killing defenceless civilians with outlawed tactics of indiscrimainate bombing.
Remember Jimmy Carter shaking hands with a terrorist killer Arafat at Camp David, only to see an Intifada erupt in Israel before the echoes of "peace in our time" died out. And we financed that little genocide!!! Thanks Jimmy...Once again we repeat that mistake.

Feel safer yet? Think our allies feel better about us?

Think we the voters dont care or are unaware?

Really Chuck Schumer? Still think we the voters dont care about a "little porky spending"?

This unrelentless decline in our standard of living, our ability to plan for retirement (your annuities are not going to pay you out when Insurance companies are bankrupt) and the money you do get will be worth less and less...inflation IS coming,
is all happening because our political establishment is TOTALLY UNABLE top rovide solutions to our economic problems that do not involve more taxes (there is an incentive to work harder now!!) or less tax deductions, or senseless pork barrel spending or a credible solution to our housing cris.

This Government is destroying our future American Dream including breaking the explicit contract with its citizens over their right to a house to live in!! They are destroying the opportunities to build a home and a future for our families and providing NO CREDIBLE ALTERNATIVE...

This Government should:

1. Set up a mortgage buying program so that every homeowner living with their family in their home can sell their existing mortgage to the Government and replace it with a 30yr fixed rate mortgage at 4% rate with principal adjusted to reflect the family ability to pay no more than 31% of Gross income as reported onlatest Tax retun. No tax return no mortgage. Government gets to issue these mortgages and second mortgages interest free payable at sale of home in the future.
2. Revoke all earmarks. As promised by our president.
3 spend money on government projects that can be guranteed to break ground within 30 days. Officials proven to have misrepresented these projects should be forced to resign if convicted..without golden parachutes. All non-esstential spending in these projects (clearly not DIRECTLY contributing to the progress of these projects)to be refunded with interest to Treasury within 7 days. Resignation to follow and no further participation in any Government projects to be permanently forbidden.
4. Stop all foreign policy efforts that threaten the security of the nation At a minimum stop funding any and all efforts connected to terrorist organizations, terrorist states and any organization supporting these. Start with Hamas, Iran and go from there or prove clearly that sending mony from US taxpayers to terrorists will make us tangibly and immediately safer. Do not rely on treaties made with terrorists. Defeat terrorism dont bargain with it...every single time in the last 100 years we have appeased terrorists, Nazis, jihadists, drug dealers, despots and dictators this country has become worse off.

The first task of our Government now is to make this country prosperous again. The markets worldwide, stock and commodity and any other kind, is voting a huge NO to the weak flailing of our legislators. You wont be able to persuade a rational businessperson to invest for the future when all they face is undefined but definitely higher taxes and costs of doing business. There is no way to play the game when the referees are making up the rules as they go...especially when the referees cant show that they have run a business or balanced a budget or are able to act with impartiality for the good of the nation.

Well? How can you conclude that you are better off? There is no evidence we are not circling the toilet bowl. Hope and change dont keep the bill collectors from hounding us to death. We are tangibly less safe than just 6 months ago...drug lords run the biggest country on our border..Mexico.

This government is failing this nation!!

We dont feel better about the future..we feel worse. You cant spend Hope especially if it isnt there.

We are not better off. Beware the ballot box in a few years..oh yes I forgot, election campaigns are about to start again. God help us all!

Blue Chip Penny Stocks?!!!

Here’s a short list of only the highest quality, bluest of blue chip, penny stocks:

AIG (39 cents)
Citigroup (98 cents)
E*Trade (66 cents)
Fannie Mae (39 cents)
Freddie (39 cents)
Unisys (37 cents)
Given the trading volumes, you might think these were real firms or something!

Now, for the not-quite-penny stocks:

Ford ($1.83)
GM ($1.83)
Las Vegas Sands ($1.97)
MGM ($1.99)
CIT ($2)
Kodak ($2.50)
Bank of America ($3.15)
New York Times ($4.00)
News Corp ($6.15)
Xerox ($4.36)
International Paper ($4.22)
Alcoa ($5.55)
GE ($6.75)
Dow Chemical ($6.56)
Wells Fargo ($7.95)
Dell ($8.50)
It looks like American Express ($10.83) is one of the few double digit stocks . . .

Courtesy Barry Ritholz

Market Reflections 3/5/2009

The day arrived that General Motors is talking of bankruptcy, sending money to safety in Thursday's session. The company's shares fell 15 percent to $1.86. Another routed blue chip, Citigroup, may get booted out of the Dow Jones industrial average because its share price is too low, ending today at $1.02 for another 10 percent plunge. Bank stocks in general were hit following a warning from Moody's. The GM and Moody's news, along with disappointment over lack of follow through to Chinese stimulus plans, sent the stock market tumbling once again, with the S&P 500 down 4.3 percent at 682.55.

Nearly 12 percent of U.S. homeowners with a mortgage are behind in their payments, data from the Mortgage Bankers Association. MBA said delinquency rates are now on the rise in states outside of California, Nevada or Florida. There's talk that the administration's homeowner relief program won't be much help for homeowners who are unemployed. Weekly jobless claims eased back from peak levels but are still reflecting severe contraction in the labor market. Tomorrow's monthly employment report looks to be one of the very worst on record.

The dollar firmed nearly 1 cent against the euro to end at $1.2558, gains on safe-haven buying. Money moved deeply into the front-end of the Treasury curve where the 3-month yield fell 6 basis points to 19 basis points. Gold jumped nearly $30 to $934.70. Oil, ending at $43.70 for April WTI, continues to hold in a tight range showing less and less reaction to stock market movements.

Thursday, March 5, 2009

World's Biggest Bankruptcy?

The media have given London a new nickname: Reykjavik-on-Thames.

Britain's economy revolved around banking. British banks hold about $4.4 trillion in foreign debt. The total size of the UK economy is $2.1 trillion. This year, the British government nationalized major parts of the UK's banking system. In total, the UK Treasury is on the hook for over $2 trillion in potential liabilities, according to an estimate by the Office of National Statistics.

But Britain is NOT going to be the world's biggest national bankruptcy. The government debt of the United Kingdom is only around $950 billion... or about $15,000 per capita.

This week, the United States Treasury sunk another $30 billion into AIG... its fourth bailout. It also put another $25 billion into Citigroup. The Treasury is now on the hook for as much as $6 trillion in liabilities. Last week, the White House produced its new budget. President Obama wants to run a deficit of $1.75 trillion in 2009.

The Treasury will pay for these bailouts by borrowing money. The Treasury borrows money by issuing Treasury bonds. Tomorrow, for example, it will auction three-year, 10-year, and 30-year bonds. This auction should raise around $60 billion.

The "debt clock" measures the amount of money the government owes its creditors. Today, the U.S. debt clock reads $11 trillion. To pay off this debt tomorrow, the government would have to collect $36,000 from every American.

But America is NOT about to be the world's biggest bankruptcy.

Of the major industrial economies in the world, Japan's government is the most indebted.

Since its recession began 20 years ago, Japan has plowed trillions into its banking system via numerous bailout programs. Japan's mantra is growth without cost. As a result, the Japanese government has built up the world's most crippling debt load.

The government of Japan owes $7.8 trillion. That's $157,000 per capita.

We've been using government debt per capita to compare the government debts of Britain, the United States, and Japan. But government debt to GDP is the ratio economists use to compare the indebtedness of countries. The UK has a government debt-to-GDP ratio of 48%. The U.S. has a government debt-to-GDP ratio of 75%. Japan has a government debt-to-GDP ratio of 187%.

If there's going to be a major sovereign bankruptcy, it's going to happen in Japan. Its economy is a shambles. For years, Japan has relied on exports... but even that's drying up now. In January, Japan's exports plunged 47%, producing a trade deficit. People talk about Japan as a "nation of savers." But that's not true anymore. Japan's personal savings rate has collapsed from 16% in the early 1990s to 2.2% last year.

Japan has an aging population and no immigration. I can't see where it's going to find the money to pay off its huge pile of debt.

The way to play the collapse in Japan is by shorting the yen. Right now, the Japanese yen is the world's most popular currency. Traders perceive it as a safe haven. In 2008, the yen was the world's best performing currency.... Rising 33% against the Canadian dollar, 40% against the British pound, and 19% against the dollar.

Back in January, I told you a fall in the yen was all but inevitable. The yen is down 12% since that article. But according to

Japan Is About to Devalue Its Currency: Here's How to Profit
This Year's Triple-Digit Trade

a Merrill lynch report I saw yesterday, large speculators still have a $3.7 billion long position in yen futures. The analyst described it as "crowded."

The Japanese yen has been in a 40-year bull market. I think a new long-term bear market has just started... and it will end in the bankruptcy of Japan's government.

Obama administration launches foreclosure-relief plan

Data show about 20% of U.S. homeowners with mortgages are "under water," meaning they owe more than their home is worth.
The Obama administration's $75 billion plan enables even those homeowners with negative equity to modify their loans. The program targets homeowners who are facing imminent hardship. Meanwhile, the administration continues to push for legislation that would give bankruptcy judges the authority to alter mortgage terms. Reuters.

Will this work is the question.

As Goes GE, So Goes The Economy?

March 4: GE's shares tumbled below $6 (the stock is down 60% in 2009), to a level unseen since 1991, amid continued investor fears that the conglomerate could lose its ‘AAA’ credit rating and make another equity issue. The two scenarios have haunted GE’s shares in recent weeks, even as the company took steps to shore up its beleaguered finance arm, GE Capital, by diverting $9.5 bn in cash from the corporate parent in Q1 2009 and slashing the company’s dividend

As Goes GE, So Goes The Economy?

March 4: GE's shares tumbled below $6 (the stock is down 60% in 2009), to a level unseen since 1991, amid continued investor fears that the conglomerate could lose its ‘AAA’ credit rating and make another equity issue. The two scenarios have haunted GE’s shares in recent weeks, even as the company took steps to shore up its beleaguered finance arm, GE Capital, by diverting $9.5 bn in cash from the corporate parent in Q1 2009 and slashing the company’s dividend

Will China Increase Its Stimulus Spending? How Much Will it Support Growth?

Reports suggest that Chinese Premier Wen may announce additional stimulus measures at the Central party conference in his speech on March 5. China may double its spending from the 4 trillion yuan invested - spending more on infrastructure and to boost manufacturing and on unemployment and social spending - even as concerns are being raised about where the previously announced stimulus is being spent

Market Reflections 3/4/2009

It was news of Chinese stimulus that drove the U.S. markets on Wednesday. Many here have been complaining that Chinese efforts to fire up their economy have been half hearted, at least until now. The Chinese government announced a nearly $600 billion two-year investment plan aimed at infrastructure.

Stocks posted their first gain in five sessions with the the S&P 500 gaining a solid 2.4 percent to 712.86. Money moved out of safety, making for a nearly 1 cent decline in the dollar to $1.2645 against the euro. Money moved out of Treasuries where the 2-year yield rose 6 basis points to end at 0.95 percent.

Oil got a boost from the Chinese stimulus plan, ending nearly $4 higher at $45.19 for April WTI. Gold edged lower to $907.

The news from China far overshadowed economic news here that included a rock-bottom reading for mortgage purchase applications, an ADP call for a staggering 697,000 loss in Friday's payrolls, and a step backwards for the ISM non-manufacturing report. The calendar also included the Beige Book, which reports that the recession is deepening, and a series of comments from Federal Reserve officials warning of the same.

Wednesday, March 4, 2009

Market Reflections 3/3/2009

President Obama reached out to Wall Street Tuesday, saying that the long-term valuation of the stock market is attractive. The comment didn't move the markets but it may help to improve spirits among traders who widely complain they're being demonized by the new administration for the economic downturn.

A very weak pending home sales report headlined the day's economic data. The report points to deepening declines for current home sales data. Home sales don't seem to be getting a lift yet from low mortgage rates or falling prices.

Stocks ended a narrow range near their lows, down 0.6 percent for the S&P 500 which ended at 696.33. The dollar was little changed against the euro at $1.2563. Money eased out of the Treasury market where the 2-year yield ended at 0.89 percent, up 2 basis points on the day. Money continued to exit gold on what traders describe as liquidation tied to margin calls. Gold's fall from $1,000 has been lightening fast, ending at $915.40 for a more than $20 drop on the session. April WTI oil firmed to $41.45.

Tuesday, March 3, 2009

Buffett and the Banks

Berkshire Hathaway (Buffett’s investment vehicle) is like a “Rock of Gibraltar” in the Oracle’s own words.

It is one of the most, if not the most, financially sound corporations in the world. Off the top of my head, the only other outfit that comes close is Exxon... and Exxon’s lifeblood comes from a single industry, oil and gas.

Berkshire, on the other hand, owns a famously wide and diverse variety of businesses. Those businesses throw off many collective billions in cash, with very little (if any) leverage or debt.

In times like these, a “fortress balance sheet” is a huge asset. And what the world needs now, more than ever before, is not love sweet love but rather strong entities with the ability to lend and invest wisely. Berky (as some holders affectionately call it) is one of those entities.

The trouble is, the government’s attitude towards the “zombie banks” – Citigroup chief among them – is holding back investors like Buffett and screwing up the recovery process in general.

The following passage makes that truth painfully clear:

Funders that have access to any sort of government guarantee – banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have money costs that are minimal.

Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.

This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.

Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

Exactly Backwards

That last sentence is the killer: “At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.”

This is exactly backwards from how the process is supposed to work. It is backward from the way free markets work, the way evolution works, and even the way basic logic works.

The virtue of the “creative destruction” process is that, when the business cycle goes through a downturn, capital is transferred from weak hands to strong hands.

Failure is a vital aspect of the free market because if failed experiments are not shut down, the experiments that work will not have the resources needed to expand. Without failure, the market has no way to reorganize and revitalize itself.

In more concrete terms, think of it from the perspective of a business owner. Imagine your business has two divisions and a general manager for each division. One of those managers is hard-working, savvy, and consistently profitable. The other is a complete idiot.

So... do you punish the smart successful manager for his success, and reward the idiot for his failure, by pouring more funds into the flailing division at the expense of the one that’s working?

Of course not. No sane business owner would do that.

But if your name is Tim Geithner, and your title is Secretary of the Treasury, and the idiot in question happens to be an old Wall Street pal, then that is exactly what you do.

And when successful outfits like Berkshire find their opportunities constrained by the likes of the government propping up Citigroup – a ship of fools if there ever was one – the above is roughly what happens. The idiots get continued funding, while the diligent and prudent get punished for their wise stewardship.

As a result, the market does not heal itself. Money does not flow to where it will be best treated and best allocated. Instead it gets dammed up in stagnant pools, good for little more than attracting mosquitoes and leeches. Bad behavior is rewarded; good behavior is ignored or worse yet punished. Brain-dead politicians, seeing their initial dose of medicine is not working, then call for a bigger dose of the same.

Buffett Versus Pelosi

Here is another way to ponder it. Berkshire had a very tough year last year – the company’s worst year ever in fact. But it should still be rather easy to answer the following question:

“Who would you rather have manage your money... Warren Buffett or Nancy Pelosi?”

When we sign up for letting the government expand its budget dramatically, we give a vote to the likes of Pelosi and Reid over Buffett and Munger. And it really is an either/or type vote to a large degree. When times are tough and people are scared, government-backed debt competes with private debt and private investment opportunity in the general marketplace.

So if Uncle Sam is able to put out a couple trillion in new government-backed securities and find buyers for all that paper, well, then bully for him. But that flood of government securities winds up crowding out smarter managers in the marketplace – guys like Buffett – and reducing their scope of opportunity. Good opportunities go begging and the recovery gets delayed that much more.

Getting Worse, Not Better
The situation is depressing because it seems to be getting worse, not better.

We are making no headway with the banks. Geithner’s “stress tests” are a complete joke. The government can’t be bothered to fire any of the executives who got us into this mess. AIG is opening its massive maw to swallow up another $30 billion.

And the new Obama budget has been deemed “very, very good” by NYT’s liberal uber-columnist Paul Krugman... which means in all likelihood it is a fiscal nightmare.

Meanwhile, most Americans still don’t seem to understand what’s happening, or what to do about it. For instance, a recent Gallup poll produced the following nonsensical results:

Poll question 1: Do you favor or oppose the federal government temporarily taking over major U.S. banks in danger of failing in an attempt to stabilize them? 54% favor / 44% oppose / 3% no opinion.

Poll question 2: Do you favor or oppose the federal government temporarily nationalizing major U.S. banks in danger of failing in an attempt to stabilize them? 37% favor / 57% oppose / 6% no opinion.

The public doesn’t understand what the word “nationalize” means. Nor do they understand that the U.S. taxpayer already owns the zombie banks – or at least should own them, at any rate, given the hundreds of billions that have been pumped in. We have de facto nationalized, but we are still paying off the private parties who should have been wiped out as a logical consequence of their enabling this fiasco.

Management has proven grossly inept on all sides, public and private. And the biggest stakeholders in this whole mess – American taxpayers – have proven too uninformed or too unmotivated to realize how badly they are being screwed.

If ever proof existed for the twin assertions “ignorance is dangerous” and “government doesn’t work,” that proof is now staring us in the face.

Treasury and Federal Reserve announce launch of TALF

In carrying out the Financial Stability Plan, the Department of the Treasury and the Federal Reserve Board are announcing the launch of the Term Asset-Backed Securities Loan Facility (TALF), a component of the Consumer and Business Lending Initiative (CBLI). The TALF has the potential to generate up to $1 trillion of lending for businesses and households.

The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October. By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.

Under today’s announcement, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans. Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009. On March 25, 2009, those new securitizations will be funded by the program, creating new lending capacity for additional future loans.

The program will hold monthly fundings through December 2009 or longer if the Federal Reserve Board chooses to extend the facility.

Today the Board also released revised terms and conditions for the facility and a revised set of frequently asked questions. The revisions include a reduction in the interest rates and collateral haircuts for loans secured by asset-backed securities guaranteed by the Small Business Administration or backed by government-guaranteed student loans. The modifications are warranted by the minimal credit risk on these assets owing to the government guarantees, and, by making the terms of the TALF loans more attractive, they should encourage greater flows of credit to small businesses and students.

Additional details of the TALF and the CBLI can be found at Further information on the Federal Reserve’s credit and liquidity programs is available at

The Treasury Department also released a new white paper outlining efforts to unlock credit markets.

On February 10, 2009, the Board and Treasury announced an expansion of TALF to include new asset categories that could generate up to $1 trillion in new lending. Teams from the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and are evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program. The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government.

The Federal Reserve and Treasury currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF.

Other types of securities under consideration include private-label residential mortgage-backed securities, collateralized loan and debt obligations, and other ABS not included in the initial rollout such as ABS backed by non-auto floorplan loans and ABS backed by mortgage-servicer advances. As is the case for the current categories of newly originated loans, the TALF will combine public financing with private capital to encourage the private securitization of loans in the asset classes eligible in the expanded program.

Increased TALF lending and other actions to stabilize the financial system have the potential to greatly expand the Federal Reserve’s balance sheet. In order for the Federal Reserve to conduct monetary policy over time in a way consistent with maximum sustainable employment and price stability, it must be able to manage its balance sheet, and in particular, to control the amount of reserves that the Federal Reserve provides to the banking system.

The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives.

Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for the TALF and for other key credit-easing programs.

Key Dates for the TALFSchedule for First Funding with Initial Eligible Assets DateAnnouncement/Event March 3, 2009 Launch of the TALF.
Publication of the details for the first funding March 3-17, 2009
Marketing first funding to investors March 17, 2009
Subscriptions for first funding for TALF recorded March 25, 2009
First funds from the TALF dispersed
Schedule for Second Funding
Date Announcement/Event
March 24, 2009 Announcement of details of second funding
March 24-April 7, 2009 Marketing second funding to investors
April 7, 2009 Subscriptions for second funding for TALF recorded
April 14, 2009 Second funds from the TALF dispersed

Market Reflections 3/2/2009

The steady flow of bad news continues. In the latest handout for American International Group, the Treasury is injecting another $30 billion into the insurer. The news did not lift confidence in financial shares which tumbled again: Citigroup fell 19 percent to $1.22 with Bank of America down 9 percent at $3.59. By day's end, the S&P 500 was testing support at 700, falling through for a moment but ending at 700.84 for a 4.7 percent plunge on the day.

Economic data was surprisingly positive including an ISM manufacturing report that showed a second straight month of comparative firmness and which is leading some to say that the worst may be over. Also of note in the day's data was the savings rate for January, at a 13-year high of 5 percent and evidence that consumers are definitely holding back.

Money moved into the dollar which rose about 1 cent against the euro to end at $1.2576. Money also moved deeper into the Treasury market where the 3-month yield fell 2 basis points to 0.23 percent with the 2-year down 9 basis points at 0.88 percent.

An odd twist is that gold failed to get a lift from the flight out of the stock market, ending at $939 for a $5 decline from Friday. Oil fell more than $4 from Friday to end at $40.03 for April WTI, a loss that traders attribute to the global run of bad economic news.

Monday, March 2, 2009

U.S. GDP Shrank 6.2% in Q4 2008: Economy in a L-Shaped Recession?

Real GDP contraction in Q4 2008 was revised down from -3.8% to -6.2% (most since 1982) led by a greater than initially estimated contraction in exports, consumer spending and lesser contribution from inventories. Economy contracted -0.5% in Q3 2008 and grew 1.1% in 2008

Details: Real final sales (GDP - change in private inventories) decreased -6.4%. Private inventories added 0.16% to GDP growth. Real Personal consumption fell -4.3% (most since 1980); non-residential fixed investment fell 21.1% (most since 1975); government expenditure rose +6.7%; exports fell -23.6% (steepest fall since 1971); imports fell -16%. Net exports contribution to GDP growth turned negative: -0.5%