Payden & Rygel
HEADLINE NEWS WEEK ENDING 3/27/09
Overview
Existing home sales rose 5.1% in February to an annualized rate of 4.72 million as declining home prices and falling interest rates began to lure would-be home buyers back into the market. more...http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
US MARKETS
Treasury/Economics
US Treasuries traded in a narrow range this week with a tendency towards higher yields. The 30-year bond was the exception by rallying 10 basis points (bps). more...
http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
Large-Cap Equities
The stock market rallied for the third straight week spurred by details of the Treasury's $1 trillion public-private plan to buy troubled bank assets on Monday. more...http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
Corporate Bonds
Investment grade primary issuance utilized the recent positive sentiment in the equity markets to bring out issuers looking to tap into the market before earnings season commences. more...http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
Mortgage-Backed Securities
The residential and commercial mortgage markets responded favorably to the Obama Administration’s long awaited plan to address the slew of legacy real estate assets clogging the banking system. more...http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
Municipal Bonds
Dominating market action this week was California’s gigantic new general obligation (GO) bond issue. The state set out to borrow $4 billion, but due to strong demand from retail investors in higher tax brackets seeing yields equivalent to 8-9% taxable bonds, the deal was upsized to $6.54 billion. more...http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
High-Yield
The high yield market has maintained the momentum of the past two weeks and continued to rally. The Merrill Lynch High Yield Constrained Index is up 6.3% since March 6, 2009 and has been following directionally the 20% rally in the S&P 500 index over the comparable period. more...http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were auto and parts (+4.9%) and food and beverages (+4.4%). more...
http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +2.7% this week, while the Russian stock index RTS went up by +3.5%. more...http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
Global Bonds and Currencies
Major non-US government bond markets were generally weaker over the past week, weighed down by a combination of further stock market gains, a more upbeat tone to some economic forecasts and supply concerns. more...http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week. Risk markets continued the positive tone of recent weeks, with investor sentiment buoyed by the better-than-expected US economic data. more...http://payden.com/library/weeklyMarketUpdateE.aspx#treasury
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Saturday, March 28, 2009
Market Reflections 3/27/2009
A slip in personal income tripped a run of profit taking in the stock market where the S&P 500 fell 2% to 815.93. But there was also good news in the session, at least out of the UK where reports said Barclays would successfully pass a stress test, a reminder from earlier in the month when both Citigroup and Bank of America said they were running at a profit.
Profit taking hit oil as did supply-cut news from OPEC members Ecuador and Venezuela. Supplies are tightening right as inventories are peaking in what some are calling a "tie" between supply and demand. May WTI ended just above $52. Gold fell back $15 to $925.
Much of gold's dip was due to strength in the dollar which jumped more than 2 cents to end at $1.3290 against the euro. The euro was hit by profit taking and by weak economic data from Europe. Treasuries were little changed but the Fed did buy $7.4 billion of mid-maturity issues, part of its effort to lower mortgage rates.
Profit taking hit oil as did supply-cut news from OPEC members Ecuador and Venezuela. Supplies are tightening right as inventories are peaking in what some are calling a "tie" between supply and demand. May WTI ended just above $52. Gold fell back $15 to $925.
Much of gold's dip was due to strength in the dollar which jumped more than 2 cents to end at $1.3290 against the euro. The euro was hit by profit taking and by weak economic data from Europe. Treasuries were little changed but the Fed did buy $7.4 billion of mid-maturity issues, part of its effort to lower mortgage rates.
Friday, March 27, 2009
Market Reflections 3/26/2009
News from Linux provider Red Hat best embodies Thursday's upbeat session. Markets moved on a Reuters report that the company thinks the worst has passed, comments repeated by a run of others in the session including retailers Best Buy and Citi Trends. Economic data in the session was not upbeat, including another jump in continuing unemployment claims and a final fourth-quarter GDP headline of -6.3 percent.
Stocks ended at their highs, up 2.3% at 832.65 for the S&P 500 but in another session of light volume. Treasuries were especially strong in the session, highlighted by heavy demand for $24 billion in 7-year notes in an auction that helped renew confidence in the ability of the Treasury to attract buyers. The Federal Reserve is now buying Treasuries in an effort announced last week to lower mortgage rates. The 10-year yield fell 4 basis points to 2.74 percent. The dollar regained about half of yesterday's losses, up 3/4 of a cent against the euro to $1.3522.
Gold posted important gains in the session, up about $5 to $940 despite the gain in the stock market and despite the gain in the dollar. There's plenty of talk among gold traders that Chinese unease with their dollar holdings point to future weakness for the dollar and future gains for gold. Oil also ended firmer, up more than $1 to just over $54.
Stocks ended at their highs, up 2.3% at 832.65 for the S&P 500 but in another session of light volume. Treasuries were especially strong in the session, highlighted by heavy demand for $24 billion in 7-year notes in an auction that helped renew confidence in the ability of the Treasury to attract buyers. The Federal Reserve is now buying Treasuries in an effort announced last week to lower mortgage rates. The 10-year yield fell 4 basis points to 2.74 percent. The dollar regained about half of yesterday's losses, up 3/4 of a cent against the euro to $1.3522.
Gold posted important gains in the session, up about $5 to $940 despite the gain in the stock market and despite the gain in the dollar. There's plenty of talk among gold traders that Chinese unease with their dollar holdings point to future weakness for the dollar and future gains for gold. Oil also ended firmer, up more than $1 to just over $54.
Thursday, March 26, 2009
US data releases
The US data releases continued to be surprisingly strong.
Both durable goods and sales of new homes unexpectedly rose in February according to yesterday's reports. Durable goods orders jumped 3.4% in February, after dropping a revised 7.3% in January.
This increase was the largest in more than a year, and the first positive move in seven months.
The other big piece of data released by the Commerce Department showed New home sales increased 4.7% vs. the January sales.
These two positive numbers eased fears in the equity markets, and encouraged investors to take more risks. This is why positive economic data releases in the US cause a sell off in the US$ (the reversal of the trend we were seeing earlier this year).
Does anyone find it odd that all of the data we are seeing this week are surprisingly strong, while the revisions to the prior month's data show even bigger drops? I'm not accusing the government of massaging the numbers (wink wink) but it just seems odd.
Today we will see the GDP numbers from 4th quarter of 2008. The economists are predicting a drop of 6.6% during the last quarter, but the trend with data releases this week would suggest the number will come a bit stronger. We will also see the weekly jobless claims which are expected to show another 650k US citizens were out of a job last week. This would be the eighth consecutive week of a 600k+ number for jobless claims. The jobs numbers will have to start improving if the US is going to really turn things around.
Both durable goods and sales of new homes unexpectedly rose in February according to yesterday's reports. Durable goods orders jumped 3.4% in February, after dropping a revised 7.3% in January.
This increase was the largest in more than a year, and the first positive move in seven months.
The other big piece of data released by the Commerce Department showed New home sales increased 4.7% vs. the January sales.
These two positive numbers eased fears in the equity markets, and encouraged investors to take more risks. This is why positive economic data releases in the US cause a sell off in the US$ (the reversal of the trend we were seeing earlier this year).
Does anyone find it odd that all of the data we are seeing this week are surprisingly strong, while the revisions to the prior month's data show even bigger drops? I'm not accusing the government of massaging the numbers (wink wink) but it just seems odd.
Today we will see the GDP numbers from 4th quarter of 2008. The economists are predicting a drop of 6.6% during the last quarter, but the trend with data releases this week would suggest the number will come a bit stronger. We will also see the weekly jobless claims which are expected to show another 650k US citizens were out of a job last week. This would be the eighth consecutive week of a 600k+ number for jobless claims. The jobs numbers will have to start improving if the US is going to really turn things around.
Market Reflections 3/25/2009
Treasury Geithner didn't help the dollar which fell more than 1-1/2 cents to $1.3600 against the euro. Speaking in New York, Geithner reportedly said he is "open" to a proposal, voiced earlier this week by China, to increase the use of the IMF's special drawing rights, a system that would substitute non-dollar currencies or commodities for dollars. Geithner later affirmed the dollar's role as the world's reserve currency, saying it won't be changing anytime soon. President Obama voiced opposition on Tuesday against a global currency.
Stocks were little changed but not Treasuries where the surge of supply is beginning to bend the rafters. Demand was very thin for the day's gigantic $34 billion 5-year auction. The Treasury auctions $24 billion of 7-year notes on tomorrow.
A big inventory draw at the key delivery point of Cushing, Oklahoma will probably help keep oil above $50 through the rest of the week. May WTI ended at $52.86. Talk is building that oil's range, stuck for months at $35 to $50, has shifted to $50 to $60. News of strong inflows into gold ETFs is helping to keep gold firm, ending at $936.90.
Stocks were little changed but not Treasuries where the surge of supply is beginning to bend the rafters. Demand was very thin for the day's gigantic $34 billion 5-year auction. The Treasury auctions $24 billion of 7-year notes on tomorrow.
A big inventory draw at the key delivery point of Cushing, Oklahoma will probably help keep oil above $50 through the rest of the week. May WTI ended at $52.86. Talk is building that oil's range, stuck for months at $35 to $50, has shifted to $50 to $60. News of strong inflows into gold ETFs is helping to keep gold firm, ending at $936.90.
Wednesday, March 25, 2009
Interesting tidbits
Feldstein: Recession likely to linger into next year
There is a good chance the U.S. will need to implement a second economic stimulus as the recession persists beyond this year, said economist Martin Feldstein, a member of President Barack Obama's Economic Recovery Advisory Board. The Harvard University professor said he does not know when the recession will end, but "the forecasts that it'll end later this year, I think, are too optimistic." Reuters.
No argument here on that.
S&P downgrades Berkshire Hathaway's ratings outlook
Berkshire Hathaway's ratings outlook was lowered from stable to negative by Standard & Poor's. The rating agency attributed the change to a drop in capital for Berkshire's insurance operations that came as a result of the stock market's decline. The Wall Street Journal.
Fitch was ahead on this one on 3/12.
Unexpected inflation spike hits U.K. economy
In a development that economists did not anticipate, inflation in Britain rose to 3.2% in February, driven primarily by food prices. Experts had expected a 2.6% increase for the consumer-price index.
The U.S. Treasury's plan for removing troubled assets from the balance sheets of banks will likely force those institutions, including Bank of America, Citigroup and Wells Fargo, to take substantial write-downs, analysts and executives said. The losses might force the banks to raise additional capital from investors or taxpayers. "The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks," one bank executive said. Financial Times.
Sound somewhat familiar?
Fidelity creates fund for commodity stocks
Fidelity Investments plans to launch Tuesday an equity fund that invests in the stocks of companies in agriculture, energy and metals, both within the U.S. and worldwide. The Fidelity Global Commodity Stock Fund will offer adviser- and retail-class shares. Unlike many commodity funds that invest in derivatives, this fund will buy stocks. planadviser.com
So expect stocks of these three categories of companies to pop while Fidelity ramps up the holdings of these funds.
There is a good chance the U.S. will need to implement a second economic stimulus as the recession persists beyond this year, said economist Martin Feldstein, a member of President Barack Obama's Economic Recovery Advisory Board. The Harvard University professor said he does not know when the recession will end, but "the forecasts that it'll end later this year, I think, are too optimistic." Reuters.
No argument here on that.
S&P downgrades Berkshire Hathaway's ratings outlook
Berkshire Hathaway's ratings outlook was lowered from stable to negative by Standard & Poor's. The rating agency attributed the change to a drop in capital for Berkshire's insurance operations that came as a result of the stock market's decline. The Wall Street Journal.
Fitch was ahead on this one on 3/12.
Unexpected inflation spike hits U.K. economy
In a development that economists did not anticipate, inflation in Britain rose to 3.2% in February, driven primarily by food prices. Experts had expected a 2.6% increase for the consumer-price index.
The U.S. Treasury's plan for removing troubled assets from the balance sheets of banks will likely force those institutions, including Bank of America, Citigroup and Wells Fargo, to take substantial write-downs, analysts and executives said. The losses might force the banks to raise additional capital from investors or taxpayers. "The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks," one bank executive said. Financial Times.
Sound somewhat familiar?
Fidelity creates fund for commodity stocks
Fidelity Investments plans to launch Tuesday an equity fund that invests in the stocks of companies in agriculture, energy and metals, both within the U.S. and worldwide. The Fidelity Global Commodity Stock Fund will offer adviser- and retail-class shares. Unlike many commodity funds that invest in derivatives, this fund will buy stocks. planadviser.com
So expect stocks of these three categories of companies to pop while Fidelity ramps up the holdings of these funds.
Market Reflections
Stocks were unable to build on yesterday's big gain. The S&P 500 ended at its lows, down 2% at just over 800. Volume was once again thin in what the optimists say reflects a lack of sellers. The dollar edged about 1 cent higher to $1.3439 against the euro amid talk that U.S.-Europe interest rate differentials are bound to come in as the ECB cuts rates. Oil ended little changed ahead of tomorrow's inventory data with May WTI ending at $53.60. Gold slipped about $10 to $929.00. Treasuries were mixed despite a strong 2-year note auction. The 2-year yield ended at 0.90 percent.
Tuesday, March 24, 2009
Market Reflections
Stocks surged in reaction to the Treasury's latest move to stimulate the banking sector, this time a loan-based program to encourage private funds to bid for toxic assets. In a reversal of the disappointment that greeted an initial Treasury plan in early February, the S&P 500 jumped 7.1% to 822.91 for the biggest gain since the violent swings of October. Adding to the optimism was a big jump in existing home sales, a gain underscoring prospects that government stimulus will make for further jumps in future months. One sour note is that gains were made in comparatively low volumes especially for S&P futures.
Money continues to move out of the dollar which fell nearly 1 more cent to end at $1.3548 against the euro. The exit reflects concerns over monetary inflation and also increasing demand for risk. Concerns over inflation continue to help oil as is the improving economic outlook. May WTI gained nearly $2 to $53.84. Despite the fireworks in the stock market, money stayed in the Treasury market where yields were little changed with the 3-month yield ending at a very tight 0.19 percent. Gold dipped $15 to end at $940.
Money continues to move out of the dollar which fell nearly 1 more cent to end at $1.3548 against the euro. The exit reflects concerns over monetary inflation and also increasing demand for risk. Concerns over inflation continue to help oil as is the improving economic outlook. May WTI gained nearly $2 to $53.84. Despite the fireworks in the stock market, money stayed in the Treasury market where yields were little changed with the 3-month yield ending at a very tight 0.19 percent. Gold dipped $15 to end at $940.
Monday, March 23, 2009
Treasury Department Releases Details on Public Private Partnership Investment Program
Treasury Department Releases Details on Public Private Partnership Investment Program
Fact Sheet
Public-Private Investment Program
View White Paper and FAQs at http://financialstability.gov
The Financial Stability Plan – Progress So Far: Over the past six weeks, the Treasury Department has implemented a series of initiatives as part of its Financial Stability Plan that – alongside the American Recovery and Reinvestment Act – lay the foundations for economic recovery:
• Efforts to Improve Affordability for Responsible Homeowners: Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows. This past month, the 30% increase in mortgage refinancing demonstrated that working families are benefiting from the savings due to these lower rates.
• Consumer and Business Lending Initiative to Unlock Frozen Credit Markets: Treasury and the Federal Reserve are expanding the TALF in conjunction with the Federal Reserve to jumpstart the secondary markets that support consumer and business lending. Last week, Treasury announced its plans to purchase up to $15 billion in securities backed by Small Business Administration loans.
• Capital Assistance Program: Treasury has also launched a new capital program, including a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now – making it less likely that a more serious downturn will occur.
The Challenge of Legacy Assets: Despite these efforts, the financial system is still working against economic recovery. One major reason is the problem of "legacy assets" – both real estate loans held directly on the books of banks ("legacy loans") and securities backed by loan portfolios ("legacy securities"). These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending.
• Origins of the Problem:The challenge posed by these legacy assets began with an initial shock due to the bursting of the housing bubble in 2007, which generated losses for investors and banks. Losses were compounded by the lax underwriting standards that had been used by some lenders and by the proliferation of complex securitization products, some of whose risks were not fully understood. The resulting need by investors and banks to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.
• Creation of a Negative Economic Cycle: As a result, a negative cycle has developed where declining asset prices have triggered further deleveraging, which has in turn led to further price declines. The excessive discounts embedded in some legacy asset prices are now straining the capital of U.S. financial institutions, limiting their ability to lend and increasing the cost of credit throughout the financial system. The lack of clarity about the value of these legacy assets has also made it difficult for some financial institutions to raise new private capital on their own.
The Public-Private Investment Program for Legacy Assets
To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.
Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:
• Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
• Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
• Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.
The Merits of This Approach: This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.
Two Components for Two Types of Assets: The Public-Private Investment Program has two parts, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms:
• Legacy Loans:The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.
• Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.
The Legacy Loans Program: To cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the Federal Deposit Insurance Corporation and Treasury are launching a program to attract private capital to purchase eligible legacy loans from participating banks through the provision of FDIC debt guarantees and Treasury equity co-investment. Treasury currently anticipates that approximately half of the TARP resources for legacy assets will be devoted to the Legacy Loans Program, but our approach will allow for flexibility to allocate resources where we see the greatest impact.
• Involving Private Investors to Set Prices: A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged. The Legacy Loans Program will facilitate the creation of individual Public-Private Investment Funds which will purchase asset pools on a discrete basis. The program will boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets.
• Using FDIC Expertise to Provide Oversight: The FDIC will provide oversight for the formation, funding, and operation of these new funds that will purchase assets from banks.
• Joint Financing from Treasury, Private Capital and FDIC: Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from the FDIC.
• The Process for Purchasing Assets Through The Legacy Loans Program: Purchasing assets in the Legacy Loans Program will occur through the following process:
o Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
o Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
o Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
o Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.
Sample Investment Under the Legacy Loans Program
Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.
The Legacy Securities Program: The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit. The resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital. The Legacy Securities Program consists of two related parts designed to draw private capital into these markets by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility (TALF) and through matching private capital raised for dedicated funds targeting legacy securities.
1. Expanding TALF to Legacy Securities to Bring Private Investors Back into the Market: The Treasury and the Federal Reserve are today announcing their plans to create a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit. The intention is to incorporate this program into the previously announced Term Asset-Backed Securities Facility (TALF).
o Providing Investors Greater Confidence to Purchase Legacy Assets:As with securitizations backed by new originations of consumer and business credit already included in the TALF, we expect that the provision of leverage through this program will give investors greater confidence to purchase these assets, thus increasing market liquidity.
o Funding Purchase of Legacy Securities: Through this new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.
o Working with Market Participants: Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.
2. Partnering Side-by-Side with Private Investors in Legacy Securities Investment Funds: Treasury will make co-investment/leverage available to partner with private capital providers to immediately support the market for legacy mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination.
Side-by-Side Investment with Qualified Fund Managers: Treasury will approve up to five asset managers with a demonstrated track record of purchasing legacy assets though we may consider adding more depending on the quality of applications received. Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching Treasury funds under the Public-Private Investment Program. Treasury funds will be invested one-for-one on a fully side-by-side basis with these investors.
Offer of Senior Debt to Leverage More Financing: Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the Public-Private Investment Fund from the Treasury Department in the amount of 50% of total equity capital of the fund. The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital subject to further restrictions.
Sample Investment Under the Legacy Securities Program
Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.
Fact Sheet
Public-Private Investment Program
View White Paper and FAQs at http://financialstability.gov
The Financial Stability Plan – Progress So Far: Over the past six weeks, the Treasury Department has implemented a series of initiatives as part of its Financial Stability Plan that – alongside the American Recovery and Reinvestment Act – lay the foundations for economic recovery:
• Efforts to Improve Affordability for Responsible Homeowners: Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows. This past month, the 30% increase in mortgage refinancing demonstrated that working families are benefiting from the savings due to these lower rates.
• Consumer and Business Lending Initiative to Unlock Frozen Credit Markets: Treasury and the Federal Reserve are expanding the TALF in conjunction with the Federal Reserve to jumpstart the secondary markets that support consumer and business lending. Last week, Treasury announced its plans to purchase up to $15 billion in securities backed by Small Business Administration loans.
• Capital Assistance Program: Treasury has also launched a new capital program, including a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now – making it less likely that a more serious downturn will occur.
The Challenge of Legacy Assets: Despite these efforts, the financial system is still working against economic recovery. One major reason is the problem of "legacy assets" – both real estate loans held directly on the books of banks ("legacy loans") and securities backed by loan portfolios ("legacy securities"). These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending.
• Origins of the Problem:The challenge posed by these legacy assets began with an initial shock due to the bursting of the housing bubble in 2007, which generated losses for investors and banks. Losses were compounded by the lax underwriting standards that had been used by some lenders and by the proliferation of complex securitization products, some of whose risks were not fully understood. The resulting need by investors and banks to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.
• Creation of a Negative Economic Cycle: As a result, a negative cycle has developed where declining asset prices have triggered further deleveraging, which has in turn led to further price declines. The excessive discounts embedded in some legacy asset prices are now straining the capital of U.S. financial institutions, limiting their ability to lend and increasing the cost of credit throughout the financial system. The lack of clarity about the value of these legacy assets has also made it difficult for some financial institutions to raise new private capital on their own.
The Public-Private Investment Program for Legacy Assets
To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.
Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:
• Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
• Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
• Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.
The Merits of This Approach: This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.
Two Components for Two Types of Assets: The Public-Private Investment Program has two parts, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms:
• Legacy Loans:The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.
• Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.
The Legacy Loans Program: To cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the Federal Deposit Insurance Corporation and Treasury are launching a program to attract private capital to purchase eligible legacy loans from participating banks through the provision of FDIC debt guarantees and Treasury equity co-investment. Treasury currently anticipates that approximately half of the TARP resources for legacy assets will be devoted to the Legacy Loans Program, but our approach will allow for flexibility to allocate resources where we see the greatest impact.
• Involving Private Investors to Set Prices: A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged. The Legacy Loans Program will facilitate the creation of individual Public-Private Investment Funds which will purchase asset pools on a discrete basis. The program will boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets.
• Using FDIC Expertise to Provide Oversight: The FDIC will provide oversight for the formation, funding, and operation of these new funds that will purchase assets from banks.
• Joint Financing from Treasury, Private Capital and FDIC: Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from the FDIC.
• The Process for Purchasing Assets Through The Legacy Loans Program: Purchasing assets in the Legacy Loans Program will occur through the following process:
o Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
o Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
o Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
o Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.
Sample Investment Under the Legacy Loans Program
Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.
The Legacy Securities Program: The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit. The resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital. The Legacy Securities Program consists of two related parts designed to draw private capital into these markets by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility (TALF) and through matching private capital raised for dedicated funds targeting legacy securities.
1. Expanding TALF to Legacy Securities to Bring Private Investors Back into the Market: The Treasury and the Federal Reserve are today announcing their plans to create a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit. The intention is to incorporate this program into the previously announced Term Asset-Backed Securities Facility (TALF).
o Providing Investors Greater Confidence to Purchase Legacy Assets:As with securitizations backed by new originations of consumer and business credit already included in the TALF, we expect that the provision of leverage through this program will give investors greater confidence to purchase these assets, thus increasing market liquidity.
o Funding Purchase of Legacy Securities: Through this new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.
o Working with Market Participants: Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.
2. Partnering Side-by-Side with Private Investors in Legacy Securities Investment Funds: Treasury will make co-investment/leverage available to partner with private capital providers to immediately support the market for legacy mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination.
Side-by-Side Investment with Qualified Fund Managers: Treasury will approve up to five asset managers with a demonstrated track record of purchasing legacy assets though we may consider adding more depending on the quality of applications received. Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching Treasury funds under the Public-Private Investment Program. Treasury funds will be invested one-for-one on a fully side-by-side basis with these investors.
Offer of Senior Debt to Leverage More Financing: Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the Public-Private Investment Fund from the Treasury Department in the amount of 50% of total equity capital of the fund. The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital subject to further restrictions.
Sample Investment Under the Legacy Securities Program
Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.
Saturday, March 21, 2009
Weekly Market Update (3/20/09)
HEADLINE NEWS WEEK ENDING 3/20/09
Overview
The Federal Reserve said this week that it “will employ all available tools to promote economic recovery.” more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
US MARKETS
Treasury/Economics
This week was historic for the Treasury market as yields had their biggest one-day rally in decades following the news that the Federal Reserve is committed to purchasing Treasuries. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Large-Cap Equities
The stock market continued to rally this week as the Fed announced that it will purchase Treasuries and mortgage bonds to help lower borrowing costs. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Corporate Bonds
Investment grade primary activity continued its torrid pace as issuers took advantage of the improving sentiment in the equity market. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Mortgage-Backed Securities
In a continuing effort to support the housing and mortgage markets, the Federal Reserve surprised investors with their announcement to commit another $750 billion of their balance sheet to purchasing agency mortgage backed securities. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Municipal Bonds
After the Treasury market’s massive Wednesday rally in the wake of the Fed’s announcement that it would literally create more money to buy assets like Treasury bonds and mortgages, the municipal market registered a dramatic, lagged response on Thursday. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
High-Yield
This week’s decision by the Federal Reserve to fully engage in quantitative easing by directly buying US Treasuries and the following positive impact on the equity markets, have translated into an upward momentum for the high yield market. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were insurance (+19.7%) and banks (+15.4%). more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +8.3% this week, while the Russian stock index RTS went up by +6.8%. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Global Bonds and Currencies
The announcement of the US Fed’s latest, surprisingly aggressive, easing measures elicited a relatively subdued response from major non-US sovereign bond markets although yields were generally lower this the week. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week, as the increased level of risk appetite seen over the previous week continued to drive credit spreads lower. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
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!
Overview
The Federal Reserve said this week that it “will employ all available tools to promote economic recovery.” more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
US MARKETS
Treasury/Economics
This week was historic for the Treasury market as yields had their biggest one-day rally in decades following the news that the Federal Reserve is committed to purchasing Treasuries. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Large-Cap Equities
The stock market continued to rally this week as the Fed announced that it will purchase Treasuries and mortgage bonds to help lower borrowing costs. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Corporate Bonds
Investment grade primary activity continued its torrid pace as issuers took advantage of the improving sentiment in the equity market. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Mortgage-Backed Securities
In a continuing effort to support the housing and mortgage markets, the Federal Reserve surprised investors with their announcement to commit another $750 billion of their balance sheet to purchasing agency mortgage backed securities. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Municipal Bonds
After the Treasury market’s massive Wednesday rally in the wake of the Fed’s announcement that it would literally create more money to buy assets like Treasury bonds and mortgages, the municipal market registered a dramatic, lagged response on Thursday. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
High-Yield
This week’s decision by the Federal Reserve to fully engage in quantitative easing by directly buying US Treasuries and the following positive impact on the equity markets, have translated into an upward momentum for the high yield market. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were insurance (+19.7%) and banks (+15.4%). more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +8.3% this week, while the Russian stock index RTS went up by +6.8%. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Global Bonds and Currencies
The announcement of the US Fed’s latest, surprisingly aggressive, easing measures elicited a relatively subdued response from major non-US sovereign bond markets although yields were generally lower this the week. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week, as the increased level of risk appetite seen over the previous week continued to drive credit spreads lower. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview
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!
Market Reflections 3/20/2009
Friday was a quiet day of profit taking in the stock market especially in bank stocks which have soared the past two weeks. The S&P 500 lost 2% to 768.54. After suffering its worst losses in a generation following the Fed's big liquidity move on Wednesday, the dollar finally firmed, ending slightly higher at $1.3568 against the euro. Oil firmed slightly to end at $51.55 with gold little changed at $952.70.
Friday, March 20, 2009
What's winning in this bull rally...
From Bespoke Investment Group:
Below we highlight sector performance during the current rally that started last Tuesday. As shown, the Financial sector is up a whopping 50% since the close on March 9th! The S&P 500 as a whole is up 17.4%, and Telecom, Materials, Industrials, and Consumer Discretionary are all outperforming. Consumer Staples, Health Care, Energy, Utilities, and Technology are underperforming the S&P 500.
Below we highlight sector performance during the current rally that started last Tuesday. As shown, the Financial sector is up a whopping 50% since the close on March 9th! The S&P 500 as a whole is up 17.4%, and Telecom, Materials, Industrials, and Consumer Discretionary are all outperforming. Consumer Staples, Health Care, Energy, Utilities, and Technology are underperforming the S&P 500.
Bond King Bill Gross says Bernanke's funny money isn't enough...
The latest from master bond investor Bill Gross: Total Fed money printing so far isn't enough to restart the American economy.
As Bloomberg reports: "We need more than that," Gross said today in a Bloomberg Television interview from Pimco's headquarters in Newport Beach, California. The Fed's balance sheet "will probably have to grow to about $5 trillion or $6 trillion," he said.
Gross is almost always right on these sorts of things... so expect more money printing... and expect it to lead to inflation in a few years. And expect commodity bets to keep working.
As Bloomberg reports: "We need more than that," Gross said today in a Bloomberg Television interview from Pimco's headquarters in Newport Beach, California. The Fed's balance sheet "will probably have to grow to about $5 trillion or $6 trillion," he said.
Gross is almost always right on these sorts of things... so expect more money printing... and expect it to lead to inflation in a few years. And expect commodity bets to keep working.
Bernanke wants mortgage rates at 3-4%; "massive assault"
From Dow Theory Letters:
Russell Comment -- They're calling it "The Rambo Fed." Bernanke is not fooling around any longer. He's playing all his cards. He's going to put a floor under housing and boost asset prices in an all-out attack on the bear market. Bernanke wants to drive mortgage rates down and refinance housing at 3-4%. On the news, the dollar swooned, the Euro surged, the long T-bond exploded higher by six points, and the yield on the ten-year Treasury bond sank to 1.51%. Whew, what a day and what an announcement.
The Bernanke plan -- smother deflation with money and put a floor under housing. Bernanke will in no way accept deflation. The Fed will go all-out in printing Federal Reserve Notes in its massive assault on deflation. Bernanke will accept a collapsing dollar rather than a repeat of the Great Depression. Actually, the Fed would like a lower (not a crashing) dollar. A lower dollar would be inflationary, which is what the Fed wants.
Russell Comment -- They're calling it "The Rambo Fed." Bernanke is not fooling around any longer. He's playing all his cards. He's going to put a floor under housing and boost asset prices in an all-out attack on the bear market. Bernanke wants to drive mortgage rates down and refinance housing at 3-4%. On the news, the dollar swooned, the Euro surged, the long T-bond exploded higher by six points, and the yield on the ten-year Treasury bond sank to 1.51%. Whew, what a day and what an announcement.
The Bernanke plan -- smother deflation with money and put a floor under housing. Bernanke will in no way accept deflation. The Fed will go all-out in printing Federal Reserve Notes in its massive assault on deflation. Bernanke will accept a collapsing dollar rather than a repeat of the Great Depression. Actually, the Fed would like a lower (not a crashing) dollar. A lower dollar would be inflationary, which is what the Fed wants.
ON CHINA
From the March 19, 2009 issue of The Gartman Letter
Speaking at the People’s Congress in Beijing recently, Premier Wen Jiabo made it quite clear that China intends fully to achieve 8% growth in GDP this year. Not next year; not two years hence, but this year...’09; the year of the Ox... this year.
Interestingly, Mr. Wen made it clear that not only was the government intent upon force feeding liquidity into the nation’s banks, but was also prepared to make material cuts in income taxes, across the board to sponsor such growth.
Wen made it clear that the only way he can see Chinese economic growth returning to the not-so-long-ago-lost halcyon days of 9% growth almost relentlessly shall require more than simple reserve injections.
Mr. Wen said that it is his intention to turn China from an export driven society to a consumer driven one instead. He know that liquidity alone will not suffice to do what Beijing needs the economy to do; hence Mr. Wen will begin this new era of growing consumer demand by cutting corporate and personal income taxes. According to The China Daily, Mr. Wen said, in the simplest of terms, that it is Beijing’s intention to spur the economy forward by “boosting domestic demand through residential tax cuts, in addition to the levy reduction for companies.”
The latter has already been put into effect; the former is coming. Mr. Wen’s proposed “residential” tax cuts include tax cuts on securities transactions; tax cuts on property sales; smaller taxes on exports and an end to a number of “administrative charges” on various goods and services. At a time when American law makers on the Left are debating the possibilities of taxing stock transactions, the Chinese are moving to end them!
Further, China is moving swiftly ahead with very real “infrastructure” spending. The new term here in the US is “shovel ready.” Our stimulus program is manifestly un-shovel ready; in China, the shovels are already at hand and the programs are being put into effect, with workers being hired and ground being broken.
Mr. Wen has the calendar working for him too, for this year marks the 60th anniversary of the founding of the People’s Republic. As is always the case, China will have myriad numbers of building programs in place to commemorate that event. Too... and this is hard for us to believe, for time passes so quickly... this is the 20th anniversary of the Tiananmen Square Uprising. Mr. Wen and Mr. Hu will want to make certain that things are on the economic mend in order to keep dissidents wrong-footed throughout the years.
This is a strange era in which we live then. We live at a time when ex-Communists are taking the more free market route toward a consumer led society. We are living in an era when Beijing reads Atlas Shrugged and Washington reads The Manchester Guardian. We are living in an era when tax cuts of all sorts are effected by Beijing, while Washington talks about and effects tax increases of all sorts. We live in an era when Beijing gets out of the way of entrepreneurs, and Washington throws rocks and rubble in their way instead.
As was said in Ecclesiastes, “To everything, turn, turn, turn...”
Good Luck and Good Trading,
Dennis Gartman
------------------------------------------------------------------------------------------------------------------------------------------------------
The Gartman Letter is a daily commentary on the global capital markets subscribed to by leading banks, broking firms, hedge funds, mutual funds, energy and grain trading companies around the world.
The Letter each day deals with political, economic and technical circumstances from both a long and short term perspective, and is available to clients and prospects at approximately 10:30 - 10:45 GMT each business day of the year. Mr. Gartman has been producing his commentary on a continuous basis since 1987, and has taught courses on capital markets creation and derivatives for banks, broking firms, governments and central banks all the while.
Speaking at the People’s Congress in Beijing recently, Premier Wen Jiabo made it quite clear that China intends fully to achieve 8% growth in GDP this year. Not next year; not two years hence, but this year...’09; the year of the Ox... this year.
Interestingly, Mr. Wen made it clear that not only was the government intent upon force feeding liquidity into the nation’s banks, but was also prepared to make material cuts in income taxes, across the board to sponsor such growth.
Wen made it clear that the only way he can see Chinese economic growth returning to the not-so-long-ago-lost halcyon days of 9% growth almost relentlessly shall require more than simple reserve injections.
Mr. Wen said that it is his intention to turn China from an export driven society to a consumer driven one instead. He know that liquidity alone will not suffice to do what Beijing needs the economy to do; hence Mr. Wen will begin this new era of growing consumer demand by cutting corporate and personal income taxes. According to The China Daily, Mr. Wen said, in the simplest of terms, that it is Beijing’s intention to spur the economy forward by “boosting domestic demand through residential tax cuts, in addition to the levy reduction for companies.”
The latter has already been put into effect; the former is coming. Mr. Wen’s proposed “residential” tax cuts include tax cuts on securities transactions; tax cuts on property sales; smaller taxes on exports and an end to a number of “administrative charges” on various goods and services. At a time when American law makers on the Left are debating the possibilities of taxing stock transactions, the Chinese are moving to end them!
Further, China is moving swiftly ahead with very real “infrastructure” spending. The new term here in the US is “shovel ready.” Our stimulus program is manifestly un-shovel ready; in China, the shovels are already at hand and the programs are being put into effect, with workers being hired and ground being broken.
Mr. Wen has the calendar working for him too, for this year marks the 60th anniversary of the founding of the People’s Republic. As is always the case, China will have myriad numbers of building programs in place to commemorate that event. Too... and this is hard for us to believe, for time passes so quickly... this is the 20th anniversary of the Tiananmen Square Uprising. Mr. Wen and Mr. Hu will want to make certain that things are on the economic mend in order to keep dissidents wrong-footed throughout the years.
This is a strange era in which we live then. We live at a time when ex-Communists are taking the more free market route toward a consumer led society. We are living in an era when Beijing reads Atlas Shrugged and Washington reads The Manchester Guardian. We are living in an era when tax cuts of all sorts are effected by Beijing, while Washington talks about and effects tax increases of all sorts. We live in an era when Beijing gets out of the way of entrepreneurs, and Washington throws rocks and rubble in their way instead.
As was said in Ecclesiastes, “To everything, turn, turn, turn...”
Good Luck and Good Trading,
Dennis Gartman
------------------------------------------------------------------------------------------------------------------------------------------------------
The Gartman Letter is a daily commentary on the global capital markets subscribed to by leading banks, broking firms, hedge funds, mutual funds, energy and grain trading companies around the world.
The Letter each day deals with political, economic and technical circumstances from both a long and short term perspective, and is available to clients and prospects at approximately 10:30 - 10:45 GMT each business day of the year. Mr. Gartman has been producing his commentary on a continuous basis since 1987, and has taught courses on capital markets creation and derivatives for banks, broking firms, governments and central banks all the while.
When a Hybrid Can Pull a Boat, Then We'll Talk - wsj
This must be one of the best letters to the editor I have seen. I can hear the theme song from Team America playing in the background..............
In response to Ford CEO Alan Mulally's call for higher gas taxes (which you report in "Tax My Products, Please," Review & Outlook, March 17), I would like to say that Americans don't want smaller vehicles. We have great distances to travel, mountains and plains to cross in all seasons of the year. We tow our boats and other contrivances. We haul our children around and travel with them over the continent.
Our businessmen drive long distances since they can no longer own corporate jets.
What we want is a more efficient internal combustion engine, not a smaller car. And do not tell us it cannot be done. It can be done, because efficient engines can be created today with off-the-shelf parts bought from General Motors, Ford or Chrysler.
A friend of mine has converted a GMC Vortec V8 gasoline engine for his 2.5 ton pickup truck and the engine delivers more than 30 mpg. Why can't we buy this type of vehicle at the dealer? Why does individual ingenuity have to point the way to corporations that have the money, skill and engineering brainpower to deliver a more efficient engine?
Why do we have to pay more at the pump?
The suggestion that consumers should pay more in gasoline taxes is a cop-out on the part of the auto makers, politicians and everyone else who supports it.
This is not Europe. This is the United States of America, a vast country with amazing distances and varieties of geography and climate. We do not want higher gas prices. We want more efficient engines to power our vehicles. We want the Big Three to use their brains to create something new, not deliver a rehash of junk from a bunch of whiners.
In response to Ford CEO Alan Mulally's call for higher gas taxes (which you report in "Tax My Products, Please," Review & Outlook, March 17), I would like to say that Americans don't want smaller vehicles. We have great distances to travel, mountains and plains to cross in all seasons of the year. We tow our boats and other contrivances. We haul our children around and travel with them over the continent.
Our businessmen drive long distances since they can no longer own corporate jets.
What we want is a more efficient internal combustion engine, not a smaller car. And do not tell us it cannot be done. It can be done, because efficient engines can be created today with off-the-shelf parts bought from General Motors, Ford or Chrysler.
A friend of mine has converted a GMC Vortec V8 gasoline engine for his 2.5 ton pickup truck and the engine delivers more than 30 mpg. Why can't we buy this type of vehicle at the dealer? Why does individual ingenuity have to point the way to corporations that have the money, skill and engineering brainpower to deliver a more efficient engine?
Why do we have to pay more at the pump?
The suggestion that consumers should pay more in gasoline taxes is a cop-out on the part of the auto makers, politicians and everyone else who supports it.
This is not Europe. This is the United States of America, a vast country with amazing distances and varieties of geography and climate. We do not want higher gas prices. We want more efficient engines to power our vehicles. We want the Big Three to use their brains to create something new, not deliver a rehash of junk from a bunch of whiners.
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.
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