Friday, March 20, 2009
Market Reflections 3/19/2009
Momentum from yesterday's move by the Fed to buyback more than $1 trillion in agencies and Treasuries cooled in Thursday's session which saw stocks give back gains and the dollar tumble further. The use of monetary inflation as a policy tool raises the risk that price inflation may take off before policy makers can reverse the process. The deep drop in the dollar, losing another 2 cents to end at $1.3672 against the euro, is dramatic evidence of this concern. Further evidence is the big gain underway in gold, up another $20 to $959.40. Inflation risk is sweeping commodities in general higher including oil where WTI, despite yesterday's gain in inventories at Cushing, ended at $51.37 for a more than $2 gain. The stock market ended lower with the S&P 500 down 1.3% at 784.04.
Thursday, March 19, 2009
The Next Big Disaster Will Be Insurance Stocks
By Dan Ferris
A major North American life insurance company will fail this year...
I'm talking about AFLAC, Ameriprise, Hartford, MetLife, Prudential, or another familiar insurance provider, possibly the one that holds your life insurance policy. At least one of these companies is going under very soon. Let me explain...
Insurance companies have been the largest purchasers of corporate debt every year since the 1930s. If Berkshire Hathaway and its financial fortress balance sheet can be downgraded from triple-A status (by Fitch Ratings last week), you should assume a great swath of investment-grade corporate debt is in imminent danger of being downgraded to junk.
Here's the thing: Insurance companies are state regulated. Every state determines how much capital insurance companies have to keep on hand using a "risk-based" model provided by the National Association of Insurance Commissioners. Risk-based just means it's based on financial strength and credit ratings published by A.M. Best, Standard & Poor's, Moody's, and Fitch.
As the corporate debt market collapses, life insurance companies will fall well below the capital requirements of the risk-based models used by the states. When news leaks out, it'll trigger a panic.
The same way banks can experience deposit runs, life insurance companies can experience runs from policyholders. And the same way the FDIC backs up bank deposits, state insurance guarantee funds back up life insurance policies.
Those state funds are in even worse shape than the FDIC. Nationwide, they hold a total of just $8 billion. According to a report by investment firm Bridgewater Associates, only $21 billion of claims have been processed through these funds in the last 25 years. They are not at all prepared for the insolvency of a major life insurer. But life insurance policyholders are hurting along with everyone else. They'll start cashing policies at an even faster rate once they see headlines about insurance companies going broke.
They haven't seen those headlines yet because many life insurance company assets are reported at historical cost, not current market value. Life insurance companies do report losses based on current market values... but view those losses as temporary. That has delayed the realization there's a problem, potentially making it much worse.
Some of these stocks have fallen so far already that raising cash by selling more shares is no longer an option. Genworth, Phoenix Companies, Conseco, and AIG are all penny stocks.
Aside from being the world's biggest corporate bondholders, life insurance companies are also major commercial real estate lenders. A lot of commercial real estate projects are going bust. All kinds of real estate lenders are seeing huge losses.
Another potential source of trouble is simply the dramatic drop in the big stock market indexes. Life insurance companies hedge market performance so they can fulfill guaranteed investment contracts (like annuities), which promise a minimum rate of return or the return on the S&P 500 index.
The S&P 500 got killed last year and made new lows recently. Losses on hedges for these contracts are already enormous. The reinsurance for these products is probably more expensive now, too.
Nobody thought AIG could ever become a penny stock, but here it is, trading below $1. Several other major insurance companies are headed in the same direction.
You could short a basket of life insurance companies and probably do pretty well over the next year. I'd stick with the largest, most liquid names as a proxy for the entire industry.
A major North American life insurance company will fail this year...
I'm talking about AFLAC, Ameriprise, Hartford, MetLife, Prudential, or another familiar insurance provider, possibly the one that holds your life insurance policy. At least one of these companies is going under very soon. Let me explain...
Insurance companies have been the largest purchasers of corporate debt every year since the 1930s. If Berkshire Hathaway and its financial fortress balance sheet can be downgraded from triple-A status (by Fitch Ratings last week), you should assume a great swath of investment-grade corporate debt is in imminent danger of being downgraded to junk.
Here's the thing: Insurance companies are state regulated. Every state determines how much capital insurance companies have to keep on hand using a "risk-based" model provided by the National Association of Insurance Commissioners. Risk-based just means it's based on financial strength and credit ratings published by A.M. Best, Standard & Poor's, Moody's, and Fitch.
As the corporate debt market collapses, life insurance companies will fall well below the capital requirements of the risk-based models used by the states. When news leaks out, it'll trigger a panic.
The same way banks can experience deposit runs, life insurance companies can experience runs from policyholders. And the same way the FDIC backs up bank deposits, state insurance guarantee funds back up life insurance policies.
Those state funds are in even worse shape than the FDIC. Nationwide, they hold a total of just $8 billion. According to a report by investment firm Bridgewater Associates, only $21 billion of claims have been processed through these funds in the last 25 years. They are not at all prepared for the insolvency of a major life insurer. But life insurance policyholders are hurting along with everyone else. They'll start cashing policies at an even faster rate once they see headlines about insurance companies going broke.
They haven't seen those headlines yet because many life insurance company assets are reported at historical cost, not current market value. Life insurance companies do report losses based on current market values... but view those losses as temporary. That has delayed the realization there's a problem, potentially making it much worse.
Some of these stocks have fallen so far already that raising cash by selling more shares is no longer an option. Genworth, Phoenix Companies, Conseco, and AIG are all penny stocks.
Aside from being the world's biggest corporate bondholders, life insurance companies are also major commercial real estate lenders. A lot of commercial real estate projects are going bust. All kinds of real estate lenders are seeing huge losses.
Another potential source of trouble is simply the dramatic drop in the big stock market indexes. Life insurance companies hedge market performance so they can fulfill guaranteed investment contracts (like annuities), which promise a minimum rate of return or the return on the S&P 500 index.
The S&P 500 got killed last year and made new lows recently. Losses on hedges for these contracts are already enormous. The reinsurance for these products is probably more expensive now, too.
Nobody thought AIG could ever become a penny stock, but here it is, trading below $1. Several other major insurance companies are headed in the same direction.
You could short a basket of life insurance companies and probably do pretty well over the next year. I'd stick with the largest, most liquid names as a proxy for the entire industry.
Nobody (With Any Sense) Wants to Play This Game Anymore
The Fed plan is to continue sopping up all those toxic mortgage bonds that are slopping around the system. They also plan on buying some $300 billion in U.S. Treasury notes over the next six months.
Funny that, because they are the only ones who want Treasuries and such right now. Certainly almost no one besides the Japanese and Chinese is interested. And yet outsiders are supposed to be funding most all of Washington’s various recovery plans.
As per the accountants at the Treasury Department, net foreign purchases of long-term U.S. Treasury notes, Fannie Mae and Freddie Mac bonds, corporate debt and stocks dropped from a positive $34.7 billion in December ’08 to a negative $43 billion in January ’09, a 224% net decline in one short month!
Now consider that both Japan and China actually increased their holdings over this period (although even they came in under their 12-month purchase average). Seems to me that right about the same moment that we are trying to flog $2 trillion in shiny new “Obama-Bonds” on the open market, most everyone else is trying to unload nasty old used U.S. notes onto that same market.
The upshot? That light at the end of the tunnel that the cheerleaders were touting? That’s the 4:19 express out of Galveston,and the Obama recovery program is sitting square in the middle of the track.
Funny that, because they are the only ones who want Treasuries and such right now. Certainly almost no one besides the Japanese and Chinese is interested. And yet outsiders are supposed to be funding most all of Washington’s various recovery plans.
As per the accountants at the Treasury Department, net foreign purchases of long-term U.S. Treasury notes, Fannie Mae and Freddie Mac bonds, corporate debt and stocks dropped from a positive $34.7 billion in December ’08 to a negative $43 billion in January ’09, a 224% net decline in one short month!
Now consider that both Japan and China actually increased their holdings over this period (although even they came in under their 12-month purchase average). Seems to me that right about the same moment that we are trying to flog $2 trillion in shiny new “Obama-Bonds” on the open market, most everyone else is trying to unload nasty old used U.S. notes onto that same market.
The upshot? That light at the end of the tunnel that the cheerleaders were touting? That’s the 4:19 express out of Galveston,and the Obama recovery program is sitting square in the middle of the track.
Obama climate plan could cost $2 trillion
UPDATED:
President Obama's climate plan could cost industry close to $2 trillion, nearly three times the White House's initial estimate of the so-called "cap-and-trade" legislation, according to Senate staffers who were briefed by the White House.
A top economic aide to Mr. Obama told a group of Senate staffers last month that the president's climate-change plan would surely raise more than the $646 billion over eight years the White House had estimated publicly, according to multiple a number of staffers who attended the briefing Feb. 26.
"We all looked at each other like, 'Wow, that's a big number,'" said a top Republican staffer who attended the meeting along with between 50 and 60 other Democratic and Republican congressional aides.
The plan seeks to reduce pollution by setting a limit on carbon emissions and allowing businesses and groups to buy allowances, although exact details have not been released.
At the meeting, Jason Furman, a top Obama staffer, estimated that the president's cap-and-trade program could cost up to three times as much as the administration's early estimate of $646 billion over eight years. A study of an earlier cap-and-trade bill co-sponsored by Mr. Obama when he was a senator estimated the cost could top $366 billion a year by 2015.
A White House official did not confirm the large estimate, saying only that Obama aides previously had noted that the $646 billion estimate was "conservative."
"Any revenues in excess of the estimate would be rebated to vulnerable consumers, communities and businesses," the official said.
The Obama administration has proposed using the majority of the money generated from a cap-and-trade plan to pay for its middle-class tax cuts, while using about $120 billion to invest in renewable-energy projects.
Mr. Obama and congressional Democratic leaders have made passing a climate-change bill a top priority. But Republican leaders and moderate to conservative Democrats have cautioned against levying increased fees on businesses while the economy is still faltering.
House Republican leaders blasted the costs in the new estimate.
"The last thing we need is a massive tax increase in a recession, but reportedly that's what the White House is offering: up to $1.9 trillion in tax hikes on every single American who drives a car, turns on a light switch or buys a product made in the United States," said Michael Steel, a spokesman for House Minority Leader John A. Boehner. "And since this energy tax won't affect manufacturers in Mexico, India and China, it will do nothing but drive American jobs overseas."
President Obama's climate plan could cost industry close to $2 trillion, nearly three times the White House's initial estimate of the so-called "cap-and-trade" legislation, according to Senate staffers who were briefed by the White House.
A top economic aide to Mr. Obama told a group of Senate staffers last month that the president's climate-change plan would surely raise more than the $646 billion over eight years the White House had estimated publicly, according to multiple a number of staffers who attended the briefing Feb. 26.
"We all looked at each other like, 'Wow, that's a big number,'" said a top Republican staffer who attended the meeting along with between 50 and 60 other Democratic and Republican congressional aides.
The plan seeks to reduce pollution by setting a limit on carbon emissions and allowing businesses and groups to buy allowances, although exact details have not been released.
At the meeting, Jason Furman, a top Obama staffer, estimated that the president's cap-and-trade program could cost up to three times as much as the administration's early estimate of $646 billion over eight years. A study of an earlier cap-and-trade bill co-sponsored by Mr. Obama when he was a senator estimated the cost could top $366 billion a year by 2015.
A White House official did not confirm the large estimate, saying only that Obama aides previously had noted that the $646 billion estimate was "conservative."
"Any revenues in excess of the estimate would be rebated to vulnerable consumers, communities and businesses," the official said.
The Obama administration has proposed using the majority of the money generated from a cap-and-trade plan to pay for its middle-class tax cuts, while using about $120 billion to invest in renewable-energy projects.
Mr. Obama and congressional Democratic leaders have made passing a climate-change bill a top priority. But Republican leaders and moderate to conservative Democrats have cautioned against levying increased fees on businesses while the economy is still faltering.
House Republican leaders blasted the costs in the new estimate.
"The last thing we need is a massive tax increase in a recession, but reportedly that's what the White House is offering: up to $1.9 trillion in tax hikes on every single American who drives a car, turns on a light switch or buys a product made in the United States," said Michael Steel, a spokesman for House Minority Leader John A. Boehner. "And since this energy tax won't affect manufacturers in Mexico, India and China, it will do nothing but drive American jobs overseas."
ZIRP in the U.S.: Fed Launches Quantitative Easing in the Form of Treasury Purchases
March 18:
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period
To provide greater support to mortgage lending and housing markets, the Committee decided to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion in 2009, and to increase its purchases of agency debt in 2009 by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period
To provide greater support to mortgage lending and housing markets, the Committee decided to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion in 2009, and to increase its purchases of agency debt in 2009 by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months
Market Reflections
The government is printing money like crazy, raising questions over inflation but also improving the outlook for borrowing and with it the outlook for the economy. The Fed, in an effort to free up cash in the banking system, greatly intensified its quantitative easing program, saying it will purchase up to $300 billion in long-term Treasuries and an additional $750 billion in agency securities. The Fed is also expanding collateral for business lending.
The surprise news pulled money deep into Treasuries, which now have a guaranteed buyer, and pushed money out of the dollar where lower Treasury yields spell a cross-border disadvantage for U.S. investments. Details are still being released but the Treasury buying will be concentrated in the 2- to 10-year sector. The yield on the 2-year note fell nearly 25 basis points to 0.79 percent with the yield on the 10-year, ending at 2.52 percent, down nearly 50 basis points on the day!
But it was the decline of the dollar that was the most dramatic event of the day, falling 4-1/2 cents to $1.3450 against the euro. The decline tripped a major run into commodities where gold, which had appeared weak earlier in the day, jolted $50 from lows to $940.90 in late electronic trading. Traders said concern over inflation is major a positive for gold though guaranteed demand in the Treasury market may, at the expense of gold, increase the attractiveness of Treasuries as a safe haven.
Stocks bolted higher on the announcement but gains eased with the S&P 500 ending 2.1 percent higher at 794.35. Oil also jolted higher, ending at $49.19 after trading below $47 following new builds in weekly inventory data.
The surprise news pulled money deep into Treasuries, which now have a guaranteed buyer, and pushed money out of the dollar where lower Treasury yields spell a cross-border disadvantage for U.S. investments. Details are still being released but the Treasury buying will be concentrated in the 2- to 10-year sector. The yield on the 2-year note fell nearly 25 basis points to 0.79 percent with the yield on the 10-year, ending at 2.52 percent, down nearly 50 basis points on the day!
But it was the decline of the dollar that was the most dramatic event of the day, falling 4-1/2 cents to $1.3450 against the euro. The decline tripped a major run into commodities where gold, which had appeared weak earlier in the day, jolted $50 from lows to $940.90 in late electronic trading. Traders said concern over inflation is major a positive for gold though guaranteed demand in the Treasury market may, at the expense of gold, increase the attractiveness of Treasuries as a safe haven.
Stocks bolted higher on the announcement but gains eased with the S&P 500 ending 2.1 percent higher at 794.35. Oil also jolted higher, ending at $49.19 after trading below $47 following new builds in weekly inventory data.
Wednesday, March 18, 2009
Jim Rogers' prediction is coming true...
Master investment gurus Warren Buffett, Jim Rogers, and Marc Faber all went on record recently to say the U.S. government would start buying its own debt... which would stoke inflation down the road. And now it's happening...
The Federal Reserve just announced it would buy $300 billion of long-term Treasuries to keep interest rates low and help along the economic recovery. Of course, no real work or toil will create the money it takes to buy the debt. The money will be created at the stroke of a computer key. Short-term, it will boost a lot of assets. Long-term, it's going to be a disaster... so own gold, real assets, and bet on higher rates.
The Federal Reserve just announced it would buy $300 billion of long-term Treasuries to keep interest rates low and help along the economic recovery. Of course, no real work or toil will create the money it takes to buy the debt. The money will be created at the stroke of a computer key. Short-term, it will boost a lot of assets. Long-term, it's going to be a disaster... so own gold, real assets, and bet on higher rates.
Fed Action
News Alertfrom The Wall Street Journal
The Federal Reserve said Wednesday it will buy up to $300 billion in longer-term Treasurys and raise the size of lending programs already aimed at reducing mortgage rates by another $750 billion, a forceful reminder that officials still have powerful tools to combat the recession.
The commitment to buy Treasury securities and additional mortgage-related debt should mean lower rates for a variety of business and consumer loans. Meanwhile, the Federal Open Market Committee voted 10-0 to hold the target federal funds rate for interbank lending in a range between zero and 0.25% and to continue using credit programs financed by an expansion of the Fed's balance sheet to stabilize markets.
For more information, see:http://online.wsj.com/article/SB123739788518173569.html#mod=djemalertNEWS
The Federal Reserve said Wednesday it will buy up to $300 billion in longer-term Treasurys and raise the size of lending programs already aimed at reducing mortgage rates by another $750 billion, a forceful reminder that officials still have powerful tools to combat the recession.
The commitment to buy Treasury securities and additional mortgage-related debt should mean lower rates for a variety of business and consumer loans. Meanwhile, the Federal Open Market Committee voted 10-0 to hold the target federal funds rate for interbank lending in a range between zero and 0.25% and to continue using credit programs financed by an expansion of the Fed's balance sheet to stabilize markets.
For more information, see:http://online.wsj.com/article/SB123739788518173569.html#mod=djemalertNEWS
Market Reflections 3/17/2009
The stock market extended its rally Tuesday, closing at its highs for a very strong 3.1 percent jump on the S&P 500 to 778.12. Economic data in the session was headed by a very strong housing starts report for February, a report however that follows a very weak January and was skewed higher by a jump in multi-family units.
But gains in the session weren't tied to news but to a surge in bargain hunting that is definitely helping to build the market's momentum. Money continues to move out of the safety of the dollar which fell another 1/2 cent to end at just over $1.3000 against the euro. Yields moved higher in the Treasury market where the 10-year is at 3.00 percent, up 4 basis points on the day.
Oil moved higher on the day in part on technical factors related to monthly futures expiration and on news of output problems in Nigeria. WTI ended at $48.64, up nearly $2 on the day and setting the stage for tomorrow's petroleum data, which if showing draws, could trigger a move past $50. Gold slipped about $10 to $915.
But gains in the session weren't tied to news but to a surge in bargain hunting that is definitely helping to build the market's momentum. Money continues to move out of the safety of the dollar which fell another 1/2 cent to end at just over $1.3000 against the euro. Yields moved higher in the Treasury market where the 10-year is at 3.00 percent, up 4 basis points on the day.
Oil moved higher on the day in part on technical factors related to monthly futures expiration and on news of output problems in Nigeria. WTI ended at $48.64, up nearly $2 on the day and setting the stage for tomorrow's petroleum data, which if showing draws, could trigger a move past $50. Gold slipped about $10 to $915.
Tuesday, March 17, 2009
Market Reflections 3/16/2009
Ben Bernanke's reassuring interview on Sunday TV, where he said the recession may come to an end this year, did not make for a full day of gains on Monday. The S&P 500, up most of the day, ended at its lows, down 0.4 percent at 753.89. Economic data in the session included a major drop in foreign buying of U.S. securities, news that hurt the dollar which slipped 1/2 cent against the euro to end at $1.2966. Other data included another steep decline in industrial production and an Empire State report that points to further declines for the manufacturing sector in the months ahead. The housing market index was also decidedly negative, holding at a record low as customer traffic evaporates further.
But there was good news and it came from the U.K. where Barclays joined Citigroup and Bank of America saying that business so far this year has been good. Money moved out of the safety of Treasury. Yields rose on the front-end of the Treasury curve with the 3-month bill up 4 basis points to end at 0.22 percent.
Oil actually rose in the session despite OPEC's surprise decision over the weekend to hold output steady. But prices moved higher in any case, up about $1 to end just over $47 for April WTI. Gold ended little changed at $924.50.
But there was good news and it came from the U.K. where Barclays joined Citigroup and Bank of America saying that business so far this year has been good. Money moved out of the safety of Treasury. Yields rose on the front-end of the Treasury curve with the 3-month bill up 4 basis points to end at 0.22 percent.
Oil actually rose in the session despite OPEC's surprise decision over the weekend to hold output steady. But prices moved higher in any case, up about $1 to end just over $47 for April WTI. Gold ended little changed at $924.50.
Monday, March 16, 2009
The changing American Dream?
Last week the Met Life Study of the American dream was making its rounds to trading desks and I found some
interesting items in there. First off the study found a shift in priorities from “investments” to “protection” . Unlike 12+
months ago when Americans craved a moderate dose of risk in their portfolios, today’s consumers are eyeing more
conservative investment and/or protection products for their personal safety nets. Among the top ten items that
consumers would most like to have in their safety net, most are insurance products — long-term care insurance,
health insurance, life insurance, annuities — or conservative investments such as cash or bonds. Only the fourthranked
(real estate) and tenth-ranked (mutual funds) carry a moderate level of risk. Last year, by contrast, the
number one priority was health insurance that continues through retirement (60%), followed by retirement savings
(52%). Stability and security are the new growth frontiers. One figure that might shock some readers - only 35% of
respondents had cash on hand for 3-6 months. A startling 59% of Americans say they would be somewhat or very
concerned about having to file for bankruptcy if they were to lose their job. This cuts across all generations and
income levels. Even mass affluent Americans are deeply concerned about bankruptcy, with 53% identifying
themselves as being at risk without a job. An equally high percentage of Americans is worried about home
foreclosure; two in three homeowners (64%) are concerned they would lose their home if they were to lose their
job. Generation X feels the most vulnerable, with 73% of Americans in this demographic group expressing concern.
Baby Boomers are the next most vulnerable group, with 63% reporting worry. Fears of bankruptcy and foreclosure
are also unusually high among Middle Market consumers — i.e., those between the ages of 35 and 44 with income
of $35,000–$100,000 per year. Two-thirds (66%) of these Americans risk bankruptcy if faced with a job loss. An
even higher percentage of Middle Market consumers are worried about home foreclosure, with 75% expressing
concern that unemployment would lead to the loss of their home.
Without a steady paycheck, 50% of Americans say they could not meet their financial obligations for more
than a month — and, of that, a disturbing 28% couldn’t support themselves for more than two weeks of
unemployment. This is pretty important stuff and hammers a theme we have stated for some time – consumer
deleveraging is just getting started and savings need to continue to rise. The attitude toward risk, if it endures also
has many big implications.
Source: 2009 Met Life Study of the American Dream
interesting items in there. First off the study found a shift in priorities from “investments” to “protection” . Unlike 12+
months ago when Americans craved a moderate dose of risk in their portfolios, today’s consumers are eyeing more
conservative investment and/or protection products for their personal safety nets. Among the top ten items that
consumers would most like to have in their safety net, most are insurance products — long-term care insurance,
health insurance, life insurance, annuities — or conservative investments such as cash or bonds. Only the fourthranked
(real estate) and tenth-ranked (mutual funds) carry a moderate level of risk. Last year, by contrast, the
number one priority was health insurance that continues through retirement (60%), followed by retirement savings
(52%). Stability and security are the new growth frontiers. One figure that might shock some readers - only 35% of
respondents had cash on hand for 3-6 months. A startling 59% of Americans say they would be somewhat or very
concerned about having to file for bankruptcy if they were to lose their job. This cuts across all generations and
income levels. Even mass affluent Americans are deeply concerned about bankruptcy, with 53% identifying
themselves as being at risk without a job. An equally high percentage of Americans is worried about home
foreclosure; two in three homeowners (64%) are concerned they would lose their home if they were to lose their
job. Generation X feels the most vulnerable, with 73% of Americans in this demographic group expressing concern.
Baby Boomers are the next most vulnerable group, with 63% reporting worry. Fears of bankruptcy and foreclosure
are also unusually high among Middle Market consumers — i.e., those between the ages of 35 and 44 with income
of $35,000–$100,000 per year. Two-thirds (66%) of these Americans risk bankruptcy if faced with a job loss. An
even higher percentage of Middle Market consumers are worried about home foreclosure, with 75% expressing
concern that unemployment would lead to the loss of their home.
Without a steady paycheck, 50% of Americans say they could not meet their financial obligations for more
than a month — and, of that, a disturbing 28% couldn’t support themselves for more than two weeks of
unemployment. This is pretty important stuff and hammers a theme we have stated for some time – consumer
deleveraging is just getting started and savings need to continue to rise. The attitude toward risk, if it endures also
has many big implications.
Source: 2009 Met Life Study of the American Dream
Penn West Energy: Too Good to Be True?
Penn West Energy Trust (PWE) is a Canadian-based company engaged in acquiring, developing, exploiting, and holding interests in petroleum and natural gas properties and assets. 43% of revenue is from natural gas and 57% is from crude oil.
According to a Scotia Bank report released on 3/13/09, though Penn West’s forecasted P/E for 2009 is 35, its Price/Cash Flow is only 3.2, much lower than the previous four years' average of 4.5.
This financial crisis is all about Balance Sheet. There doesn’t seem to be fundamental demand-supply imbalance problem. That’s why this week the market was up around 10% when government looked at relaxing “Mark to Market” rules. Though it might take much longer to recover, as long as a company has a strong balance sheet, it should be able to weather the storm.
From PWE's latest quarterly report, which outlines estimated future contractual obligations:Penn West’s financial liabilities as at December 31, 2008, the earliest debt due is $2.56 billion in year 2011.
Source: Yahoo Finance
Penn West recently announced a reduction in monthly distribution to unit holders from $0.34 per unit per month, a sustained level for 35 months, to $0.23 per unit per month. With 385 million unit holders, that is over $1 billion cash-outflow for 2009.
Compared to 2008, Penn West’s 2009 capital program was reduced significantly to between $600 million and $825 million. Assuming 2009 average prices of $45.00 per barrel for oil, $5.50 per GJ natural gas, the company believes that it can fund capital programs and distributions with internally generated funds flow.
With 28% yield, is it too good to be true? January 2009 car sales in China were more than in the U.S., the first time in history. In February China’s car sales were up by 25%. If you believe oil and gas prices will stay at this low level for a long time, then probably it is.
Disclose: Long PWE.
According to a Scotia Bank report released on 3/13/09, though Penn West’s forecasted P/E for 2009 is 35, its Price/Cash Flow is only 3.2, much lower than the previous four years' average of 4.5.
This financial crisis is all about Balance Sheet. There doesn’t seem to be fundamental demand-supply imbalance problem. That’s why this week the market was up around 10% when government looked at relaxing “Mark to Market” rules. Though it might take much longer to recover, as long as a company has a strong balance sheet, it should be able to weather the storm.
From PWE's latest quarterly report, which outlines estimated future contractual obligations:Penn West’s financial liabilities as at December 31, 2008, the earliest debt due is $2.56 billion in year 2011.
Source: Yahoo Finance
Penn West recently announced a reduction in monthly distribution to unit holders from $0.34 per unit per month, a sustained level for 35 months, to $0.23 per unit per month. With 385 million unit holders, that is over $1 billion cash-outflow for 2009.
Compared to 2008, Penn West’s 2009 capital program was reduced significantly to between $600 million and $825 million. Assuming 2009 average prices of $45.00 per barrel for oil, $5.50 per GJ natural gas, the company believes that it can fund capital programs and distributions with internally generated funds flow.
With 28% yield, is it too good to be true? January 2009 car sales in China were more than in the U.S., the first time in history. In February China’s car sales were up by 25%. If you believe oil and gas prices will stay at this low level for a long time, then probably it is.
Disclose: Long PWE.
China and the USA credit quality
China threw a cat among the pigeons as they voiced concerns about their holdings of US Treasuries and wanted assurances their investments are safe. Premier Jiaboa said "We have lent a huge amount of money to the US and I request the US to maintain its good credit, to honor its promises, and to guarantee the safety of China's assets."
A Chinese analyst commented that they are worried the US may solve its problems by printing money which would stoke inflation and if the US can make sure this won't happen, then China should continue to invest.
President Obama quickly responded to ease those concerns by saying in a press conference "Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the US." Continued Chinese investment in Treasuries are crucial in financing the stimulus packages. I wouldn't think any type of a major sell off is likely but I could see them backing off a bit if they don't feel comfortable. It will be interesting to see if anything changes going forward, but I don't blame them for wanting some type of re-assurance.
Of course, even Obama is likely to be unable, read not really willing, to stop the coming inflationary rise in rates. The Chinese will have to adjust to the new reality but will do so I suspect with a lot more wailing.
A Chinese analyst commented that they are worried the US may solve its problems by printing money which would stoke inflation and if the US can make sure this won't happen, then China should continue to invest.
President Obama quickly responded to ease those concerns by saying in a press conference "Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the US." Continued Chinese investment in Treasuries are crucial in financing the stimulus packages. I wouldn't think any type of a major sell off is likely but I could see them backing off a bit if they don't feel comfortable. It will be interesting to see if anything changes going forward, but I don't blame them for wanting some type of re-assurance.
Of course, even Obama is likely to be unable, read not really willing, to stop the coming inflationary rise in rates. The Chinese will have to adjust to the new reality but will do so I suspect with a lot more wailing.
Severe drilling decline could cause huge natural gas rally
To combat lower energy prices, oil and gas drillers are idling rigs at the fastest pace since 2002… which may cause prices to double. The number of rigs in the U.S. has fallen to 884 from a record 1,606 in September.
According to Bloomberg:
About 45 percent of U.S. rigs have been shut since September, which means fourth-quarter gas production will tumble 5.2 percent, faster than the 1.9 percent decline in use, the Energy Department forecast. Prices will rise to $7 per million British thermal units by January from $3.897 today on the New York Mercantile Exchange, according to a Bloomberg News survey of 20 analysts. The gain would be the largest since the first half of 2008.
When energy demand rebounds, the infrastructure won't be there to supply it, and prices will soar.
According to Bloomberg:
About 45 percent of U.S. rigs have been shut since September, which means fourth-quarter gas production will tumble 5.2 percent, faster than the 1.9 percent decline in use, the Energy Department forecast. Prices will rise to $7 per million British thermal units by January from $3.897 today on the New York Mercantile Exchange, according to a Bloomberg News survey of 20 analysts. The gain would be the largest since the first half of 2008.
When energy demand rebounds, the infrastructure won't be there to supply it, and prices will soar.
Saturday, March 14, 2009
Market Reflections 3/13/2009
Premier Wen Jiabao reminded everyone Friday that Chinese demand for U.S. Treasuries is a lynchpin of the global economic recovery. Jiabao said he's worried about the extent of China's exposure to U.S. financial assets and called on the U.S. to honor its words and ensure the value of the dollar and the safety of China's holdings.
The comments had surprisingly little effect, with Treasuries showing no change and gold showing no gains. Stocks managed to rally on the session, gaining 0.8 percent on the S&P 500 and closing a very important and very positive week, a week that saw big rebounds in financial shares on tangible hopes that the worst for banks may be passing.
Oil ended at just under $46 for April WTI ahead of Sunday's OPEC meeting which is widely expected to result in a token output cut, one that nevertheless is expected to trip short covering and a move toward $50. The dollar ended little changed against the euro at $1.2918.
The comments had surprisingly little effect, with Treasuries showing no change and gold showing no gains. Stocks managed to rally on the session, gaining 0.8 percent on the S&P 500 and closing a very important and very positive week, a week that saw big rebounds in financial shares on tangible hopes that the worst for banks may be passing.
Oil ended at just under $46 for April WTI ahead of Sunday's OPEC meeting which is widely expected to result in a token output cut, one that nevertheless is expected to trip short covering and a move toward $50. The dollar ended little changed against the euro at $1.2918.
Friday, March 13, 2009
WEEK ENDING 3/13/09
Overview
This week, Fed Chairman Ben Bernanke acknowledged that “The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy,” during a speech on reforming the financial sector.
more:http://payden.com/library/weeklyMarketUpdateE.aspx#overview
US MARKETS
Treasury/Economics
U.S. Treasury yields continue to settle in to a trading range, exhibiting little volatility this week as investors pause to assess the direction of economic growth and inflation.
more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Large-Cap Equities
The stock market rallied for the first time in five weeks due to positive comments from banks regarding profits for the quarter.
more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Corporate Bonds
Investment grade primary activity remained rampant as the search for any incremental yield continues to be the major driving factor in the mind of investors.
more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Mortgage-Backed Securities
The agency mortgage market benefited from a recovery in equity valuations and benign movement in Treasury yields.
Municipal Bonds
Municipal bond market weakness continued this week. While shorter-maturities were broadly unchanged over the course of the week, the 10-year maturity range showed the softness in the market.
High-Yield
The markedly improved tone in the global equity markets since the beginning of the week is aiding with the stability of the high yield market. more...
INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were banks (+21.8%) and insurance (+17.2%).
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +10.8% this week, while the Russian stock index RTS went up by +13.2%.
Global Bonds and Currencies
Major sovereign bond markets were mostly weaker in the past week, with the exception of the long-end of the UK Gilt curve, which continued to benefit as the Bank of England (BoE) began its £75 billion (US$106 billion) program of quantitative easing.
Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week as a result of the more positive tone to risk markets. For more information, please contact 800 5-PAYDEN or visit payden.com.
If you have difficulties viewing this e-mail and would prefer the Weekly Market Update in plain text format, please e-mail us at paydenrygel@payden-rygel.com. To unsubscribe from this email, please email us at unsubscribe@payden-rygel.com.
Have a great weekend!
This week, Fed Chairman Ben Bernanke acknowledged that “The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy,” during a speech on reforming the financial sector.
more:http://payden.com/library/weeklyMarketUpdateE.aspx#overview
US MARKETS
Treasury/Economics
U.S. Treasury yields continue to settle in to a trading range, exhibiting little volatility this week as investors pause to assess the direction of economic growth and inflation.
more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Large-Cap Equities
The stock market rallied for the first time in five weeks due to positive comments from banks regarding profits for the quarter.
more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Corporate Bonds
Investment grade primary activity remained rampant as the search for any incremental yield continues to be the major driving factor in the mind of investors.
more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Mortgage-Backed Securities
The agency mortgage market benefited from a recovery in equity valuations and benign movement in Treasury yields.
Municipal Bonds
Municipal bond market weakness continued this week. While shorter-maturities were broadly unchanged over the course of the week, the 10-year maturity range showed the softness in the market.
High-Yield
The markedly improved tone in the global equity markets since the beginning of the week is aiding with the stability of the high yield market. more...
INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were banks (+21.8%) and insurance (+17.2%).
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +10.8% this week, while the Russian stock index RTS went up by +13.2%.
Global Bonds and Currencies
Major sovereign bond markets were mostly weaker in the past week, with the exception of the long-end of the UK Gilt curve, which continued to benefit as the Bank of England (BoE) began its £75 billion (US$106 billion) program of quantitative easing.
Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week as a result of the more positive tone to risk markets. For more information, please contact 800 5-PAYDEN or visit payden.com.
If you have difficulties viewing this e-mail and would prefer the Weekly Market Update in plain text format, please e-mail us at paydenrygel@payden-rygel.com. To unsubscribe from this email, please email us at unsubscribe@payden-rygel.com.
Have a great weekend!
GE and GE Capital Lose Their 'AAA' Ratings: What Next for GE?
March 12: GE and its finance arm lost the top-level 'AAA' rating from S&P that they’ve held since 1956 as earnings are under immense pressure with exposed potential risks for the company as the deteriorating economy will produce mounting credit losses at GE Capital
S&P balanced the “excellent risk profile” of GE’s industrial businesses against the prospects of weaker earnings or a “modest net loss” at GE Capital. The one-level downgrade to ‘AA+’ with a “stable” outlook will affect the long-term debt. Under debt guarantees and covenants, GE would have had to post additional collateral if the ratings fell below AA-/Aa3 or A-1 and P-1
S&P balanced the “excellent risk profile” of GE’s industrial businesses against the prospects of weaker earnings or a “modest net loss” at GE Capital. The one-level downgrade to ‘AA+’ with a “stable” outlook will affect the long-term debt. Under debt guarantees and covenants, GE would have had to post additional collateral if the ratings fell below AA-/Aa3 or A-1 and P-1
Market Reflections
The day that the great Ponzi swindler Bernard Madoff was led to jail in handcuffs was, fittingly, a good day for the financial markets. Stocks in fact are putting together a blockbuster week, reacting to strong improvement in company news and emerging indications, such as today's retail sales report, that the worst of the recession may have passed. The S&P 500 rallied strongly near the close to end a great session, up 4.1 percent at 750.74.
Money moved out of the dollar, which slipped slightly to end a $1.2922 against the euro, but money barely moved out of the Treasury market which saw another very strong auction, this time for 30-year bonds. And money didn't move out of gold either, which got a boost to more than $925 after the Swiss central bank surprised markets with a rate cut, a move that shifted safe-haven flows out of the Swiss franc.
Money moved out of the dollar, which slipped slightly to end a $1.2922 against the euro, but money barely moved out of the Treasury market which saw another very strong auction, this time for 30-year bonds. And money didn't move out of gold either, which got a boost to more than $925 after the Swiss central bank surprised markets with a rate cut, a move that shifted safe-haven flows out of the Swiss franc.
Thursday, March 12, 2009
Cassano responsible for the Depression?
And people thought Jerome Kerviel's blow up was spectacular. In an interesting piece out on abcnews, more light is being shed on AIG's small financial products London office which even AIG now acknowledges was ground zero for roughly $500 billion in losses, as well as the person who ran it, Joseph Cassano. Joe, who previously had made waves after the Washington Post first profiled him in October 2008, had "earned" $280 million during his tenure with AIG and who left the company with a $1 million a year consulting contract, and owns houses in London and Connecticut, was so confident in his huge risky bets that he is quoted as saying "It is hard for us with, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions."It is a little easier to see a scenario where Cassano would end up losing $500 billion.
Cassano's nearsighted actions have had staggering repercussions: everyone knows about the secret 21 page mutual assured destruction memo, the billions in cash downstreamed to AIG's counterparties, the systemic impact AIG's collapse has had on both the U.S. and global economy and all the other indirect consequences of the near $200 billion in taxpayer money that AIG's failure has so far cost.
It is somewhat surprising that while Barney Frank et al have been so focused on the executives of the major banks, Joe has been flying low under the public radar. After all, if allegations against Cassano prove true, his loss will have the tenfold impact of Madoff's ponzi scheme, however unlike with Bernie, who impacted a small group of people to a high degree, Cassano's $500 billion loss has to be shared equally amongst all taxpayers. And while hubris and reckless risk management are not criminal acts, incentives will always exist for traders to take on outsized risk unless there is some regulatory intervention, which really cuts to the heart of the whole problem.
Cassano's nearsighted actions have had staggering repercussions: everyone knows about the secret 21 page mutual assured destruction memo, the billions in cash downstreamed to AIG's counterparties, the systemic impact AIG's collapse has had on both the U.S. and global economy and all the other indirect consequences of the near $200 billion in taxpayer money that AIG's failure has so far cost.
It is somewhat surprising that while Barney Frank et al have been so focused on the executives of the major banks, Joe has been flying low under the public radar. After all, if allegations against Cassano prove true, his loss will have the tenfold impact of Madoff's ponzi scheme, however unlike with Bernie, who impacted a small group of people to a high degree, Cassano's $500 billion loss has to be shared equally amongst all taxpayers. And while hubris and reckless risk management are not criminal acts, incentives will always exist for traders to take on outsized risk unless there is some regulatory intervention, which really cuts to the heart of the whole problem.
Greenspan others responsible for the Financial Crisis
Former Fed Chairman Alan Greenspan defended his "easy money" policies today in the Wall Street Journal, saying they did not cause the housing bubble. He placed the blame on the extreme growth in China and other emerging markets, which led to an excess of savings that pushed global long-term interest rates down between 2000 and 2005. Before this phenomenon, Greenspan argues, mortgage rates and the benchmark fed-funds rate moved "in lockstep."
Greenspan can say what he wants. But when the government guarantees the balance sheets of Fannie and Freddie (not to mention every other large bank in the country)... when it encourages the creation of an enormous amount of credit by lowering short-term interest rates to 1%... and when Congress insists on providing loans with no down payments to low-income and first-time homebuyers, you will eventually have a disaster.
There was either no risk, or very little risk, to home speculators. Banks didn't rein in lending because depositors don't care how risky a bank's loan book becomes – their deposits are guaranteed. Fannie and Freddie could buy an unlimited amount of subprime debt (with almost no loss reserves) because they had a line of credit with the Treasury. Greenspan didn't worry about the credit bubble because the market is efficient. Everyone acted like a fool because no one was going to be responsible for his actions.
Parsing the blame accurately is probably impossible, but one thing should be obvious to all of us: Greenspan had a hell of a lot more to do with it than 99% of his fellow Americans, who are now left with a multitrillion-dollar bill to clean up the mess.
Greenspan can say what he wants. But when the government guarantees the balance sheets of Fannie and Freddie (not to mention every other large bank in the country)... when it encourages the creation of an enormous amount of credit by lowering short-term interest rates to 1%... and when Congress insists on providing loans with no down payments to low-income and first-time homebuyers, you will eventually have a disaster.
There was either no risk, or very little risk, to home speculators. Banks didn't rein in lending because depositors don't care how risky a bank's loan book becomes – their deposits are guaranteed. Fannie and Freddie could buy an unlimited amount of subprime debt (with almost no loss reserves) because they had a line of credit with the Treasury. Greenspan didn't worry about the credit bubble because the market is efficient. Everyone acted like a fool because no one was going to be responsible for his actions.
Parsing the blame accurately is probably impossible, but one thing should be obvious to all of us: Greenspan had a hell of a lot more to do with it than 99% of his fellow Americans, who are now left with a multitrillion-dollar bill to clean up the mess.
Sell airlines short
Warren Buffett hates airline stocks. He bought a preferred stock issue from U.S. Air in 1989. By 1995, the company had lost $3 billion, and Buffett's preferred dividend was suspended. Since then, he has been very vocal about his feelings toward the aviation industry.
The net wealth creation in airlines since Orville Wright has been next to zero. If a capitalist had been at Kitty Hawk and shot him down, he would have done us a huge favor... The worst sort of business is one that grows rapidly, requires significant capital to engender growth, and then earns little or no money. Think airlines.
But... knowing the airline industry has always been a loser for investors makes airline stocks very easy (and safe) to sell short. In fact, right now, you can easily find a half-dozen airlines that cannot afford the interest on their debts, suffer from plummeting revenues, and face huge losses related to commodity hedging.
The net wealth creation in airlines since Orville Wright has been next to zero. If a capitalist had been at Kitty Hawk and shot him down, he would have done us a huge favor... The worst sort of business is one that grows rapidly, requires significant capital to engender growth, and then earns little or no money. Think airlines.
But... knowing the airline industry has always been a loser for investors makes airline stocks very easy (and safe) to sell short. In fact, right now, you can easily find a half-dozen airlines that cannot afford the interest on their debts, suffer from plummeting revenues, and face huge losses related to commodity hedging.
Budget Deficit Widens on Lower Tax Revenues and Massive Spending
The Federal deficit hit $765
billion in the first five months of the budget year, approximately 65% higher than the gap for all of the prior year. The
Congressional Budget Office estimates the U.S. budget deficit will top $1.2 trillion in the fiscal year 2009. The deficit
reached $192.8 billion in February, a record for the month but below expectations of $205.7 billion. The slow
economy sharply reduced the government’s tax revenue last month to $87.3 billion, 17% below the previous year.
Meanwhile, government spending soared.
billion in the first five months of the budget year, approximately 65% higher than the gap for all of the prior year. The
Congressional Budget Office estimates the U.S. budget deficit will top $1.2 trillion in the fiscal year 2009. The deficit
reached $192.8 billion in February, a record for the month but below expectations of $205.7 billion. The slow
economy sharply reduced the government’s tax revenue last month to $87.3 billion, 17% below the previous year.
Meanwhile, government spending soared.
Market Reflections 3/11/2009
The stock market didn't rally sharply but it didn't reverse, posting a slight gain but one on top of yesterday's giant surge. The S&P 500, which gained 6.5 percent yesterday, rose 0.2 percent to end at 721.36. Bank shares were once again big winners including JP Morgan, up 5% at $20.42 after saying that it too, like Citigroup, is posting a profit so far this year.
Money moved out of the safety of the dollar which fell nearly 2 cents against the euro to end at $1.2852. But money moved into the Treasury market following strong demand at the month's 10-year note auction. The 10-year yield fell 11 basis points to 2.89 percent. The Treasury, in its endless blizzard of offerings tied to the government's surging debt, auctions $11 billion of 30-year bonds tomorrow. Treasury budget data during the session shows the federal deficit, only five months into the fiscal year, at more than $750 billion.
A rise in weekly crude inventories helped push oil lower with April WTI down 6% on the day at $42.94. Gold edged 1% higher to $904.30.
Money moved out of the safety of the dollar which fell nearly 2 cents against the euro to end at $1.2852. But money moved into the Treasury market following strong demand at the month's 10-year note auction. The 10-year yield fell 11 basis points to 2.89 percent. The Treasury, in its endless blizzard of offerings tied to the government's surging debt, auctions $11 billion of 30-year bonds tomorrow. Treasury budget data during the session shows the federal deficit, only five months into the fiscal year, at more than $750 billion.
A rise in weekly crude inventories helped push oil lower with April WTI down 6% on the day at $42.94. Gold edged 1% higher to $904.30.
Wednesday, March 11, 2009
GMAC vs GM - Big Difference
As the new administration makes a critical decision about the future of General Motors Corporation,. it is very important to remember that GMAC and General Motors Corporation are separate and distinct entities with different ownership. Cerberus Capital a very big hedge fund, owns half of GMAC, and General Motors owns the rest.
GMAC has been "saved". GMAC’s institutional bondholders took different bonds and gave equity to the company. This meet the government's requirements for capital levels at banks, allowing GMAC to become a bank. GMAC now has FDIC insured deposits and can issue government guaranteed bonds just like Morgan Stanley, Citicorp and Goldman. GMAC earned $1.8 billion in 2008 and has an “unqualified letter” from its accountants. This means they do not fear for it to continue to be a going concern.
General Motors Corporation, on the other hand, is in big trouble. Losing billions, with sales down over 50%, its accountants issued a letter that they believe it may not be able to continue as a "going concern".
This is why GMAC bonds are currently at a much higher in price than GM bonds. We believe that investors who can bear the reasonable risk should continue to hold GMAC bonds, with the view they are likely to pay interest and principal when due unless there are many more catastrophic changes in our economy. GMAC now has $20 billion in equity, and could most likely go into a “runoff” and still pay off its debt obligations. GMAC bonds are offered as low as 24.
GM bonds should be held for a completely different reason. These bonds are now so low-priced that by holding them through a possible bankruptcy or reorganization may return a higher result than selling them under current conditions. GM bonds are being bid as low as 12.
The balance sheet and income statement for GMAC from their 2008 10K is now available along with the unqualified opinion on GMAC of Deloitte & Touche LLP. Contact info@coreportfolio for information.
GMAC has been "saved". GMAC’s institutional bondholders took different bonds and gave equity to the company. This meet the government's requirements for capital levels at banks, allowing GMAC to become a bank. GMAC now has FDIC insured deposits and can issue government guaranteed bonds just like Morgan Stanley, Citicorp and Goldman. GMAC earned $1.8 billion in 2008 and has an “unqualified letter” from its accountants. This means they do not fear for it to continue to be a going concern.
General Motors Corporation, on the other hand, is in big trouble. Losing billions, with sales down over 50%, its accountants issued a letter that they believe it may not be able to continue as a "going concern".
This is why GMAC bonds are currently at a much higher in price than GM bonds. We believe that investors who can bear the reasonable risk should continue to hold GMAC bonds, with the view they are likely to pay interest and principal when due unless there are many more catastrophic changes in our economy. GMAC now has $20 billion in equity, and could most likely go into a “runoff” and still pay off its debt obligations. GMAC bonds are offered as low as 24.
GM bonds should be held for a completely different reason. These bonds are now so low-priced that by holding them through a possible bankruptcy or reorganization may return a higher result than selling them under current conditions. GM bonds are being bid as low as 12.
The balance sheet and income statement for GMAC from their 2008 10K is now available along with the unqualified opinion on GMAC of Deloitte & Touche LLP. Contact info@coreportfolio for information.
Credit Contraction and inflation, why the banking system fix will unleash mammoth inflation
Analyst Meredith Whitney expects outstanding U.S. credit-card lines – which now total about $5 trillion – to shrink by $2 trillion in 2009 and another $700 billion in 2010. She points out most credit cards were issued when unemployment was below 6%.
Whitney also dispelled the popular myth that America's credit cards are maxed out. They aren't. Just 17% of total credit-card lines were drawn on at the end of 2008. But that percentage will ramp up sharply when credit-card issuers start pulling credit lines from borrowers who lose jobs and fall behind on payments.
The contraction of credit-card lines... the rapid rises in home foreclosures and corporate defaults... the bank failures... These all have the effect of shrinking the money supply.
Most of our money is not created by the Federal Reserve. Most of our money is lent into existence by our banking system. That's why the Fed doubling its balance sheet in world-record time last fall didn't have inflationary consequences.
The Fed's fiat money merely provides the fuel for inflation. The real engine, where $1 is multiplied many times over, is the banking system... and it's broken. The Fed's balance sheet has expanded dramatically since September, but the banks' balance sheets are still contracting as mortgages and other loans continue to go bad. That reduces lending capacity – money-creation capacity.
More capacity will evaporate later this year and next year. Option-ARM loans will hit reset levels, causing more mortgage delinquencies and defaults. Insurance companies will get hit by corporate-bond defaults. (Insurance companies, especially life insurance companies, have been the largest buyers of corporate debt going back to the Great Depression. They're also huge commercial real estate lenders.)
Perhaps the hardest thing for you to believe is that all this credit destruction is good... but it is. Less borrowing means more saving. Economic growth requires saving, not borrowing and spending. Savings is the horse. Borrowing, spending, and higher tax revenues are all in the cart. If you put the cart before the horse, you won't get very far. If you put the horse in front, you can go anywhere you want.
When the banking system gets fixed and the banks start lending again watch out for rabid inflation. Remember $1 of reserves gets multiplied many times (perhaps as much as into $10 of new money creation)since the reserve ratio is a fraction of the actual reszerves.
So the bank lending process will reverse the money supply contraction and all that new money will chase after a much shrunken supply of goods and services.
Bingo!! Up go prices. The next bubble will be started.
Whitney also dispelled the popular myth that America's credit cards are maxed out. They aren't. Just 17% of total credit-card lines were drawn on at the end of 2008. But that percentage will ramp up sharply when credit-card issuers start pulling credit lines from borrowers who lose jobs and fall behind on payments.
The contraction of credit-card lines... the rapid rises in home foreclosures and corporate defaults... the bank failures... These all have the effect of shrinking the money supply.
Most of our money is not created by the Federal Reserve. Most of our money is lent into existence by our banking system. That's why the Fed doubling its balance sheet in world-record time last fall didn't have inflationary consequences.
The Fed's fiat money merely provides the fuel for inflation. The real engine, where $1 is multiplied many times over, is the banking system... and it's broken. The Fed's balance sheet has expanded dramatically since September, but the banks' balance sheets are still contracting as mortgages and other loans continue to go bad. That reduces lending capacity – money-creation capacity.
More capacity will evaporate later this year and next year. Option-ARM loans will hit reset levels, causing more mortgage delinquencies and defaults. Insurance companies will get hit by corporate-bond defaults. (Insurance companies, especially life insurance companies, have been the largest buyers of corporate debt going back to the Great Depression. They're also huge commercial real estate lenders.)
Perhaps the hardest thing for you to believe is that all this credit destruction is good... but it is. Less borrowing means more saving. Economic growth requires saving, not borrowing and spending. Savings is the horse. Borrowing, spending, and higher tax revenues are all in the cart. If you put the cart before the horse, you won't get very far. If you put the horse in front, you can go anywhere you want.
When the banking system gets fixed and the banks start lending again watch out for rabid inflation. Remember $1 of reserves gets multiplied many times (perhaps as much as into $10 of new money creation)since the reserve ratio is a fraction of the actual reszerves.
So the bank lending process will reverse the money supply contraction and all that new money will chase after a much shrunken supply of goods and services.
Bingo!! Up go prices. The next bubble will be started.
Weaker US dollar coming
Vincent Chaigneau, head of currency and interest rate strategy at Societe Generale, said "The current account deficit and the massive government bond issuance suggest heavy dollar losses over the next 6 to 12 months.
Investors aren't buying risky assets and are focused on Treasuries. With the amount of bonds the government is issuing, investors will demand higher yields. Yields will remain low if the Fed buys bonds. The dollar will have to fall to improve returns."
Our sentiments exactly.
Investors aren't buying risky assets and are focused on Treasuries. With the amount of bonds the government is issuing, investors will demand higher yields. Yields will remain low if the Fed buys bonds. The dollar will have to fall to improve returns."
Our sentiments exactly.
Muni & Corporate bond Comments 3/11/09
The treasury market continued its selloff yesterday, while Muni's and Corporates are both cheapening in price, widening in spread.
The Muni market hit a wall about two weeks ago, spreads have been widening versus the MMD scale ever since. Supply in the muni market has also been very robust, with 7BB worth of New Issues coming in each of the last few weeks.
In the high tax states, 10yr Ma State GO has widened over 25 BP's, now trading at +35 to scale.. NY City GO's have widened about 30, now trade +155 over the MMD.. Cal is trading +150 these days, but that widening took place earlier.
Corporate Bonds, which had tightened at a torrid pace from November thru mid February have slid recently
In both sectors, the market had moved too far, too fast. Take advantage of these back ups. The recession will pressure both sectors from a credit perspective, but diligent selection will provide great opportunities. Quality Investment Grade Bonds yielding 4 to 7.5% make great sense, and Muni's will be in greater and greater demand over the next few years as inevitably State and Federal Tax Rates rise.
In Agency Securities, the FDIC Insured Corporate Bond sector continues to explode in size. The market has now grown to over 100BB, since its initial issuance in November. These bonds have NO CREDIT RISK, as they carry the governments Full Faith and Credit backing.. 2 year bonds trade at 70 Basis Points over Treasurys @ 1.70% 3 year Bonds @ 80 Over Treasurys or 2.20%... More than ever, FNMA FHLMC and FHLB will be leaned on by the government to help resolve the Mortgage Crisis, and I reckon that credit risk in those entities is miniscule. Bonds with at least 1 year of call protection are the best value.
LIQUIDITY FOR SECURITIES THAT ARE IMPAIRED REMAINS AWFUL. In credit, there are MANY MANY MULTIPLES OF SELLERS of AIG and its entities International Lease Finance, and American General, HSBC, Citigroup, Bank America, Merrill Lynch, Prudential, Genworth Financial, Hartford Insurance, Ford, and GMAC FOR ANY BUYER... CPI Floating Rate Notes, and Bill Based Floating rate notes also struggle to find a Bid Side..
The large global Financial Issues (1BB+ in size) which in previous years would have a daily trading volume of 30-40mm Bonds per day, in today's market might only trade a few million, sometimes much less on a given day.
In Municipal's, bonds that have only insured ratings, and/or weak underlying ratings are also a struggle to sell. In my opinion, the market has had a structural change with the losses of a number of large brokerage company balance sheets, and the liquidation of so many levered hedge funds..In the past, these were the buyers of last resort, who could be counted on providing a "down" bid..but it was liquidity nonetheless.
On the flip side, keep in mind that quality paper in any sector will have a decent bid, in even poor market conditions. In Muni's, that means Hi Quality State, County and City GO's and essential purpose revs.. In Corporates, companies that have solid investment grade ratings, and good cash flow.
The banking crisis and the economy will still be down for longer than anyone wants to believe.
The Muni market hit a wall about two weeks ago, spreads have been widening versus the MMD scale ever since. Supply in the muni market has also been very robust, with 7BB worth of New Issues coming in each of the last few weeks.
In the high tax states, 10yr Ma State GO has widened over 25 BP's, now trading at +35 to scale.. NY City GO's have widened about 30, now trade +155 over the MMD.. Cal is trading +150 these days, but that widening took place earlier.
Corporate Bonds, which had tightened at a torrid pace from November thru mid February have slid recently
In both sectors, the market had moved too far, too fast. Take advantage of these back ups. The recession will pressure both sectors from a credit perspective, but diligent selection will provide great opportunities. Quality Investment Grade Bonds yielding 4 to 7.5% make great sense, and Muni's will be in greater and greater demand over the next few years as inevitably State and Federal Tax Rates rise.
In Agency Securities, the FDIC Insured Corporate Bond sector continues to explode in size. The market has now grown to over 100BB, since its initial issuance in November. These bonds have NO CREDIT RISK, as they carry the governments Full Faith and Credit backing.. 2 year bonds trade at 70 Basis Points over Treasurys @ 1.70% 3 year Bonds @ 80 Over Treasurys or 2.20%... More than ever, FNMA FHLMC and FHLB will be leaned on by the government to help resolve the Mortgage Crisis, and I reckon that credit risk in those entities is miniscule. Bonds with at least 1 year of call protection are the best value.
LIQUIDITY FOR SECURITIES THAT ARE IMPAIRED REMAINS AWFUL. In credit, there are MANY MANY MULTIPLES OF SELLERS of AIG and its entities International Lease Finance, and American General, HSBC, Citigroup, Bank America, Merrill Lynch, Prudential, Genworth Financial, Hartford Insurance, Ford, and GMAC FOR ANY BUYER... CPI Floating Rate Notes, and Bill Based Floating rate notes also struggle to find a Bid Side..
The large global Financial Issues (1BB+ in size) which in previous years would have a daily trading volume of 30-40mm Bonds per day, in today's market might only trade a few million, sometimes much less on a given day.
In Municipal's, bonds that have only insured ratings, and/or weak underlying ratings are also a struggle to sell. In my opinion, the market has had a structural change with the losses of a number of large brokerage company balance sheets, and the liquidation of so many levered hedge funds..In the past, these were the buyers of last resort, who could be counted on providing a "down" bid..but it was liquidity nonetheless.
On the flip side, keep in mind that quality paper in any sector will have a decent bid, in even poor market conditions. In Muni's, that means Hi Quality State, County and City GO's and essential purpose revs.. In Corporates, companies that have solid investment grade ratings, and good cash flow.
The banking crisis and the economy will still be down for longer than anyone wants to believe.
Market Reflections 3/10/2009
News from Citigroup that the troubled bank is running at a profit this year pulled investor money off the sidelines and made for one of the very best days in memory. Stocks ended at their highs with the S&P 500 up 6.4 percent at 719.46. Shares of Citigroup (C) jumped 34 percent to end at $1.42. Percentage gains at banks with higher share prices were nearly as strong, underscoring the strength in the day's surge: PNC up 24 percent at $24.51 and JP Morgan up 20 percent at $19.15. Also helping the market is talk in Washington of changes to mark-to-market accounting, which has been widely blamed for adding to the troubles in the financial sector.
Investors sold gold to buy stocks. Gold fell nearly $25 to end at $897.90. There wasn't much movement in the dollar which dipped slightly to end at $1.2674 against the euro. But Treasury yields did move as money was pulled out of the market and put into the stock market. Yields were up as much as 15 basis points on the long end of the curve where the 30-year bond is yielding 3.72 percent. Despite the rise in yields, demand was very strong for the day's heavy run of auctions capped off by a very strong 3-year offering. The Treasury will auction 10-year notes and 30-year bonds on Wednesday and Thursday. Oil dipped back to $45.76 for April WTI.
Investors sold gold to buy stocks. Gold fell nearly $25 to end at $897.90. There wasn't much movement in the dollar which dipped slightly to end at $1.2674 against the euro. But Treasury yields did move as money was pulled out of the market and put into the stock market. Yields were up as much as 15 basis points on the long end of the curve where the 30-year bond is yielding 3.72 percent. Despite the rise in yields, demand was very strong for the day's heavy run of auctions capped off by a very strong 3-year offering. The Treasury will auction 10-year notes and 30-year bonds on Wednesday and Thursday. Oil dipped back to $45.76 for April WTI.
Tuesday, March 10, 2009
Monkey See, AIG Do
By Dr. Joseph R. Mason Hermann Moyse, Jr. - Louisiana Bankers Association Endowed Professor of Banking, Louisiana State University; Senior Fellow, The Wharton School; and Partner, Empiris, LL.
Policy rhetoric is now taking a turn to the ludicrous. I feel like real life is approaching the stories reported in the Onion. Bernanke is suddenly “angry” at the AIG bailout. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.” REALLY!?!? “[The company] made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system.” AMAZING!
Suddenly we are shocked to learn that the first $150 billion – granted with virtually no controls over an insolvent firm – was inadequate to turn the firm around. Even more shockingly, AIG officials were reluctant to sell off portions of the firm, which would have substantially reduced the value of their holdings and put them out of their jobs. SHOCKING! Managers acting in their own self- interest? ABSOLUTELY SHOCKING!
When AIG modeled its operations after hedge funds, it leveraged its off-balance sheet operations to create massive unfunded counterparty exposures that made the firm “systemically important.” Reports suggest that there remain some $300 billion in net notional exposures that must be resolved. Hence, I think the magic number for government infusions here is $300 billion, because the bleeding won’t stop until Treasury commits at least that much, if they want to “reduce the systemic importance.” More than $300 billion will be required if any direct investors are to be rescued. At the end of the road, however, there are few tangible assets to support any substantial going concern value. Critics, including former AIG Chief Executive Officer Maurice “Hank” Greenberg, said the strategy of breaking apart the insurer and selling units wouldn’t reap enough to repay AIG loans.
The fallacy lies in acting as if the result is somehow unprecedented. We have seen this all before. AIG’s business was spread across 130 countries and 400 regulators. None of those regulators apparently caught the hedge fund play and resolved the “systemic importance” issue. Remember the BCCI scandal? Before BCCI failed in 1991, it built up a corporate structure so complex that it could operate virtually unregulated all over the world. BCCI used more than 400 shell companies, offshore banks, branches, and subsidiaries, and unregulated accounts in the Cayman Islands and elsewhere to hide crooked operations with fictitious transactions.
Like AIG, BCCI based its operations in countries where regulation was weakest. If BCCI encountered a legal impediment, it would often be able to circumvent the problem by creating a new affiliate or acting through one of its myriad existing entities. [For further reading, see the December 1992 Report to the United States Senate Committee on Foreign Relations at http://www.fas.org/irp/congress/1992_rpt/bcci/.] The international context of AIG makes BCCI look puny.
In the meantime, the public policy rhetoric is attempting to sell taxpayers a bill that is not theirs to pay. Bernanke said the revised bailout gives taxpayers “the best chance” of eventually recovering “most or all of the investments” the public has made. Such specious statements are translatable as “AIG has us up against the wall, so we have to throw good money after bad.” Otherwise, the threat is that AIG won’t be able to support its counterparty relationships with “the banks.”
Which banks, in particular? Apparently it is those banks that… well, also modeled their operations after hedge funds and are also, therefore, “systemically important,” by the Federal Reserve’s and Treasury’s accounts. Banks’ total assets as of December 31, 2008 were just over $13.9 trillion, with total industry equity capital of $1.3 trillion. But bank notional derivatives exposures as of December 31, 2008 were $201 trillion, sitting on top of another $7.2 trillion in commitments to lend, $2 trillion in securitized assets, and $1 trillion in standby letters of credit and foreign office guarantees, for a total exposure of $225.1 trillion, or a leverage ratio of about 173:1 on total industry capital!
Of course, today’s situation is primarily focused on large banks. Looking only at the 86 U.S. banks with assets larger than $10 billion, there are still notional derivatives exposures as of December 31, 2008 of $201 trillion, sitting on top of another $5.6 trillion in commitments to lend, $2 trillion in securitized assets, and nearly $1 trillion in standby letters of credit and foreign office guarantees, for a total exposure of $219.4 trillion, or a leverage ratio of more than 241:1 on large-bank capital of $909 billion.
According to Timothy Geithner, “AIG is a huge, complex, global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision.” The adults not only supervise the play, however, they also help choose good playmates. The question begs to be asked, therefore, who allowed the large banks to enter counterparty relationships with AIG in the first place? That would be the bank regulators – the same ones now threatened with the large banks’ leverage of 241:1.
I disagree with Geithner’s assertion that because of “the risks AIG poses to the economy, …the most effective thing to do is to make sure the firm can be restructured over time.” There is no core at AIG to restructure. With a failed business model and all the assets hypothecated elsewhere, the only asset of value is the copy machine toner. Providing more capital and liquidity to others in the industry won’t help, either, since many other firm assets are also hypothecated to cover similar off-balance sheet commitments.
The way out of this situation, therefore, is not further support for the unstable and opaque counterparty relationships that are causing the “systemic importance,” but revealing those relationships and unwinding the exposures. It is a large task, but one that is not optional. Will policymakers continue to fiddle while our financial markets and economies burn?
Policy rhetoric is now taking a turn to the ludicrous. I feel like real life is approaching the stories reported in the Onion. Bernanke is suddenly “angry” at the AIG bailout. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.” REALLY!?!? “[The company] made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system.” AMAZING!
Suddenly we are shocked to learn that the first $150 billion – granted with virtually no controls over an insolvent firm – was inadequate to turn the firm around. Even more shockingly, AIG officials were reluctant to sell off portions of the firm, which would have substantially reduced the value of their holdings and put them out of their jobs. SHOCKING! Managers acting in their own self- interest? ABSOLUTELY SHOCKING!
When AIG modeled its operations after hedge funds, it leveraged its off-balance sheet operations to create massive unfunded counterparty exposures that made the firm “systemically important.” Reports suggest that there remain some $300 billion in net notional exposures that must be resolved. Hence, I think the magic number for government infusions here is $300 billion, because the bleeding won’t stop until Treasury commits at least that much, if they want to “reduce the systemic importance.” More than $300 billion will be required if any direct investors are to be rescued. At the end of the road, however, there are few tangible assets to support any substantial going concern value. Critics, including former AIG Chief Executive Officer Maurice “Hank” Greenberg, said the strategy of breaking apart the insurer and selling units wouldn’t reap enough to repay AIG loans.
The fallacy lies in acting as if the result is somehow unprecedented. We have seen this all before. AIG’s business was spread across 130 countries and 400 regulators. None of those regulators apparently caught the hedge fund play and resolved the “systemic importance” issue. Remember the BCCI scandal? Before BCCI failed in 1991, it built up a corporate structure so complex that it could operate virtually unregulated all over the world. BCCI used more than 400 shell companies, offshore banks, branches, and subsidiaries, and unregulated accounts in the Cayman Islands and elsewhere to hide crooked operations with fictitious transactions.
Like AIG, BCCI based its operations in countries where regulation was weakest. If BCCI encountered a legal impediment, it would often be able to circumvent the problem by creating a new affiliate or acting through one of its myriad existing entities. [For further reading, see the December 1992 Report to the United States Senate Committee on Foreign Relations at http://www.fas.org/irp/congress/1992_rpt/bcci/.] The international context of AIG makes BCCI look puny.
In the meantime, the public policy rhetoric is attempting to sell taxpayers a bill that is not theirs to pay. Bernanke said the revised bailout gives taxpayers “the best chance” of eventually recovering “most or all of the investments” the public has made. Such specious statements are translatable as “AIG has us up against the wall, so we have to throw good money after bad.” Otherwise, the threat is that AIG won’t be able to support its counterparty relationships with “the banks.”
Which banks, in particular? Apparently it is those banks that… well, also modeled their operations after hedge funds and are also, therefore, “systemically important,” by the Federal Reserve’s and Treasury’s accounts. Banks’ total assets as of December 31, 2008 were just over $13.9 trillion, with total industry equity capital of $1.3 trillion. But bank notional derivatives exposures as of December 31, 2008 were $201 trillion, sitting on top of another $7.2 trillion in commitments to lend, $2 trillion in securitized assets, and $1 trillion in standby letters of credit and foreign office guarantees, for a total exposure of $225.1 trillion, or a leverage ratio of about 173:1 on total industry capital!
Of course, today’s situation is primarily focused on large banks. Looking only at the 86 U.S. banks with assets larger than $10 billion, there are still notional derivatives exposures as of December 31, 2008 of $201 trillion, sitting on top of another $5.6 trillion in commitments to lend, $2 trillion in securitized assets, and nearly $1 trillion in standby letters of credit and foreign office guarantees, for a total exposure of $219.4 trillion, or a leverage ratio of more than 241:1 on large-bank capital of $909 billion.
According to Timothy Geithner, “AIG is a huge, complex, global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision.” The adults not only supervise the play, however, they also help choose good playmates. The question begs to be asked, therefore, who allowed the large banks to enter counterparty relationships with AIG in the first place? That would be the bank regulators – the same ones now threatened with the large banks’ leverage of 241:1.
I disagree with Geithner’s assertion that because of “the risks AIG poses to the economy, …the most effective thing to do is to make sure the firm can be restructured over time.” There is no core at AIG to restructure. With a failed business model and all the assets hypothecated elsewhere, the only asset of value is the copy machine toner. Providing more capital and liquidity to others in the industry won’t help, either, since many other firm assets are also hypothecated to cover similar off-balance sheet commitments.
The way out of this situation, therefore, is not further support for the unstable and opaque counterparty relationships that are causing the “systemic importance,” but revealing those relationships and unwinding the exposures. It is a large task, but one that is not optional. Will policymakers continue to fiddle while our financial markets and economies burn?
Inflation coming?
OK... I've been reading a book that was written some time ago, by Christopher Wood, called the "Bubble Economy"... Sounds like he was writing about the U.S. eh? I'm afraid not! He was writing about Japan in the 90's... And you know me, I've been writing about how we are following Japan's footsteps to their disastrous decade of the 90's, so I just had to pick up this book and read it, to see what other comparisons could be picked up... And half way into the book, I found it... OK... Now that I've already told you that this is Japan in the 90's, you are aware that it's not the U.S. now... But... I'm sure you'll see what I'm talking about here... So, here's Christopher Wood... "Debt Deflation" was a term used by American Irving Fisher, a Yale economist, in an article written in 1933 at the nadir of the Great Depression. The Debt Deflation Theory of Great Depressions, was revolutionary. It identified two stages on the road to depression. First, too-high levels of aggregate debt depress economic activity because of all the money spent servicing that debt. (paying interest) Fisher termed this debt deflation. This is what Japan has suffered in their property markets as asset values have collapsed and debts have gone bad. Fisher argued that debt deflation only leads to general depression when there is a fall in the general price level. Just as a bad cold leads to pneumonia, so over-indebtedness leads to deflation." Now... Doesn't that sound exactly like what happened here in the U.S.? I'm turning Japanese, I really think so... OK... Enough of that... How about mixing in some Warren Buffett to my story about how that on the other side of this deflationary asset price scenario that's going on right now, is soaring inflation? Well... Warren, welcome to my wagon! Let's listen in to Mr. Buffett... Billionaire Warren Buffett, whose Berkshire Hathaway, Inc. posted its worst results ever in 2008, said the economy "has fallen off a cliff and that efforts to stimulate the economy may lead to inflation higher than the 1970's."
The next bubble to pop?
You must recall, me saying on more than one occasion that I believed U.S. Treasuries were the next bubble to pop... If you're with me on that, then let's talk about something that might cause that bubble to pop... Ahhh...
Here we go! We have 3 separate auctions going on this week with a total of $92 Billion of Treasuries on the selling blocks...
We start with an astronomical $63 Billion of 3-year notes, followed the next day by $18 Billion of 10-year Notes, and finally $11 Billion of 30-year bonds...
Now... Let's circle back to the financing of our deficit...
Recall that many times I've explained how The deficit needs to be financed by foreigner purchases... And when those foreigner purchases aren't enough to finance the deficit, the Gov't only has two choices...
They can raise interest rates aggressively in an attempt to attract foreign investment... (but by doing so, would bring their economy to their knees) -OR- The Gov't can allow / force a debasement of their currency, a general weakening if you will, to allow those purchases to be made at a "discount".
For you see, any foreign investment into Treasuries, has to be made with dollars, so the foreigner needs to convert their currency for dollars... If those dollars are at a "discount" then the foreign investors gets the bargain!
So... Here we go with the big crescendo... The fears late yesterday and in the overnight markets is that these auctions carry notes and bonds with yields that just aren't of the making to attract enough investment interest to be covered... Well... If the auction doesn't go well, that means we have a financing problem, and with our economy in the shape it's in, there's no ability to aggressively raise interest rates... So... the only choice is to have a weaker dollar! And here's where I get to mock those that believed that "deficits don't matter"... They all come home to roost eventually folks...
Here we go! We have 3 separate auctions going on this week with a total of $92 Billion of Treasuries on the selling blocks...
We start with an astronomical $63 Billion of 3-year notes, followed the next day by $18 Billion of 10-year Notes, and finally $11 Billion of 30-year bonds...
Now... Let's circle back to the financing of our deficit...
Recall that many times I've explained how The deficit needs to be financed by foreigner purchases... And when those foreigner purchases aren't enough to finance the deficit, the Gov't only has two choices...
They can raise interest rates aggressively in an attempt to attract foreign investment... (but by doing so, would bring their economy to their knees) -OR- The Gov't can allow / force a debasement of their currency, a general weakening if you will, to allow those purchases to be made at a "discount".
For you see, any foreign investment into Treasuries, has to be made with dollars, so the foreigner needs to convert their currency for dollars... If those dollars are at a "discount" then the foreign investors gets the bargain!
So... Here we go with the big crescendo... The fears late yesterday and in the overnight markets is that these auctions carry notes and bonds with yields that just aren't of the making to attract enough investment interest to be covered... Well... If the auction doesn't go well, that means we have a financing problem, and with our economy in the shape it's in, there's no ability to aggressively raise interest rates... So... the only choice is to have a weaker dollar! And here's where I get to mock those that believed that "deficits don't matter"... They all come home to roost eventually folks...
Market Reflections 3/9/2009
Warren Buffett made the headlines Monday, saying in a lengthy CNBC interview that the economy has "fallen off a cliff" and that consumer behavior has changed to a degree the 78-year-old billionaire has never seen before. But Buffett is optimistic saying the banking sector will recover and that, on a long term basis, stocks are a good investment. Stocks rallied at the opening but faded through the session to end down 1% on the S&P 500 to 676.53. News of a giant $41 billion merger between drug rivals Merck and Schering-Plough failed to lift spirits. Other markets showed a gain for oil, at $47.09 for April WTI, and a dip for gold, ending at $920.60. The first Japanese trade deficit in 13 years, reflecting the export bust, sent the dollar up one full yen to end at Y98.85. Against the euro, the dollar firmed to $1.2607.
Monday, March 9, 2009
Washington’s Record as Investment Manager
Think the markets are kicking you around in 2009? Be thankful your portfolio isn’t performing like that of the federal government in its role as investor of last resort.
The Government Relief Index, created by the Nasdaq OMX to measure the performance of the 21 stocks that received at least $1 billion in emergency government funding, is down a whopping 58 percent.
And that’s just since January 5, when the index started.
This index, with the ticker QGRI, started with a value of 1,000 and on Friday it closed at 418.27.
Think the markets are kicking you around in 2009? Be thankful your portfolio isn’t performing like that of the federal government in its role as investor of last resort.
The Government Relief Index, created by the Nasdaq OMX to measure the performance of the 21 stocks that received at least $1 billion in emergency government funding, is down a whopping 58 percent.
And that’s just since January 5, when the index started.
This index, with the ticker QGRI, started with a value of 1,000 and on Friday it closed at 418.27.
By comparison, the S&P 500 Index is down 25.9 percent over the same 60 days, the Dow Jones Industrial Average 25.4 percent and the Nasdaq 20.4 percent.
Granted, the QGRI has a bit of a disadvantage compared to the other measures – it’s loaded with shares of banks, insurance companies and General Motors.
The worst-performing holding in the QGRI is Huntington Bancshares, down 86.7 percent since January 5, followed by Citigroup, down 84.7 percent. Bank of America and AIG are both off 77.7 percent.
A single stock in the QGRI is positive during the period – Morgan Stanley, which is up 7.1 percent. Northern Trust, down 9.1 percent, and Goldman Sachs, off 10.4 percent, are next.
Ford Motor Co. is looking all the better for not taking any emergency money from Washington. Its shares have declined 31 percent, roughly half of the slide experienced by General Motors, which is down 60 percent over the 60-day period.
Index Summary 3-6-09
● The major market indices were lower this week. The Dow Jones Industrial Index (1) fell 6.17 percent. The S&P
500 Stock Index (2) lost 7.03 percent, while the Nasdaq Composite (3) finished 6.10 percent lower.
● Barra Growth (4) outperformed Barra Value (5) as Barra Value finished 8.83 percent lower while Barra Growth
declined 5.55 percent. The Russell 2000 (6) closed the week with a loss of 9.76 percent.
● For the week, the Hang Seng Composite (7) finished lower by 4.66 percent; Taiwan (8) rose by 2.12 percent, and
the Kospi (9) fell 0.75 percent.
● The 10-year Treasury bond yield closed at 2.88 percent, down 17 basis points for the week.
500 Stock Index (2) lost 7.03 percent, while the Nasdaq Composite (3) finished 6.10 percent lower.
● Barra Growth (4) outperformed Barra Value (5) as Barra Value finished 8.83 percent lower while Barra Growth
declined 5.55 percent. The Russell 2000 (6) closed the week with a loss of 9.76 percent.
● For the week, the Hang Seng Composite (7) finished lower by 4.66 percent; Taiwan (8) rose by 2.12 percent, and
the Kospi (9) fell 0.75 percent.
● The 10-year Treasury bond yield closed at 2.88 percent, down 17 basis points for the week.
Saturday, March 7, 2009
Weekly Market Review
Courtesy Payden & Rygel
HEADLINE NEWS WEEK ENDING 3/6/09
Overview
The US economy shed 651,000 jobs in February and has lost a total of 4.4 million jobs since the recession began in December 2007. more: http://payden.com/library/weeklyMarketUpdateE.aspx#overview
US MARKETS
Treasury/Economics
Treasury yields headed lower this week as investors placed more credence on deteriorating fundamental data than on supply and funding concerns.
http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Large-Cap Equities
The stock market dropped for the fourth consecutive week and reached new lows for the year due to worsening economic conditions and further losses in the financial sector.
Corporate Bonds
Investment grade primary activity continued despite the slide in equities. New issue concession has dwindled slightly over the year.
Mortgage-Backed Securities
Agency mortgages kept pace with Treasuries in the bond market rally and outperformed credit and equity markets.
Municipal Bonds
This week’s municipal bond market theme: “indigestion”. While 2-year AAA-rated general obligation (GO) bond yields were up just 2 bps, to 1.22%, 5-year yields jumped 14 bps to 2.30%, 7-year yields jumped 22 bps to 2.74% and 10-year yields up 21 to 3.29%.
High-Yield
The preponderance of weak economic data (low consumer confidence and growing global unemployment) combined with free-falling equity markets have taken much of the strength out of the high yield market.
INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe lost ground over the past week. The stocks with the worst performance were banks (-17.6%) and insurance (-17.5%).
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +2.3% this week, while the Russian stock index RTS went up by +5.8%.
Global Bonds and Currencies
Most major sovereign markets strengthened over the past week as stock markets hit multi-year lows and the Bank of England (BoE) and the European Central Bank (ECB) reduced rates.
Emerging-Market Bonds
Emerging market dollar-pay debt spreads widened this week. Risk aversion once again dominated markets, as reflected in new multi-year lows being reached in major equity indices.
FACTORS SHAPING THE MARKET NEXT WEEK
Next week, the economic data calendar will lighten up in the United States. Thursday’s report on retail sales will likely garner the most attention as investors and economists seek to gauge the impact of the deterioration in the labor market on consumer spending.
For more information, please contact 800 5-PAYDEN or visit payden.com.
If you have difficulties viewing this e-mail and would prefer the Weekly Market Update in plain text format, please e-mail us at paydenrygel@payden-rygel.com. To unsubscribe from this email, please email us at unsubscribe@payden-rygel.com.
Have a great weekend!
HEADLINE NEWS WEEK ENDING 3/6/09
Overview
The US economy shed 651,000 jobs in February and has lost a total of 4.4 million jobs since the recession began in December 2007. more: http://payden.com/library/weeklyMarketUpdateE.aspx#overview
US MARKETS
Treasury/Economics
Treasury yields headed lower this week as investors placed more credence on deteriorating fundamental data than on supply and funding concerns.
http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Large-Cap Equities
The stock market dropped for the fourth consecutive week and reached new lows for the year due to worsening economic conditions and further losses in the financial sector.
Corporate Bonds
Investment grade primary activity continued despite the slide in equities. New issue concession has dwindled slightly over the year.
Mortgage-Backed Securities
Agency mortgages kept pace with Treasuries in the bond market rally and outperformed credit and equity markets.
Municipal Bonds
This week’s municipal bond market theme: “indigestion”. While 2-year AAA-rated general obligation (GO) bond yields were up just 2 bps, to 1.22%, 5-year yields jumped 14 bps to 2.30%, 7-year yields jumped 22 bps to 2.74% and 10-year yields up 21 to 3.29%.
High-Yield
The preponderance of weak economic data (low consumer confidence and growing global unemployment) combined with free-falling equity markets have taken much of the strength out of the high yield market.
INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe lost ground over the past week. The stocks with the worst performance were banks (-17.6%) and insurance (-17.5%).
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +2.3% this week, while the Russian stock index RTS went up by +5.8%.
Global Bonds and Currencies
Most major sovereign markets strengthened over the past week as stock markets hit multi-year lows and the Bank of England (BoE) and the European Central Bank (ECB) reduced rates.
Emerging-Market Bonds
Emerging market dollar-pay debt spreads widened this week. Risk aversion once again dominated markets, as reflected in new multi-year lows being reached in major equity indices.
FACTORS SHAPING THE MARKET NEXT WEEK
Next week, the economic data calendar will lighten up in the United States. Thursday’s report on retail sales will likely garner the most attention as investors and economists seek to gauge the impact of the deterioration in the labor market on consumer spending.
For more information, please contact 800 5-PAYDEN or visit payden.com.
If you have difficulties viewing this e-mail and would prefer the Weekly Market Update in plain text format, please e-mail us at paydenrygel@payden-rygel.com. To unsubscribe from this email, please email us at unsubscribe@payden-rygel.com.
Have a great weekend!
Beige Book calls for extended recession
seems that the Fed may be more honest than we want about the economy. For weeks, we’ve been getting just gloomy outlooks for the near term. And the latest Beige Book was not an exception. The Beige Book prepared for the March 17-18 FOMC meeting confirmed recent statements from Fed officials that the recession is worsening in the first quarter—but about as was expected at this point. The standout statement is that no significant recovery is seen before the end of this year or early 2010. It seems that forecasts for recovery in late 2009 now have been hedged with the rebound date also including the possibility of early 2010.
"Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010."
The Beige Book indicated that manufacturing has worsened, consumer spending is still sluggish but slightly firmed from December, residential real estate remains stagnant, and unemployment is rising. Basically, economic deterioration is broad-based but essentially as expected.
It was no surprise that consumer spending habits have changed sharply during the recession – and discounters are the beneficiaries.
"As reported by Richmond, Chicago, and San Francisco, discount chains fared much better than traditional department stores and specialized retailers, recording sales gains in many cases as consumers continued to switch away from discretionary spending and luxury items and toward basic necessities."
The Beige Book also notes that price pressures have eased—including for wages.
"Upward price pressures continued to ease across a broad spectrum of final goods and services. This was largely associated with lower prices for energy and assorted raw materials compared with earlier periods, but also with weak final demand more generally, which spurred price discounting for items other than energy and food."
On the critical issue of housing stabilizing, there are few signs of that. Residential real estate activity remains depressed and house prices continue to fall. The bottom line is that the recession is worsening but there were no unexpected bombs from the latest Beige Book. We are still on track for a longer and deeper than average recession.
The bottom line
The recession clearly has worsened in the first quarter. The good news is that inflation has eased sharply, leaving the Fed much leeway to continue its credit easing. But there are yet no signs of the recession bottoming. This is why equities continue to drift down as fiscal stimulus has not yet kicked in and banks are not doing much lending. These are reasons why the Fed’s TALF facility may be critical to boosting consumer and small business credit to get the economy moving.
"Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010."
The Beige Book indicated that manufacturing has worsened, consumer spending is still sluggish but slightly firmed from December, residential real estate remains stagnant, and unemployment is rising. Basically, economic deterioration is broad-based but essentially as expected.
It was no surprise that consumer spending habits have changed sharply during the recession – and discounters are the beneficiaries.
"As reported by Richmond, Chicago, and San Francisco, discount chains fared much better than traditional department stores and specialized retailers, recording sales gains in many cases as consumers continued to switch away from discretionary spending and luxury items and toward basic necessities."
The Beige Book also notes that price pressures have eased—including for wages.
"Upward price pressures continued to ease across a broad spectrum of final goods and services. This was largely associated with lower prices for energy and assorted raw materials compared with earlier periods, but also with weak final demand more generally, which spurred price discounting for items other than energy and food."
On the critical issue of housing stabilizing, there are few signs of that. Residential real estate activity remains depressed and house prices continue to fall. The bottom line is that the recession is worsening but there were no unexpected bombs from the latest Beige Book. We are still on track for a longer and deeper than average recession.
The bottom line
The recession clearly has worsened in the first quarter. The good news is that inflation has eased sharply, leaving the Fed much leeway to continue its credit easing. But there are yet no signs of the recession bottoming. This is why equities continue to drift down as fiscal stimulus has not yet kicked in and banks are not doing much lending. These are reasons why the Fed’s TALF facility may be critical to boosting consumer and small business credit to get the economy moving.
Market Reflections
February's jobs report was a disaster but at least it was a disaster that was expected. In fact, the markets already expect the unemployment rate to move to 9 percent sometime about mid-year, though the 5-tenth single-month jump in February to 8.1 percent is definitely steep. Payroll data so far this year show numbing declines approaching 700,000 each month, but better days, thanks to stimulus, are expected ahead. Stocks rose in reaction to the report, only to reverse and then rebound in late trading to end 0.1 percent higher at 683.38 on the S&P 500. The early rally in stocks pulled money out of the safety of the dollar and Treasuries. The dollar fell about 1 cent against the euro to $1.3651 while the 2-year yield rose 7 basis points to 0.96 percent. Crude firmed to end at $45.76 for April WTI while gold firmed slightly to end just under $940.
Friday, March 6, 2009
Jobless Rate Jumps to 8.1%; Nonfarm Payrolls Drop 651,000
NEWS ALERTfrom The Wall Street Journal March 6, 2009 U.S. nonfarm payrolls dropped 651,000 in February, almost right on expectations of a 652,000 loss. The unemployment rate rose to 8.1%, from 7.6% in January. The jobless rate is the highest since 1983. The economy has now shed 4.4 million jobs since the recession began in December 2007, with almost half of those losses occurring in the last three months alone. For more information, see:http://online.wsj.com/article/SB123634566437552601.html?mod=djemalertNEWS
Unemployment is now clearly on trajectory to achieve 10% or higher by year end, as I predicted.
This recession began in December 2007 and got worse in 2008. Obama was nominated in late 2008 and elected in November 2008 on a platform of change. The media thought that this would be change for the better.
Ask yourself: "Are you better off now than November 2008?"
Only the naieve could answer yes in the face of the facts of life:
1.Foreclosures and real estate collapse have accelerated DRAMATICALLY in the last quarter
2. Bankruptcies have accelerated dramatically in the last quarter
3. GDP has shrunk and continues to shrink
4 Congress has passed the largest boondoggle spending bill under the lie of "Stimulus". We dont have the money to pay for this. Nor do our children.
5 Obama promised to eliminate "earmarks". Watch his lips. He lied. He signed the above bill into law complete with 8000+ earmarks untouched.
6 Credit card defaults have accelerated and credit card interest charges have hit the roof...Citibank (you know the bankrupt bank we the taxpayer own) has raised everyones interest rate on credit cards to 29.99% cause they can as long as they tell you in advance that they will do this. They hid this notice in your monthly bill. A clear violation of fair dealing. Attorneys general countrywide are ignoring this.Why? Is it rational to expect strapped citizens to pay more interest! why are the politicians not doing something about this?
7. Congress is trying to run businesses!!! Which is why Citi is bankrupt, AIG is bankrupt and insolvent, GM and Chrysler too and of course add in Fredie Mac and Fannie Mae and it is obvious that the patient will soon bleed to death.
ARE YOU BETTER OFF?
Where is the hope for the future? No jobs, higher taxes, massive systemic unemployment, financial losses everywhere....and thats just at home.
In foreign policy, you know, where Government is supposed to keep us safe...Iran has won and will start up a nuclear power plant if it hasnt already done so and our Government dosent know or worse wont tell us.
We have destroyed our European allies confidence in our support by offering to trade off Baltic states security (giving up missile defences aimed at IRAN)and begging Russia to stop supporting IRAN. Of course Russia's Medvedev contemptiously rejected this. Obama failed that test. But then who cares about the Baltic states(where are they anyway).
Our government promises to close a prison housing the worst enemies of our state (where they are treated better than our own convicted murderers) without a plan to dispose of accused and confessed jihadists (no credible PROOF they were tortured) who have publically vowed to take up arms against us as soon as they can. It is proven... we let some go and they did just this!! You feel safer now?You didnt know? Ask your congressperson if they know.
We have told everyone that we will stop combat operations in Iraq in 19 months. Bravo. We won. No more need for combat. Iraq is a sucess at governing itself. You heard Al Qaeda say the same thing? Feel an impending sense of doom? Are your kids some of the 50,000 soldiers we will leave in Iraq to become targets without the ability to continue "combat operation"? Remember Vietnam? Same thing only no carpet bombing. Talk about again turning victory into defeat!!
And the doozy of them all: Gaza/Hamas/Israel. We are sending billions to a failed political administration that used the last billions we gave them to send rockets to kill anything that moves in Israel and vows to continue to do so. Nobody lifted a finger worldwide when Israel, a soverign democracy, exercised its right of self defense and retaliated. Now Hilary (presumably with O's approval) plans to give billions to rebuild the destroyed infrastructure and AGAIN make it possible for contemptuous terrorists to continue killing defenceless civilians with outlawed tactics of indiscrimainate bombing.
Remember Jimmy Carter shaking hands with a terrorist killer Arafat at Camp David, only to see an Intifada erupt in Israel before the echoes of "peace in our time" died out. And we financed that little genocide!!! Thanks Jimmy...Once again we repeat that mistake.
Feel safer yet? Think our allies feel better about us?
Think we the voters dont care or are unaware?
Really Chuck Schumer? Still think we the voters dont care about a "little porky spending"?
This unrelentless decline in our standard of living, our ability to plan for retirement (your annuities are not going to pay you out when Insurance companies are bankrupt) and the money you do get will be worth less and less...inflation IS coming,
is all happening because our political establishment is TOTALLY UNABLE top rovide solutions to our economic problems that do not involve more taxes (there is an incentive to work harder now!!) or less tax deductions, or senseless pork barrel spending or a credible solution to our housing cris.
This Government is destroying our future American Dream including breaking the explicit contract with its citizens over their right to a house to live in!! They are destroying the opportunities to build a home and a future for our families and providing NO CREDIBLE ALTERNATIVE...
This Government should:
1. Set up a mortgage buying program so that every homeowner living with their family in their home can sell their existing mortgage to the Government and replace it with a 30yr fixed rate mortgage at 4% rate with principal adjusted to reflect the family ability to pay no more than 31% of Gross income as reported onlatest Tax retun. No tax return no mortgage. Government gets to issue these mortgages and second mortgages interest free payable at sale of home in the future.
2. Revoke all earmarks. As promised by our president.
3 spend money on government projects that can be guranteed to break ground within 30 days. Officials proven to have misrepresented these projects should be forced to resign if convicted..without golden parachutes. All non-esstential spending in these projects (clearly not DIRECTLY contributing to the progress of these projects)to be refunded with interest to Treasury within 7 days. Resignation to follow and no further participation in any Government projects to be permanently forbidden.
4. Stop all foreign policy efforts that threaten the security of the nation At a minimum stop funding any and all efforts connected to terrorist organizations, terrorist states and any organization supporting these. Start with Hamas, Iran and go from there or prove clearly that sending mony from US taxpayers to terrorists will make us tangibly and immediately safer. Do not rely on treaties made with terrorists. Defeat terrorism dont bargain with it...every single time in the last 100 years we have appeased terrorists, Nazis, jihadists, drug dealers, despots and dictators this country has become worse off.
The first task of our Government now is to make this country prosperous again. The markets worldwide, stock and commodity and any other kind, is voting a huge NO to the weak flailing of our legislators. You wont be able to persuade a rational businessperson to invest for the future when all they face is undefined but definitely higher taxes and costs of doing business. There is no way to play the game when the referees are making up the rules as they go...especially when the referees cant show that they have run a business or balanced a budget or are able to act with impartiality for the good of the nation.
Well? How can you conclude that you are better off? There is no evidence we are not circling the toilet bowl. Hope and change dont keep the bill collectors from hounding us to death. We are tangibly less safe than just 6 months ago...drug lords run the biggest country on our border..Mexico.
This government is failing this nation!!
We dont feel better about the future..we feel worse. You cant spend Hope especially if it isnt there.
We are not better off. Beware the ballot box in a few years..oh yes I forgot, election campaigns are about to start again. God help us all!
Unemployment is now clearly on trajectory to achieve 10% or higher by year end, as I predicted.
This recession began in December 2007 and got worse in 2008. Obama was nominated in late 2008 and elected in November 2008 on a platform of change. The media thought that this would be change for the better.
Ask yourself: "Are you better off now than November 2008?"
Only the naieve could answer yes in the face of the facts of life:
1.Foreclosures and real estate collapse have accelerated DRAMATICALLY in the last quarter
2. Bankruptcies have accelerated dramatically in the last quarter
3. GDP has shrunk and continues to shrink
4 Congress has passed the largest boondoggle spending bill under the lie of "Stimulus". We dont have the money to pay for this. Nor do our children.
5 Obama promised to eliminate "earmarks". Watch his lips. He lied. He signed the above bill into law complete with 8000+ earmarks untouched.
6 Credit card defaults have accelerated and credit card interest charges have hit the roof...Citibank (you know the bankrupt bank we the taxpayer own) has raised everyones interest rate on credit cards to 29.99% cause they can as long as they tell you in advance that they will do this. They hid this notice in your monthly bill. A clear violation of fair dealing. Attorneys general countrywide are ignoring this.Why? Is it rational to expect strapped citizens to pay more interest! why are the politicians not doing something about this?
7. Congress is trying to run businesses!!! Which is why Citi is bankrupt, AIG is bankrupt and insolvent, GM and Chrysler too and of course add in Fredie Mac and Fannie Mae and it is obvious that the patient will soon bleed to death.
ARE YOU BETTER OFF?
Where is the hope for the future? No jobs, higher taxes, massive systemic unemployment, financial losses everywhere....and thats just at home.
In foreign policy, you know, where Government is supposed to keep us safe...Iran has won and will start up a nuclear power plant if it hasnt already done so and our Government dosent know or worse wont tell us.
We have destroyed our European allies confidence in our support by offering to trade off Baltic states security (giving up missile defences aimed at IRAN)and begging Russia to stop supporting IRAN. Of course Russia's Medvedev contemptiously rejected this. Obama failed that test. But then who cares about the Baltic states(where are they anyway).
Our government promises to close a prison housing the worst enemies of our state (where they are treated better than our own convicted murderers) without a plan to dispose of accused and confessed jihadists (no credible PROOF they were tortured) who have publically vowed to take up arms against us as soon as they can. It is proven... we let some go and they did just this!! You feel safer now?You didnt know? Ask your congressperson if they know.
We have told everyone that we will stop combat operations in Iraq in 19 months. Bravo. We won. No more need for combat. Iraq is a sucess at governing itself. You heard Al Qaeda say the same thing? Feel an impending sense of doom? Are your kids some of the 50,000 soldiers we will leave in Iraq to become targets without the ability to continue "combat operation"? Remember Vietnam? Same thing only no carpet bombing. Talk about again turning victory into defeat!!
And the doozy of them all: Gaza/Hamas/Israel. We are sending billions to a failed political administration that used the last billions we gave them to send rockets to kill anything that moves in Israel and vows to continue to do so. Nobody lifted a finger worldwide when Israel, a soverign democracy, exercised its right of self defense and retaliated. Now Hilary (presumably with O's approval) plans to give billions to rebuild the destroyed infrastructure and AGAIN make it possible for contemptuous terrorists to continue killing defenceless civilians with outlawed tactics of indiscrimainate bombing.
Remember Jimmy Carter shaking hands with a terrorist killer Arafat at Camp David, only to see an Intifada erupt in Israel before the echoes of "peace in our time" died out. And we financed that little genocide!!! Thanks Jimmy...Once again we repeat that mistake.
Feel safer yet? Think our allies feel better about us?
Think we the voters dont care or are unaware?
Really Chuck Schumer? Still think we the voters dont care about a "little porky spending"?
This unrelentless decline in our standard of living, our ability to plan for retirement (your annuities are not going to pay you out when Insurance companies are bankrupt) and the money you do get will be worth less and less...inflation IS coming,
is all happening because our political establishment is TOTALLY UNABLE top rovide solutions to our economic problems that do not involve more taxes (there is an incentive to work harder now!!) or less tax deductions, or senseless pork barrel spending or a credible solution to our housing cris.
This Government is destroying our future American Dream including breaking the explicit contract with its citizens over their right to a house to live in!! They are destroying the opportunities to build a home and a future for our families and providing NO CREDIBLE ALTERNATIVE...
This Government should:
1. Set up a mortgage buying program so that every homeowner living with their family in their home can sell their existing mortgage to the Government and replace it with a 30yr fixed rate mortgage at 4% rate with principal adjusted to reflect the family ability to pay no more than 31% of Gross income as reported onlatest Tax retun. No tax return no mortgage. Government gets to issue these mortgages and second mortgages interest free payable at sale of home in the future.
2. Revoke all earmarks. As promised by our president.
3 spend money on government projects that can be guranteed to break ground within 30 days. Officials proven to have misrepresented these projects should be forced to resign if convicted..without golden parachutes. All non-esstential spending in these projects (clearly not DIRECTLY contributing to the progress of these projects)to be refunded with interest to Treasury within 7 days. Resignation to follow and no further participation in any Government projects to be permanently forbidden.
4. Stop all foreign policy efforts that threaten the security of the nation At a minimum stop funding any and all efforts connected to terrorist organizations, terrorist states and any organization supporting these. Start with Hamas, Iran and go from there or prove clearly that sending mony from US taxpayers to terrorists will make us tangibly and immediately safer. Do not rely on treaties made with terrorists. Defeat terrorism dont bargain with it...every single time in the last 100 years we have appeased terrorists, Nazis, jihadists, drug dealers, despots and dictators this country has become worse off.
The first task of our Government now is to make this country prosperous again. The markets worldwide, stock and commodity and any other kind, is voting a huge NO to the weak flailing of our legislators. You wont be able to persuade a rational businessperson to invest for the future when all they face is undefined but definitely higher taxes and costs of doing business. There is no way to play the game when the referees are making up the rules as they go...especially when the referees cant show that they have run a business or balanced a budget or are able to act with impartiality for the good of the nation.
Well? How can you conclude that you are better off? There is no evidence we are not circling the toilet bowl. Hope and change dont keep the bill collectors from hounding us to death. We are tangibly less safe than just 6 months ago...drug lords run the biggest country on our border..Mexico.
This government is failing this nation!!
We dont feel better about the future..we feel worse. You cant spend Hope especially if it isnt there.
We are not better off. Beware the ballot box in a few years..oh yes I forgot, election campaigns are about to start again. God help us all!
Blue Chip Penny Stocks?!!!
Here’s a short list of only the highest quality, bluest of blue chip, penny stocks:
AIG (39 cents)
Citigroup (98 cents)
E*Trade (66 cents)
Fannie Mae (39 cents)
Freddie (39 cents)
Unisys (37 cents)
Given the trading volumes, you might think these were real firms or something!
Now, for the not-quite-penny stocks:
Ford ($1.83)
GM ($1.83)
Las Vegas Sands ($1.97)
MGM ($1.99)
CIT ($2)
Kodak ($2.50)
Bank of America ($3.15)
New York Times ($4.00)
News Corp ($6.15)
Xerox ($4.36)
International Paper ($4.22)
Alcoa ($5.55)
GE ($6.75)
Dow Chemical ($6.56)
Wells Fargo ($7.95)
Dell ($8.50)
It looks like American Express ($10.83) is one of the few double digit stocks . . .
Courtesy Barry Ritholz
AIG (39 cents)
Citigroup (98 cents)
E*Trade (66 cents)
Fannie Mae (39 cents)
Freddie (39 cents)
Unisys (37 cents)
Given the trading volumes, you might think these were real firms or something!
Now, for the not-quite-penny stocks:
Ford ($1.83)
GM ($1.83)
Las Vegas Sands ($1.97)
MGM ($1.99)
CIT ($2)
Kodak ($2.50)
Bank of America ($3.15)
New York Times ($4.00)
News Corp ($6.15)
Xerox ($4.36)
International Paper ($4.22)
Alcoa ($5.55)
GE ($6.75)
Dow Chemical ($6.56)
Wells Fargo ($7.95)
Dell ($8.50)
It looks like American Express ($10.83) is one of the few double digit stocks . . .
Courtesy Barry Ritholz
Market Reflections 3/5/2009
The day arrived that General Motors is talking of bankruptcy, sending money to safety in Thursday's session. The company's shares fell 15 percent to $1.86. Another routed blue chip, Citigroup, may get booted out of the Dow Jones industrial average because its share price is too low, ending today at $1.02 for another 10 percent plunge. Bank stocks in general were hit following a warning from Moody's. The GM and Moody's news, along with disappointment over lack of follow through to Chinese stimulus plans, sent the stock market tumbling once again, with the S&P 500 down 4.3 percent at 682.55.
Nearly 12 percent of U.S. homeowners with a mortgage are behind in their payments, data from the Mortgage Bankers Association. MBA said delinquency rates are now on the rise in states outside of California, Nevada or Florida. There's talk that the administration's homeowner relief program won't be much help for homeowners who are unemployed. Weekly jobless claims eased back from peak levels but are still reflecting severe contraction in the labor market. Tomorrow's monthly employment report looks to be one of the very worst on record.
The dollar firmed nearly 1 cent against the euro to end at $1.2558, gains on safe-haven buying. Money moved deeply into the front-end of the Treasury curve where the 3-month yield fell 6 basis points to 19 basis points. Gold jumped nearly $30 to $934.70. Oil, ending at $43.70 for April WTI, continues to hold in a tight range showing less and less reaction to stock market movements.
Nearly 12 percent of U.S. homeowners with a mortgage are behind in their payments, data from the Mortgage Bankers Association. MBA said delinquency rates are now on the rise in states outside of California, Nevada or Florida. There's talk that the administration's homeowner relief program won't be much help for homeowners who are unemployed. Weekly jobless claims eased back from peak levels but are still reflecting severe contraction in the labor market. Tomorrow's monthly employment report looks to be one of the very worst on record.
The dollar firmed nearly 1 cent against the euro to end at $1.2558, gains on safe-haven buying. Money moved deeply into the front-end of the Treasury curve where the 3-month yield fell 6 basis points to 19 basis points. Gold jumped nearly $30 to $934.70. Oil, ending at $43.70 for April WTI, continues to hold in a tight range showing less and less reaction to stock market movements.
Thursday, March 5, 2009
World's Biggest Bankruptcy?
The media have given London a new nickname: Reykjavik-on-Thames.
Britain's economy revolved around banking. British banks hold about $4.4 trillion in foreign debt. The total size of the UK economy is $2.1 trillion. This year, the British government nationalized major parts of the UK's banking system. In total, the UK Treasury is on the hook for over $2 trillion in potential liabilities, according to an estimate by the Office of National Statistics.
But Britain is NOT going to be the world's biggest national bankruptcy. The government debt of the United Kingdom is only around $950 billion... or about $15,000 per capita.
This week, the United States Treasury sunk another $30 billion into AIG... its fourth bailout. It also put another $25 billion into Citigroup. The Treasury is now on the hook for as much as $6 trillion in liabilities. Last week, the White House produced its new budget. President Obama wants to run a deficit of $1.75 trillion in 2009.
The Treasury will pay for these bailouts by borrowing money. The Treasury borrows money by issuing Treasury bonds. Tomorrow, for example, it will auction three-year, 10-year, and 30-year bonds. This auction should raise around $60 billion.
The "debt clock" measures the amount of money the government owes its creditors. Today, the U.S. debt clock reads $11 trillion. To pay off this debt tomorrow, the government would have to collect $36,000 from every American.
But America is NOT about to be the world's biggest bankruptcy.
Of the major industrial economies in the world, Japan's government is the most indebted.
Since its recession began 20 years ago, Japan has plowed trillions into its banking system via numerous bailout programs. Japan's mantra is growth without cost. As a result, the Japanese government has built up the world's most crippling debt load.
The government of Japan owes $7.8 trillion. That's $157,000 per capita.
We've been using government debt per capita to compare the government debts of Britain, the United States, and Japan. But government debt to GDP is the ratio economists use to compare the indebtedness of countries. The UK has a government debt-to-GDP ratio of 48%. The U.S. has a government debt-to-GDP ratio of 75%. Japan has a government debt-to-GDP ratio of 187%.
If there's going to be a major sovereign bankruptcy, it's going to happen in Japan. Its economy is a shambles. For years, Japan has relied on exports... but even that's drying up now. In January, Japan's exports plunged 47%, producing a trade deficit. People talk about Japan as a "nation of savers." But that's not true anymore. Japan's personal savings rate has collapsed from 16% in the early 1990s to 2.2% last year.
Japan has an aging population and no immigration. I can't see where it's going to find the money to pay off its huge pile of debt.
The way to play the collapse in Japan is by shorting the yen. Right now, the Japanese yen is the world's most popular currency. Traders perceive it as a safe haven. In 2008, the yen was the world's best performing currency.... Rising 33% against the Canadian dollar, 40% against the British pound, and 19% against the dollar.
Back in January, I told you a fall in the yen was all but inevitable. The yen is down 12% since that article. But according to
Japan Is About to Devalue Its Currency: Here's How to Profit
This Year's Triple-Digit Trade
a Merrill lynch report I saw yesterday, large speculators still have a $3.7 billion long position in yen futures. The analyst described it as "crowded."
The Japanese yen has been in a 40-year bull market. I think a new long-term bear market has just started... and it will end in the bankruptcy of Japan's government.
Britain's economy revolved around banking. British banks hold about $4.4 trillion in foreign debt. The total size of the UK economy is $2.1 trillion. This year, the British government nationalized major parts of the UK's banking system. In total, the UK Treasury is on the hook for over $2 trillion in potential liabilities, according to an estimate by the Office of National Statistics.
But Britain is NOT going to be the world's biggest national bankruptcy. The government debt of the United Kingdom is only around $950 billion... or about $15,000 per capita.
This week, the United States Treasury sunk another $30 billion into AIG... its fourth bailout. It also put another $25 billion into Citigroup. The Treasury is now on the hook for as much as $6 trillion in liabilities. Last week, the White House produced its new budget. President Obama wants to run a deficit of $1.75 trillion in 2009.
The Treasury will pay for these bailouts by borrowing money. The Treasury borrows money by issuing Treasury bonds. Tomorrow, for example, it will auction three-year, 10-year, and 30-year bonds. This auction should raise around $60 billion.
The "debt clock" measures the amount of money the government owes its creditors. Today, the U.S. debt clock reads $11 trillion. To pay off this debt tomorrow, the government would have to collect $36,000 from every American.
But America is NOT about to be the world's biggest bankruptcy.
Of the major industrial economies in the world, Japan's government is the most indebted.
Since its recession began 20 years ago, Japan has plowed trillions into its banking system via numerous bailout programs. Japan's mantra is growth without cost. As a result, the Japanese government has built up the world's most crippling debt load.
The government of Japan owes $7.8 trillion. That's $157,000 per capita.
We've been using government debt per capita to compare the government debts of Britain, the United States, and Japan. But government debt to GDP is the ratio economists use to compare the indebtedness of countries. The UK has a government debt-to-GDP ratio of 48%. The U.S. has a government debt-to-GDP ratio of 75%. Japan has a government debt-to-GDP ratio of 187%.
If there's going to be a major sovereign bankruptcy, it's going to happen in Japan. Its economy is a shambles. For years, Japan has relied on exports... but even that's drying up now. In January, Japan's exports plunged 47%, producing a trade deficit. People talk about Japan as a "nation of savers." But that's not true anymore. Japan's personal savings rate has collapsed from 16% in the early 1990s to 2.2% last year.
Japan has an aging population and no immigration. I can't see where it's going to find the money to pay off its huge pile of debt.
The way to play the collapse in Japan is by shorting the yen. Right now, the Japanese yen is the world's most popular currency. Traders perceive it as a safe haven. In 2008, the yen was the world's best performing currency.... Rising 33% against the Canadian dollar, 40% against the British pound, and 19% against the dollar.
Back in January, I told you a fall in the yen was all but inevitable. The yen is down 12% since that article. But according to
Japan Is About to Devalue Its Currency: Here's How to Profit
This Year's Triple-Digit Trade
a Merrill lynch report I saw yesterday, large speculators still have a $3.7 billion long position in yen futures. The analyst described it as "crowded."
The Japanese yen has been in a 40-year bull market. I think a new long-term bear market has just started... and it will end in the bankruptcy of Japan's government.
Obama administration launches foreclosure-relief plan
Data show about 20% of U.S. homeowners with mortgages are "under water," meaning they owe more than their home is worth.
The Obama administration's $75 billion plan enables even those homeowners with negative equity to modify their loans. The program targets homeowners who are facing imminent hardship. Meanwhile, the administration continues to push for legislation that would give bankruptcy judges the authority to alter mortgage terms. Reuters.
Will this work is the question.
The Obama administration's $75 billion plan enables even those homeowners with negative equity to modify their loans. The program targets homeowners who are facing imminent hardship. Meanwhile, the administration continues to push for legislation that would give bankruptcy judges the authority to alter mortgage terms. Reuters.
Will this work is the question.
As Goes GE, So Goes The Economy?
March 4: GE's shares tumbled below $6 (the stock is down 60% in 2009), to a level unseen since 1991, amid continued investor fears that the conglomerate could lose its ‘AAA’ credit rating and make another equity issue. The two scenarios have haunted GE’s shares in recent weeks, even as the company took steps to shore up its beleaguered finance arm, GE Capital, by diverting $9.5 bn in cash from the corporate parent in Q1 2009 and slashing the company’s dividend
As Goes GE, So Goes The Economy?
March 4: GE's shares tumbled below $6 (the stock is down 60% in 2009), to a level unseen since 1991, amid continued investor fears that the conglomerate could lose its ‘AAA’ credit rating and make another equity issue. The two scenarios have haunted GE’s shares in recent weeks, even as the company took steps to shore up its beleaguered finance arm, GE Capital, by diverting $9.5 bn in cash from the corporate parent in Q1 2009 and slashing the company’s dividend
Will China Increase Its Stimulus Spending? How Much Will it Support Growth?
Reports suggest that Chinese Premier Wen may announce additional stimulus measures at the Central party conference in his speech on March 5. China may double its spending from the 4 trillion yuan invested - spending more on infrastructure and to boost manufacturing and on unemployment and social spending - even as concerns are being raised about where the previously announced stimulus is being spent
Market Reflections 3/4/2009
It was news of Chinese stimulus that drove the U.S. markets on Wednesday. Many here have been complaining that Chinese efforts to fire up their economy have been half hearted, at least until now. The Chinese government announced a nearly $600 billion two-year investment plan aimed at infrastructure.
Stocks posted their first gain in five sessions with the the S&P 500 gaining a solid 2.4 percent to 712.86. Money moved out of safety, making for a nearly 1 cent decline in the dollar to $1.2645 against the euro. Money moved out of Treasuries where the 2-year yield rose 6 basis points to end at 0.95 percent.
Oil got a boost from the Chinese stimulus plan, ending nearly $4 higher at $45.19 for April WTI. Gold edged lower to $907.
The news from China far overshadowed economic news here that included a rock-bottom reading for mortgage purchase applications, an ADP call for a staggering 697,000 loss in Friday's payrolls, and a step backwards for the ISM non-manufacturing report. The calendar also included the Beige Book, which reports that the recession is deepening, and a series of comments from Federal Reserve officials warning of the same.
Stocks posted their first gain in five sessions with the the S&P 500 gaining a solid 2.4 percent to 712.86. Money moved out of safety, making for a nearly 1 cent decline in the dollar to $1.2645 against the euro. Money moved out of Treasuries where the 2-year yield rose 6 basis points to end at 0.95 percent.
Oil got a boost from the Chinese stimulus plan, ending nearly $4 higher at $45.19 for April WTI. Gold edged lower to $907.
The news from China far overshadowed economic news here that included a rock-bottom reading for mortgage purchase applications, an ADP call for a staggering 697,000 loss in Friday's payrolls, and a step backwards for the ISM non-manufacturing report. The calendar also included the Beige Book, which reports that the recession is deepening, and a series of comments from Federal Reserve officials warning of the same.
Wednesday, March 4, 2009
Market Reflections 3/3/2009
President Obama reached out to Wall Street Tuesday, saying that the long-term valuation of the stock market is attractive. The comment didn't move the markets but it may help to improve spirits among traders who widely complain they're being demonized by the new administration for the economic downturn.
A very weak pending home sales report headlined the day's economic data. The report points to deepening declines for current home sales data. Home sales don't seem to be getting a lift yet from low mortgage rates or falling prices.
Stocks ended a narrow range near their lows, down 0.6 percent for the S&P 500 which ended at 696.33. The dollar was little changed against the euro at $1.2563. Money eased out of the Treasury market where the 2-year yield ended at 0.89 percent, up 2 basis points on the day. Money continued to exit gold on what traders describe as liquidation tied to margin calls. Gold's fall from $1,000 has been lightening fast, ending at $915.40 for a more than $20 drop on the session. April WTI oil firmed to $41.45.
A very weak pending home sales report headlined the day's economic data. The report points to deepening declines for current home sales data. Home sales don't seem to be getting a lift yet from low mortgage rates or falling prices.
Stocks ended a narrow range near their lows, down 0.6 percent for the S&P 500 which ended at 696.33. The dollar was little changed against the euro at $1.2563. Money eased out of the Treasury market where the 2-year yield ended at 0.89 percent, up 2 basis points on the day. Money continued to exit gold on what traders describe as liquidation tied to margin calls. Gold's fall from $1,000 has been lightening fast, ending at $915.40 for a more than $20 drop on the session. April WTI oil firmed to $41.45.
Tuesday, March 3, 2009
Buffett and the Banks
Berkshire Hathaway (Buffett’s investment vehicle) is like a “Rock of Gibraltar” in the Oracle’s own words.
It is one of the most, if not the most, financially sound corporations in the world. Off the top of my head, the only other outfit that comes close is Exxon... and Exxon’s lifeblood comes from a single industry, oil and gas.
Berkshire, on the other hand, owns a famously wide and diverse variety of businesses. Those businesses throw off many collective billions in cash, with very little (if any) leverage or debt.
In times like these, a “fortress balance sheet” is a huge asset. And what the world needs now, more than ever before, is not love sweet love but rather strong entities with the ability to lend and invest wisely. Berky (as some holders affectionately call it) is one of those entities.
The trouble is, the government’s attitude towards the “zombie banks” – Citigroup chief among them – is holding back investors like Buffett and screwing up the recovery process in general.
The following passage makes that truth painfully clear:
Funders that have access to any sort of government guarantee – banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have money costs that are minimal.
Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.
This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.
Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.
Exactly Backwards
That last sentence is the killer: “At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.”
This is exactly backwards from how the process is supposed to work. It is backward from the way free markets work, the way evolution works, and even the way basic logic works.
The virtue of the “creative destruction” process is that, when the business cycle goes through a downturn, capital is transferred from weak hands to strong hands.
Failure is a vital aspect of the free market because if failed experiments are not shut down, the experiments that work will not have the resources needed to expand. Without failure, the market has no way to reorganize and revitalize itself.
In more concrete terms, think of it from the perspective of a business owner. Imagine your business has two divisions and a general manager for each division. One of those managers is hard-working, savvy, and consistently profitable. The other is a complete idiot.
So... do you punish the smart successful manager for his success, and reward the idiot for his failure, by pouring more funds into the flailing division at the expense of the one that’s working?
Of course not. No sane business owner would do that.
But if your name is Tim Geithner, and your title is Secretary of the Treasury, and the idiot in question happens to be an old Wall Street pal, then that is exactly what you do.
And when successful outfits like Berkshire find their opportunities constrained by the likes of the government propping up Citigroup – a ship of fools if there ever was one – the above is roughly what happens. The idiots get continued funding, while the diligent and prudent get punished for their wise stewardship.
As a result, the market does not heal itself. Money does not flow to where it will be best treated and best allocated. Instead it gets dammed up in stagnant pools, good for little more than attracting mosquitoes and leeches. Bad behavior is rewarded; good behavior is ignored or worse yet punished. Brain-dead politicians, seeing their initial dose of medicine is not working, then call for a bigger dose of the same.
Buffett Versus Pelosi
Here is another way to ponder it. Berkshire had a very tough year last year – the company’s worst year ever in fact. But it should still be rather easy to answer the following question:
“Who would you rather have manage your money... Warren Buffett or Nancy Pelosi?”
When we sign up for letting the government expand its budget dramatically, we give a vote to the likes of Pelosi and Reid over Buffett and Munger. And it really is an either/or type vote to a large degree. When times are tough and people are scared, government-backed debt competes with private debt and private investment opportunity in the general marketplace.
So if Uncle Sam is able to put out a couple trillion in new government-backed securities and find buyers for all that paper, well, then bully for him. But that flood of government securities winds up crowding out smarter managers in the marketplace – guys like Buffett – and reducing their scope of opportunity. Good opportunities go begging and the recovery gets delayed that much more.
Getting Worse, Not Better
The situation is depressing because it seems to be getting worse, not better.
We are making no headway with the banks. Geithner’s “stress tests” are a complete joke. The government can’t be bothered to fire any of the executives who got us into this mess. AIG is opening its massive maw to swallow up another $30 billion.
And the new Obama budget has been deemed “very, very good” by NYT’s liberal uber-columnist Paul Krugman... which means in all likelihood it is a fiscal nightmare.
Meanwhile, most Americans still don’t seem to understand what’s happening, or what to do about it. For instance, a recent Gallup poll produced the following nonsensical results:
Poll question 1: Do you favor or oppose the federal government temporarily taking over major U.S. banks in danger of failing in an attempt to stabilize them? 54% favor / 44% oppose / 3% no opinion.
Poll question 2: Do you favor or oppose the federal government temporarily nationalizing major U.S. banks in danger of failing in an attempt to stabilize them? 37% favor / 57% oppose / 6% no opinion.
The public doesn’t understand what the word “nationalize” means. Nor do they understand that the U.S. taxpayer already owns the zombie banks – or at least should own them, at any rate, given the hundreds of billions that have been pumped in. We have de facto nationalized, but we are still paying off the private parties who should have been wiped out as a logical consequence of their enabling this fiasco.
Management has proven grossly inept on all sides, public and private. And the biggest stakeholders in this whole mess – American taxpayers – have proven too uninformed or too unmotivated to realize how badly they are being screwed.
If ever proof existed for the twin assertions “ignorance is dangerous” and “government doesn’t work,” that proof is now staring us in the face.
It is one of the most, if not the most, financially sound corporations in the world. Off the top of my head, the only other outfit that comes close is Exxon... and Exxon’s lifeblood comes from a single industry, oil and gas.
Berkshire, on the other hand, owns a famously wide and diverse variety of businesses. Those businesses throw off many collective billions in cash, with very little (if any) leverage or debt.
In times like these, a “fortress balance sheet” is a huge asset. And what the world needs now, more than ever before, is not love sweet love but rather strong entities with the ability to lend and invest wisely. Berky (as some holders affectionately call it) is one of those entities.
The trouble is, the government’s attitude towards the “zombie banks” – Citigroup chief among them – is holding back investors like Buffett and screwing up the recovery process in general.
The following passage makes that truth painfully clear:
Funders that have access to any sort of government guarantee – banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have money costs that are minimal.
Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.
This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.
Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.
Exactly Backwards
That last sentence is the killer: “At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.”
This is exactly backwards from how the process is supposed to work. It is backward from the way free markets work, the way evolution works, and even the way basic logic works.
The virtue of the “creative destruction” process is that, when the business cycle goes through a downturn, capital is transferred from weak hands to strong hands.
Failure is a vital aspect of the free market because if failed experiments are not shut down, the experiments that work will not have the resources needed to expand. Without failure, the market has no way to reorganize and revitalize itself.
In more concrete terms, think of it from the perspective of a business owner. Imagine your business has two divisions and a general manager for each division. One of those managers is hard-working, savvy, and consistently profitable. The other is a complete idiot.
So... do you punish the smart successful manager for his success, and reward the idiot for his failure, by pouring more funds into the flailing division at the expense of the one that’s working?
Of course not. No sane business owner would do that.
But if your name is Tim Geithner, and your title is Secretary of the Treasury, and the idiot in question happens to be an old Wall Street pal, then that is exactly what you do.
And when successful outfits like Berkshire find their opportunities constrained by the likes of the government propping up Citigroup – a ship of fools if there ever was one – the above is roughly what happens. The idiots get continued funding, while the diligent and prudent get punished for their wise stewardship.
As a result, the market does not heal itself. Money does not flow to where it will be best treated and best allocated. Instead it gets dammed up in stagnant pools, good for little more than attracting mosquitoes and leeches. Bad behavior is rewarded; good behavior is ignored or worse yet punished. Brain-dead politicians, seeing their initial dose of medicine is not working, then call for a bigger dose of the same.
Buffett Versus Pelosi
Here is another way to ponder it. Berkshire had a very tough year last year – the company’s worst year ever in fact. But it should still be rather easy to answer the following question:
“Who would you rather have manage your money... Warren Buffett or Nancy Pelosi?”
When we sign up for letting the government expand its budget dramatically, we give a vote to the likes of Pelosi and Reid over Buffett and Munger. And it really is an either/or type vote to a large degree. When times are tough and people are scared, government-backed debt competes with private debt and private investment opportunity in the general marketplace.
So if Uncle Sam is able to put out a couple trillion in new government-backed securities and find buyers for all that paper, well, then bully for him. But that flood of government securities winds up crowding out smarter managers in the marketplace – guys like Buffett – and reducing their scope of opportunity. Good opportunities go begging and the recovery gets delayed that much more.
Getting Worse, Not Better
The situation is depressing because it seems to be getting worse, not better.
We are making no headway with the banks. Geithner’s “stress tests” are a complete joke. The government can’t be bothered to fire any of the executives who got us into this mess. AIG is opening its massive maw to swallow up another $30 billion.
And the new Obama budget has been deemed “very, very good” by NYT’s liberal uber-columnist Paul Krugman... which means in all likelihood it is a fiscal nightmare.
Meanwhile, most Americans still don’t seem to understand what’s happening, or what to do about it. For instance, a recent Gallup poll produced the following nonsensical results:
Poll question 1: Do you favor or oppose the federal government temporarily taking over major U.S. banks in danger of failing in an attempt to stabilize them? 54% favor / 44% oppose / 3% no opinion.
Poll question 2: Do you favor or oppose the federal government temporarily nationalizing major U.S. banks in danger of failing in an attempt to stabilize them? 37% favor / 57% oppose / 6% no opinion.
The public doesn’t understand what the word “nationalize” means. Nor do they understand that the U.S. taxpayer already owns the zombie banks – or at least should own them, at any rate, given the hundreds of billions that have been pumped in. We have de facto nationalized, but we are still paying off the private parties who should have been wiped out as a logical consequence of their enabling this fiasco.
Management has proven grossly inept on all sides, public and private. And the biggest stakeholders in this whole mess – American taxpayers – have proven too uninformed or too unmotivated to realize how badly they are being screwed.
If ever proof existed for the twin assertions “ignorance is dangerous” and “government doesn’t work,” that proof is now staring us in the face.
Treasury and Federal Reserve announce launch of TALF
In carrying out the Financial Stability Plan, the Department of the Treasury and the Federal Reserve Board are announcing the launch of the Term Asset-Backed Securities Loan Facility (TALF), a component of the Consumer and Business Lending Initiative (CBLI). The TALF has the potential to generate up to $1 trillion of lending for businesses and households.
The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October. By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.
Under today’s announcement, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans. Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009. On March 25, 2009, those new securitizations will be funded by the program, creating new lending capacity for additional future loans.
The program will hold monthly fundings through December 2009 or longer if the Federal Reserve Board chooses to extend the facility.
Today the Board also released revised terms and conditions for the facility and a revised set of frequently asked questions. The revisions include a reduction in the interest rates and collateral haircuts for loans secured by asset-backed securities guaranteed by the Small Business Administration or backed by government-guaranteed student loans. The modifications are warranted by the minimal credit risk on these assets owing to the government guarantees, and, by making the terms of the TALF loans more attractive, they should encourage greater flows of credit to small businesses and students.
Additional details of the TALF and the CBLI can be found at http://www.financialstability.gov/. Further information on the Federal Reserve’s credit and liquidity programs is available at http://www.federalreserve.gov/monetarypolicy/bst.htm.
The Treasury Department also released a new white paper outlining efforts to unlock credit markets.
On February 10, 2009, the Board and Treasury announced an expansion of TALF to include new asset categories that could generate up to $1 trillion in new lending. Teams from the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and are evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program. The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government.
The Federal Reserve and Treasury currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF.
Other types of securities under consideration include private-label residential mortgage-backed securities, collateralized loan and debt obligations, and other ABS not included in the initial rollout such as ABS backed by non-auto floorplan loans and ABS backed by mortgage-servicer advances. As is the case for the current categories of newly originated loans, the TALF will combine public financing with private capital to encourage the private securitization of loans in the asset classes eligible in the expanded program.
Increased TALF lending and other actions to stabilize the financial system have the potential to greatly expand the Federal Reserve’s balance sheet. In order for the Federal Reserve to conduct monetary policy over time in a way consistent with maximum sustainable employment and price stability, it must be able to manage its balance sheet, and in particular, to control the amount of reserves that the Federal Reserve provides to the banking system.
The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives.
Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for the TALF and for other key credit-easing programs.
Key Dates for the TALFSchedule for First Funding with Initial Eligible Assets DateAnnouncement/Event March 3, 2009 Launch of the TALF.
Publication of the details for the first funding March 3-17, 2009
Marketing first funding to investors March 17, 2009
Subscriptions for first funding for TALF recorded March 25, 2009
First funds from the TALF dispersed
Schedule for Second Funding
Date Announcement/Event
March 24, 2009 Announcement of details of second funding
March 24-April 7, 2009 Marketing second funding to investors
April 7, 2009 Subscriptions for second funding for TALF recorded
April 14, 2009 Second funds from the TALF dispersed
The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October. By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.
Under today’s announcement, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans. Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009. On March 25, 2009, those new securitizations will be funded by the program, creating new lending capacity for additional future loans.
The program will hold monthly fundings through December 2009 or longer if the Federal Reserve Board chooses to extend the facility.
Today the Board also released revised terms and conditions for the facility and a revised set of frequently asked questions. The revisions include a reduction in the interest rates and collateral haircuts for loans secured by asset-backed securities guaranteed by the Small Business Administration or backed by government-guaranteed student loans. The modifications are warranted by the minimal credit risk on these assets owing to the government guarantees, and, by making the terms of the TALF loans more attractive, they should encourage greater flows of credit to small businesses and students.
Additional details of the TALF and the CBLI can be found at http://www.financialstability.gov/. Further information on the Federal Reserve’s credit and liquidity programs is available at http://www.federalreserve.gov/monetarypolicy/bst.htm.
The Treasury Department also released a new white paper outlining efforts to unlock credit markets.
On February 10, 2009, the Board and Treasury announced an expansion of TALF to include new asset categories that could generate up to $1 trillion in new lending. Teams from the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and are evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program. The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government.
The Federal Reserve and Treasury currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF.
Other types of securities under consideration include private-label residential mortgage-backed securities, collateralized loan and debt obligations, and other ABS not included in the initial rollout such as ABS backed by non-auto floorplan loans and ABS backed by mortgage-servicer advances. As is the case for the current categories of newly originated loans, the TALF will combine public financing with private capital to encourage the private securitization of loans in the asset classes eligible in the expanded program.
Increased TALF lending and other actions to stabilize the financial system have the potential to greatly expand the Federal Reserve’s balance sheet. In order for the Federal Reserve to conduct monetary policy over time in a way consistent with maximum sustainable employment and price stability, it must be able to manage its balance sheet, and in particular, to control the amount of reserves that the Federal Reserve provides to the banking system.
The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives.
Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for the TALF and for other key credit-easing programs.
Key Dates for the TALFSchedule for First Funding with Initial Eligible Assets DateAnnouncement/Event March 3, 2009 Launch of the TALF.
Publication of the details for the first funding March 3-17, 2009
Marketing first funding to investors March 17, 2009
Subscriptions for first funding for TALF recorded March 25, 2009
First funds from the TALF dispersed
Schedule for Second Funding
Date Announcement/Event
March 24, 2009 Announcement of details of second funding
March 24-April 7, 2009 Marketing second funding to investors
April 7, 2009 Subscriptions for second funding for TALF recorded
April 14, 2009 Second funds from the TALF dispersed
Market Reflections 3/2/2009
The steady flow of bad news continues. In the latest handout for American International Group, the Treasury is injecting another $30 billion into the insurer. The news did not lift confidence in financial shares which tumbled again: Citigroup fell 19 percent to $1.22 with Bank of America down 9 percent at $3.59. By day's end, the S&P 500 was testing support at 700, falling through for a moment but ending at 700.84 for a 4.7 percent plunge on the day.
Economic data was surprisingly positive including an ISM manufacturing report that showed a second straight month of comparative firmness and which is leading some to say that the worst may be over. Also of note in the day's data was the savings rate for January, at a 13-year high of 5 percent and evidence that consumers are definitely holding back.
Money moved into the dollar which rose about 1 cent against the euro to end at $1.2576. Money also moved deeper into the Treasury market where the 3-month yield fell 2 basis points to 0.23 percent with the 2-year down 9 basis points at 0.88 percent.
An odd twist is that gold failed to get a lift from the flight out of the stock market, ending at $939 for a $5 decline from Friday. Oil fell more than $4 from Friday to end at $40.03 for April WTI, a loss that traders attribute to the global run of bad economic news.
Economic data was surprisingly positive including an ISM manufacturing report that showed a second straight month of comparative firmness and which is leading some to say that the worst may be over. Also of note in the day's data was the savings rate for January, at a 13-year high of 5 percent and evidence that consumers are definitely holding back.
Money moved into the dollar which rose about 1 cent against the euro to end at $1.2576. Money also moved deeper into the Treasury market where the 3-month yield fell 2 basis points to 0.23 percent with the 2-year down 9 basis points at 0.88 percent.
An odd twist is that gold failed to get a lift from the flight out of the stock market, ending at $939 for a $5 decline from Friday. Oil fell more than $4 from Friday to end at $40.03 for April WTI, a loss that traders attribute to the global run of bad economic news.
Monday, March 2, 2009
U.S. GDP Shrank 6.2% in Q4 2008: Economy in a L-Shaped Recession?
Real GDP contraction in Q4 2008 was revised down from -3.8% to -6.2% (most since 1982) led by a greater than initially estimated contraction in exports, consumer spending and lesser contribution from inventories. Economy contracted -0.5% in Q3 2008 and grew 1.1% in 2008
Details: Real final sales (GDP - change in private inventories) decreased -6.4%. Private inventories added 0.16% to GDP growth. Real Personal consumption fell -4.3% (most since 1980); non-residential fixed investment fell 21.1% (most since 1975); government expenditure rose +6.7%; exports fell -23.6% (steepest fall since 1971); imports fell -16%. Net exports contribution to GDP growth turned negative: -0.5%
Details: Real final sales (GDP - change in private inventories) decreased -6.4%. Private inventories added 0.16% to GDP growth. Real Personal consumption fell -4.3% (most since 1980); non-residential fixed investment fell 21.1% (most since 1975); government expenditure rose +6.7%; exports fell -23.6% (steepest fall since 1971); imports fell -16%. Net exports contribution to GDP growth turned negative: -0.5%
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