by Eric Falkenstein
Obama has announced a new plan to help renters (oops, 'homeowners') who cannot afford their mortgages.
There are two types of people who aren't paying their mortgage bills, and it is not simple to separate them. There are those whose incomes are insufficient to make the monthly payment. Then there are current homeowners who are merely underwater, and do not want to pay (mortgages are limited liability, so they can walk away and not owe anything). So the government has some rule, and 30% of people with such mortgages get to basically write down their old mortgages to a new level that make them able and/or willing to pay.
There are two problems with this:
First, it directly lowers the value of the bank's assets. We are simultaneously trying to shore up banks. That the government is legislating this implies that banks will have to write down their assets more than they would have otherwise. So it is directly inconsistent with the Treasury's other objective, to strengthen banks.
Second, it generates huge moral hazard. Say 4 million mortgage owners take advantage of this as targeted. Those who were not targeted will look at what their neighbor did, on a house bought at the same time, and try to figure out how they too can write down their mortgage obligation. A good number will successfully navigate the lame top-down criteria applied, because any cookie-cutter criteria in Washington creates a very simple target to game.
This process will put more pressure on housing, because it creates zombie properties as owners figure out if they can get this done, and it creates a new wave of defaults. Thus, previously people who, while underwater on the property or in trouble because of standard vagaries of chance, might have otherwise paid their mortgage. But to do so in this environment is to be a sucker. Many will find this unethical, but many won't. This creates the second wave of mortgage defaults, the opportunists. I imagine there will be incentives on the demand and supply side to play this game.
The most melancholy of human reflections, perhaps, is that on the whole, it is a question whether the benevolence of mankind does more good or harm. - Walter Bagehot
Thursday, February 19, 2009
8 Possible Targets for Exxon's Cash
APA / APC / CHK / ECA / RDS.A / SU / XOM
Analysts for a while have been buzzing about Exxon’s position, speculating as to whether, or when, the world’s largest publicly traded corporation will make a bid to acquire a competitor. You could make an argument that Exxon (XOM) is currently in the best shape of any financial company in the history of the world. Their net income for the third quarter of 2008 alone was over $14B dollars and they currently have $38.43B dollars in cash, ready to be deployed. On top of this mountain of greenbacks, they also have roughly $165B in repurchased stock. Exxon has been fairly quiet on the M&A front since they bought Mobil last decade, but many feel things could change with the recent collapse of crude oil prices. I would like to take a look at a few potential targets for Exxon as well as a few other options that I see as very feasible.
Apache Corp.
Apache Corp. (APA) is one of the largest exploration and production companies in the world with excellent geographical resource exposure, something that Exxon dearly covets. Apache also has a stronghold on the Southeast Asian and Australian natural gas markets, two areas that Exxon would be very wise to enter. Apache also has the scale that would lead to a meaningful acquisition for Exxon. Even though Apache looks like a perfect target for Exxon’s management, it is very unlikely that a deal like this would occur because Apache is extremely sound financially. Apache has seen positive free cash flow for the past 22 years. This trend is likely to continue even in this financial crisis. The premium that Exxon would have to pay to acquire Apache would make the relative value of such a deal extremely unfair.
Chance of occurring: <5%
Anadarko Petroleum
Anadarko Petroleum (APC) is a company similar to Apache but with less of a natural gas bias. Anadarko has excellent exposure to Africa, another area that could be lucrative for Exxon to enter. Anadarko had built up a sizable amount of debt in 2006 and 2007 and it seemed like they could have possibly been a takeover target, but their CEO Jim Hackett has done an excellent job of paying down this debt and managing the company over the last few years. This is another situation where an acquisition would be unlikely, although slightly more likely than an acquisition of Apache.
Chance of occurring: <10%
Chesapeake Energy Corp.
Chesapeake Energy (CHK) has been all over the news over the course of the last year due to their stock’s roller coaster ride. Nobody was hotter than Chesapeake during the energy boom and no one has been in worse shape (until recently) when energy commodity prices came crashing down. Exxon’s natural gas exposure is not nearly high enough when considering the likely shift in the world’s infrastructure under the new environmentally conscious hydrocarbon ban, and Chesapeake is the leading natural gas producer in the United States. Chesapeake also has massive leaseholds in the Haynesville Shale, the United States' foremost natural gas play. They have superb management with CEO Aubrey McClendon and I doubt he would let them go down without a fight or a great offer. This acquisition of Chesapeake has a higher probability of getting done, as it makes a lot of sense for Exxon going forward.
Chance of occurring: 35%
EnCana Corp.
EnCana (ECA) is a company that has run into some problems recently with liquidity. They have over $12B in debt and less than $400M in cash on hand as of the end of the last quarter. On top of their abnormally high debt levels for a large energy company, they also had negative un-levered free cash flow for the last quarter totaling approximately $1.9B. This burn rate of cash is not sustainable, and management will have to significantly cut back the capital expenditure program in order to accommodate their new financial situation. Management had been quoted saying that there was a potential for the company to break into two “separate parts to unlock value,” but this seems unlikely given their current situation. Their reserves are mostly spread throughout the United States and Canada, so Exxon wouldn’t really gain any geographical exposure by acquiring EnCana. Still, it would help boost XOM's footprint in the natural gas markets and potentially unlock value if they could manage the company better than current management. An acquisition of this size could also be at risk of antitrust regulation.
Chance of occurring: 15%
Suncor Energy
Suncor (SU) is the type of company I would consider buying if I were in charge of Exxon. The resources are located in Canada, and these resources are oil sands, which are not conventional crude oil resources. Obviously oil sands are extremely out of favor right now, but to me it would make all the sense in the world to buy near the “low” of the market. Exxon could easily finance a takeover of Suncor with an all-cash offer, even with a substantial premium over the current stock price. Exxon has shown that they are really not concerned with environmental issues, and acquiring a company as environmentally unfriendly as Suncor wouldn’t be a problem for Exxon’s management or shareholders.
Chance of occurring: 20%
Royal Dutch Shell plc
As ridiculous as it may sound, Royal Dutch is a possible (though not extremely likely) target for Exxon. RDS.A has a large amount of international exposure that Exxon envies, as well as a fairly impressive reserve replacement ratio that well outpaces Exxon’s own. The key here is the regulators and anti-trust laws, the two main reasons why I don’t see this happening. Without these two factors in the way, I think Exxon wouldn’t hesitate to buy RDS and put to rest a rivalry that has lasted over 100 years between the spin-out of Standard Oil and the European oil giant. All things being equal, Exxon could even buy RDS in a stock only deal (if the shares of Exxon didn’t lose any value).
Chance of occurring: 5%
Foreign Government Joint Venture
This is the option that most of the analysts and writers are buzzing about. Unfortunately for their speculatively racing minds, I think that this is extremely unlikely. Exxon, along with most of the other oil majors, is already having enough problems with nationalized oil producers, Venezuela being a great example. The Venezuelan state-controlled oil producing company is refusing to pay Schlumberger (SLB) and Halliburton (HAL) a combined $1B, and it seems as if the companies will never see a penny of this money. Operating in these types of environments is not worth the risk of losing all your assets to nationalization; just ask ConocoPhillips (COP) and B.P. plc (BP). In case you missed it, ConocoPhillips just wrote down over $10B in Russian exposure in their last earnings report, and the BP-TNK venture has had a world of trouble since the day it was started.
Chance of occurring: 1%.
Resource Acquisition and More Share Buybacks
Now here is an option that not only makes sense, but is very likely. Some form of this will take place with Exxon’s cash load. This method presents a few benefits for Exxon that I believe are not as easy to see. Firstly, resource acquisition in many cases will dodge the regulation barrier that would come with any Exxon acquisition. This way, the oil giant can basically sidestep Obama. Don’t forget that Obama isn’t Exxon’s biggest fan; he had commercials that attacked their profit margins running throughout his campaign. With the public outrage over “big oil profits,” I doubt the U.S. Department of Justice lets anything of this nature slide through easily. Seeing the types of deals that are made around the industry almost daily as companies are scrambling for liquidity, it seems as if Exxon could easily outbid rivals for leaseholds that are up for sale from either other struggling smaller competitors or governments.
Share buybacks present not only an effective, but also an interesting scenario for Exxon. The market may not be able to price in the full value of an acquisition by Exxon, but whenever a firm announces share buybacks, it is much easier to calculate what this will mean for the share price. Often in our markets, irrational exuberance takes over and equities prices can run up higher than they should when share buybacks are announced. Exxon could use this to its advantage to acquire a company in an all-stock deal when their stock price is inflated beyond levels they feel are fair. This approach could potentially kill two birds with one stone. With roughly $40B in cash, Exxon could potentially set more than half of this aside to buy back shares and keep the rest on hand in case of any emergency or a sustained drop in energy prices, something that actually would not be a bad thing for Exxon in the long run.
Chance of occurring: 100%
Final Thoughts
Exxon will most likely choose at least one of these options; it is just a matter of time. Exxon’s management hinted that something was in the works during the fourth quarter earnings call. With Exxon holding that much cash it would be in the best interest of shareholders if they put it to work. Regulators will be the big question, and the option of not having to deal with regulators through the last scenario I listed is very attractive for Exxon.
In the meantime, do not expect Exxon to act quickly. Exxon has waited as crude has dropped from $147 to $39 and will not be afraid to wait longer in order to get the exact deal that they want. Exxon would rather miss calling the bottom and buy in somewhat into the upside than attempt to catch a falling knife with their cash reserves. While I have full faith in Exxon’s management to make the right decision, I would warn long investors to be aware of this pending acquisition before taking a large long bet on the world’s largest company.
- Charles W. Petredis
Full Disclosure: The author’s family as well as the mutal fund the author manages are long APA, CHK, and XOM. The mutual fund the author manages is long SLB.
Analysts for a while have been buzzing about Exxon’s position, speculating as to whether, or when, the world’s largest publicly traded corporation will make a bid to acquire a competitor. You could make an argument that Exxon (XOM) is currently in the best shape of any financial company in the history of the world. Their net income for the third quarter of 2008 alone was over $14B dollars and they currently have $38.43B dollars in cash, ready to be deployed. On top of this mountain of greenbacks, they also have roughly $165B in repurchased stock. Exxon has been fairly quiet on the M&A front since they bought Mobil last decade, but many feel things could change with the recent collapse of crude oil prices. I would like to take a look at a few potential targets for Exxon as well as a few other options that I see as very feasible.
Apache Corp.
Apache Corp. (APA) is one of the largest exploration and production companies in the world with excellent geographical resource exposure, something that Exxon dearly covets. Apache also has a stronghold on the Southeast Asian and Australian natural gas markets, two areas that Exxon would be very wise to enter. Apache also has the scale that would lead to a meaningful acquisition for Exxon. Even though Apache looks like a perfect target for Exxon’s management, it is very unlikely that a deal like this would occur because Apache is extremely sound financially. Apache has seen positive free cash flow for the past 22 years. This trend is likely to continue even in this financial crisis. The premium that Exxon would have to pay to acquire Apache would make the relative value of such a deal extremely unfair.
Chance of occurring: <5%
Anadarko Petroleum
Anadarko Petroleum (APC) is a company similar to Apache but with less of a natural gas bias. Anadarko has excellent exposure to Africa, another area that could be lucrative for Exxon to enter. Anadarko had built up a sizable amount of debt in 2006 and 2007 and it seemed like they could have possibly been a takeover target, but their CEO Jim Hackett has done an excellent job of paying down this debt and managing the company over the last few years. This is another situation where an acquisition would be unlikely, although slightly more likely than an acquisition of Apache.
Chance of occurring: <10%
Chesapeake Energy Corp.
Chesapeake Energy (CHK) has been all over the news over the course of the last year due to their stock’s roller coaster ride. Nobody was hotter than Chesapeake during the energy boom and no one has been in worse shape (until recently) when energy commodity prices came crashing down. Exxon’s natural gas exposure is not nearly high enough when considering the likely shift in the world’s infrastructure under the new environmentally conscious hydrocarbon ban, and Chesapeake is the leading natural gas producer in the United States. Chesapeake also has massive leaseholds in the Haynesville Shale, the United States' foremost natural gas play. They have superb management with CEO Aubrey McClendon and I doubt he would let them go down without a fight or a great offer. This acquisition of Chesapeake has a higher probability of getting done, as it makes a lot of sense for Exxon going forward.
Chance of occurring: 35%
EnCana Corp.
EnCana (ECA) is a company that has run into some problems recently with liquidity. They have over $12B in debt and less than $400M in cash on hand as of the end of the last quarter. On top of their abnormally high debt levels for a large energy company, they also had negative un-levered free cash flow for the last quarter totaling approximately $1.9B. This burn rate of cash is not sustainable, and management will have to significantly cut back the capital expenditure program in order to accommodate their new financial situation. Management had been quoted saying that there was a potential for the company to break into two “separate parts to unlock value,” but this seems unlikely given their current situation. Their reserves are mostly spread throughout the United States and Canada, so Exxon wouldn’t really gain any geographical exposure by acquiring EnCana. Still, it would help boost XOM's footprint in the natural gas markets and potentially unlock value if they could manage the company better than current management. An acquisition of this size could also be at risk of antitrust regulation.
Chance of occurring: 15%
Suncor Energy
Suncor (SU) is the type of company I would consider buying if I were in charge of Exxon. The resources are located in Canada, and these resources are oil sands, which are not conventional crude oil resources. Obviously oil sands are extremely out of favor right now, but to me it would make all the sense in the world to buy near the “low” of the market. Exxon could easily finance a takeover of Suncor with an all-cash offer, even with a substantial premium over the current stock price. Exxon has shown that they are really not concerned with environmental issues, and acquiring a company as environmentally unfriendly as Suncor wouldn’t be a problem for Exxon’s management or shareholders.
Chance of occurring: 20%
Royal Dutch Shell plc
As ridiculous as it may sound, Royal Dutch is a possible (though not extremely likely) target for Exxon. RDS.A has a large amount of international exposure that Exxon envies, as well as a fairly impressive reserve replacement ratio that well outpaces Exxon’s own. The key here is the regulators and anti-trust laws, the two main reasons why I don’t see this happening. Without these two factors in the way, I think Exxon wouldn’t hesitate to buy RDS and put to rest a rivalry that has lasted over 100 years between the spin-out of Standard Oil and the European oil giant. All things being equal, Exxon could even buy RDS in a stock only deal (if the shares of Exxon didn’t lose any value).
Chance of occurring: 5%
Foreign Government Joint Venture
This is the option that most of the analysts and writers are buzzing about. Unfortunately for their speculatively racing minds, I think that this is extremely unlikely. Exxon, along with most of the other oil majors, is already having enough problems with nationalized oil producers, Venezuela being a great example. The Venezuelan state-controlled oil producing company is refusing to pay Schlumberger (SLB) and Halliburton (HAL) a combined $1B, and it seems as if the companies will never see a penny of this money. Operating in these types of environments is not worth the risk of losing all your assets to nationalization; just ask ConocoPhillips (COP) and B.P. plc (BP). In case you missed it, ConocoPhillips just wrote down over $10B in Russian exposure in their last earnings report, and the BP-TNK venture has had a world of trouble since the day it was started.
Chance of occurring: 1%.
Resource Acquisition and More Share Buybacks
Now here is an option that not only makes sense, but is very likely. Some form of this will take place with Exxon’s cash load. This method presents a few benefits for Exxon that I believe are not as easy to see. Firstly, resource acquisition in many cases will dodge the regulation barrier that would come with any Exxon acquisition. This way, the oil giant can basically sidestep Obama. Don’t forget that Obama isn’t Exxon’s biggest fan; he had commercials that attacked their profit margins running throughout his campaign. With the public outrage over “big oil profits,” I doubt the U.S. Department of Justice lets anything of this nature slide through easily. Seeing the types of deals that are made around the industry almost daily as companies are scrambling for liquidity, it seems as if Exxon could easily outbid rivals for leaseholds that are up for sale from either other struggling smaller competitors or governments.
Share buybacks present not only an effective, but also an interesting scenario for Exxon. The market may not be able to price in the full value of an acquisition by Exxon, but whenever a firm announces share buybacks, it is much easier to calculate what this will mean for the share price. Often in our markets, irrational exuberance takes over and equities prices can run up higher than they should when share buybacks are announced. Exxon could use this to its advantage to acquire a company in an all-stock deal when their stock price is inflated beyond levels they feel are fair. This approach could potentially kill two birds with one stone. With roughly $40B in cash, Exxon could potentially set more than half of this aside to buy back shares and keep the rest on hand in case of any emergency or a sustained drop in energy prices, something that actually would not be a bad thing for Exxon in the long run.
Chance of occurring: 100%
Final Thoughts
Exxon will most likely choose at least one of these options; it is just a matter of time. Exxon’s management hinted that something was in the works during the fourth quarter earnings call. With Exxon holding that much cash it would be in the best interest of shareholders if they put it to work. Regulators will be the big question, and the option of not having to deal with regulators through the last scenario I listed is very attractive for Exxon.
In the meantime, do not expect Exxon to act quickly. Exxon has waited as crude has dropped from $147 to $39 and will not be afraid to wait longer in order to get the exact deal that they want. Exxon would rather miss calling the bottom and buy in somewhat into the upside than attempt to catch a falling knife with their cash reserves. While I have full faith in Exxon’s management to make the right decision, I would warn long investors to be aware of this pending acquisition before taking a large long bet on the world’s largest company.
- Charles W. Petredis
Full Disclosure: The author’s family as well as the mutal fund the author manages are long APA, CHK, and XOM. The mutual fund the author manages is long SLB.
See if you qualify for mortgage help
Official guidelines of the new mortgage plan won’t be available until March, but there are a few things it will ultimately boil down to: 1) Encouraging refinancers… and 2) Modifying loans that are underwater.
Folks with jumbo loans (over $417,000) won’t be eligible… speculators won’t be eligible… but for people who are underwater on their loan, it could be a big help.
By Les Christie, CNNMoney.com staff writer
Last Updated: February 18, 2009: 7:11 PM ET
NEW YORK (CNNMoney.com) -- The eagerly anticipated foreclosure prevention program unveiled Wednesday by President Obama targets 9 million borrowers for help - are you one of them?
The $75 billion effort, dubbed the Homeowner Affordability and Stability Plan, boils down to two basic solutions:
First, the government is aiming to help more homeowners refinance to take advantage of new low interest rates.
Second, it provides incentives to lenders and servicers to restructure your mortgage to more affordable levels.
Official guidelines won't be unveiled until March 4, but here's how to know whether you'll likely be able to take advantage of either of these options.
Help for those seeking refinancing
This part of the program targets borrowers who have kept current on their mortgages. Many of the homeowners in this group have been unable to lower their housing costs through refinancings because of falling home prices.
Right now, if you're underwater on your mortgage, owing more than the home's market value, forget about qualifying for a refi. In fact, at least 20% equity in your home is now a must.
The new guidelines should help. Even homeowners with debt that exceeds home value by 5% could be eligible. And there will be no prepayment penalties.
The Administration estimates that this will enable up to 5 million homeowners to obtain lower interest rate mortgages.
Who's not eligible. Homeowners whose property values have dipped severely, putting them underwater by more than 5% are out of luck.
Those with "jumbo" mortgages also don't qualify - only those with "conforming' mortgages do. To be absolutely sure what kind of loan you have, you need to check with your servicer or lender after March 4. But in general, until the past year, loans above $417,000 were considered jumbo mortgages, and Fannie Mae and Freddie Mac were not allowed to buy and guarantee them.
All borrowers will have to prove they have sufficient income to be able to keep up their loan payments, though what would be sufficient proof wasn't yet clear.
Mortgage modification help for at-risk borrowers
Homeowners in default or at risk of default may qualify for loan modifications, which restructure the terms of loans.
Anyone with high combined mortgage debt compared to income or who is underwater may be eligible for a loan modification.
Borrowers with high levels of other debt, such as car loans and credit card debt exceeding 55% of their incomes, may still qualify for a modification but they'll be required to accept debt counseling in a HUD-certified program.
If you qualify, your servicer or lender will reduce your monthly mortgage payments to 31% of your gross income.
The payment would stay there for five years and then gradually revert back to the conforming loan rates in place at the time.
The reduction would come mostly through interest-rate reductions, though in some cases, principal reduction also would be an option.
Borrowers would also receive incentive bonuses of up to $1,000 a year for five years for making payments on time.
President Obama estimated 3 to 4 million homeowners could benefit from the new modification procedures.
Who's not eligible. Speculators, those who bought homes for investment purposes, do not qualify for help -- all homes must be owner/occupied.
The program will also not reward homebuyers who were irresponsible in their borrowing. All applicants will be closely examined by lenders and those who acted unscrupulously by, for example, misrepresenting their incomes in no-doc loan applications, would not qualify.
And, in order to protect taxpayers from excessive expenses, no loans will be modified unless it results in a net savings compared with the costs of foreclosing. Finally, rates would not be lowered below 2%.
That will disqualify many borrowers who simply can't afford any reasonable mortgage payment because of illness, for example, or job loss.
"[The plan] will not reward folks who bought homes they knew from the beginning they would never be able to afford," said Obama. "In short, this plan will not save every home."
No mortgages for amounts above comforming loan limits would be eligible.
First Published: February 18, 2009: 6:57 PM ET
Folks with jumbo loans (over $417,000) won’t be eligible… speculators won’t be eligible… but for people who are underwater on their loan, it could be a big help.
By Les Christie, CNNMoney.com staff writer
Last Updated: February 18, 2009: 7:11 PM ET
NEW YORK (CNNMoney.com) -- The eagerly anticipated foreclosure prevention program unveiled Wednesday by President Obama targets 9 million borrowers for help - are you one of them?
The $75 billion effort, dubbed the Homeowner Affordability and Stability Plan, boils down to two basic solutions:
First, the government is aiming to help more homeowners refinance to take advantage of new low interest rates.
Second, it provides incentives to lenders and servicers to restructure your mortgage to more affordable levels.
Official guidelines won't be unveiled until March 4, but here's how to know whether you'll likely be able to take advantage of either of these options.
Help for those seeking refinancing
This part of the program targets borrowers who have kept current on their mortgages. Many of the homeowners in this group have been unable to lower their housing costs through refinancings because of falling home prices.
Right now, if you're underwater on your mortgage, owing more than the home's market value, forget about qualifying for a refi. In fact, at least 20% equity in your home is now a must.
The new guidelines should help. Even homeowners with debt that exceeds home value by 5% could be eligible. And there will be no prepayment penalties.
The Administration estimates that this will enable up to 5 million homeowners to obtain lower interest rate mortgages.
Who's not eligible. Homeowners whose property values have dipped severely, putting them underwater by more than 5% are out of luck.
Those with "jumbo" mortgages also don't qualify - only those with "conforming' mortgages do. To be absolutely sure what kind of loan you have, you need to check with your servicer or lender after March 4. But in general, until the past year, loans above $417,000 were considered jumbo mortgages, and Fannie Mae and Freddie Mac were not allowed to buy and guarantee them.
All borrowers will have to prove they have sufficient income to be able to keep up their loan payments, though what would be sufficient proof wasn't yet clear.
Mortgage modification help for at-risk borrowers
Homeowners in default or at risk of default may qualify for loan modifications, which restructure the terms of loans.
Anyone with high combined mortgage debt compared to income or who is underwater may be eligible for a loan modification.
Borrowers with high levels of other debt, such as car loans and credit card debt exceeding 55% of their incomes, may still qualify for a modification but they'll be required to accept debt counseling in a HUD-certified program.
If you qualify, your servicer or lender will reduce your monthly mortgage payments to 31% of your gross income.
The payment would stay there for five years and then gradually revert back to the conforming loan rates in place at the time.
The reduction would come mostly through interest-rate reductions, though in some cases, principal reduction also would be an option.
Borrowers would also receive incentive bonuses of up to $1,000 a year for five years for making payments on time.
President Obama estimated 3 to 4 million homeowners could benefit from the new modification procedures.
Who's not eligible. Speculators, those who bought homes for investment purposes, do not qualify for help -- all homes must be owner/occupied.
The program will also not reward homebuyers who were irresponsible in their borrowing. All applicants will be closely examined by lenders and those who acted unscrupulously by, for example, misrepresenting their incomes in no-doc loan applications, would not qualify.
And, in order to protect taxpayers from excessive expenses, no loans will be modified unless it results in a net savings compared with the costs of foreclosing. Finally, rates would not be lowered below 2%.
That will disqualify many borrowers who simply can't afford any reasonable mortgage payment because of illness, for example, or job loss.
"[The plan] will not reward folks who bought homes they knew from the beginning they would never be able to afford," said Obama. "In short, this plan will not save every home."
No mortgages for amounts above comforming loan limits would be eligible.
First Published: February 18, 2009: 6:57 PM ET
Market Reflections 2/18/2009
President Obama unveiled a $75 billion plan to help limit foreclosures especially for those who fail to qualify for refinancing because their homes have contracted in price. Unlike last week's Treasury stability plan which was met with disappointment, reaction to today's announcement was quiet though initial word of the plan did give the stock market a push last week.
The day's economic data was headed by a 17 percent plunge in January housing starts and a less frightening though still severe 5 percent plunge in permits. The Fed updated its 2009 projections calling for an unemployment peak of up to 8.8 percent. The rate is currently at 7.6 percent. The Fed also sees full year economic contraction of up to 1.3 percent. But the Fed is optimistic, at least for 2011 when it sees growth as high as 5 percent.
The Dow industrials were fractionally changed on the day while money moved out of the Treasury market where the 2-year yield rose 10 basis points to 0.96 percent. The dollar gained another 1/2 cent against the euro to end at $1.2553. Gold is pressing back toward $1,000, ending higher on the day at $988. Oil ended under $35.
The day's economic data was headed by a 17 percent plunge in January housing starts and a less frightening though still severe 5 percent plunge in permits. The Fed updated its 2009 projections calling for an unemployment peak of up to 8.8 percent. The rate is currently at 7.6 percent. The Fed also sees full year economic contraction of up to 1.3 percent. But the Fed is optimistic, at least for 2011 when it sees growth as high as 5 percent.
The Dow industrials were fractionally changed on the day while money moved out of the Treasury market where the 2-year yield rose 10 basis points to 0.96 percent. The dollar gained another 1/2 cent against the euro to end at $1.2553. Gold is pressing back toward $1,000, ending higher on the day at $988. Oil ended under $35.
Wednesday, February 18, 2009
Is the Obama mortgage plan a solution?
No. It is a political bastard. Govt wants to pay existing servicers to modify loans without giving them any meaningful incentive to do so. The rewards are trivial. The element of payment not to exceed 31% of income is kinda familiar, however it is, as usual a political solution with no real practical way to implement.
Jumbo mortgages are excluded: anything over 650 ish thou is unrefinanaceable.
The plan talks about refinancing at some level of house value; that is the one variable that in not definable,and anyway what is the real incentive for a homeowner upside down in his mortgage to refi under these terms and be paying off a mortgage forever with no hope of getting anything back at the end.
This is a horrible political creation, a compromise.
My solution puts govt directly into the business of writing mortgages; with a real end result that works for govt, homeowners and taxpayers.
The only unintended consequence is that govt is now directly in competition with banks and mortgage lenders, the vast majority are effectively insolvent and bankrupt with no hope of ever lending anything meaningful because that will deplete their statutory capital and govt will put them out of business...because threre is no way for banks to lay off their mortgage bets because the securitization market is gone, because there is no way to value mortgage assets on bank books ... and round we go.
This will spiral out of control very soon.
Obama has no concept of the problem. He is playing politics with US citizens homes.
Jumbo mortgages are excluded: anything over 650 ish thou is unrefinanaceable.
The plan talks about refinancing at some level of house value; that is the one variable that in not definable,and anyway what is the real incentive for a homeowner upside down in his mortgage to refi under these terms and be paying off a mortgage forever with no hope of getting anything back at the end.
This is a horrible political creation, a compromise.
My solution puts govt directly into the business of writing mortgages; with a real end result that works for govt, homeowners and taxpayers.
The only unintended consequence is that govt is now directly in competition with banks and mortgage lenders, the vast majority are effectively insolvent and bankrupt with no hope of ever lending anything meaningful because that will deplete their statutory capital and govt will put them out of business...because threre is no way for banks to lay off their mortgage bets because the securitization market is gone, because there is no way to value mortgage assets on bank books ... and round we go.
This will spiral out of control very soon.
Obama has no concept of the problem. He is playing politics with US citizens homes.
Market Reflections 2/17/2009
It was concern over Japan and Europe that sank the U.S. markets on Monday. A 3.3 percent fourth-quarter contraction in Japanese GDP deepened concern over the global recession as did talk of European bank failures. Treasury International Capital data showed renewed foreign investment but not Japanese investment in Treasuries, another result of contraction in Japan. Data here showed record lows for the Empire State manufacturing report, data suggesting that the recession for the manufacturing sector continues to deepen in the first quarter.
President Obama signed the latest stimulus bill into law and, along with the Treasury Secretary, will offer tomorrow a foreclosure prevention plan for the housing sector. Other data in the session included another rock bottom reading for the housing market report from the nation's homebuilders. Bank stocks were heavily sold in the session as were shares of GM which was due after the close to report its status to the government. The Dow industrials ended at their lows, down 3.8 percent to 7,552.
Money moved further into safety including once again into gold which ended about $30 higher at $970. The dollar gained more than 2 cents against the euro to $1.2605 while yields fell sharply in the Treasury market with the 10-year down 26 basis points to 2.63 percent. Oil fell further with the March contract going off the board at $34.95. April WTI ended 8% lower at $38.55.
President Obama signed the latest stimulus bill into law and, along with the Treasury Secretary, will offer tomorrow a foreclosure prevention plan for the housing sector. Other data in the session included another rock bottom reading for the housing market report from the nation's homebuilders. Bank stocks were heavily sold in the session as were shares of GM which was due after the close to report its status to the government. The Dow industrials ended at their lows, down 3.8 percent to 7,552.
Money moved further into safety including once again into gold which ended about $30 higher at $970. The dollar gained more than 2 cents against the euro to $1.2605 while yields fell sharply in the Treasury market with the 10-year down 26 basis points to 2.63 percent. Oil fell further with the March contract going off the board at $34.95. April WTI ended 8% lower at $38.55.
Friday, February 13, 2009
Imagine Pandit Querying Barney Frank: Caroline Baum 2009-02-12 19:23:05.574 GMT
Commentary by Caroline BaumFeb. 12 (Bloomberg)
-- The chief executive officers of WallStreet’s too-big-to-fail banks traipsed up to Capitol Hillyesterday to submit to questioning from Barney Frank and theHouse Financial Services Committee he heads.
It was the latest installment in a series of show trialsfeaturing the likes of Major League baseball, the Detroit autoindustry, Big Oil and Bad Tobacco.
Not that Congress is outside its jurisdiction in inquiringafter the taxpayer money it has doled out. (If only lawmakerswere as vigilant about the rest of their spending.)
When our elected representatives are out for blood, a legitimate form of inquiry quickly degenerates into finger-pointing and grand-standing for the folks back home.Yesterday’s hearing was relatively tame, as far as lynchings go.
The eight Wall Street CEOs, including Citigroup Inc.’s VikramPandit, JPMorgan Chase & Co.’s Jamie Dimon, and Bank of AmericaCorp.’s Ken Lewis were questioned about their lending, or lack ofit, since they received an injection of government capital underthe Troubled Asset Relief Program. They were scolded for spendingthe money unwisely. They were asked about salary, bonuses and“planes and perks” (a show of hands, please).The bankers were appropriately contrite in admittingmistakes and sincere in their commitment to make amends.
Panditvolunteered to take a salary of $1 and no bonus until Citigroupis profitable again.
The execs had to dance around some of the questions, such as one on raising credit-card rates, with prosecutor Maxine Waters,Democrat of California, cutting off the witness before he could explain how banks make a profit.
Reversal of Fortune
Just imagine if the tables were reversed.
Frank and Watersare seated at the witness table instead of perched on the hearingroom dais.
The questioning would go something like this:
Chairman Frank, on July 14, 2008, you made the followingpronouncements about Fannie Mae and Freddie Mac, the two hugegovernment-sponsored enterprises that are the key players inmortgage finance:
“Fannie and Freddie are fundamentally sound.”
“They are not in danger of going under.”
“Looking at the financials, they’re solid.”
You followed that analysis with a forecast.
Referring tolegislation before your committee to allow the Treasury to lend to and buy unlimited shares in the GSEs, you said:
“We’re doingthree separate things that make it much less likely -- very, veryunlikely -- that we’ll have this kind of a housing crisis sixmonths or a year from now.”
Less than two months later, Fannie and Freddie were wards ofthe state.
Just answer the questions, Mr. Chairman.
GSE Enabler
As the ranking member of the House Financial ServicesCommittee -- before you became chairman in 2007 -- you consistently opposed stricter regulation of Fannie Mae andFreddie Mac.
I would just note that you received $42,350 fromFannie’s and Freddie’s political action committees and employees from 1989 to 2008.
In 2004, you received a report from the GSE regulator showing that Fannie and Freddie had manipulated their earnings, enriching their senior executives in the process.
Yet you and your fellowcommittee members, primarily Democrats, looked the other way.
Even worse, you shot the messenger, Armando Falcon, directorof the Office of Federal Housing Enterprise Oversight, who foundaccounting irregularities at both companies.
‘Innovation’ Lending
This is what you said to Falcon at a committee hearing:
“I don’t see anything in your report that raises safenessand soundness problems.”
Your distinguished colleague, Maxine Waters, was right thereto back you up.
“We do not have a crisis at Freddie Mac, and particularlyat Fannie Mae, under the outstanding leadership of FranklinRaines,” she said.
She went on.“What we need to do today is to focus on the regulator, andthis must be done in a manner so as not to impede their affordable housing mission.”
That mission, as you noted, has seen “innovation flourish from desk-top underwriting to 100 percent loans.”
We all know how that worked out.
Fannie had to restate earnings back to 2001, erasing $6.3 billion in previouslyreported profits.
Doing Penance
Former CEO Franklin Raines kept the lion’s share of the $91million bounty he received for his six years of service at thecompany. (Raines had to cough up $24.7 million last year to settle a claim that he inflated earnings.)
Questioned by former congressman Chris Shays, Republican of Connecticut, about Fannie’s teensy 3 percent capital cushion,Raines said of the multi- and single-family loans the companyholds:
“These assets are so riskless that capital for holdingthem should be under 2 percent.”
Finally, Mr. Chairman, you used your influence as chairman of the House Financial Services Committee to secure $12 millionfor a troubled home-state bank under the TARP program.
Treasuryhad stipulated that the banks be healthy.
It’s disingenuous to be critical of legislation you passed and a program you implemented when you’re the one bending the rules. Mr. Chairman, we thank you for your candor in appearing before us today.
(Caroline Baum, author of “Just What I Said,” is aBloomberg News columnist. The opinions expressed are her own.)
Editors: Steven Gittelson, David Henry
To contact the writer of this column: Caroline Baum in New York at +1-212-617-3369 orcabaum@bloomberg.net.
To contact the editor responsible for this column: James Greiff at +1-212-617-5801 or jgreiff@bloomberg.net
-- The chief executive officers of WallStreet’s too-big-to-fail banks traipsed up to Capitol Hillyesterday to submit to questioning from Barney Frank and theHouse Financial Services Committee he heads.
It was the latest installment in a series of show trialsfeaturing the likes of Major League baseball, the Detroit autoindustry, Big Oil and Bad Tobacco.
Not that Congress is outside its jurisdiction in inquiringafter the taxpayer money it has doled out. (If only lawmakerswere as vigilant about the rest of their spending.)
When our elected representatives are out for blood, a legitimate form of inquiry quickly degenerates into finger-pointing and grand-standing for the folks back home.Yesterday’s hearing was relatively tame, as far as lynchings go.
The eight Wall Street CEOs, including Citigroup Inc.’s VikramPandit, JPMorgan Chase & Co.’s Jamie Dimon, and Bank of AmericaCorp.’s Ken Lewis were questioned about their lending, or lack ofit, since they received an injection of government capital underthe Troubled Asset Relief Program. They were scolded for spendingthe money unwisely. They were asked about salary, bonuses and“planes and perks” (a show of hands, please).The bankers were appropriately contrite in admittingmistakes and sincere in their commitment to make amends.
Panditvolunteered to take a salary of $1 and no bonus until Citigroupis profitable again.
The execs had to dance around some of the questions, such as one on raising credit-card rates, with prosecutor Maxine Waters,Democrat of California, cutting off the witness before he could explain how banks make a profit.
Reversal of Fortune
Just imagine if the tables were reversed.
Frank and Watersare seated at the witness table instead of perched on the hearingroom dais.
The questioning would go something like this:
Chairman Frank, on July 14, 2008, you made the followingpronouncements about Fannie Mae and Freddie Mac, the two hugegovernment-sponsored enterprises that are the key players inmortgage finance:
“Fannie and Freddie are fundamentally sound.”
“They are not in danger of going under.”
“Looking at the financials, they’re solid.”
You followed that analysis with a forecast.
Referring tolegislation before your committee to allow the Treasury to lend to and buy unlimited shares in the GSEs, you said:
“We’re doingthree separate things that make it much less likely -- very, veryunlikely -- that we’ll have this kind of a housing crisis sixmonths or a year from now.”
Less than two months later, Fannie and Freddie were wards ofthe state.
Just answer the questions, Mr. Chairman.
GSE Enabler
As the ranking member of the House Financial ServicesCommittee -- before you became chairman in 2007 -- you consistently opposed stricter regulation of Fannie Mae andFreddie Mac.
I would just note that you received $42,350 fromFannie’s and Freddie’s political action committees and employees from 1989 to 2008.
In 2004, you received a report from the GSE regulator showing that Fannie and Freddie had manipulated their earnings, enriching their senior executives in the process.
Yet you and your fellowcommittee members, primarily Democrats, looked the other way.
Even worse, you shot the messenger, Armando Falcon, directorof the Office of Federal Housing Enterprise Oversight, who foundaccounting irregularities at both companies.
‘Innovation’ Lending
This is what you said to Falcon at a committee hearing:
“I don’t see anything in your report that raises safenessand soundness problems.”
Your distinguished colleague, Maxine Waters, was right thereto back you up.
“We do not have a crisis at Freddie Mac, and particularlyat Fannie Mae, under the outstanding leadership of FranklinRaines,” she said.
She went on.“What we need to do today is to focus on the regulator, andthis must be done in a manner so as not to impede their affordable housing mission.”
That mission, as you noted, has seen “innovation flourish from desk-top underwriting to 100 percent loans.”
We all know how that worked out.
Fannie had to restate earnings back to 2001, erasing $6.3 billion in previouslyreported profits.
Doing Penance
Former CEO Franklin Raines kept the lion’s share of the $91million bounty he received for his six years of service at thecompany. (Raines had to cough up $24.7 million last year to settle a claim that he inflated earnings.)
Questioned by former congressman Chris Shays, Republican of Connecticut, about Fannie’s teensy 3 percent capital cushion,Raines said of the multi- and single-family loans the companyholds:
“These assets are so riskless that capital for holdingthem should be under 2 percent.”
Finally, Mr. Chairman, you used your influence as chairman of the House Financial Services Committee to secure $12 millionfor a troubled home-state bank under the TARP program.
Treasuryhad stipulated that the banks be healthy.
It’s disingenuous to be critical of legislation you passed and a program you implemented when you’re the one bending the rules. Mr. Chairman, we thank you for your candor in appearing before us today.
(Caroline Baum, author of “Just What I Said,” is aBloomberg News columnist. The opinions expressed are her own.)
Editors: Steven Gittelson, David Henry
To contact the writer of this column: Caroline Baum in New York at +1-212-617-3369 orcabaum@bloomberg.net.
To contact the editor responsible for this column: James Greiff at +1-212-617-5801 or jgreiff@bloomberg.net
The U.S. foreclosure rate improved in January!!!?? Rubbish
The U.S. foreclosure rate improved in January
“Only” 274,399 foreclosure filings hit the books in January, down 10% from the month before.
Wait… what’s this?
According to RealtyTrac, most of decline was due to a moratorium on foreclosures at Fannie Mae and Freddie Mac.
Ah, we see the logic. If you don’t allow foreclosures to take place, the problem will just go away.
Impeccable.
Bummer. Foreclosures were still up 18% annually. The trend remains.
“Only” 274,399 foreclosure filings hit the books in January, down 10% from the month before.
Wait… what’s this?
According to RealtyTrac, most of decline was due to a moratorium on foreclosures at Fannie Mae and Freddie Mac.
Ah, we see the logic. If you don’t allow foreclosures to take place, the problem will just go away.
Impeccable.
Bummer. Foreclosures were still up 18% annually. The trend remains.
China: the first to recover?
China with all their trillions of dollars sitting around losing their value, and set to lose their value even more in the future, looks to have possibly turned around their recession in a heartbeat... You may recall that China put into place a 4 Trillion renminbi Stimulus Package a few months ago... And when you deal from a position of strength, you can do these things quickly and with force. So, according to an economist at Merrill Lynch, "China looks set to be the first major economy to recover from the current global meltdown. China is the only economy in the world to see significant growth in credit to corporate and household sectors since September 2008, when the financial crisis worsened to a near collapse."
Oil and Gas Transport Plays
S&P believes these six high-yielding issues should be able to maintain their distribution levels this year
By Beth Piskora From Standard & Poor's Equity Research
Quick: name an industry group where the average dividend yield is hovering around 11%. If you guessed utilities, real estate investment trusts (REITS), or banks, you're wrong. But if you guessed oil and gas transportation companies, that would be correct.
Most oil and gas pipeline companies are set up as Master Limited Partnerships (MLPs), which means they must, by law, distribute their earnings, just like REITs do. That makes them good choices for income-focused investors, in our view.
"The distribution—or dividend—level is a very important driver of investor interest in this group," explains Tanjila Shafi, a Standard & Poor's equity analyst. "The companies know this, so they are working very hard not to cut the payouts. They are doing other things like cutting capital expenditures to preserve capital, just to maintain the distribution levels."
Shafi recommends only six MLPs, and believes all six should be able to maintain their distribution levels this year. She also believes that they, as a group, are the strongest companies in the industry, have good balance sheets, and are more likely to be able to tap the capital markets. She notes investors may find other MLPs with higher dividend yields, but recommends for purchase only these six, each of which carries an S&P investment ranking of 4 STARS (buy) or 5 STARS (strong buy).
Company Ticker S&P STARS Rank (2/12/09)
Energy Transfer Partners ETP 4
Kinder Morgan Energy Partners KMP 5
Magellan Midstream Holdings MGG 4
NuStar Energy NS 4
Oneok Partners OKS 4
Plains All American Pipeline PAA 4
Piskora is managing editor of U.S. Editorial Operations for Standard & Poor's .
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
By Beth Piskora From Standard & Poor's Equity Research
Quick: name an industry group where the average dividend yield is hovering around 11%. If you guessed utilities, real estate investment trusts (REITS), or banks, you're wrong. But if you guessed oil and gas transportation companies, that would be correct.
Most oil and gas pipeline companies are set up as Master Limited Partnerships (MLPs), which means they must, by law, distribute their earnings, just like REITs do. That makes them good choices for income-focused investors, in our view.
"The distribution—or dividend—level is a very important driver of investor interest in this group," explains Tanjila Shafi, a Standard & Poor's equity analyst. "The companies know this, so they are working very hard not to cut the payouts. They are doing other things like cutting capital expenditures to preserve capital, just to maintain the distribution levels."
Shafi recommends only six MLPs, and believes all six should be able to maintain their distribution levels this year. She also believes that they, as a group, are the strongest companies in the industry, have good balance sheets, and are more likely to be able to tap the capital markets. She notes investors may find other MLPs with higher dividend yields, but recommends for purchase only these six, each of which carries an S&P investment ranking of 4 STARS (buy) or 5 STARS (strong buy).
Company Ticker S&P STARS Rank (2/12/09)
Energy Transfer Partners ETP 4
Kinder Morgan Energy Partners KMP 5
Magellan Midstream Holdings MGG 4
NuStar Energy NS 4
Oneok Partners OKS 4
Plains All American Pipeline PAA 4
Piskora is managing editor of U.S. Editorial Operations for Standard & Poor's .
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
Market Reflections 2/12/2009
Doubts that the Treasury's stability plan, under which the government would swap out the bad debt of financial firms, sent stocks lower, at least in early trading. But a report by day's end that the Obama administration is working on a plan to subsidize homeowner mortgage payments sent stocks back toward their opening levels.
Retail sales showed a strong bounce in January but are still contracting badly on a year-on-year rate. Jobless claims were decidedly weak indicating steady and severe rates of contraction in the labor market.
Money moved into safety with the dollar gaining about 1/2 cent to $1.2856 against the euro. Treasury yields slipped slightly with the exception of the 30-year bond where the yield rose 7 basis points to 3.52 percent. Demand was soft for a giant $14 billion auction of new bonds.
The March WTI contract fell another $2 to just under $34, but the April contract is much stronger ending at nearly $42. This giant gap, not seen in the Brent contract, reflects the lack of available storage space at the key delivery point of Cushing, Oklahoma. Gold ended slightly higher just over $950 and on its way, many say, to $1,000.
Retail sales showed a strong bounce in January but are still contracting badly on a year-on-year rate. Jobless claims were decidedly weak indicating steady and severe rates of contraction in the labor market.
Money moved into safety with the dollar gaining about 1/2 cent to $1.2856 against the euro. Treasury yields slipped slightly with the exception of the 30-year bond where the yield rose 7 basis points to 3.52 percent. Demand was soft for a giant $14 billion auction of new bonds.
The March WTI contract fell another $2 to just under $34, but the April contract is much stronger ending at nearly $42. This giant gap, not seen in the Brent contract, reflects the lack of available storage space at the key delivery point of Cushing, Oklahoma. Gold ended slightly higher just over $950 and on its way, many say, to $1,000.
Thursday, February 12, 2009
China must buy more U.S. debt… "it is the only option"
Even though it knows the dollar will fall, China – the world’s largest holder of U.S. Treasuries – will continue buying because it’s their “only option.”
Luo Ping, a director-general at the China Banking Regulatory Commission, asked at a meeting in New York on Wednesday, “Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”
Read full article... (requires subscription)
Luo Ping, a director-general at the China Banking Regulatory Commission, asked at a meeting in New York on Wednesday, “Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”
Read full article... (requires subscription)
Market Reflections 2/11/2009
Lawmakers reached a deal on a $789 million stimulus bill and set the stage for quick passage. Sentiment is mixed. Government spending is important to stimulate growth but many say pork spending will dull the bill's economic effectiveness. A reminder of what's ahead was offered by the Treasury's monthly budget statement where deficits are already dwarfing any thing ever seen before.
Stocks regained little following yesterday's disappointment over lack of details in the Treasury's stability plan. The Dow industrials edged 0.6% higher while the dollar was little changed at $1.2897 against the euro. Money keeps moving back into Treasuries and gold with the 10-year yield down 5 basis points at 2.76 percent and gold ending more than $25 higher at $941.10. Another bulge in supplies sent oil down more than $2 to $36, yet gasoline went higher, briefly over $1.30 in reaction to draws in gasoline stocks.
Stocks regained little following yesterday's disappointment over lack of details in the Treasury's stability plan. The Dow industrials edged 0.6% higher while the dollar was little changed at $1.2897 against the euro. Money keeps moving back into Treasuries and gold with the 10-year yield down 5 basis points at 2.76 percent and gold ending more than $25 higher at $941.10. Another bulge in supplies sent oil down more than $2 to $36, yet gasoline went higher, briefly over $1.30 in reaction to draws in gasoline stocks.
Wednesday, February 11, 2009
Waiting for Geithner/Godot Part Deux (2)
This courtesy of Nouriel Roubini's RGE Monitor. It is a must read for all citizen/taxpayers in the USA.
On February 10 Treasury Secretary Timothy Geithner presented the administration’s Financial Stability Plan to deal with the financial system’s toxic asset overhang and ease, if not reverse, the ongoing decline in bank lending to households and corporations. Out of the three broad options available -including nationalization, ‘good / bad bank’, backstop guarantee on ring-fenced toxic assets- the administration plan offers elements of all three.
The first program involves a mandatory ‘stress test’ for all banks with $100bn-plus assets which should also shed some clarity on the individual banks exposures and valuations of toxic assets. The Treasury’s Capital Assistance Program stands ready with preferred shares / warrants injections where needed, only this time with clear lending requirements and strict limits on dividends, stock repurchases and acquisitions next to a $500,000 compensation cap. Any capital investments made by Treasury under the CAP will be placed in the Financial Stability Trust. However, it is still unclear what the options are for institutions that are severely undercapitalized or that fail to attract public capital on a recurring basis (see e.g. Bank of America, Citigroup after the 2nd bailout.) The program aims at ensuring full transparency disclosing all relevant information on capital recipients at www.FinancialStability.gov.
The second program, the Public-Private Investment Fund (PPP), aims at setting up a new lending/guarantee facility by leveraging an initial private capital commitment with government funds to an initial scale of up to $500bn (can be expanded to max. $1 trillion.) The aim is to involve private capital on a large scale that sits currently on the sidelines while also allowing private market forces to determine the price for currently troubled and illiquid assets.
A similar experiment was tried before with the private sector sponsored M-LEC vehicle that ultimately proved unviable due to asymmetric toxic asset exposures of participating banks and due to still unresolved asset valuation issues. Commentators agree that for a similar plan to work this time, the government will have to assume a potentially substantial downside in order to induce otherwise unwilling investors to participate in view of the size of potential losses.
As we noted before, the size of the entire shadow banking system lacking liquidity is $10 trillion of which $6 trillion are assets held in the U.S. Not all of these assets will turn bad but at RGE we expect total losses on these shadow banking assets plus traditional loan losses to reach $3.6 trillion (of which $1.8 trillion borne by U.S. banks.)
One practical example is the Federal Reserve’s Maiden Lane portfolio of toxic Bear Stearns assets. If that performance is any guide, the upside left in these toxic assets might in reality be more limited than previously assumed. Cumberland Advisors reports that this particular portfolio has lost over 10% of its value, and losses are mounting. Indeed, the authors see ‘no prospect for a profit’ on this portfolio.
Renowned distressed debt experts such as Edward Altman and Martin Fridson note that the best time to invest in distressed debt is when default rates peak. Mind that high-yield default rates are set to rise to 15-20% sometime in 2010 from currently 4-5% due to very bad credit quality at the outset of the cycle.
The third program put forth by Secretary Geithner is an expanded version of the previously $200bn Federal Reserve Term Asset Backed Securities Loan Facility (TALF) program aimed at unclogging the markets for auto, student and other consumer loans. That initiative may expand to as much as $1 trillion, using $100 billion from the Treasury's rescue funds, and include aid for commercial real estate markets.
Geithner points out that securitization created about 40% of the demand for new loans extended to consumers, students, and auto buyers. The decline of securitized lending to the tune of $1.2 trillion between 2006 and 2008 leaves a hole that needs to be filled if a severe lending contraction should be prevented.
Nouriel Roubini in his latest writing It Is Time to Nationalize Insolvent Banking Systems argues that, ultimately, nationalization may be a more market friendly solution of a banking crisis: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – possibly – even the unsecured creditors in case the bank insolvency is too large; it provides a fair upside to the tax-payer. Moreover, it bypasses the asset valuation issue as any overpayment goes back into taxpayers pockets. “With the government starting stress tests to figure out which institutions are so massively undercapitalized that they need to be taken over by the FDIC the administration is putting in place the steps for the eventual and necessary takeover of the insolvent banks.” This might well explain some of the negative market reaction.
The Treasury has stressed that while the ongoing price correction will stimulate home demand, there is a need to reduce foreclosures, which otherwise adding to the excess overhang of homes pose the risk of price over-correction, pushing more homeowners into negative equity. The Treasury plans to announce a Housing Program in the next few weeks to help refinance mortgages and contain foreclosures by reducing monthly payments for homeowners. The program will be financed by using $50 billion from the remaining TARP funds. To increase lender participation, the plan makes it compulsory for banks using government funds under the Financial Stability Plan to participate in foreclosure mitigation. In order to stimulate home demand and help the current homeowners refinance, the Treasury and Fed will continue with their November 2008 plans use $600 billion to buy MBSs and debt of the GSEs using and reduce mortgage rates to the 4-4.5% range. More importantly, the plan will increase flexibility to modify loans under the Hope Now and FHA Programs started in 2007-08 to help increase participation and foreclosure prevention.
Efforts to stimulate demand reducing mortgage rates and offering tax incentives will be largely ineffective as they are a small factor in determining home demand relative to factors such as tighter lending standards, changing dynamics for households - job and income loss, wealth erosion, rising savings rate, and low expectations of income or asset appreciation. These factors will constrain home demand in the short run while potential buyers await further price correction and banks don’t see the viability in offering mortgage for a house whose value is expected to fall.
As a result, the government needs to focus on the supply side of the market by refinancing at-risk mortgages and preventing foreclosures that will only add to the existing overhang of houses. Moreover, government’s loan modification program should reduce mortgage principal rather than just reducing the mortgage rate or extending the loan maturity, which has been the case in past government programs. Unless the problem of insolvency among a large number of households is addressed, default on modified mortgages will also continue. Also, given the large number of homeowners with negative home equity, the program will need much larger funds - over $600 billion to $1 trillion though the actual cost might be much less, since the government will receive a share from future home appreciation. Monetary incentives for servicers are also low and ineffective. Even the number of homeowners the program plans to target, 1.5-2 million is a very small fraction of the over 12 million homeowners with negative equity. In fact, several Democrats are pushing a legislation to allow bankruptcy judges to change mortgage terms that would allow lenders to reduce the mortgage principal for primary homes and bring down monthly payments. To increase participation, they support offering monetary incentives for servicers while lenders will be entitled to a share if the homeowner sells the house and also have the government share any losses on the modified mortgage.
As we have argued before at RGE Monitor, looking at the shortcomings of past government programs such as the Hope Now, Housing Retention and FDIC programs, the new program should be mandatory for lenders in order to increase participation. The government will also need to share the cost of modifying the loan, by matching the principal or the interest rate cut in a proportionate or less than proportionate amount. By guaranteeing the loans, the government will be the senior debt holder. The new interest rate should be based on the risk assessment of the borrower and all three parties – homeowner, lenders and servicers, and the government should share the cost of modification. However, determining the extent of principal reduction based on the true value of the house, and dealing with second lien mortgages and the diverging interests of mortgage servicers will be challenging.
Under the new guidelines for compensation issued by the Treasury, firms receiving federal aid will be subject to shareholder say on pay and will be required to cap executive compensation at $500,000 with any additional compensation given out in restricted stocks which can be cashed only after the government has been repaid or the bank has satisfied repayment obligations, and met lending and stability standards. Moreover, bonuses and compensation for other top executives will also be reduced. The Treasury requires disclosure of the compensation structure and strategy, and expenditure on luxury items.
While government intervention is warranted, the compensation reform does little to align risks with rewards. Large share of the compensation can and will still be given out in restricted stocks including compensation for several traders and funds managers who are not under the lenses of the current plan. Government measures also give a green signal to those who have already received large compensation and severance packages at the troubled banks. More importantly, the measures might act a disincentive in attracting credible executive talent to these troubled institutions in the future who can help deal with the bank losses and overhaul. Wall Street compensation is determined in a competitive market with CEOs joining a firm offering the most attractive pay packages and perks. Many banks are already reluctant to seek capital injection from the Treasury or are contemplating to payback past borrowings in order to avoid government scrutiny over their compensation packages.
To reduce excessive risk-taking in the short-run, compensation, bonuses and even severance packages should be based on the long-term performance of the employee relative to the risk undertaken with large part of the payments given out in restricted stocks that can be redeemed over a longer period of time.
On February 10 Treasury Secretary Timothy Geithner presented the administration’s Financial Stability Plan to deal with the financial system’s toxic asset overhang and ease, if not reverse, the ongoing decline in bank lending to households and corporations. Out of the three broad options available -including nationalization, ‘good / bad bank’, backstop guarantee on ring-fenced toxic assets- the administration plan offers elements of all three.
The first program involves a mandatory ‘stress test’ for all banks with $100bn-plus assets which should also shed some clarity on the individual banks exposures and valuations of toxic assets. The Treasury’s Capital Assistance Program stands ready with preferred shares / warrants injections where needed, only this time with clear lending requirements and strict limits on dividends, stock repurchases and acquisitions next to a $500,000 compensation cap. Any capital investments made by Treasury under the CAP will be placed in the Financial Stability Trust. However, it is still unclear what the options are for institutions that are severely undercapitalized or that fail to attract public capital on a recurring basis (see e.g. Bank of America, Citigroup after the 2nd bailout.) The program aims at ensuring full transparency disclosing all relevant information on capital recipients at www.FinancialStability.gov.
The second program, the Public-Private Investment Fund (PPP), aims at setting up a new lending/guarantee facility by leveraging an initial private capital commitment with government funds to an initial scale of up to $500bn (can be expanded to max. $1 trillion.) The aim is to involve private capital on a large scale that sits currently on the sidelines while also allowing private market forces to determine the price for currently troubled and illiquid assets.
A similar experiment was tried before with the private sector sponsored M-LEC vehicle that ultimately proved unviable due to asymmetric toxic asset exposures of participating banks and due to still unresolved asset valuation issues. Commentators agree that for a similar plan to work this time, the government will have to assume a potentially substantial downside in order to induce otherwise unwilling investors to participate in view of the size of potential losses.
As we noted before, the size of the entire shadow banking system lacking liquidity is $10 trillion of which $6 trillion are assets held in the U.S. Not all of these assets will turn bad but at RGE we expect total losses on these shadow banking assets plus traditional loan losses to reach $3.6 trillion (of which $1.8 trillion borne by U.S. banks.)
One practical example is the Federal Reserve’s Maiden Lane portfolio of toxic Bear Stearns assets. If that performance is any guide, the upside left in these toxic assets might in reality be more limited than previously assumed. Cumberland Advisors reports that this particular portfolio has lost over 10% of its value, and losses are mounting. Indeed, the authors see ‘no prospect for a profit’ on this portfolio.
Renowned distressed debt experts such as Edward Altman and Martin Fridson note that the best time to invest in distressed debt is when default rates peak. Mind that high-yield default rates are set to rise to 15-20% sometime in 2010 from currently 4-5% due to very bad credit quality at the outset of the cycle.
The third program put forth by Secretary Geithner is an expanded version of the previously $200bn Federal Reserve Term Asset Backed Securities Loan Facility (TALF) program aimed at unclogging the markets for auto, student and other consumer loans. That initiative may expand to as much as $1 trillion, using $100 billion from the Treasury's rescue funds, and include aid for commercial real estate markets.
Geithner points out that securitization created about 40% of the demand for new loans extended to consumers, students, and auto buyers. The decline of securitized lending to the tune of $1.2 trillion between 2006 and 2008 leaves a hole that needs to be filled if a severe lending contraction should be prevented.
Nouriel Roubini in his latest writing It Is Time to Nationalize Insolvent Banking Systems argues that, ultimately, nationalization may be a more market friendly solution of a banking crisis: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – possibly – even the unsecured creditors in case the bank insolvency is too large; it provides a fair upside to the tax-payer. Moreover, it bypasses the asset valuation issue as any overpayment goes back into taxpayers pockets. “With the government starting stress tests to figure out which institutions are so massively undercapitalized that they need to be taken over by the FDIC the administration is putting in place the steps for the eventual and necessary takeover of the insolvent banks.” This might well explain some of the negative market reaction.
The Treasury has stressed that while the ongoing price correction will stimulate home demand, there is a need to reduce foreclosures, which otherwise adding to the excess overhang of homes pose the risk of price over-correction, pushing more homeowners into negative equity. The Treasury plans to announce a Housing Program in the next few weeks to help refinance mortgages and contain foreclosures by reducing monthly payments for homeowners. The program will be financed by using $50 billion from the remaining TARP funds. To increase lender participation, the plan makes it compulsory for banks using government funds under the Financial Stability Plan to participate in foreclosure mitigation. In order to stimulate home demand and help the current homeowners refinance, the Treasury and Fed will continue with their November 2008 plans use $600 billion to buy MBSs and debt of the GSEs using and reduce mortgage rates to the 4-4.5% range. More importantly, the plan will increase flexibility to modify loans under the Hope Now and FHA Programs started in 2007-08 to help increase participation and foreclosure prevention.
Efforts to stimulate demand reducing mortgage rates and offering tax incentives will be largely ineffective as they are a small factor in determining home demand relative to factors such as tighter lending standards, changing dynamics for households - job and income loss, wealth erosion, rising savings rate, and low expectations of income or asset appreciation. These factors will constrain home demand in the short run while potential buyers await further price correction and banks don’t see the viability in offering mortgage for a house whose value is expected to fall.
As a result, the government needs to focus on the supply side of the market by refinancing at-risk mortgages and preventing foreclosures that will only add to the existing overhang of houses. Moreover, government’s loan modification program should reduce mortgage principal rather than just reducing the mortgage rate or extending the loan maturity, which has been the case in past government programs. Unless the problem of insolvency among a large number of households is addressed, default on modified mortgages will also continue. Also, given the large number of homeowners with negative home equity, the program will need much larger funds - over $600 billion to $1 trillion though the actual cost might be much less, since the government will receive a share from future home appreciation. Monetary incentives for servicers are also low and ineffective. Even the number of homeowners the program plans to target, 1.5-2 million is a very small fraction of the over 12 million homeowners with negative equity. In fact, several Democrats are pushing a legislation to allow bankruptcy judges to change mortgage terms that would allow lenders to reduce the mortgage principal for primary homes and bring down monthly payments. To increase participation, they support offering monetary incentives for servicers while lenders will be entitled to a share if the homeowner sells the house and also have the government share any losses on the modified mortgage.
As we have argued before at RGE Monitor, looking at the shortcomings of past government programs such as the Hope Now, Housing Retention and FDIC programs, the new program should be mandatory for lenders in order to increase participation. The government will also need to share the cost of modifying the loan, by matching the principal or the interest rate cut in a proportionate or less than proportionate amount. By guaranteeing the loans, the government will be the senior debt holder. The new interest rate should be based on the risk assessment of the borrower and all three parties – homeowner, lenders and servicers, and the government should share the cost of modification. However, determining the extent of principal reduction based on the true value of the house, and dealing with second lien mortgages and the diverging interests of mortgage servicers will be challenging.
Under the new guidelines for compensation issued by the Treasury, firms receiving federal aid will be subject to shareholder say on pay and will be required to cap executive compensation at $500,000 with any additional compensation given out in restricted stocks which can be cashed only after the government has been repaid or the bank has satisfied repayment obligations, and met lending and stability standards. Moreover, bonuses and compensation for other top executives will also be reduced. The Treasury requires disclosure of the compensation structure and strategy, and expenditure on luxury items.
While government intervention is warranted, the compensation reform does little to align risks with rewards. Large share of the compensation can and will still be given out in restricted stocks including compensation for several traders and funds managers who are not under the lenses of the current plan. Government measures also give a green signal to those who have already received large compensation and severance packages at the troubled banks. More importantly, the measures might act a disincentive in attracting credible executive talent to these troubled institutions in the future who can help deal with the bank losses and overhaul. Wall Street compensation is determined in a competitive market with CEOs joining a firm offering the most attractive pay packages and perks. Many banks are already reluctant to seek capital injection from the Treasury or are contemplating to payback past borrowings in order to avoid government scrutiny over their compensation packages.
To reduce excessive risk-taking in the short-run, compensation, bonuses and even severance packages should be based on the long-term performance of the employee relative to the risk undertaken with large part of the payments given out in restricted stocks that can be redeemed over a longer period of time.
Trojan horse in Senate bill: healthy care nationalization
And here's something in the plan that I bet you didn't know was a part of it.
This past weekend and Monday I took the time to read "The Obama Stimulus Plan".
I will leave politics to the side and will leave my interpretation from an Economic perspective aside. What I will NOT leave to the side is what is buried in "The Bill" from a health care standpoint. YOU NEED TO KNOW.....the "stimulus bill" is a Trojan Horse.....hidden in "this horse" is the legislation to NATIONALIZE HEALTH CARE."
So... Do I have your attention now? Here's a link to the story by Betsy McCaughey on Bloomberg...http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLzfDxfbwhzs
This past weekend and Monday I took the time to read "The Obama Stimulus Plan".
I will leave politics to the side and will leave my interpretation from an Economic perspective aside. What I will NOT leave to the side is what is buried in "The Bill" from a health care standpoint. YOU NEED TO KNOW.....the "stimulus bill" is a Trojan Horse.....hidden in "this horse" is the legislation to NATIONALIZE HEALTH CARE."
So... Do I have your attention now? Here's a link to the story by Betsy McCaughey on Bloomberg...http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLzfDxfbwhzs
Q4 Earnings
Q4 earnings: they made me a pessimist
Econoday Short Take 2/11/09
By Mark Pender, Senior Writer, Econoday
The fourth-quarter earnings season is still dragging on as companies, not surprisingly, are in no hurry to post their results. With two-thirds of the season in the books, data courtesy of Thomson Reuters show year-on-year profit growth for the S&P 500 down just over 41 percent. The quarter began with high expectations but has slid day by day since.
The graph below tracks S&P 500 profits over the past seven years. Companies posted consistent and often very strong profit growth until third-quarter 2007, one quarter ahead of the recession. Profits (blue bars) have contracted every quarter since the third quarter of 2007 and look to continue to contract based on the outlooks for the first and second quarters (outlined bars at right of graph).
There are countless factors offered to explain the movement of the stock market, including financial factors, economic factors, and sometimes even astrological factors. One factor that does track convincingly with the stock market is change in corporate profits. The graph below combines the above graph with a graph of year-on-year change in the S&P 500 index. Only twice, at the pivot of the business cycle, did the direction of stock market change not match up with directional change for profits. The degree of the changes are also matching tightly at a decline of 40 percent for stocks in the fourth quarter against the latest count of a drop of 41 percent for profits and a decline of 24 percent for stocks in the third quarter against a drop of 19 percent in profits. So far in the first quarter, the S&P 500 is at a year-on-year decline of 44 percent, a bit ahead of the 29 percent drop in the outlook for profits — a mismatch that anticipates further contraction in profits.
The outlook matters
I keep telling myself that analyst outlooks matter. But each quarter, year after year, analysts over-estimate corporate results by a mile. In their defense, analysts base their estimates on the company's estimates. Either way, optimism is the system, the system by which company outlooks are offered to the public and priced into the stock market.
Going into the earning season at the beginning of the month, analysts expected virtually no change in profits — no change vs. the current decline of 41 percent. The quarter before, analysts expected virtually no change for third-quarter profits which ended up sinking 19 percent. Their performance is not improving.
Analysts' outlook for the first quarter, which had been up 30 percent at this time last quarter, currently calls for a 29 percent contraction followed by a 25 percent contraction in the second quarter. If the usual overstatement applies, actual contraction may prove much worse.
The government's tally of corporate profits is very slow with the latest data available only for the third quarter. The graph below compares changes in the S&P 500 index (red line) with changes in corporate profits (blue line). The blue line has already peaked, at an annual rate of just over $1.5 trillion in third-quarter 2007. Profits for the third quarter 2008 were $1.3 trillion — a level that is certain to fall.
Bottom Line
If the first-quarter earnings season proves as bad as the current season, this time next quarter the red bars and lines of the S&P 500 index will likely be pointing downward once again. Keeping track of company news and tracking earnings are central to the understanding of the financial markets and the outlook for the economy.
powered by
Legal Notices © Copyright 2000 -
2009 Econoday, Inc.
Econoday Short Take 2/11/09
By Mark Pender, Senior Writer, Econoday
The fourth-quarter earnings season is still dragging on as companies, not surprisingly, are in no hurry to post their results. With two-thirds of the season in the books, data courtesy of Thomson Reuters show year-on-year profit growth for the S&P 500 down just over 41 percent. The quarter began with high expectations but has slid day by day since.
The graph below tracks S&P 500 profits over the past seven years. Companies posted consistent and often very strong profit growth until third-quarter 2007, one quarter ahead of the recession. Profits (blue bars) have contracted every quarter since the third quarter of 2007 and look to continue to contract based on the outlooks for the first and second quarters (outlined bars at right of graph).
There are countless factors offered to explain the movement of the stock market, including financial factors, economic factors, and sometimes even astrological factors. One factor that does track convincingly with the stock market is change in corporate profits. The graph below combines the above graph with a graph of year-on-year change in the S&P 500 index. Only twice, at the pivot of the business cycle, did the direction of stock market change not match up with directional change for profits. The degree of the changes are also matching tightly at a decline of 40 percent for stocks in the fourth quarter against the latest count of a drop of 41 percent for profits and a decline of 24 percent for stocks in the third quarter against a drop of 19 percent in profits. So far in the first quarter, the S&P 500 is at a year-on-year decline of 44 percent, a bit ahead of the 29 percent drop in the outlook for profits — a mismatch that anticipates further contraction in profits.
The outlook matters
I keep telling myself that analyst outlooks matter. But each quarter, year after year, analysts over-estimate corporate results by a mile. In their defense, analysts base their estimates on the company's estimates. Either way, optimism is the system, the system by which company outlooks are offered to the public and priced into the stock market.
Going into the earning season at the beginning of the month, analysts expected virtually no change in profits — no change vs. the current decline of 41 percent. The quarter before, analysts expected virtually no change for third-quarter profits which ended up sinking 19 percent. Their performance is not improving.
Analysts' outlook for the first quarter, which had been up 30 percent at this time last quarter, currently calls for a 29 percent contraction followed by a 25 percent contraction in the second quarter. If the usual overstatement applies, actual contraction may prove much worse.
The government's tally of corporate profits is very slow with the latest data available only for the third quarter. The graph below compares changes in the S&P 500 index (red line) with changes in corporate profits (blue line). The blue line has already peaked, at an annual rate of just over $1.5 trillion in third-quarter 2007. Profits for the third quarter 2008 were $1.3 trillion — a level that is certain to fall.
Bottom Line
If the first-quarter earnings season proves as bad as the current season, this time next quarter the red bars and lines of the S&P 500 index will likely be pointing downward once again. Keeping track of company news and tracking earnings are central to the understanding of the financial markets and the outlook for the economy.
powered by
Legal Notices © Copyright 2000 -
2009 Econoday, Inc.
Tuesday, February 10, 2009
IN THE SPIRIT OF TRANSPARENCY
DOW JONES NEWSWIRES
Treasury Secretary Timothy Geithner received nearly $435,000 in severancefrom his previous employer, the New York Federal Reserve, and Securities andExchange Commission Chairman
Mary Schapiro $7.2 million from the privateauthority she left to join the Obama administration, the Washington Postreported Tuesday on its Web site.
Geithner disclosed $434,668 in severance fromthe New York Fed, plus between $50,000 and $100,000 in unused vacation time andcomp days.
The SEC said Schapiro will receive $7.2 million from the FinancialIndustry Regulatory Authority, the self-regulatory group she headed. Schapiro also received between $750,000 and $1.5 million in deferred compensation fromDuke Energy Corp. (DUK) in cash and stock, and a payout of $675,033 in deferredcompensation from Kraft Foods Inc. (KFT), where she was a board member.
Attorney General Eric Holder Jr. received a severance of between $1 million to$5 million from his former law firm employer.
Full story athttp://www.washingtonpost.com/wp-dyn/content/article/2009/02/09/AR2009020903274html
Treasury Secretary Timothy Geithner received nearly $435,000 in severancefrom his previous employer, the New York Federal Reserve, and Securities andExchange Commission Chairman
Mary Schapiro $7.2 million from the privateauthority she left to join the Obama administration, the Washington Postreported Tuesday on its Web site.
Geithner disclosed $434,668 in severance fromthe New York Fed, plus between $50,000 and $100,000 in unused vacation time andcomp days.
The SEC said Schapiro will receive $7.2 million from the FinancialIndustry Regulatory Authority, the self-regulatory group she headed. Schapiro also received between $750,000 and $1.5 million in deferred compensation fromDuke Energy Corp. (DUK) in cash and stock, and a payout of $675,033 in deferredcompensation from Kraft Foods Inc. (KFT), where she was a board member.
Attorney General Eric Holder Jr. received a severance of between $1 million to$5 million from his former law firm employer.
Full story athttp://www.washingtonpost.com/wp-dyn/content/article/2009/02/09/AR2009020903274html
1ST IMPRESSION OF GEITHNER PLAN
I can sum this up in one word - underwhelmed.
Equity market reaction right now has the right read on this in my opinion.
The expanded TALF is the only good piece of information I like.
STILL waiting for details.
What a disappointment.
Equity market reaction right now has the right read on this in my opinion.
The expanded TALF is the only good piece of information I like.
STILL waiting for details.
What a disappointment.
Housing in Crisis: When Will Metro Markets Recover?
Moody's Economy.com Research reports as follows:
Despite the darkening national economic outlook and the weak conditions in the housing market, some positive signs give hope that housing is about to hit bottom. Housing in Crisis: When Will Metro Markets Recover?, a comprehensive new study, evaluates the near-term prospects for housing markets in a recessionary environment.
Key Findings:
House prices will stabilize by the end of this year.
The national Case-Shiller® house price index will decline by another 11% from the fourth quarter of last year for a total peak-to-trough decline of 36%.
By the end of this unprecedented downturn, house prices will have declined by double digits peak to trough in nearly 62% of the nation's 381 metro areas. In about 10% of metro areas, price declines will exceed 30%.
See the Table of Contents and the Executive Summary »
Despite the darkening national economic outlook and the weak conditions in the housing market, some positive signs give hope that housing is about to hit bottom. Housing in Crisis: When Will Metro Markets Recover?, a comprehensive new study, evaluates the near-term prospects for housing markets in a recessionary environment.
Key Findings:
House prices will stabilize by the end of this year.
The national Case-Shiller® house price index will decline by another 11% from the fourth quarter of last year for a total peak-to-trough decline of 36%.
By the end of this unprecedented downturn, house prices will have declined by double digits peak to trough in nearly 62% of the nation's 381 metro areas. In about 10% of metro areas, price declines will exceed 30%.
See the Table of Contents and the Executive Summary »
Nouriel Roubini: Anglo-Saxon Model Has Failed
Roubini: The Anglo-Saxon model of supervision and regulation of the financial system has failed. The supervisory system relied on self-regulation that, in effect, meant no regulation; on market discipline that doesn’t exist when there is euphoria and irrational exuberance; on internal risk management models that fail because - as a former chief executive of Citigroup put it - when the music is playing you gotta stand up and dance. All the pillars of Basel II have already failed even before being implemented
In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system. The current U.S. and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze
Click Here For Full Analysis
In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system. The current U.S. and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze
Click Here For Full Analysis
Waiting for Geithner/Godot
Details of the TARP overhaul and details of the 2009 stimulus package will shape the day, and profit-taking may greet the actual news.
Just as existential an exercise as Waiting for Godot.
Just as existential an exercise as Waiting for Godot.
Market Reflections 2/9/2009
Markets held in mostly narrow ranges awaiting the outcome of the 2009 stimulus package and details of the Treasury's plan to overhaul TARP. The day did see the resignation of the SEC's enforcement chief and a civil agreement with Bernard Madoff. The criminal case against the suspected Ponzi giant, the giant who slipped by the SEC, is still open.
The Dow industrials slipped slightly on the day while Treasury yields were little changed. The pending stimulus news didn't help the value of the dollar which fell back 1-1/2 cents against the euro to end at $1.3016. Oil, benefiting from talk of OPEC quota compliance, is holding near $40. Benefiting from talk of post-stimulus inflation, gold is holding near $900, ending just under on the day.
The Dow industrials slipped slightly on the day while Treasury yields were little changed. The pending stimulus news didn't help the value of the dollar which fell back 1-1/2 cents against the euro to end at $1.3016. Oil, benefiting from talk of OPEC quota compliance, is holding near $40. Benefiting from talk of post-stimulus inflation, gold is holding near $900, ending just under on the day.
Monday, February 9, 2009
Fannie Mae to lower refinancing standards
Guaranteeing home loans issued to people with no proof of employment, bad credit scores, and almost no equity is what bankrupted Fannie Mae and Freddie Mac in the first place.
So of course, that's the "new" strategy the government is taking by lowering standards for re-financing loans. Washington might as well take our tax money and throw it on a bonfire.
So of course, that's the "new" strategy the government is taking by lowering standards for re-financing loans. Washington might as well take our tax money and throw it on a bonfire.
Race to the Arctic: The New Source of Oil and Gas?
U.S. Geological Survey suggests that the area north of the Arctic Circle has an estimated 1,670 trillion cubic feet of natural gas – 2/3 the proved gas reserves of the entire Middle East – and 90 billion barrels of oil. Most of the gas is concentrated in Russian territory
Wood Mackenzie suggested that Arctic basins, hold 233bn of discovered oil and gas and another 166bn that has yet to be found, the vast majority of it gas
Wood Mackenzie suggested that Arctic basins, hold 233bn of discovered oil and gas and another 166bn that has yet to be found, the vast majority of it gas
Saturday, February 7, 2009
Market performance figures
Market Levels
Friday* Last Week Dec. 31 2008 1 Yr Ago
Dow Jones Ind. Avg. 8,255 8,001 8,776 12,247
S&P 500 864 826 903 1,337
Nasdaq 100 1,580 1,476 1,577 2,293
The Russell 2000 464 444 499 703
DJ STOXX Europe 199 191 198 314
Nikkei Index 8,077 7,994 8,860 13,207
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 4.50%
2-Year U.S. Treasury Yield 0.97% 0.95% 0.77% 2.05%
10-Year U.S. Treasury Yield 2.95% 2.84% 2.21% 3.76%
U.S.$ / Euro 1.29 1.28 1.40 1.45
U.S.$ / British Pound 1.48 1.45 1.46 1.94
Yen / U.S.$ 91.88 89.92 90.64 107.49
Gold ($/oz) $913.30 $927.85 $882.05 $910.51
Oil $39.20 $41.68 $44.60 $88.11
*Levels as of 10:45 a.m. PST
MARKET RETURNS
Year to Date (1/1/09 - 2/6/09)
Dow Jones Industrial Avg -5.49%
S&P 500 -4.38%
NASDAQ 0.18%
Russell 2000 -7.06%
MSCI World Index -7.31%
DJ STOXX Europe 600 (euro) 0.15%
Year to Date (1/1/00 - 2/5/09)
90 Day T-Bill -0.01%
2-Year Treasury -0.18%
10-Year Treasury -4.97%
ML High Yield Index 5.97%
JP Morgan EMBI Global Diversified 0.62%
JP Morgan Global Hedged -1.59%
Friday* Last Week Dec. 31 2008 1 Yr Ago
Dow Jones Ind. Avg. 8,255 8,001 8,776 12,247
S&P 500 864 826 903 1,337
Nasdaq 100 1,580 1,476 1,577 2,293
The Russell 2000 464 444 499 703
DJ STOXX Europe 199 191 198 314
Nikkei Index 8,077 7,994 8,860 13,207
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 4.50%
2-Year U.S. Treasury Yield 0.97% 0.95% 0.77% 2.05%
10-Year U.S. Treasury Yield 2.95% 2.84% 2.21% 3.76%
U.S.$ / Euro 1.29 1.28 1.40 1.45
U.S.$ / British Pound 1.48 1.45 1.46 1.94
Yen / U.S.$ 91.88 89.92 90.64 107.49
Gold ($/oz) $913.30 $927.85 $882.05 $910.51
Oil $39.20 $41.68 $44.60 $88.11
*Levels as of 10:45 a.m. PST
MARKET RETURNS
Year to Date (1/1/09 - 2/6/09)
Dow Jones Industrial Avg -5.49%
S&P 500 -4.38%
NASDAQ 0.18%
Russell 2000 -7.06%
MSCI World Index -7.31%
DJ STOXX Europe 600 (euro) 0.15%
Year to Date (1/1/00 - 2/5/09)
90 Day T-Bill -0.01%
2-Year Treasury -0.18%
10-Year Treasury -4.97%
ML High Yield Index 5.97%
JP Morgan EMBI Global Diversified 0.62%
JP Morgan Global Hedged -1.59%
Market Reflections 2/6/2009
Yet another catastrophic employment report heightened the pitch of concern over the economic outlook and is forcing the immediate response of policy makers. Hopes that the government will rescue the banking system and quickly stimulate the economy shifted the focus away from the troubles of the present and toward the future, pushing the Dow industrials 2.7 percent higher and back near 8,300. The S&P 500 also gained 2.7 percent to end at 868.60.
The movement away from safety pulled money out of Treasuries and the dollar. Treasury yields are at 0.27 percent for the 3-month bill and 3.69 percent for the 30-year bond. The dollar fell back a cent against the euro to $1.2934.
Oil isn't reacting to the stock market as it used to. The March contract held within its tight range ending just over $40 once again. Money stayed in gold which was little changed at $913.80.
The movement away from safety pulled money out of Treasuries and the dollar. Treasury yields are at 0.27 percent for the 3-month bill and 3.69 percent for the 30-year bond. The dollar fell back a cent against the euro to $1.2934.
Oil isn't reacting to the stock market as it used to. The March contract held within its tight range ending just over $40 once again. Money stayed in gold which was little changed at $913.80.
Friday, February 6, 2009
Auto bankruptcy is imminent?
Reuters reports the US government has retained two law cos with extensivebankruptcy experience and the investment bank Rothschild to advise officialson the taxpayer-backed restructuring of General Motors and Chrysler, a person with direct knowledge of the work said. New York law company Cadwalader, Wickersham& Taft was hired by the US Treasury last month and will consider a range ofpossibilities for the struggling automakers including the prospect of abankruptcy funded by the US government, the person said. Cadwalader is joinedby law co Sonnenschein, Nath & Rosenthal and Rothschild in working with USofficials as they prepare to review turnaround plans being readied by the twostruggling automakers, the person said. A spokeswoman for Sonnenschein in LosAngeles confirmed that the co had been engaged to advise Treasury on "ongoingmatters related to the 2008-2009 developments within the US automobile industry."
Face it, the auto industry in the USA is BANKRUPT, INSOLVENT and unrescuable. It is criminal for our government (read Congress) to billios of my and your money into this debacle.
$25 BILLION given to auto companies with great fanfare.... and behind the petticoat curtain the government hires a bankruptcy advisor!!!!
Stop this theft of our future well being now!
Face it, the auto industry in the USA is BANKRUPT, INSOLVENT and unrescuable. It is criminal for our government (read Congress) to billios of my and your money into this debacle.
$25 BILLION given to auto companies with great fanfare.... and behind the petticoat curtain the government hires a bankruptcy advisor!!!!
Stop this theft of our future well being now!
When the "Stimulus/Spending" fails: what then?
Could it be that we have now moved from a recession to a depression? Bill Bonner, thinks so...
He was also the first to put in writing the thoughts about the U.S. following Japan's decade of funk, with his book Financial Reckoning Day, that was published about 6 years ago! So... I stop to listen to what he has to say... I don't always agree, but I sure do listen, for his track record is good... Recall, he also coined the "Trade of the Decade" at the turn of the millennium... "sell the DOW, and buy Gold on the dips"... That's worked out quite nicely, eh?
Courtesy of Bill Bonner: a scenario to think about: full story here: (www.dailyreckoning.com)
"In a recession, the basic plan or formula for the economy is still valid.The economy just needs a little time...and maybe a little monetary boost...before it continues growing. Typically, inventories are sold down...so a new burst of production can begin.
But in a depression, the problems are structural.
One way of understanding this is just to look at balance sheets. Whether you are a business or a family, you can only afford so much debt. When you get too much, you have stop and pay it down. And when it becomes so great you can't pay if off - because you don't have enough income - you have to declare bankruptcy. A depression is when a whole economy declares bankruptcy...or should. Because it can't pay its debts. Businesses, for example, have been built for a level of demand that no longer exists. It is not a question of waiting a few months. By the time consumers are ready to buy again, the whole economy will have moved on. Imagine, for example, a guy who built a nationwide chain of stores just to sell ipods to teenagers. The business may have been a great success - for a while. And he took out huge loans so he could expand...and take advantage of the demand. But then comes a depression. He says to himself: 'I'll just get some more financing...and wait it out.' But who's going to lend to him? By the time the kids begin buying again, ipods will be like vinyl LPs. His business is history. His lenders have lost money. The loans should be written off and the business should be destroyed, not mummified and preserved.
A depression is when the whole economy changes its business plan, in other words. And that takes time...and creative destruction.
How much time? Well, in the United States alone there is about $6 trillion too much private debt...$1 trillion too much output capacity...and millions of "excess" workers. How long will it take to retrain, retool, and re-absorb these excesses?
We don't know. The last depression took about 20 years...and a major war (talk about creative destruction!) Then, the United States was making the structural shift from a Japan-like capital investment-led economy...to a post-WWII consumer-led economy."
Sheesh!
He was also the first to put in writing the thoughts about the U.S. following Japan's decade of funk, with his book Financial Reckoning Day, that was published about 6 years ago! So... I stop to listen to what he has to say... I don't always agree, but I sure do listen, for his track record is good... Recall, he also coined the "Trade of the Decade" at the turn of the millennium... "sell the DOW, and buy Gold on the dips"... That's worked out quite nicely, eh?
Courtesy of Bill Bonner: a scenario to think about: full story here: (www.dailyreckoning.com)
"In a recession, the basic plan or formula for the economy is still valid.The economy just needs a little time...and maybe a little monetary boost...before it continues growing. Typically, inventories are sold down...so a new burst of production can begin.
But in a depression, the problems are structural.
One way of understanding this is just to look at balance sheets. Whether you are a business or a family, you can only afford so much debt. When you get too much, you have stop and pay it down. And when it becomes so great you can't pay if off - because you don't have enough income - you have to declare bankruptcy. A depression is when a whole economy declares bankruptcy...or should. Because it can't pay its debts. Businesses, for example, have been built for a level of demand that no longer exists. It is not a question of waiting a few months. By the time consumers are ready to buy again, the whole economy will have moved on. Imagine, for example, a guy who built a nationwide chain of stores just to sell ipods to teenagers. The business may have been a great success - for a while. And he took out huge loans so he could expand...and take advantage of the demand. But then comes a depression. He says to himself: 'I'll just get some more financing...and wait it out.' But who's going to lend to him? By the time the kids begin buying again, ipods will be like vinyl LPs. His business is history. His lenders have lost money. The loans should be written off and the business should be destroyed, not mummified and preserved.
A depression is when the whole economy changes its business plan, in other words. And that takes time...and creative destruction.
How much time? Well, in the United States alone there is about $6 trillion too much private debt...$1 trillion too much output capacity...and millions of "excess" workers. How long will it take to retrain, retool, and re-absorb these excesses?
We don't know. The last depression took about 20 years...and a major war (talk about creative destruction!) Then, the United States was making the structural shift from a Japan-like capital investment-led economy...to a post-WWII consumer-led economy."
Sheesh!
Jobs 7.6% unemployment
The US economy lost more than half a million jobs in January for the third month running, figures showed on Friday.
The number of jobs lost last month reached 598,000, while the unemployment rate - 4.4 per cent before the credit crisis - jumped to 7.6 per cent in January, its highest level since 1992.
Economists had expected non-farm payrolls to drop by 525,000 and the unemployment rate to rise to 7.5 per cent, up from 7.2 per cent the month before. Employment has declined by 3.6m since the recession began in December 2007, and half of this decline occurred during the last three months, according to the Bureau of Labor Statistics
If you think that aTrillion dollar pork spending bill that a congress with an 8% approval rating (can it get any lower!) is trying to force down the throats of all of us and our unborn grandchildren, will change these statistics...you are breathing from the same bong that Phelps did.
Our president is being at least disingenuous if not startlingly naieve if he continues to push nonsense of the kind that seems to promise 4million jobs to be created from this unbelievable theft of this nations future.
Last night he pulled the petticoat off the pig and stopped calling this current spending boondoggle a stimulus and revealed it for what it is: a "pork spending" bill.
Whatever happened to "timely, targeted and temporary" that Pelosi et al crammed into the national psyche this time last year?
The political lies are well noted by the electorate.
There may be a majority of Democratic votes in Congress, but that is all it is. A majority. It is NOT a mandate from every citizen of this still great country to continue politics as usual and spend money this nation does not have. This path will lead to the ruin of the lifestyle we know, for us and for generations to come.
All this spending has to be funded. We will have to borrow unbelievably large amounts of money from anyone who will lend! At ever higher rates of interest.
The laws of economics cannot be repealed by our congress. King Canute tried that too.
If you remember inflation at 21% and Treasury interest rates at 12% or higher (remember the ruin Jimmy Carter brought to us?) hold your britches: what is to come will make us look like a banana republic or worse, like Argentina!
Revisit 21% inflation rates or higher? Very likely and as soon as 2010/2011.
Unemployment above 10%? as soon as this very year!!
Challenge Pelosi, Reid, Obama et al to stand by their responsible dogma: Targeted, timely and temporary and Mr Obama, get rid of earmarks, all of them, now . This is the moment to prove your greatness or tarnish you image forever.
The number of jobs lost last month reached 598,000, while the unemployment rate - 4.4 per cent before the credit crisis - jumped to 7.6 per cent in January, its highest level since 1992.
Economists had expected non-farm payrolls to drop by 525,000 and the unemployment rate to rise to 7.5 per cent, up from 7.2 per cent the month before. Employment has declined by 3.6m since the recession began in December 2007, and half of this decline occurred during the last three months, according to the Bureau of Labor Statistics
If you think that aTrillion dollar pork spending bill that a congress with an 8% approval rating (can it get any lower!) is trying to force down the throats of all of us and our unborn grandchildren, will change these statistics...you are breathing from the same bong that Phelps did.
Our president is being at least disingenuous if not startlingly naieve if he continues to push nonsense of the kind that seems to promise 4million jobs to be created from this unbelievable theft of this nations future.
Last night he pulled the petticoat off the pig and stopped calling this current spending boondoggle a stimulus and revealed it for what it is: a "pork spending" bill.
Whatever happened to "timely, targeted and temporary" that Pelosi et al crammed into the national psyche this time last year?
The political lies are well noted by the electorate.
There may be a majority of Democratic votes in Congress, but that is all it is. A majority. It is NOT a mandate from every citizen of this still great country to continue politics as usual and spend money this nation does not have. This path will lead to the ruin of the lifestyle we know, for us and for generations to come.
All this spending has to be funded. We will have to borrow unbelievably large amounts of money from anyone who will lend! At ever higher rates of interest.
The laws of economics cannot be repealed by our congress. King Canute tried that too.
If you remember inflation at 21% and Treasury interest rates at 12% or higher (remember the ruin Jimmy Carter brought to us?) hold your britches: what is to come will make us look like a banana republic or worse, like Argentina!
Revisit 21% inflation rates or higher? Very likely and as soon as 2010/2011.
Unemployment above 10%? as soon as this very year!!
Challenge Pelosi, Reid, Obama et al to stand by their responsible dogma: Targeted, timely and temporary and Mr Obama, get rid of earmarks, all of them, now . This is the moment to prove your greatness or tarnish you image forever.
Market Reflections 2/5/2009
Economic slowing, at least at first, has usually been associated with slowing productivity as the labor force produces less. But not this time. Despite a drop in output, fourth-quarter productivity proved strong and is raising talk that firms have slashed their workforces with unusual speed. The day's jobless claims data show acute contraction in the labor market and point, as do a host of other indications, to another month of severe losses in tomorrow's jobs report.
Talk in Washington is building that the new administration will roll back mark-to-market accounting rules that have forced banks to value assets at their current value. The talk gave a boost to bank shares and reversed early losses in the stock market. The Dow industrials rose 1.3 percent to end back over 8,000 at 8,063.
Other economic data included another run of very weak chain store reports, reports that point to another very weak retail sales report. The weak economic data pulled money into the Treasury market despite the gain in stocks. Yields were down 1 to 2 basis points across the curve with the 2-year ending at 0.97 percent and the 30-year at 3.64 percent. The dollar firmed slightly to end at $1.2814 against the euro. Oil remains steady, holding just over $40 while gold moved further over $900, ending at $917.80.
Talk in Washington is building that the new administration will roll back mark-to-market accounting rules that have forced banks to value assets at their current value. The talk gave a boost to bank shares and reversed early losses in the stock market. The Dow industrials rose 1.3 percent to end back over 8,000 at 8,063.
Other economic data included another run of very weak chain store reports, reports that point to another very weak retail sales report. The weak economic data pulled money into the Treasury market despite the gain in stocks. Yields were down 1 to 2 basis points across the curve with the 2-year ending at 0.97 percent and the 30-year at 3.64 percent. The dollar firmed slightly to end at $1.2814 against the euro. Oil remains steady, holding just over $40 while gold moved further over $900, ending at $917.80.
Thursday, February 5, 2009
Bank of America bankruptcy?
US Senator Dodd doesn't see nationalization of Bank of America-DJ
then again he didn't see the economic train wreck coming either.
then again he didn't see the economic train wreck coming either.
The U.S. economy is screwed
The Old Guys Say “Sell!”
What if I told you that the oldest technical indicator in the book – a system of signals established by the best-known name in the financial business – was telling you to sell blue-chip stocks immediately?
First, a little back-story. Okay, a good bit of back story, but bear with me and I promise to get to that sell signal (and what you can do about it) in the end.
Back in the days when beards, tails and top hats were de rigueur for gentleman in the financial biz, Charles Dow wrote a series of 255 editorials for his quaint new paper, The Wall Street Journal.
After his death, William P. Hamilton, Robert Rhea and E. George Schaefer took his various cogitations, stray comments and bits of sentiment, and hammered them into a cohesive “Theory of Everything.”
The Six Commandments
This eponymous trading system had six primary tenets:
1: The market has three movementsMajor trends last one or more years, secondary reactions retrace the major trend over some 10 to 90 days, and short swings oscillate within reactions over either hours or days, depending on whom you ask.
2: Market trends have three phasesAccumulation (when insiders are buying a into a good deal), public participation (when every Tom, Dick and Harry gets involved), and distribution (when the wise guys sell off their shares for profit).
3: The stock market discounts all news Also known as “the efficient market theory,” there are three flaws to this idea of a level playing field. The first presumes that all companies are completely transparent and all information is universally available. The second presumes that this information is universally understandable. The third is that investors will always act in their own best interest.
(Now things get interesting: While the first tenet is technical in nature, relating to the time it takes for the market to uptake ideas, and the oscillating reactions to that uptake, the second two are really philosophical, relating to our presumed intelligence and sanity. But with item 4, Dow et al. resume contemplating empirical data.)
4: Stock market averages must confirm each other Back in Chuck Dow’s time, our buying population had spread from coast to coast. Industrial centers were cropping up all over the darn place, and raw materials were even further astray.
It was all well and good to set up a saddler in St. Louis. If you want to make money, you have to be able to get cowhide at a decent price from Montana and then profitably ship your saddles to riders in Philadelphia.
So the gist of this rule is that an increase in manufacturing isn’t a trend until it is confirmed by an increase in shipping. The same holds true in inverse: It ain’t a genuine bite-you-where-it-hurts bear market until the steam ships stay in port and the railroads stop rolling.
5: Trends are confirmed by volumeThis one’s easy: Trends aren’t hiccoughs, twitches or momentary indigestion. They require the full force and faith of millions of investors putting their money where it matters.
6: Trends exist until definitive signals prove that they have ended Finally, Dow lived in an era where science was remaking the world. Because he trusted the tangible over the ephemeral, he tried to link the concept of physical momentum to the psychology of crowd behavior. To wit: “A market in motion tends to remain in motion.”
So What Happens Now?
Let’s set rules 2 and 3 aside for a moment.
They are, as I said, more philosophy than science, and depend on a certain level of rationality and honesty that is in short supply these days.
I think that we can all agree that the requirements of rules 1 and 5 for a genuine bear trend have been satisfied beyond a shadow of doubt.
The question at hand is: “What happens now?”
Will Washington suddenly uncover some unfound well of competence, and drag our collective behinds back from the brink? Or are we about to tip into another yearlong round of bloody sell offs?
Bad News and Worse
I could point out the worst GDP reading in a quarter century (except I think I already have several times over the past few weeks). I could read you chapter and verse on current unemployment (7.2% according to the government, already cresting 12% according to some more “inclusive” calculations).
I could quote no less a luminary than British Prime Minister Gordon Brown, who confessed in the House of Commons that we are truly mired in a great depression akin to the 1930s. (The apparatchiks at #10 Downing Street are desperately trying to retract the statement, but I’m afraid that this particular cat is out of the bag, through the door, and out of sight down the street already.)
Or I could simply go back to Charles Dow’s tenet 4: “The Transports must confirm the Industrials.”
The Facts of the Matter
If you look at the Dow Jones Industrial Average for the past few days, you can’t help but see the fact that last Monday’s low of 7867.37 beat the previous low of 7909.03 set on Jan. 23.
If you look to the Dow Transports’ chart you can see consecutive lower lows of 2926.66 on Jan. 27 and 2865.58 on Feb. 2.
The Only Sane Solution
The trend is already in place.
The counter-reaction is ending.
The next leg down has been signaled and confirmed.
The only protective tactic that makes any sense is to buy puts against both the Industrials and Transports
What if I told you that the oldest technical indicator in the book – a system of signals established by the best-known name in the financial business – was telling you to sell blue-chip stocks immediately?
First, a little back-story. Okay, a good bit of back story, but bear with me and I promise to get to that sell signal (and what you can do about it) in the end.
Back in the days when beards, tails and top hats were de rigueur for gentleman in the financial biz, Charles Dow wrote a series of 255 editorials for his quaint new paper, The Wall Street Journal.
After his death, William P. Hamilton, Robert Rhea and E. George Schaefer took his various cogitations, stray comments and bits of sentiment, and hammered them into a cohesive “Theory of Everything.”
The Six Commandments
This eponymous trading system had six primary tenets:
1: The market has three movementsMajor trends last one or more years, secondary reactions retrace the major trend over some 10 to 90 days, and short swings oscillate within reactions over either hours or days, depending on whom you ask.
2: Market trends have three phasesAccumulation (when insiders are buying a into a good deal), public participation (when every Tom, Dick and Harry gets involved), and distribution (when the wise guys sell off their shares for profit).
3: The stock market discounts all news Also known as “the efficient market theory,” there are three flaws to this idea of a level playing field. The first presumes that all companies are completely transparent and all information is universally available. The second presumes that this information is universally understandable. The third is that investors will always act in their own best interest.
(Now things get interesting: While the first tenet is technical in nature, relating to the time it takes for the market to uptake ideas, and the oscillating reactions to that uptake, the second two are really philosophical, relating to our presumed intelligence and sanity. But with item 4, Dow et al. resume contemplating empirical data.)
4: Stock market averages must confirm each other Back in Chuck Dow’s time, our buying population had spread from coast to coast. Industrial centers were cropping up all over the darn place, and raw materials were even further astray.
It was all well and good to set up a saddler in St. Louis. If you want to make money, you have to be able to get cowhide at a decent price from Montana and then profitably ship your saddles to riders in Philadelphia.
So the gist of this rule is that an increase in manufacturing isn’t a trend until it is confirmed by an increase in shipping. The same holds true in inverse: It ain’t a genuine bite-you-where-it-hurts bear market until the steam ships stay in port and the railroads stop rolling.
5: Trends are confirmed by volumeThis one’s easy: Trends aren’t hiccoughs, twitches or momentary indigestion. They require the full force and faith of millions of investors putting their money where it matters.
6: Trends exist until definitive signals prove that they have ended Finally, Dow lived in an era where science was remaking the world. Because he trusted the tangible over the ephemeral, he tried to link the concept of physical momentum to the psychology of crowd behavior. To wit: “A market in motion tends to remain in motion.”
So What Happens Now?
Let’s set rules 2 and 3 aside for a moment.
They are, as I said, more philosophy than science, and depend on a certain level of rationality and honesty that is in short supply these days.
I think that we can all agree that the requirements of rules 1 and 5 for a genuine bear trend have been satisfied beyond a shadow of doubt.
The question at hand is: “What happens now?”
Will Washington suddenly uncover some unfound well of competence, and drag our collective behinds back from the brink? Or are we about to tip into another yearlong round of bloody sell offs?
Bad News and Worse
I could point out the worst GDP reading in a quarter century (except I think I already have several times over the past few weeks). I could read you chapter and verse on current unemployment (7.2% according to the government, already cresting 12% according to some more “inclusive” calculations).
I could quote no less a luminary than British Prime Minister Gordon Brown, who confessed in the House of Commons that we are truly mired in a great depression akin to the 1930s. (The apparatchiks at #10 Downing Street are desperately trying to retract the statement, but I’m afraid that this particular cat is out of the bag, through the door, and out of sight down the street already.)
Or I could simply go back to Charles Dow’s tenet 4: “The Transports must confirm the Industrials.”
The Facts of the Matter
If you look at the Dow Jones Industrial Average for the past few days, you can’t help but see the fact that last Monday’s low of 7867.37 beat the previous low of 7909.03 set on Jan. 23.
If you look to the Dow Transports’ chart you can see consecutive lower lows of 2926.66 on Jan. 27 and 2865.58 on Feb. 2.
The Only Sane Solution
The trend is already in place.
The counter-reaction is ending.
The next leg down has been signaled and confirmed.
The only protective tactic that makes any sense is to buy puts against both the Industrials and Transports
Summers warns of deflation threat
Warning that the U.S. does "not have time to wait," Lawrence Summers, director of the National Economic Council, said the country faces "a real risk" of slipping into deflation. He said it is urgent that Congress quickly adopt the economic stimulus proposed by President Barack Obama. Bloomberg.
I agree with the deflation threat, but again as I have highlighted this stimulus bill is an abomination!
I agree with the deflation threat, but again as I have highlighted this stimulus bill is an abomination!
Economic advisory panel: Volcker
Our old Fed Chairman, who is highly regarded for his inflation fighting in the early 80's, Paul Volcker, spoke last night and he's none too happy with the delay in starting the economic advisory group that the new President, Obama, set up. Obama picked Volcker, but Volcker isn't seeing any moving forward with this advisory panel. Volcker wants to help, and I believe we need his voice, but no one wants to "include" him... Hmmmm... I wonder what's going on there... Does the new administration believe they don't need Volcker's voice? I sure hope that's not true!
Chinese Manufacturing Contracting, Industrial Production Slowing As Global Demand Weakens
Based on PMI surveys, manufacturing, which accounts for 40% of China's GDP, has been in contraction for at least six months as external demand for Chinese goods falls and domestic demand is depressed by the decline in housing prices and construction sector
Industrial production growth is the slowest in a decade (5.7%) and electricity demand, a key proxy for output, contracted in Q4 2008. Chinese manufacturing continues to contract, albeit at a slightly less sharp pace since November 2008 and is now shedding record jobs
Industrial production growth is the slowest in a decade (5.7%) and electricity demand, a key proxy for output, contracted in Q4 2008. Chinese manufacturing continues to contract, albeit at a slightly less sharp pace since November 2008 and is now shedding record jobs
Fitch Downgrades Russia to ‘BBB’ with Negative Outlook
Fitch lowered Russia's debt ratings to ‘BBB’ and maintained its negative outlook as the impact of negative shocks from commodity prices and global capital markets, and the challenge to the Russian authorities in trying to manage the necessary macroeconomic policy adjustment weaken the economy
Market Reflections AM Thursday
Courtesy Briefing.com
09:00 ET Market is Closed : [BRIEFING.COM] S&P futures vs fair value: -7.40. Nasdaq futures vs fair value: -20.50. The major U.S. indices are heading toward a lower open. Europe's major indices are also under pressure as France's CAC is down 2.2%, Britain's FTSE is down 1.6%, and Germany's DAX is off 1.7% as European financials continue to trade with marked weakness. To help stimulate economic conditions England's central bank cut its key lending rate target to 1.00% from 1.50%. The European Central Bank stood pat on its target rate of 2.00%, as expected. Asian markets concluded Thursday with mixed results. The MSCI Asia-Pacific Index closed 0.6% lower amid weakness in tech stocks. Japan's Nikkei lost 1.1% Technology stocks were under pressure in the wake of a disappointing forecast from U.S.-based Cisco (CSCO), but shippers spiked after the key Baltic Dry Index climbed. Hong Kong's Hang Seng closed 0.9% higher. Top Lender ICBC and Bank of Communications were strong performers, while insurers also rallied. China Cosco, mainland's biggest shipping conglomerate, had a strong showing, as well. Personal computer maker Lenovo was was unable to join the advance after posting its first net loss in nearly three years. In mainland China, the Shanghai Composite closed 0.5% lower amid ongoing weakness in bank shares.
09:00 ET Market is Closed : [BRIEFING.COM] S&P futures vs fair value: -7.40. Nasdaq futures vs fair value: -20.50. The major U.S. indices are heading toward a lower open. Europe's major indices are also under pressure as France's CAC is down 2.2%, Britain's FTSE is down 1.6%, and Germany's DAX is off 1.7% as European financials continue to trade with marked weakness. To help stimulate economic conditions England's central bank cut its key lending rate target to 1.00% from 1.50%. The European Central Bank stood pat on its target rate of 2.00%, as expected. Asian markets concluded Thursday with mixed results. The MSCI Asia-Pacific Index closed 0.6% lower amid weakness in tech stocks. Japan's Nikkei lost 1.1% Technology stocks were under pressure in the wake of a disappointing forecast from U.S.-based Cisco (CSCO), but shippers spiked after the key Baltic Dry Index climbed. Hong Kong's Hang Seng closed 0.9% higher. Top Lender ICBC and Bank of Communications were strong performers, while insurers also rallied. China Cosco, mainland's biggest shipping conglomerate, had a strong showing, as well. Personal computer maker Lenovo was was unable to join the advance after posting its first net loss in nearly three years. In mainland China, the Shanghai Composite closed 0.5% lower amid ongoing weakness in bank shares.
Wednesday, February 4, 2009
Market Reflections 2/3/2009
Vehicle sales were extremely weak in January in news that pushes concern over auto makers to a new level of urgency. The results will raise talk of major bankruptcies.
The news on vehicles sales surprisingly did not affect the market, at least in Tuesday's session. Shares of GM and Ford were little changed. The Dow industrials posted a strong 1.8 percent gain. Many companies warning of trouble ahead, including Dow Chemical, Cummins Engine and homebuilder DR Horton, posted gains on the session.
What did give a boost to the market was a bounce in pending home sales which, together with last week's report on existing home sales, are raising talk that low mortgage rates and falling home prices are finally giving a boost to the housing sector. The pending home sales data along with the stock market's gain pulled money out of the Treasury market where yields jumped sharply, including an 18 basis point jump to 3.66 percent for the 30-year bond.
News of a labor agreement between refiners and refinery workers hit the wires at the market close. But the news was expected and isn't likely to move oil prices which have been little changed in recent sessions at just over $40. Gold ended little changed at just over $900. The dollar fell 1-1/2 cents against the euro to $1.3036.
The news on vehicles sales surprisingly did not affect the market, at least in Tuesday's session. Shares of GM and Ford were little changed. The Dow industrials posted a strong 1.8 percent gain. Many companies warning of trouble ahead, including Dow Chemical, Cummins Engine and homebuilder DR Horton, posted gains on the session.
What did give a boost to the market was a bounce in pending home sales which, together with last week's report on existing home sales, are raising talk that low mortgage rates and falling home prices are finally giving a boost to the housing sector. The pending home sales data along with the stock market's gain pulled money out of the Treasury market where yields jumped sharply, including an 18 basis point jump to 3.66 percent for the 30-year bond.
News of a labor agreement between refiners and refinery workers hit the wires at the market close. But the news was expected and isn't likely to move oil prices which have been little changed in recent sessions at just over $40. Gold ended little changed at just over $900. The dollar fell 1-1/2 cents against the euro to $1.3036.
Tuesday, February 3, 2009
Dont believe the housing industry economists
Thanks to plummeting prices, pending home sales jumped 6.3% in December, the National Association of Realtors reports.
The NAR’s median home price plummeted 15% in December, year over year, to $175,400… the steepest drop on record.
Almost hilariously, the NAR projects the 2009 median home price to be $198,100. That’s a 12% hike from today’s median. And in 2010, your home’s value will pop another 5%, to an average of $207,700. Seriously? Some people never learn:
“The broad trend over the coming year,” forecast Lawence Yun, the NAR chief economist, back in December 2007, “will be a gradual rise in existing home sales, but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007.” He predicted the median home price would rise to $218,300 last year… just a tiny bit off. Yun still leads the NAR economics unit.
The NAR’s median home price plummeted 15% in December, year over year, to $175,400… the steepest drop on record.
Almost hilariously, the NAR projects the 2009 median home price to be $198,100. That’s a 12% hike from today’s median. And in 2010, your home’s value will pop another 5%, to an average of $207,700. Seriously? Some people never learn:
“The broad trend over the coming year,” forecast Lawence Yun, the NAR chief economist, back in December 2007, “will be a gradual rise in existing home sales, but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007.” He predicted the median home price would rise to $218,300 last year… just a tiny bit off. Yun still leads the NAR economics unit.
Inflation? bond traders bet on it
Bond traders are making bets the inflation is coming to the U.S.
The yield on a 30-year bond has risen to 3.6% today, about 100bps higher than all-time lows set in late 2008. Might not seem like much, but it’s pretty breakneck for the bond world… economists polled by Bloomberg didn’t predict yields that high until 2010.
The yield on a 30-year bond has risen to 3.6% today, about 100bps higher than all-time lows set in late 2008. Might not seem like much, but it’s pretty breakneck for the bond world… economists polled by Bloomberg didn’t predict yields that high until 2010.
The Truth about investing: the Core Method it works very well
Consider what Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:
"Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, 'I don't want to play against those guys!'
Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared -- the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either."
That's a brutal and very honest observation. The institutions Ellis refers to are mutual funds, hedge funds, and program traders -- and all of their professional staff, mathematicians, and researchers. The pros are deploying every possible tool to give them whatever edge they can get. And even they can have a hard time, as most of them will testify to the difficulty of trading in 2008.
The Core Method relies on ferreting out the information on what the best of these institutions are buying from the morass of data on their holdings.
Most of this data is gleaned from public filings. Using that data is a terrible way to invest for the future. Thats what they were doing as much as a year ago in some cases.
The Core Method identifies the most successful institutional investors currently, and then searches news, websites and other media for information on the most current holdings.
Where there is a consensus amongst the best, we can identify the security and Invest like the Best sm
"Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, 'I don't want to play against those guys!'
Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared -- the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either."
That's a brutal and very honest observation. The institutions Ellis refers to are mutual funds, hedge funds, and program traders -- and all of their professional staff, mathematicians, and researchers. The pros are deploying every possible tool to give them whatever edge they can get. And even they can have a hard time, as most of them will testify to the difficulty of trading in 2008.
The Core Method relies on ferreting out the information on what the best of these institutions are buying from the morass of data on their holdings.
Most of this data is gleaned from public filings. Using that data is a terrible way to invest for the future. Thats what they were doing as much as a year ago in some cases.
The Core Method identifies the most successful institutional investors currently, and then searches news, websites and other media for information on the most current holdings.
Where there is a consensus amongst the best, we can identify the security and Invest like the Best sm
When will we know if Government Stimulation is working?
How will we know that the government stimulus is working to stabilize the markets?
Very simply, It ALL comes back to commodities; we will know that the financial markets will stabilize when…oil prices rise again.
The economic data that the media tend to focus on are often lagging indicators. Unemployment, GDP, corporate earnings and retail sales tell us what has already happened…not what is going to happen.
Very simply, It ALL comes back to commodities; we will know that the financial markets will stabilize when…oil prices rise again.
The economic data that the media tend to focus on are often lagging indicators. Unemployment, GDP, corporate earnings and retail sales tell us what has already happened…not what is going to happen.
Another argument for higher interest rates
This is a little technical, courtesy Niels Jensen , Managing Partner of Absolute Return Partners based in London, courtesy of John Mauldin. Thanks John, your work is much appreciated:
"So when we are told that the bailout cost, although large, is still manageable, it is only half the story.
The loss of tax revenue is another nail in the coffin and could lead to a dramatic – and unpredicted - rise in public debt. Have you heard any mention of that from your government?
At this point I need to introduce something as alien as the "flow-of-funds accounting identity"3:
Δ(G-T) = Δ(S – I) + ΔNFCI4
I rarely throw formulas at you for the simple reason that it scares many readers away. I urge you to stay with me for a bit longer, though, because this formula is critical in order to understand how the government response to the current crisis is likely to impact interest rates longer term. The equation states that any change in fiscal stimulus (Δ(G-T)) must equal the change in private sector net savings (Δ(S-I)) plus the change in net foreign capital inflows.
Translation: If our government stimulates the economy through public spending, as it is currently doing in spades, we must either save more or we have to rely on foreigners being prepared to invest in our country. There are no exceptions to this rule.
The key question, as our economic adviser Woody Brock points out, is what will cause this equation to hold true? It is quite simple. We will save more if we get paid more to do so (through higher interest rates) or if we are so scared of the future that we stop spending and start investing instead.
Foreign investors are no different. Now, with the trillions of dollars being spent around the world to shore up our financial system, the fear factor alone is not going to be enough. Higher – possibly much higher - interest rates will be required to ensure sufficient savings.
Obviously, there is another option at the government's disposal. The central bank can monetize some or all of the deficit by buying the bonds issued by the government. This line of action will keep Δ(G-T) down; hence the need for increased private savings (and/or capital inflows) drops accordingly. The problem with this approach, as an old Danish saying states, is that it is like wetting your pants to stay warm. Monetization executed on a big scale is highly inflationary in the long run, inevitably driving bond yields higher.
The good news is that we are very unlikely to loose control of inflation in the short run. The economy is simply too weak for that to happen.
"So when we are told that the bailout cost, although large, is still manageable, it is only half the story.
The loss of tax revenue is another nail in the coffin and could lead to a dramatic – and unpredicted - rise in public debt. Have you heard any mention of that from your government?
At this point I need to introduce something as alien as the "flow-of-funds accounting identity"3:
Δ(G-T) = Δ(S – I) + ΔNFCI4
I rarely throw formulas at you for the simple reason that it scares many readers away. I urge you to stay with me for a bit longer, though, because this formula is critical in order to understand how the government response to the current crisis is likely to impact interest rates longer term. The equation states that any change in fiscal stimulus (Δ(G-T)) must equal the change in private sector net savings (Δ(S-I)) plus the change in net foreign capital inflows.
Translation: If our government stimulates the economy through public spending, as it is currently doing in spades, we must either save more or we have to rely on foreigners being prepared to invest in our country. There are no exceptions to this rule.
The key question, as our economic adviser Woody Brock points out, is what will cause this equation to hold true? It is quite simple. We will save more if we get paid more to do so (through higher interest rates) or if we are so scared of the future that we stop spending and start investing instead.
Foreign investors are no different. Now, with the trillions of dollars being spent around the world to shore up our financial system, the fear factor alone is not going to be enough. Higher – possibly much higher - interest rates will be required to ensure sufficient savings.
Obviously, there is another option at the government's disposal. The central bank can monetize some or all of the deficit by buying the bonds issued by the government. This line of action will keep Δ(G-T) down; hence the need for increased private savings (and/or capital inflows) drops accordingly. The problem with this approach, as an old Danish saying states, is that it is like wetting your pants to stay warm. Monetization executed on a big scale is highly inflationary in the long run, inevitably driving bond yields higher.
The good news is that we are very unlikely to loose control of inflation in the short run. The economy is simply too weak for that to happen.
Dishonesty in labelling: The house "stimulus" package
Thought this rant pretty much sums up why the Congress has the lowest approval rating in history! Hope it wont drag down the approval rating of our President:
Courtesy Chuck Butler, President, Everbank World Markets.
OK, speaking of stimulus... I'm very upset with the "new and Improved" stimulus package. I'm sure you've figured this out already from previous rants. However, now... I'm even more ticked off! Oh, and the TV / Cable media are swallowing the propaganda from the White House, hook, line and sinker! Here's what I'm talking about folks...
The package has a "buy American" portion in the package... This is protectionism folks... And here's what gets my goat the most about protectionism at this stage of the recession... Fed Chairman, Big Ben Bernanke, is supposedly a "U.S. depression guru"... Well, Big Ben, wasn't the protectionism of the 1930's one of the reasons for the Great Depression? And is just so happens that now we've had "the cheater's" confirmation, calling China "currency manipulators", and that was followed up with the "buy American" portion of the package...
Look... There's nothing wrong with the slogan, Buy American... In fact, I think it would be a great thing to go around saying and doing, based on our manufacturing prowess... But, that's not what I'm talking about here... I'm talking about protectionism, at a time when the global economies are hurting and need to export to us... I'm really surprised that the currency traders haven't seen this and taken the dollar to the woodshed... But then, maybe they're getting the wool pulled over their eyes...
The other thing that ticks me off on the "new and improved" stimulus package is the fact that a very small piece of the $816 Billion (before the Senate adds their pork!), stimulus is for the infrastructure projects that have been billed as a "major piece" of this plan! HOGWASH! Now, I'm not going to sit here and pass judgment on all the "items" that are being allocated Billions of dollars, like $1 Billion to deal with the census problems, and $88 Billion to help move the Public Health Service into a new building next year, and $650 million for TV Converter boxes. The list of items like this goes on and on... And all worthy items, I'm sure... But none of these types of spending allocations, and I repeat this so you get the full force of this statement... None of these types of spending allocations are doing anything to create jobs. Oh... And just for those of you keeping score at home... $50 Billion is allocated to bricks and mortar... Infrastructure... Which has had "top billing" on this package... Well, the truth is out... I sure hope someone takes their lawmakers to the woodshed for this!
Courtesy Chuck Butler, President, Everbank World Markets.
OK, speaking of stimulus... I'm very upset with the "new and Improved" stimulus package. I'm sure you've figured this out already from previous rants. However, now... I'm even more ticked off! Oh, and the TV / Cable media are swallowing the propaganda from the White House, hook, line and sinker! Here's what I'm talking about folks...
The package has a "buy American" portion in the package... This is protectionism folks... And here's what gets my goat the most about protectionism at this stage of the recession... Fed Chairman, Big Ben Bernanke, is supposedly a "U.S. depression guru"... Well, Big Ben, wasn't the protectionism of the 1930's one of the reasons for the Great Depression? And is just so happens that now we've had "the cheater's" confirmation, calling China "currency manipulators", and that was followed up with the "buy American" portion of the package...
Look... There's nothing wrong with the slogan, Buy American... In fact, I think it would be a great thing to go around saying and doing, based on our manufacturing prowess... But, that's not what I'm talking about here... I'm talking about protectionism, at a time when the global economies are hurting and need to export to us... I'm really surprised that the currency traders haven't seen this and taken the dollar to the woodshed... But then, maybe they're getting the wool pulled over their eyes...
The other thing that ticks me off on the "new and improved" stimulus package is the fact that a very small piece of the $816 Billion (before the Senate adds their pork!), stimulus is for the infrastructure projects that have been billed as a "major piece" of this plan! HOGWASH! Now, I'm not going to sit here and pass judgment on all the "items" that are being allocated Billions of dollars, like $1 Billion to deal with the census problems, and $88 Billion to help move the Public Health Service into a new building next year, and $650 million for TV Converter boxes. The list of items like this goes on and on... And all worthy items, I'm sure... But none of these types of spending allocations, and I repeat this so you get the full force of this statement... None of these types of spending allocations are doing anything to create jobs. Oh... And just for those of you keeping score at home... $50 Billion is allocated to bricks and mortar... Infrastructure... Which has had "top billing" on this package... Well, the truth is out... I sure hope someone takes their lawmakers to the woodshed for this!
China: money fleeing,economy declines
Beware what you wish for Schumer et al. What happens when this situation changes?
China's money in full flight to foreign refuges: The flow of capital into China has reversed. Money is going out as the nation's growth rate plummets, with experts estimating that as much as $240 billion left during last year's fourth quarter. Chinese investors are sending their money out of the country; the foreign affiliates of Chinese companies are parking their money elsewhere; and foreign investors are increasingly pulling their money out.
A senior Chinese government official said 20 million migrant workers have lost their jobs because of the economic crisis, a figure that is two to three times higher than what the government forecast. Chinese Premier Wen Jiabao assured an audience in London that the government will "take forceful steps" to prevent the nation's growth rate from falling significantly below 8%.
Bloomberg
China's money in full flight to foreign refuges: The flow of capital into China has reversed. Money is going out as the nation's growth rate plummets, with experts estimating that as much as $240 billion left during last year's fourth quarter. Chinese investors are sending their money out of the country; the foreign affiliates of Chinese companies are parking their money elsewhere; and foreign investors are increasingly pulling their money out.
A senior Chinese government official said 20 million migrant workers have lost their jobs because of the economic crisis, a figure that is two to three times higher than what the government forecast. Chinese Premier Wen Jiabao assured an audience in London that the government will "take forceful steps" to prevent the nation's growth rate from falling significantly below 8%.
Bloomberg
Higher interst rates are inevitable!
As things currently stand, the government and the Fed may take any steps they want to stabilize the economy, no matter how much these steps cost.
Now, the government is like a fat schoolboy taking candies from a well-dressed stranger. It has spent $8.5 trillion of future taxpayers' and foreign creditors' money guaranteeing debt and bailing out failed companies. But the government doesn't have its own money to pay for these remedies. So it borrows and inflates.
Analyst Jim Bianco's research shows the government's remedies have now cost America more than World War II. The Fed is expanding the money supply at a current rate of 151% a year... and in the last three months, the Treasury borrowed $485 billion. It has never borrowed this much in 12 months.
In 2009, the government will run the world's first trillion-dollar deficit.In 2010 or 2011 – when the Chinese arrangement ends – the Bond Market Vigilantes will return. Watch gold for the signal.
Gold is a much smaller market than the bond market, so it's more nimble. When gold makes a new high above 1,050, you should immediately start looking for shelter. It means the Chinese arrangement is winding down and the Vigilantes are coming.
The Vigilantes will run interest rates up by at least 10%.
They will force the U.S. economy to deal with its debt problem, the root of all our troubles today. No more bailouts, no more government guarantees, no more expensive spending programs, and no more printing money. This is what the situation was like in the early 1980s. It was chaos, but those who prepared ahead of time made a fortune.
This time around, while the vigilantes restore balance, you should own only gold, cash, and short-term money-market instruments. In the meantime, you should use the stability to earn as much income as you can by selling options against blue-chip stocks and holding high-yield bonds and other income investments.
These investments prosper when there are no Bond Market Vigilantes around.
Now, the government is like a fat schoolboy taking candies from a well-dressed stranger. It has spent $8.5 trillion of future taxpayers' and foreign creditors' money guaranteeing debt and bailing out failed companies. But the government doesn't have its own money to pay for these remedies. So it borrows and inflates.
Analyst Jim Bianco's research shows the government's remedies have now cost America more than World War II. The Fed is expanding the money supply at a current rate of 151% a year... and in the last three months, the Treasury borrowed $485 billion. It has never borrowed this much in 12 months.
In 2009, the government will run the world's first trillion-dollar deficit.In 2010 or 2011 – when the Chinese arrangement ends – the Bond Market Vigilantes will return. Watch gold for the signal.
Gold is a much smaller market than the bond market, so it's more nimble. When gold makes a new high above 1,050, you should immediately start looking for shelter. It means the Chinese arrangement is winding down and the Vigilantes are coming.
The Vigilantes will run interest rates up by at least 10%.
They will force the U.S. economy to deal with its debt problem, the root of all our troubles today. No more bailouts, no more government guarantees, no more expensive spending programs, and no more printing money. This is what the situation was like in the early 1980s. It was chaos, but those who prepared ahead of time made a fortune.
This time around, while the vigilantes restore balance, you should own only gold, cash, and short-term money-market instruments. In the meantime, you should use the stability to earn as much income as you can by selling options against blue-chip stocks and holding high-yield bonds and other income investments.
These investments prosper when there are no Bond Market Vigilantes around.
Banking system still on life support
As expected The Federal Reserve on Tuesday announced the extension through October 30, 2009, of its existing liquidity programs that were scheduled to expire on April 30, 2009. The Board of Governors approved the extension through October 30 of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The FOMC also took action to extend the TSLF, which is established under the joint authority of the Board and the FOMC.
In addition, to address continued pressures in global U.S. dollar funding markets, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks have been extended to October 30. This extension currently applies to the swap lines between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank. The Bank of Japan will consider the extension at its next Monetary Policy Meeting. The Federal Reserve action to extend the swap lines was taken by the Federal Open Market Committee.
The current expiration date for the Term Asset-Backed Securities Loan Facility (TALF) remains December 31, 2009. Other Federal Reserve liquidity facilities, such as the Term Auction Facility (TAF), do not have a fixed expiration date.
In addition, to address continued pressures in global U.S. dollar funding markets, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks have been extended to October 30. This extension currently applies to the swap lines between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank. The Bank of Japan will consider the extension at its next Monetary Policy Meeting. The Federal Reserve action to extend the swap lines was taken by the Federal Open Market Committee.
The current expiration date for the Term Asset-Backed Securities Loan Facility (TALF) remains December 31, 2009. Other Federal Reserve liquidity facilities, such as the Term Auction Facility (TAF), do not have a fixed expiration date.
Market Reflections 2/2/2009
Economic data included another rise in the savings rate, a rise that reflects concern over jobs and one that is chocking off consumer spending. Construction spending on housing continues to fall while spending on commercial and government projects is now on the decline. ISM data on the manufacturing sector showed slowing rates of contraction but nevertheless point to six months of remaining contraction and a full year of contraction for factory jobs. Company news included another run of layoffs, this one led by retailer Macy's.
approach of Friday's jobs report, one that is expected to show another month of giant losses, kept markets quiet. The Dow industrials fell 0.8 percent while the dollar gave back 1/2 cent of its recent gains against the euro to end at $1.2840. There was a moderate safe-haven bid for long term Treasuries with the 30-year yield down 14 basis points to 3.47 percent.
The risk of a refinery strike seems remote, judging at least by oil prices which slipped 3 percent to $40.37. Gold gave back 3% of its recent gains to end at $903.80.
approach of Friday's jobs report, one that is expected to show another month of giant losses, kept markets quiet. The Dow industrials fell 0.8 percent while the dollar gave back 1/2 cent of its recent gains against the euro to end at $1.2840. There was a moderate safe-haven bid for long term Treasuries with the 30-year yield down 14 basis points to 3.47 percent.
The risk of a refinery strike seems remote, judging at least by oil prices which slipped 3 percent to $40.37. Gold gave back 3% of its recent gains to end at $903.80.
Monday, February 2, 2009
High yield bonds
High yield taxable bonds started off the year with a bang, generating a total return of 5.99% (752 bps of excess return).
We are starting to see investors reaching for yield again which is somewhat troublesome to us and we advise caution in high yield.
In the municipal space, total returns were solid and when you factor in the tax benefits clearly outpaced most of their fixed income brethren. Our theme of quality underperformed as a bevy of recent press articles about how “cheap” municipal bonds are drew in the lemmings. Here too we advise caution. It is my belief that the strains in the municipal market are much more severe than anything in the recent past and a period of above average defaults can not be ruled out.
We are starting to see investors reaching for yield again which is somewhat troublesome to us and we advise caution in high yield.
In the municipal space, total returns were solid and when you factor in the tax benefits clearly outpaced most of their fixed income brethren. Our theme of quality underperformed as a bevy of recent press articles about how “cheap” municipal bonds are drew in the lemmings. Here too we advise caution. It is my belief that the strains in the municipal market are much more severe than anything in the recent past and a period of above average defaults can not be ruled out.
Subscribe to:
Posts (Atom)