April 2nd, 2009
After ruminating on the rally we saw in March, it is time to shift our focus on to the remaining 9 months of the year. Now, more than ever, investors are asking their advisors if we did indeed reach the market bottom in early March. It is best to recognize "exact market timing" as a myth, and instead recognize when opportunities present themselves and invest accordingly.
As the market re-tested its lows, and enjoyed a nice rally, sentiment on the street seemed to turn from a smile to a smirk as the market raged on. Continued weakness in the economy is expected, but this weakness is already priced into the market. To assist you better understanding the current economic conditions, we are pleased to bring you highlights from the most recent Zacks Economic Report.
The Outlook in Brief
Despite a recent upturn in equity markets, the earlier implosion, and other signs of weakness, especially abroad, darkened an already-dismal economic landscape. Expected near-term declines in GDP were deepened, and the projected upturn starting in the second half has been trimmed back significantly. GDP is now expected to decline at a 5.5% pace in the first quarter, and fall at a 0.5% rate in the second quarter. In the second half, GDP is projected to grow at just a 1.4% pace.
This forecast assumes that equities decline 22% (at a quarterly rate) in the first quarter, versus a 5% decline expected last month, and carving an additional $2.1 trillion from household net worth. This decline significantly restrains consumer spending relative to last month's forecast in the second half
of this year and in the first half of 2010.
Every major component of final sales, save government spending, is significantly weaker in the first half of 2009 in this forecast than last month. Overall final sales are expected to decline at nearly a 4% pace in the first quarter before flattening (0.0%) in the second quarter. The downward revisions in
capital spending components were especially sharp, as the credit-market dysfunction and growing pessimism begin to weigh heavily on this sector.
GDP is now expected to decline 0.9% in 2009 and to rise 3.5% in 2010, both 0.6 percentage point less than we expected last month. As a result, the unemployment rate is expected to peak at 9.4% early next year and to decline to just 8.1% by the end of 2011.?? With considerable slack emerging in the economy, inflation quickly falls to near zero, and by 2011 moves into a period of mild deflation. Core consumer inflation (excludes food and energy prices) is projected to rise 0.4% in 2009, remain flat in 2010, and decline 0.2% in 2011.
The federal funds rate target remains pinned near zero into late 2011, and the Federal Reserve's unconventional policies will be pursued aggressively to promote easier credit conditions. The Fed will continue to emphasize its conditional commitment to keep the federal funds rate near zero, will
expand its credit facilities, and begin the purchase of longer-term Treasury securities in order to ease credit conditions.
Zacks Investment Management
Friday, April 3, 2009
Taxing Mutual Funds
These are taxing times for mutual-fund shareholders, indeed.
Not only are stock-fund investors facing stiff losses from 2008, those in taxable accounts also received a bill from the IRS. That's because their fund managers sold appreciated securities to meet redemptions and rescue performance in last year's meltdown. Investors were left with capital gains taxes to pay -- but nothing to show for it.
Shareholders who reinvest distributions are hit hardest. Owing tax when you haven't sold a single share is one of the rougher edges of fund investing, in good markets or bad.
Individual stockholders don't have that problem; they pay capital gains taxes only when they sell. If fund shareholders could do the same, money siphoned for taxes could instead be invested and grow over time.
Some reform-minded lawmakers in Congress have tried over the past decade to give fund investors an even tax break, but with no luck. A new session of Congress offers yet another chance to level the playing field, but for now the score is still IRS: 1; Shareholders: 0.
-- Jonathan Burton , assistant personal finance editor, Morningstar
Not only are stock-fund investors facing stiff losses from 2008, those in taxable accounts also received a bill from the IRS. That's because their fund managers sold appreciated securities to meet redemptions and rescue performance in last year's meltdown. Investors were left with capital gains taxes to pay -- but nothing to show for it.
Shareholders who reinvest distributions are hit hardest. Owing tax when you haven't sold a single share is one of the rougher edges of fund investing, in good markets or bad.
Individual stockholders don't have that problem; they pay capital gains taxes only when they sell. If fund shareholders could do the same, money siphoned for taxes could instead be invested and grow over time.
Some reform-minded lawmakers in Congress have tried over the past decade to give fund investors an even tax break, but with no luck. A new session of Congress offers yet another chance to level the playing field, but for now the score is still IRS: 1; Shareholders: 0.
-- Jonathan Burton , assistant personal finance editor, Morningstar
Market Reflections 4/2/2009
The U.S. Financial Accounting Standards Board (FASB) offered new guidance that immediately gives companies more leeway on mark-to-market valuations, news that triggered an inflow into the stock market where the S&P 500 rose 2.9 percent to 834.38. News out of the G-20 also boosted the stock market. World leaders pledged more than $1 trillion in emergency aid for undeveloped countries.
The dollar fell 2-1/2 cents after the ECB defied both expectations and G-20 calls for stimulus and cut rates by an incremental 25 basis points, half of what was expected.
Commodities were mostly lower especially gold which had been benefiting from the scramble of stimulus efforts, all of which as some warn are certain to lead to inflation down the road. Gold fell about $15 to end at $905 after briefly dipping below $900. Oil ended above $52.
Money moved into the stock market and out of the Treasury market where yields backed up from 7 to 10 basis points with the belly of the curve hit by the most selling. The yield on the 3-year note rose 10 basis points to 1.23 percent.
The dollar fell 2-1/2 cents after the ECB defied both expectations and G-20 calls for stimulus and cut rates by an incremental 25 basis points, half of what was expected.
Commodities were mostly lower especially gold which had been benefiting from the scramble of stimulus efforts, all of which as some warn are certain to lead to inflation down the road. Gold fell about $15 to end at $905 after briefly dipping below $900. Oil ended above $52.
Money moved into the stock market and out of the Treasury market where yields backed up from 7 to 10 basis points with the belly of the curve hit by the most selling. The yield on the 3-year note rose 10 basis points to 1.23 percent.
Thursday, April 2, 2009
Bailout scorecard: Adding up the dollars Total: $10.5 trillion allocated $2.6 trillion spent
If you are getting dizzy from all the government rescue attempts and trying to get your arms around what has been
committed and how much is out the door, then you might find the following table I found on CNNMoney as a good
reference or starting point.
The government is engaged in an unprecedented - and expensive - effort to rescue the economy. Here are all the elements of the bailouts.
Date Bailout Allocated Spent
December 2007 Term Auction Facility
Lending program that allows commercial banks to unload hard-to-sell assets, including mortgage-backed securities: Fed takes assets as collateral and banks get cash. $600 billion $468.6 billion
February 2008 Economic Stimulus Act of 2008
Tax rebates of up to $600 for individual filers and $1,200 for couples in effort to boost the economy. Businesses received more than $60 billion in tax breaks. $168 billion $168 billion
March 2008 Bear Stearns bailout
Program to guarantee potential losses on Bear Stearns' portfolio; smoothed the way for JPMorgan Chase to buy the failed investment bank. $29 billion $26.2 billion
March 2008 Term Securities Lending Facility
Federal Reserve facility that loans Treasurys to banks against hard-to-sell collateral like mortgage-backed securities. $200 billion $88.6 billion
March 2008 Primary Dealer Credit Facility
Long-time lending facility for commercial banks that was opened to investment banks for first time in March 2008. n/a $61.3 billion
May 2008 Student loan guarantees
Program to purchase federal student loans from private lenders. Aim is to provide financing to companies that provide student loans. $130 billion $9 billion
September 2008 Fannie Mae and Freddie Mac bailout
Cost to the government of taking the mortgage finance companies into conservatorship. $400 billion1 $59.8 billion
September 2008 Foreign exchange dollar swaps
Exchange of dollars to 13 foreign central banks for collateral. Aim is to provide liquidity to foreign financial institutions. Unlimited $327.8 billion
October 2008 FHA housing rescue
Funding set aside for insurance of new 30-year fixed-rate mortgages for at-risk borrowers, tax credits for first-time home buyers and assistance to states and municipalities. $320 billion $20 billion +2
October 2008 Auto industry energy efficiency loans
Low-interest loans to help speed the industry's transition to more fuel-efficient vehicles. $25 billion $0
October 2008 Troubled Asset Relief Program
Financial rescue plan aimed at restoring liquidity to the financial markets. Funds thus far allocated for capital purchases in banks and emergency bailouts. $700 billion $323.4 billion
October 2008 Bank capital investments $218 billion $198.6 billion
November 2008 Citigroup capital investment
Emergency funding to keep bank afloat; in addition to previous $25 billion capital investment. $20 billion $20 billion
November 2008 Asset Guarantee Program
Funds set aside to backstop potential losses to Treasury from Citigroup and Bank of America loans. $12.5 billion $0
November 2008 TALF loss provisions
Funds set aside to backstop potential losses to Treasury from purchases of consumer loan-backed securities and mortgage-backed securities. $35 billion $0
December 2008 Auto industry bailout
Program that will provide capital on a case-by-case basis to systemically significant institutions that are at substantial risk of failure. $29.8 billion $24.8 billion
December 2008 General Motors
Government bailout of automaker to keep company afloat and help it achieve viability for the future. Last $4 billion subject to congressional approval $13.4 billion $13.4 billion
December 2008 Chrysler
Government bailout of automaker to keep company afloat and help it achieve viability for the future. Last $4 billion subject to congressional approval $4 billion $4 billion
December 2008 GMAC
Government bailout of auto finance company to which Federal Reserve granted bank holding company status. $5 billion went to GMAC directly and $1 billion to GM to make an investment in the company. $5.9 billion $5.9 billion
January 2009 Chrysler Financial
Government bailout of auto finance company to which Federal Reserve granted bank holding company status. $1.5 billion $1.5 billion
March 2009 Auto Supplier Support Program
Program to help stabilize auto suppliers by guaranteeing debt owed to them for shipped products, and providing financing to continue operations. $5 billion $0
hide
January 2009 Bank of America capital investment
Emergency funding to aid Merrill Lynch transaction; in addition to previous $25 billion capital investment. $20 billion $20 billion
February 2009 Foreclosure prevention
$50 billion4 $0
February 2009 Public-private investment fund
Taxpayer funds used in partnership with private investment that will buy up at least $500 billion of toxic assets from financial institutions. $100 billion $0
March 2009 AIG common stock investment
Money to help troubled insurer pay off now defunct lending facility set up by Fed in the initial version of the company's bailout. $40 billion $40 billion
March 2009 TALF investment $20 billion $20 billion
March 2009 AIG preferred capital investment $30 billion $0
March 2009 Small business loan-backed securities purchasesFunds to purchase securities backed by SBA loans in effort to unlock credit for small businesses $15 billion $0
n/a Estimated capital investment payback
-$25 billion n/a
n/a Funds left unallocated
$134.5 billion n/a
hide
October 2008 Money market guarantees
Four programs to help money market funds by insuring against losses; financing bank purchases of debt from funds; buying funds’ debt; and lending to funds directly. $659 billion $15 billion
October 2008 Commercial Paper Funding Facility
Purchases of short-term corporate debt aimed at boosting the struggling market and providing critical three-month financing to businesses. $1.4 trillion $241.3 billion
November 2008 Unemployment benefit extensions
Funds to help states expand unemployment benefits. $8 billion $8 billion
November 2008 Citigroup loan-loss backstop
Funds set aside to insure against losses from bank’s mortgage-backed securities investments. $245 billion $0
November 2008 Term Asset-Backed Securities Loan Facility
Program to buy consumer loan-backed securities. Aim is to revive the securitization market for consumer loans like credit cards and auto loans. $1 trillion $4.7 billion
November 2008 GSE mortgage-backed securities purchases
Program to buy mortgage-backed securities held by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans. $1.25 trillion $236.2 billion
November 2008 GSE debt purchases
Program to buy debt issued by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans. $100 billion $50.4 billion
November 2008 FDIC Temporary Liquidity Guarantee Program
Guarantees on newly issued bank bonds with maturities of more than three months. Aim is to restore liquidity to the corporate bond market and provide long-term financing to banks. $1.5 trillion $297.1 billion
2008 FDIC bank takeovers
Cost to FDIC fund that insures losses depositors suffer when a bank fails. n/a $18.5 billion
January 2009 Bank of America loan-loss backstop
Funds set aside to insure against losses from bank’s Merrill Lynch merger. $97 billion $0
January 2009 Credit Union deposit insurance guarantees
$80 billion $0
January 2009 U.S. Central Federal Credit Union capital injection
$1 billion $1 billion
February 2009 American Recovery and Reinvestment Act
Infrastructure spending, funding for states, help for the needy and tax cuts for individuals and businesses to stimulate the economy. $787.2 billion n/a3
February 2009 Tax cuts for individuals and businesses $212 billion n/a
February 2009 Direct spending $267 billion n/a
February 2009 Appropriations spending $308.3 billion n/a
hide
February 2009 Foreclosure prevention $25 billion4 $0
March 2009 AIG
Multifaceted bailout to help insurer through restructuring, minimize the need to post collateral and get rid of toxic assets from its balance sheet. $182 billion5 $129.3 billion5
November 2008 Bridge loan
Financing to help company through its restructuring process as it spins off non-core businesses. $60 billion6 $43.2 billion
November 2008 Collateralized debt obligation purchases
Facility to buy private investors' loans on which AIG sold insurance. As the value of loans plummeted, AIG was forced to post more collateral to back up the insurance contracts, known as credit default swap agreements. $30 billion $27.6 billion
November 2008 Mortgage-backed securities purchases
Facility to buy company’s securities backed by residential loans. $22.5 billion $18.4 billion
March 2009 Treasury preferred capital investment
Loan to help pay off a now defunct lending facility set up by the Fed in the initial version of the company’s bailout. $30 billion $0
March 2009 Investment in ALICO and AIA life insurance units $26 billion $0
March 2009 Purchases of life insurance-backed securities $8.5 billion $0
March 2009 Treasury common stock investment $40 billion $40 billion
hide
March 2009 U.S. government bond purchases
Federal Reserve will buy up to $300 billion of U.S. debt to support Treasury market and help keep interest rates down for consumer loans. $300 billion $15 billion
2009 FDIC bank takeovers
Cost to FDIC fund that insures losses depositors suffer when a bank fails. n/a $2.3 billion
Total: $10.5 trillion $2.6 trillion
1$200 billion set aside in September 2008; $200 billion additional in February 2009
2At least $20 billion
3Estimated budget impact for 2009 is $120 billion
4Making Home Affordable foreclosure prevention program will get $50 billion from Treasury, $20 billion from GSEs and $5 billion from HUD.
5Includes $70 billion from TARP
6Bridge loan allocation to be reduced to not less than $25 billion once government takes stakes in life insurance units
Sources: Federal Reserve, Treasury, FDIC, CBO
Note: Figures as of April 1, 2009
committed and how much is out the door, then you might find the following table I found on CNNMoney as a good
reference or starting point.
The government is engaged in an unprecedented - and expensive - effort to rescue the economy. Here are all the elements of the bailouts.
Date Bailout Allocated Spent
December 2007 Term Auction Facility
Lending program that allows commercial banks to unload hard-to-sell assets, including mortgage-backed securities: Fed takes assets as collateral and banks get cash. $600 billion $468.6 billion
February 2008 Economic Stimulus Act of 2008
Tax rebates of up to $600 for individual filers and $1,200 for couples in effort to boost the economy. Businesses received more than $60 billion in tax breaks. $168 billion $168 billion
March 2008 Bear Stearns bailout
Program to guarantee potential losses on Bear Stearns' portfolio; smoothed the way for JPMorgan Chase to buy the failed investment bank. $29 billion $26.2 billion
March 2008 Term Securities Lending Facility
Federal Reserve facility that loans Treasurys to banks against hard-to-sell collateral like mortgage-backed securities. $200 billion $88.6 billion
March 2008 Primary Dealer Credit Facility
Long-time lending facility for commercial banks that was opened to investment banks for first time in March 2008. n/a $61.3 billion
May 2008 Student loan guarantees
Program to purchase federal student loans from private lenders. Aim is to provide financing to companies that provide student loans. $130 billion $9 billion
September 2008 Fannie Mae and Freddie Mac bailout
Cost to the government of taking the mortgage finance companies into conservatorship. $400 billion1 $59.8 billion
September 2008 Foreign exchange dollar swaps
Exchange of dollars to 13 foreign central banks for collateral. Aim is to provide liquidity to foreign financial institutions. Unlimited $327.8 billion
October 2008 FHA housing rescue
Funding set aside for insurance of new 30-year fixed-rate mortgages for at-risk borrowers, tax credits for first-time home buyers and assistance to states and municipalities. $320 billion $20 billion +2
October 2008 Auto industry energy efficiency loans
Low-interest loans to help speed the industry's transition to more fuel-efficient vehicles. $25 billion $0
October 2008 Troubled Asset Relief Program
Financial rescue plan aimed at restoring liquidity to the financial markets. Funds thus far allocated for capital purchases in banks and emergency bailouts. $700 billion $323.4 billion
October 2008 Bank capital investments $218 billion $198.6 billion
November 2008 Citigroup capital investment
Emergency funding to keep bank afloat; in addition to previous $25 billion capital investment. $20 billion $20 billion
November 2008 Asset Guarantee Program
Funds set aside to backstop potential losses to Treasury from Citigroup and Bank of America loans. $12.5 billion $0
November 2008 TALF loss provisions
Funds set aside to backstop potential losses to Treasury from purchases of consumer loan-backed securities and mortgage-backed securities. $35 billion $0
December 2008 Auto industry bailout
Program that will provide capital on a case-by-case basis to systemically significant institutions that are at substantial risk of failure. $29.8 billion $24.8 billion
December 2008 General Motors
Government bailout of automaker to keep company afloat and help it achieve viability for the future. Last $4 billion subject to congressional approval $13.4 billion $13.4 billion
December 2008 Chrysler
Government bailout of automaker to keep company afloat and help it achieve viability for the future. Last $4 billion subject to congressional approval $4 billion $4 billion
December 2008 GMAC
Government bailout of auto finance company to which Federal Reserve granted bank holding company status. $5 billion went to GMAC directly and $1 billion to GM to make an investment in the company. $5.9 billion $5.9 billion
January 2009 Chrysler Financial
Government bailout of auto finance company to which Federal Reserve granted bank holding company status. $1.5 billion $1.5 billion
March 2009 Auto Supplier Support Program
Program to help stabilize auto suppliers by guaranteeing debt owed to them for shipped products, and providing financing to continue operations. $5 billion $0
hide
January 2009 Bank of America capital investment
Emergency funding to aid Merrill Lynch transaction; in addition to previous $25 billion capital investment. $20 billion $20 billion
February 2009 Foreclosure prevention
$50 billion4 $0
February 2009 Public-private investment fund
Taxpayer funds used in partnership with private investment that will buy up at least $500 billion of toxic assets from financial institutions. $100 billion $0
March 2009 AIG common stock investment
Money to help troubled insurer pay off now defunct lending facility set up by Fed in the initial version of the company's bailout. $40 billion $40 billion
March 2009 TALF investment $20 billion $20 billion
March 2009 AIG preferred capital investment $30 billion $0
March 2009 Small business loan-backed securities purchasesFunds to purchase securities backed by SBA loans in effort to unlock credit for small businesses $15 billion $0
n/a Estimated capital investment payback
-$25 billion n/a
n/a Funds left unallocated
$134.5 billion n/a
hide
October 2008 Money market guarantees
Four programs to help money market funds by insuring against losses; financing bank purchases of debt from funds; buying funds’ debt; and lending to funds directly. $659 billion $15 billion
October 2008 Commercial Paper Funding Facility
Purchases of short-term corporate debt aimed at boosting the struggling market and providing critical three-month financing to businesses. $1.4 trillion $241.3 billion
November 2008 Unemployment benefit extensions
Funds to help states expand unemployment benefits. $8 billion $8 billion
November 2008 Citigroup loan-loss backstop
Funds set aside to insure against losses from bank’s mortgage-backed securities investments. $245 billion $0
November 2008 Term Asset-Backed Securities Loan Facility
Program to buy consumer loan-backed securities. Aim is to revive the securitization market for consumer loans like credit cards and auto loans. $1 trillion $4.7 billion
November 2008 GSE mortgage-backed securities purchases
Program to buy mortgage-backed securities held by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans. $1.25 trillion $236.2 billion
November 2008 GSE debt purchases
Program to buy debt issued by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans. $100 billion $50.4 billion
November 2008 FDIC Temporary Liquidity Guarantee Program
Guarantees on newly issued bank bonds with maturities of more than three months. Aim is to restore liquidity to the corporate bond market and provide long-term financing to banks. $1.5 trillion $297.1 billion
2008 FDIC bank takeovers
Cost to FDIC fund that insures losses depositors suffer when a bank fails. n/a $18.5 billion
January 2009 Bank of America loan-loss backstop
Funds set aside to insure against losses from bank’s Merrill Lynch merger. $97 billion $0
January 2009 Credit Union deposit insurance guarantees
$80 billion $0
January 2009 U.S. Central Federal Credit Union capital injection
$1 billion $1 billion
February 2009 American Recovery and Reinvestment Act
Infrastructure spending, funding for states, help for the needy and tax cuts for individuals and businesses to stimulate the economy. $787.2 billion n/a3
February 2009 Tax cuts for individuals and businesses $212 billion n/a
February 2009 Direct spending $267 billion n/a
February 2009 Appropriations spending $308.3 billion n/a
hide
February 2009 Foreclosure prevention $25 billion4 $0
March 2009 AIG
Multifaceted bailout to help insurer through restructuring, minimize the need to post collateral and get rid of toxic assets from its balance sheet. $182 billion5 $129.3 billion5
November 2008 Bridge loan
Financing to help company through its restructuring process as it spins off non-core businesses. $60 billion6 $43.2 billion
November 2008 Collateralized debt obligation purchases
Facility to buy private investors' loans on which AIG sold insurance. As the value of loans plummeted, AIG was forced to post more collateral to back up the insurance contracts, known as credit default swap agreements. $30 billion $27.6 billion
November 2008 Mortgage-backed securities purchases
Facility to buy company’s securities backed by residential loans. $22.5 billion $18.4 billion
March 2009 Treasury preferred capital investment
Loan to help pay off a now defunct lending facility set up by the Fed in the initial version of the company’s bailout. $30 billion $0
March 2009 Investment in ALICO and AIA life insurance units $26 billion $0
March 2009 Purchases of life insurance-backed securities $8.5 billion $0
March 2009 Treasury common stock investment $40 billion $40 billion
hide
March 2009 U.S. government bond purchases
Federal Reserve will buy up to $300 billion of U.S. debt to support Treasury market and help keep interest rates down for consumer loans. $300 billion $15 billion
2009 FDIC bank takeovers
Cost to FDIC fund that insures losses depositors suffer when a bank fails. n/a $2.3 billion
Total: $10.5 trillion $2.6 trillion
1$200 billion set aside in September 2008; $200 billion additional in February 2009
2At least $20 billion
3Estimated budget impact for 2009 is $120 billion
4Making Home Affordable foreclosure prevention program will get $50 billion from Treasury, $20 billion from GSEs and $5 billion from HUD.
5Includes $70 billion from TARP
6Bridge loan allocation to be reduced to not less than $25 billion once government takes stakes in life insurance units
Sources: Federal Reserve, Treasury, FDIC, CBO
Note: Figures as of April 1, 2009
DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING
DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
Another reason weve seen the market low for now
About a year ago I wrote about how the stock market resembles a dog on a leash. Prices fluctuate from the trend, sometimes in extreme spikes which mark important inflection points.
I thought I’d revisit the idea by taking a long term look at the S&P 500 and comparing how it has fared to its own long term (200 moving average). To equalize things and make it comparable over time, I expressed the divergence from the mean as a percentage:
Looking at the data from 1950 to present, here are the rare times when the S&P 500 Index (SPX) traded at an extreme relative to its simple 200 day moving average:
July 26th 1962 -22.62%
May 26th 1970 -23.18%
October 4th 1974 -28.58%
October 19th 1987 -24.75%
Sept 21st 2001 -22.11%
July 23rd 2002 -26.98%
October 7th, 2002 -23.84%
November 20th 2008 -39.79%
March 9th 2009 -36.53%
The dates should be easily recognizable since they correspond to almost every single major turning point in recent market history. The numbers represent the percentage relative to the long term moving average. So on July 26th, 1962 the S&P 500 traded 22.62% below its simple 200 day moving average.
Looking at the data this way, you easily gain perspective on just how epic the recent market action has been. Not since 1929 has the market veered off so dramatically from its long term path. Put another way, if the November 2008 low doesn’t mark a significant inflection point, it will be the first time.
A quick back-of-the-envelope calculation shows that 60 trading days after these dates shown above the market is always higher, sometimes significantly:
7.95%
10.03%
12.93%
10.72%
6.14%
9.54%
8.3%
20.9%
I’ll revisit this when 60 days have passed from March 9th, 2009
Even if we assume that the November lows will indeed mark a significant low for the S&P 500, there is no reason to believe that prices would simply climb higher from here onward. We could enter a protracted sideways market, or we could also slowly drip lower, revisiting the previous lows. But it is difficult to argue that what we have just witnessed isn’t but a monumental and rare market event that has characterized important turning points in the past.
I thought I’d revisit the idea by taking a long term look at the S&P 500 and comparing how it has fared to its own long term (200 moving average). To equalize things and make it comparable over time, I expressed the divergence from the mean as a percentage:
Looking at the data from 1950 to present, here are the rare times when the S&P 500 Index (SPX) traded at an extreme relative to its simple 200 day moving average:
July 26th 1962 -22.62%
May 26th 1970 -23.18%
October 4th 1974 -28.58%
October 19th 1987 -24.75%
Sept 21st 2001 -22.11%
July 23rd 2002 -26.98%
October 7th, 2002 -23.84%
November 20th 2008 -39.79%
March 9th 2009 -36.53%
The dates should be easily recognizable since they correspond to almost every single major turning point in recent market history. The numbers represent the percentage relative to the long term moving average. So on July 26th, 1962 the S&P 500 traded 22.62% below its simple 200 day moving average.
Looking at the data this way, you easily gain perspective on just how epic the recent market action has been. Not since 1929 has the market veered off so dramatically from its long term path. Put another way, if the November 2008 low doesn’t mark a significant inflection point, it will be the first time.
A quick back-of-the-envelope calculation shows that 60 trading days after these dates shown above the market is always higher, sometimes significantly:
7.95%
10.03%
12.93%
10.72%
6.14%
9.54%
8.3%
20.9%
I’ll revisit this when 60 days have passed from March 9th, 2009
Even if we assume that the November lows will indeed mark a significant low for the S&P 500, there is no reason to believe that prices would simply climb higher from here onward. We could enter a protracted sideways market, or we could also slowly drip lower, revisiting the previous lows. But it is difficult to argue that what we have just witnessed isn’t but a monumental and rare market event that has characterized important turning points in the past.
The biggest names on Wall Street expect stocks to soar this year!!!
Contrarians take note: Wall Street's average end of year price target is 956.5. This is around 20% higher that where we are today.
In other words, big firms like Goldman Sachs, UBS, and Credit Suisse expect stocks to soar in the next nine months. If you're feeling bullish, then you're smack dab in the middle of the crowd.
In other words, big firms like Goldman Sachs, UBS, and Credit Suisse expect stocks to soar in the next nine months. If you're feeling bullish, then you're smack dab in the middle of the crowd.
War on poor Southerners
Barack Obama got elected for two reasons
1. It felt so good to so many people to vote against Bush & Co.
And...
2. He promised the world to people who like to believe you can get something for nothing.
Everyone who believes this nonsense will eventually get what they deserve. But smokers who believe are going to "get it" immediately. Obama's massive cigarette tax increase - put into effect today - is going straight for the pocketbooks of smokers. Most smokers are poor, so it's basically a tax on poor people.
The tax increase will also depress cigarette sales... which is particularly harmful to Southern states with low cigarette tax rates. It greatly increases the amount per pack a Southerner will pay for his smokes.
You asked for it America... here come the taxes.
1. It felt so good to so many people to vote against Bush & Co.
And...
2. He promised the world to people who like to believe you can get something for nothing.
Everyone who believes this nonsense will eventually get what they deserve. But smokers who believe are going to "get it" immediately. Obama's massive cigarette tax increase - put into effect today - is going straight for the pocketbooks of smokers. Most smokers are poor, so it's basically a tax on poor people.
The tax increase will also depress cigarette sales... which is particularly harmful to Southern states with low cigarette tax rates. It greatly increases the amount per pack a Southerner will pay for his smokes.
You asked for it America... here come the taxes.
Commercial real estate much worse than thought
Yesterday's sale of the John Hancock Tower to Normandy was an interesting market test, with media reports claiming it implied either nothing much or only good things about CRE and CMBS recoveries. A contrarian (and realistic) analysis on the transaction out of Morgan Stanley implies that based on this deal, not all is good in CRE land.
In a foreclosure auction today, the John Hancock Tower - a marquee building in Boston - traded at $660MM to Normandy Real Estate Partners. That same property was appraised for $1.3BN in 2006 and traded for $935MM in 2003. This is VERY negative for commercial real estate. At face, it looks like even top quality assets are down 50% from their peak, but that forgets the value of the financing that Normandy now gets to assume. There will still be a $640.5MM mortgage on the property at a rate of 5.6%.
**The main takeaway: property values are down A LOT more than people think, especially when considering the implied value of financing. Caveat Emptor.**
In a foreclosure auction today, the John Hancock Tower - a marquee building in Boston - traded at $660MM to Normandy Real Estate Partners. That same property was appraised for $1.3BN in 2006 and traded for $935MM in 2003. This is VERY negative for commercial real estate. At face, it looks like even top quality assets are down 50% from their peak, but that forgets the value of the financing that Normandy now gets to assume. There will still be a $640.5MM mortgage on the property at a rate of 5.6%.
**The main takeaway: property values are down A LOT more than people think, especially when considering the implied value of financing. Caveat Emptor.**
More big bank trouble ahead
It’s a widespread misconception that banks have marked most of their assets to market. The mark to market rules generally apply only to securities, not whole loans. Whole loans are carried at original face value, less any impairment (i.e., provisions for loan losses) judged appropriate by management, with input from auditors.
So the big banks have marked only a small fraction of their assets to market. In crushing all of the big bank stocks until the March 10 bottom, the market was discounting massive increases in loan loss provisions. The banks have already increased their provisions dramatically (in line with delinquencies and other indicators of impairment), but they still have a long way to go to offset the enormous potential losses on whole loans.
So the big banks have marked only a small fraction of their assets to market. In crushing all of the big bank stocks until the March 10 bottom, the market was discounting massive increases in loan loss provisions. The banks have already increased their provisions dramatically (in line with delinquencies and other indicators of impairment), but they still have a long way to go to offset the enormous potential losses on whole loans.
Banks repay TARP money
Four different banks paid back their TARP loans yesterday, the first of the lot to do so. Signature Bank of New York; Old National Bancorp of Evansville, Ind.; Iberiabank down in Lafayette, La.; and California’s Bank of Marin paid back a collective $338 million, mostly by repurchasing the shares Uncle Sam bartered in exchange for the capital.
“It became apparent that we should return these funds to the Treasury,” said Signature’s CEO Joseph J. DePaolo. “The return of these funds allows us to continue to execute our business model, which includes the successful recruitment and retention of highly talented banking professionals throughout the metropolitan New York area.”
DePaolo went on to say TARP pressures and restrictions “adversely affected our business model.” In other words, the feds had forced him to borrow taxpayer cash and then hamstrung his ability to pay employees.
If small banks are starting to walk without a government crutch, should we expect those that are “too big to fail” to follow? Heh… not quite yet.
“It became apparent that we should return these funds to the Treasury,” said Signature’s CEO Joseph J. DePaolo. “The return of these funds allows us to continue to execute our business model, which includes the successful recruitment and retention of highly talented banking professionals throughout the metropolitan New York area.”
DePaolo went on to say TARP pressures and restrictions “adversely affected our business model.” In other words, the feds had forced him to borrow taxpayer cash and then hamstrung his ability to pay employees.
If small banks are starting to walk without a government crutch, should we expect those that are “too big to fail” to follow? Heh… not quite yet.
1st Quarter 2009 results
You’d think with a large portion of the Western world’s retirement funds vaporized over the past 18 months -- there’d be a lot more blue hairs in the streets. The Dow and S&P 500 closed out the first quarter yesterday with an 11% loss. That’s the sixth quarter of losses in a row, the longest streak since 1970.
Market Reflections 4/1/2009
The ISM manufacturing report shows a second month of improvement with new orders showing a much shallower rate of contraction, results which are raising talk that the worst may be over for the economy. The results are also giving a lift to risk taking, evident by the inflow into the stock market where the S&P 500 index ended at its highs, up 1.6 percent at 810.26. Helping the market's late rally was month-to-month strength in vehicle sales, results that offer hope for a third month of strength for retail sales. But not all the news was good as ADP is calling for a massive, larger-than-expected decline in Friday's employment report.
The dollar firmed about 1/2 cent to $1.3221 against the euro. Steady firmness in the dollar is feeding talk that the currency may be set to make a move toward the $1.2000 area especially if this weekend's G-20 plays down prospects for a world currency or a gold standard. The $1.2000 area was the high range prior to the Fed's eventful announcement two weeks ago that is was buying long-dated Treasuries, news that triggered a massive but apparently limited run on the dollar. Treasuries and gold were little changed.
Oil was not little changed, falling about 50 cents to $48.50 for May WTI following surprising builds in weekly inventory data including a giant build in gasoline stocks that is hitting at the same time that gasoline demand, due to high pump prices and the weak economy, is now thinning.
The dollar firmed about 1/2 cent to $1.3221 against the euro. Steady firmness in the dollar is feeding talk that the currency may be set to make a move toward the $1.2000 area especially if this weekend's G-20 plays down prospects for a world currency or a gold standard. The $1.2000 area was the high range prior to the Fed's eventful announcement two weeks ago that is was buying long-dated Treasuries, news that triggered a massive but apparently limited run on the dollar. Treasuries and gold were little changed.
Oil was not little changed, falling about 50 cents to $48.50 for May WTI following surprising builds in weekly inventory data including a giant build in gasoline stocks that is hitting at the same time that gasoline demand, due to high pump prices and the weak economy, is now thinning.
Wednesday, April 1, 2009
Market Reflections
Stocks recovered about half of Monday's deep losses, not in reaction to news but on bargain hunting and hopes that the worst is past. The S&P 500 rose 1.3 percent to 797.87 to close out a very strong month, but a month benefiting from an easy comparison against a very weak February. The index was up 8.5 percent in March but down 12 percent on the quarter. Tuesday's economic data included a Conference Board report that shows consumer confidence holding quietly at record lows. Company news included a warning from steel-fastener maker Ingersoll Rand, the latest in a rush of negative company news out of the industrial sector. The dollar gave back some of its recent gains, down slightly against the euro to end at $1.3268. Treasuries were mixed though money did ease out of the front end of the curve, reflected in a weak 4-week note auction and a more than 5 basis point rise in the 3-month rate to 0.20 percent. Oil, at $49, and gold, at $920, were little changed.
Tuesday, March 31, 2009
Market Reflections 3/30/2009
President Obama's removal of GM's chairman is raising talk of widening economic nationalization but also talk that the government will not keep losing firms afloat, at least losing firms outside the financial sector. The news sent a chill through the markets which, taking their cues from the administration, now expect both GM and Chrysler to fall into bankruptcy. Yet bankruptcy or not, the future extent of the government's involvement with the domestic auto sector appears expansive, with the president saying the government will offer incentives to consumers, will stand by warranties and that the U.S. will lead the world in building the next generation of cars.
After jumping 20 percent over the past two weeks, stocks were ready to fall back and fall back they did, ending near their lows at 787.53 on the S&P 500 for a 3.5 percent plunge. Money moved into the safety of the dollar, which rose 1 cent against the euro to end at $1.3193. Money also moved into the safety of Treasuries, especially front-end Treasuries where the 3-month bill ended at 0.130 percent -- a key indication that demand for safety has once again turned intense.
Losses in oil were steep, more than $3 for May WTI which ended just under $49. Like the stock market, recent gains in oil have been strong and not altogether backed by indications of improvement in underlying fundamentals -- setting up today's profit taking. But gold, benefiting from its own safe-haven demand, held little changed near $925 despite the gain in the dollar.
After jumping 20 percent over the past two weeks, stocks were ready to fall back and fall back they did, ending near their lows at 787.53 on the S&P 500 for a 3.5 percent plunge. Money moved into the safety of the dollar, which rose 1 cent against the euro to end at $1.3193. Money also moved into the safety of Treasuries, especially front-end Treasuries where the 3-month bill ended at 0.130 percent -- a key indication that demand for safety has once again turned intense.
Losses in oil were steep, more than $3 for May WTI which ended just under $49. Like the stock market, recent gains in oil have been strong and not altogether backed by indications of improvement in underlying fundamentals -- setting up today's profit taking. But gold, benefiting from its own safe-haven demand, held little changed near $925 despite the gain in the dollar.
Saturday, March 28, 2009
week in review:take 2
Weekly Wrap The S&P 500 continued its rally off its March 6 lows, surging 6.2% on the week, led by gains in financials as Treasury Secretary Geithner unveiled his plan to purchase bad assets from banks and housing data came in better-than-expected.
The bulk of the gains were made on Monday with the major indices gaining around 6% and financials spiking 17.7% as the Treasury Department released details regarding its plan to remove troubled assets from the balance sheets of banks. The Treasury plans to create a series of public-private investment funds to buy $500 billion to $1 trillion in legacy loans and securities. To encourage participation from the private sector, the government is taking on much of the risk and offering subsidies. In a show of support, Bill Gross, co-Chief Investment Officer of the world's largest bond fund, told Reuters that Pimco plans to participate in the program.
Also giving the market a boost on Monday was news that existing home sales in February rose 5.1% month-over-month to a seasonally adjusted annual rate of 4.72 million, according to the National Association of Realtors. Economists expected a 0.9% month-over-month drop to 4.45 million. A substantial portion of the sales were from first time homebuyers and distressed properties.
Later in the week, the Census Bureau released upside new home sales reports. February new home sales increased 4.7% month-over-month at an annualized rate of 337,000, topping the consensus estimate that called for a 2.9% decline. Though the result was better-than-expected, it is important to note the increase is at 4.7% +-18.3% (range of -13.6% to +22.7% ), which the Census Bureau notes makes it not statistically significant because it is not clear if the sales rose or fell. Meanwhile, sales are still down 41.1% +-7.9% from the previous year and are at their second lowest rate on records dating back to 1963. Still, traders took the data as an encouraging sign of a potential bottoming in new home sales.
While low interest rates and increased affordability are encouraging developments, the housing sector continues to face high levels of inventory, tight credit conditions and the deleveraging of consumers.
In other economic data, February durable goods orders increased 3.4%, marking the first time in six months that orders increased. Excluding transportation, orders increased 3.9%. Economists expected respective declines of 2.5% and 2.0%, respectively. Separately, final fourth quarter GDP reading showed a 6.3% annualized rate of contraction, a slight decrease from the preliminary -6.2%, but better then the 6.6% decline that was expected.
Though not normally stock market-moving events, Treasury auctions were widely watched after a U.K. offering failed on Wednesday and a U.S. five year offering had disappointing demand, resulting in a sharp drop in Treasuries and a brief pullback in the stock market. But a 7-year auction on Thursday had solid demand, giving the stock market a boost and easing concerns that the U.S. cost of borrowing will increase in the face of record borrowing. On a related note, there was some speculation the movement in Treasuries had to do with China, which this week said it wants an international currency instead of using U.S. dollars. In addition, the Federal Reserve said began its $300 bln long-term Treasury purchase program on Wednesday.
As has been the case for the last several months, Capitol Hill was in focus throughout the week. Fed Chairman Bernanke and Treasury Secretary Geithner testified before the House Financial Services Committee hearing regarding the rescue of AIG (AIG ). Bernanke and Geithner expressed their own frustrations and opinions regarding executive compensation, efforts to protect the economy, and risk-taking constraints. Separately, Treasury Secretary Geithner testified before the House Financial Services Committee that an overhaul of financial regulation is needed. The changes would aim to limit risk in order to prevent future financial crises.
World governments are likely to garner attention next week, as the G-20 meets April 2. Tighter regulation over the financial markets is expected to be an area of focus.
In corporate news, Best Buy (BBY) surged 17.8% on the week after posting better-than-expected fourth quarter earnings of $1.61, $0.21 better than the consensus. The retailer also provided full year guidance that was well above expectations. Accenture (ACN) lowered its outlook for the full year, sending its stock down 8.4% for the week.
In the end, all ten sectors posted solid gains for the week. Financials advanced 12.2% , industrials gained 10.5% and consumer discretionary advanced 8.8%. Defensive sectors underperformed on a relative basis, with utilities up 1.5%.
The S&P 500 is now up 22.4% from its March 6 low.
Index Started Week Ended Week Change % Change YTD %
DJIA 7278.38 7776.18 497.80 6.8 -11.4
Nasdaq 1457.27 1545.20 87.93 6.0 -2.0
S&P 500 768.54 815.94 47.40 6.2 -9.7
Russell 2000 400.11 429.00 28.89 7.2 -14.1
The bulk of the gains were made on Monday with the major indices gaining around 6% and financials spiking 17.7% as the Treasury Department released details regarding its plan to remove troubled assets from the balance sheets of banks. The Treasury plans to create a series of public-private investment funds to buy $500 billion to $1 trillion in legacy loans and securities. To encourage participation from the private sector, the government is taking on much of the risk and offering subsidies. In a show of support, Bill Gross, co-Chief Investment Officer of the world's largest bond fund, told Reuters that Pimco plans to participate in the program.
Also giving the market a boost on Monday was news that existing home sales in February rose 5.1% month-over-month to a seasonally adjusted annual rate of 4.72 million, according to the National Association of Realtors. Economists expected a 0.9% month-over-month drop to 4.45 million. A substantial portion of the sales were from first time homebuyers and distressed properties.
Later in the week, the Census Bureau released upside new home sales reports. February new home sales increased 4.7% month-over-month at an annualized rate of 337,000, topping the consensus estimate that called for a 2.9% decline. Though the result was better-than-expected, it is important to note the increase is at 4.7% +-18.3% (range of -13.6% to +22.7% ), which the Census Bureau notes makes it not statistically significant because it is not clear if the sales rose or fell. Meanwhile, sales are still down 41.1% +-7.9% from the previous year and are at their second lowest rate on records dating back to 1963. Still, traders took the data as an encouraging sign of a potential bottoming in new home sales.
While low interest rates and increased affordability are encouraging developments, the housing sector continues to face high levels of inventory, tight credit conditions and the deleveraging of consumers.
In other economic data, February durable goods orders increased 3.4%, marking the first time in six months that orders increased. Excluding transportation, orders increased 3.9%. Economists expected respective declines of 2.5% and 2.0%, respectively. Separately, final fourth quarter GDP reading showed a 6.3% annualized rate of contraction, a slight decrease from the preliminary -6.2%, but better then the 6.6% decline that was expected.
Though not normally stock market-moving events, Treasury auctions were widely watched after a U.K. offering failed on Wednesday and a U.S. five year offering had disappointing demand, resulting in a sharp drop in Treasuries and a brief pullback in the stock market. But a 7-year auction on Thursday had solid demand, giving the stock market a boost and easing concerns that the U.S. cost of borrowing will increase in the face of record borrowing. On a related note, there was some speculation the movement in Treasuries had to do with China, which this week said it wants an international currency instead of using U.S. dollars. In addition, the Federal Reserve said began its $300 bln long-term Treasury purchase program on Wednesday.
As has been the case for the last several months, Capitol Hill was in focus throughout the week. Fed Chairman Bernanke and Treasury Secretary Geithner testified before the House Financial Services Committee hearing regarding the rescue of AIG (AIG ). Bernanke and Geithner expressed their own frustrations and opinions regarding executive compensation, efforts to protect the economy, and risk-taking constraints. Separately, Treasury Secretary Geithner testified before the House Financial Services Committee that an overhaul of financial regulation is needed. The changes would aim to limit risk in order to prevent future financial crises.
World governments are likely to garner attention next week, as the G-20 meets April 2. Tighter regulation over the financial markets is expected to be an area of focus.
In corporate news, Best Buy (BBY) surged 17.8% on the week after posting better-than-expected fourth quarter earnings of $1.61, $0.21 better than the consensus. The retailer also provided full year guidance that was well above expectations. Accenture (ACN) lowered its outlook for the full year, sending its stock down 8.4% for the week.
In the end, all ten sectors posted solid gains for the week. Financials advanced 12.2% , industrials gained 10.5% and consumer discretionary advanced 8.8%. Defensive sectors underperformed on a relative basis, with utilities up 1.5%.
The S&P 500 is now up 22.4% from its March 6 low.
Index Started Week Ended Week Change % Change YTD %
DJIA 7278.38 7776.18 497.80 6.8 -11.4
Nasdaq 1457.27 1545.20 87.93 6.0 -2.0
S&P 500 768.54 815.94 47.40 6.2 -9.7
Russell 2000 400.11 429.00 28.89 7.2 -14.1
Weekly Market Update (3/27/09)
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
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!
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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
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!
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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.
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