Market Reflections 4/22/2009

Banking news may be taking a turn for the worse. Morgan Stanley posted an unexpectedly deep loss and cut its dividend, news that follows last week's warning from Bank of America that qualified borrowers are scarce. Morgan Stanley shares lost 9.0 percent while the S&P 500 slipped 0.8 percent. The dollar eased slightly to end at $1.3005 against the euro while the Treasury curve steepened ahead of long-end supply. Huge builds in weekly inventories didn't hurt oil which firmed to $48. Gold firmed slightly to $890.

Market Reflections 4/21/2009

Reassurance from Treasury Secretary Geithner that the vast majority of banks are well capitalized helped to ease questions over stress tests and sparked a rally in the stock market where the S&P 500 gained 2.1 percent to end at 850.08. Earnings news was mostly upbeat including an optimistic outlook from industrial conglomerate United Technologies. Kansas City Federal Reserve President Thomas Hoenig offered lively testimony, saying the too-big-to-fail doctrine is uncompetitive and is at the center of the financial crisis. The dollar held firm at $1.2950 against the euro while Treasury yields were mixed. Oil firmed to just over $47 while gold held steady at $884.

Market Reflections 4/20/2009

News from Bank of America that it is having trouble finding qualified borrowers is a new twist for the markets which had been focused on whether banks were bankrupt or not. The change to mark-to-model accounting is giving a boost to bank profits including profits at Bank of America. Not doing as well are the bank's customers who are being pulled under by the wave of layoffs.

Investors ran back into safety Monday in a big move that raises the question whether five weeks of stock-market gains were grounded in fundamentals. The S&P 500 ended at their lows, down 4.3 percent at 832.39. Investors also ran to the dollar, which jumped 1 cent against the euro to $1.2924. Treasuries were in high demand with the yield on the 10-year falling 11 basis points to 2.83 percent. The yield on the 3-month bill tightened a notch to a thinning 12 basis points.

Investors fled commodities which had been benefiting from expectations for economic improvement together with inflation. Oil touched $44 for the first time in five weeks, ending down 4-1/2 dollars to $45.60. Grains and industrial metals, two groups that had been very strong, were down across the board. Gold of course was one commodity that didn't suffer. Gold, which just last week seemed to be finally wavering, gained $15 to end at $885.

Weekly Market Update (4/17/09)‏

HEADLINE NEWS WEEK ENDING 4/17/09

Overview
There are signs of a modest improvement in the latest US economic data. However, it is still premature to call a bottom for the US recession which began in December 2007. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview

US MARKETS
Treasury/Economics
US Treasury yields barely moved this week. With the Fed continuing their buyback program and no Treasury supply on the agenda, investors remained on the sidelines. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview

Large-Cap Equities
The stock market rallied for the week spurred by better-than-expected first quarter earnings from some of the largest S&P 500 firms. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview

Corporate Bonds
Investment grade primary activity slowed to a crawl as a number of issuers reported earnings. There is a chance that General Electric’s and Citibank’s better-than-expected earnings at the end of this week might catapult us through the avalanche of earnings over the next several weeks. more...
http://payden.com/library/weeklyMarketUpdateE.aspx#overview
Mortgage-Backed Securities
Agency mortgages weathered a pickup in originations to outperform Treasuries in a sideways market. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview

Municipal Bonds
Build American Bonds (BABs) captured the market’s attention this week. Speculation is that BABs will substitute for regular tax-exempt issuance and thus keep municipal bond market supply more limited than otherwise. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview

High-Yield
The high yield market started the first half of April at a torrid pace, with broad indices up over 5% since the end of March 2009. 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 banks (+14.9%) and financial services (+10.7%). 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) lost -3.6% this week, while the Russian stock index RTS went up by +2.9%. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview

Global Bonds and Currencies
Major non-US sovereign bond markets spent the past week trading within well-established ranges. After making modest progress over most of the week, European and UK sovereign bond markets finished flat to slightly weaker, after a late sell-off on Friday afternoon. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview

Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week. A combination of better-than-expected earnings announcements from US banks and marginal improvement in US economic data helped continue the positive tone in risk markets. more...http://payden.com/library/weeklyMarketUpdateE.aspx#overview

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The investment strategy and investment management information presented on this email and related Web site, payden.com, should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. Payden.com is an informative Web site designed to provide information to the general public based on our recommendations of investment management and investment strategies and is not designed to be representative of your own financial needs. Nor does the information contained herein constitute financial management advice. The firm makes no warranty or representation regarding the accuracy or legality of any information contained in this Web site, and assumes no liability for the use of said information. Be advised that as Internet communications are not always confidential, you provide our Web site your personal information at your own risk. Please do not make any decisions about any investment management or investment strategy matter without consulting with a qualified professional.

GE results

General Electric's GE earnings for the first quarter were largely in line with our expectation, excluding the tax benefits flowing through GE Capital. For the past few quarters, the company has been riding the back of energy infrastructure, and this quarter's results showed much of the same. Surprisingly, aviation increased revenue and profit 12% and 39%, respectively. Given the weakness in the economy and project delays at Boeing BA and Airbus, we expected weaker numbers in this group. As impressive as energy and aviation were, the rest of the segme nts were equally unimpressive. Consumer and industrial and NBC Universal continued to take the brunt of the recession with a combined profit drop of 50%. These two segments are highly dependent on a strong consumer, so we expect the weakness here to persist until employment picks up and people begin buying houses again. While it is true that GE Capital earned $1.1 billion in profit for the quarter, all of the profit came from a tax benefit of $1.2 billion. Pretax, preprovision income was down 45% to $2.2 billion from $3.9 billion last year, reflecting the shrinking size of GE Capital's balance sheet and fewer financing transactions in the broader market. The results for the quarter were not stellar, but do show that GE's portfolio of businesses has held up far better than others thus far. We are comfortable with our fair value estimate and assumptions.
Daniel Holland

CITI‏ results April 2009

Iknow everybody is in love with the citi results, but I thought it would be worth noting that $2.5B of "earnings" came from marks on their own debt and also as a result of recent cave in by FASB on fair value accounting, Citi was able to have $631MM pretax lower impairment charges recorded in net revenue in the quarter.

Market Reflections 4/16/2009

Strong results at JP Morgan, benefiting like other financial firms from changes to mark-to-market accounting, drove the stock market higher with the S&P 500 ending 1.6 percent higher at 865.27. Google after the close also beat estimates.

Economic news was mostly downbeat led by a big fall in housing starts which have yet to reflect the improvement underway in home sales. The Philadelphia's Fed manufacturing report showed another month of steep contraction but a little less severe contraction than in prior months. Many fewer individuals applied for first-time jobless claims though the data were skewed by the shortened Easter/Passover week. Continuing claims in the prior week continued to rise and are now over 6 million.

Gold dropped suddenly at mid-morning raising talk of sales by the International Monetary Fund which may be raising cash for G-20 stimulus efforts. Gold fell about $25 to end near $875. Oil remains hypnotized ending little changed just under $50. The effect of very heavy supply in oil is being offset by investment demand. The dollar ended little changed at $1.3178 against the euro. Treasuries were mixed though the yield on the 3-month bill continues to fall, down 1 basis point on the day to 13 basis points and signaling continuing doubts over the banking system.

Market Reflections 4/15/2009

The Fed's Beige Book added to the run of good news on the economy, showing weak conditions but also signs that the pace of contraction is easing. April's housing market index offers similar indications, showing a rare jump tied to home affordability and government stimulus efforts. The Treasury International Capital report is another reason for optimism showing improving foreign interest in U.S. financial assets especially out of China and Japan.

But not all of Wednesday's news was good. The Fed's industrial production showed sharp declines that were much worse than expected and that point to sizable drop for first quarter GDP. Also not good was talk that the government's stress tests in the banking sector, to be released early next month, may show trouble, possible trouble that is helping to keep gold steady near $900 despite the extended climb in the stock market. Capital One is definitely showing some stress with the credit card issuer reporting rising charge-offs in line with rising unemployment.

The biggest surprise in the markets came from oil which showed no reaction to a huge jump in U.S. crude inventories. Oil's strength is raising talk that market players, through ETFs and hedge funds, appear to consider oil as a safe-haven financial asset. But demand for oil has yet to improve and the dollar has yet to erode due to inflation, which are apparently the two central reasons behind oil's curious stability. Oil ended little changed at just under $49.50.

Other financial markets showed limited reaction to all the news with the S&P 500 up 1.3% at just over 850. The dollar firmed about 3/4 of a cent to $1.3200 against the euro. Treasury yields edged 1 to 2 basis points lower across the curve with the 3-month yield, at 0.14 percent, betraying a significant lack of confidence in the banking system.

Market Reflections 4/14/2009

A big fall in retail sales together with soft producer price data pushed back the outlook for economic improvement. The retail sales drop more than wiped out the gains in February and suggest that job losses, which are continuing without letup based on weekly jobless claims, may very well be hurting this month's retail sales as well. Fed Chairman Ben Bernanke eased some of the sting, saying that the economy is indeed on the mend.

Money moved out of stocks and the dollar and into the safety of Treasuries. The S&P 500 fell 2% to end at 841.65 while the dollar fell about 1 cent to $1.3276 against the euro. Treasury yields fell nearly 10 basis points for long rates and about 2 basis points for short rates, including a 1.6 point drop for the 3-month bill which, at a very tight yield of 0.15 percent, reflects still unrelenting demand for safety.

The weak data pushed down many commodities including oil, which dipped about 50 cents to just under $49.50. But gold was steady ending little changed just under $890.

Market Reflections 4/13/2009

Reports of a pending bankruptcy at GM and extending gains in bank stocks, in lingering reaction to last week's shockingly strong profits at Wells Fargo, headed an otherwise quiet session ahead of earnings. The S&P 500 ended fractionally higher at 858.72.

News of strong car sales out of China raised demand for platinum, up 3% at $1,237, while news of new stimulus out of China raised demand for industrial metals including copper which rose 2% on the day to end at $2.0934/lb. Gold ended just above $890 while oil ended right at $50.

Money moved into the Treasury market where the Fed, as part of its effort to lower lending rates, bought $4.4 billion of 2- to 3-year Treasuries. The Fed will buy 4- to 7-year paper on Tuesday. The Fed has so far bought back $36.5 billion of Treasuries under a $300 billion program announced last month. The dollar eased in the session, ending at $1.3376 against the euro.

U.S. Treasury tells GM to prepare for bankruptcy

General Motors was instructed by the U.S. Treasury to be ready to file for bankruptcy protection no later than June 1, The New York Times reported, quoting unnamed sources who are familiar with the matter. The government wants to see GM go through the bankruptcy process as quickly as possible to minimize the likely damage to the company's sales and to its image among car buyers, according to the newspaper. The New York Times Bondholders reportedly readying to fight GM bankruptcy.
Investors who own General Motors bonds are working on legal arguments against a potential bankruptcy filing by the troubled automaker, The Wall Street Journal reported, quoting sources acquainted with the matter. The bondholders fear that having GM in bankruptcy would force them to accept huge losses on their investments, according to the newspaper. Reuters.
This is unbelievable. who would have thought that a bankruptcy would force one to accept losses?

Weekly Market Update (4/9/09)‏

HEADLINE NEWS WEEK ENDING 4/9/09

Overview
The US trade deficit shrank by more than $10 billion in February to $26 billion—its lowest level since 1999. more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

US MARKETS
Treasury/Economics
US Treasuries sold off this week on the back of ongoing supply fears and a positive sentiment change in the financial sector. more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

Large-Cap Equities
The stock market continued to rally during this holiday shortened trading week. more...

Corporate Bonds
Investment grade primary issuance was almost non-existent this week as Alcoa, the first of many companies, started to report earnings. more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

Mortgage-Backed Securities
Agency mortgages performed very well on an absolute basis and relative to Treasuries. A strong tone in credit and equity markets coupled with healthy buying overseas, the US Government, and domestic money managers helped support mortgage prices. more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

Municipal Bonds
Investor demand for high grade municipal bonds and pre-refunded securities remains strong. Yields on AAA-rated general obligation bonds were about 4 bps lower across maturities this week. more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

High-Yield
The high yield market started April on firm footing. The continuing equity rally and significant inflows into the high yield market pushed the market higher. more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe lost ground over the past week. The stocks with the worst performance were oil and gas (-6.2%) and health care (-6.2%). more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +5.9% this week, while the Russian stock index RTS went up by +8.7%. more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

Global Bonds and Currencies
The surge of confidence inspired by the previous week’s G-20 summit faded in the past week and equity markets weakened, while major non-US sovereign bond markets were mixed. more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week. The positive tone in credit markets continued as equity markets were buoyed by better-than-expected earnings announcements in the US. more...http://payden.com/library/weeklyMarketUpdateE.aspx#emerging

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All rights reserved. Legal terms. Payden & Rygel respects your privacy. Privacy policy.

The investment strategy and investment management information presented on this email and related Web site, payden.com, should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. Payden.com is an informative Web site designed to provide information to the general public based on our recommendations of investment management and investment strategies and is not designed to be representative of your own financial needs. Nor does the information contained herein constitute financial management advice. The firm makes no warranty or representation regarding the accuracy or legality of any information contained in this Web site, and assumes no liability for the use of said information. Be advised that as Internet communications are not always confidential, you provide our Web site your personal information at your own risk. Please do not make any decisions about any investment management or investment strategy matter without consulting with a qualified professional.

Banks' "shadow inventory" of housing could destroy the market

Various real estate research firms estimate that banks are sitting on hundreds of thousands of foreclosed homes that they have neither sold nor listed. If these rumors are true, and the banks brought these homes onto market, it would flood an already dismal housing market... causing prices to fall further.

From The San Francisco Chronicle:

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

Market Reflections 4/8/2009

A report that the Treasury will extend TARP funds to insurers gave a boost to Wednesday's session. The S&P 500 rose 1.2% to end at 825.01. A move to protect insurers would be aimed at bolstering confidence in the sector and limiting customer redemptions. Insurers posting gains included Lincoln National (LNC) +35 percent, Principal Financial (PFG) +21 percent and Hartford Financial Services (HIG) +13 percent.

Also helping the market was surprisingly solid earnings from home furnishings retailer Bed Bath & Beyond (BBBY), whose shares rose more than 20 percent. Stocks were initially set to move lower in reaction to weak earnings late yesterday from aluminum giant Alcoa. Brokers are warning that stocks over the next week are likely to swing in wide moves in reaction to single earnings announcements. Earnings don't get underway in force until mid-month with Thomson Reuters pegging S&P 500 earnings at -38 percent.

FOMC minutes held attention late in the session but offered no surprises, showing that policy makers are committed to injecting huge amounts of liquidity into the banking system. Economic data included an upbeat wholesale trade report that shows inventories are coming back in line with sales, a plus for future output and future employment.

Oil data showed another build in crude inventories and also a build in gasoline. But the builds weren't enough to shake oil's lockstep with the stock market. May WTI gained nearly $1 to end just below $50.

Treasuries firmed helped by strong demand for $35 billion of new 3-year notes. The 3-year yield ended 1 basis point lower on the day at 1.29 percent. Gold slipped $5 to $880. The dollar was little changed at $1.3246 against the euro.

Gambling and the stock market

By Richard Russell in Dow Theory Letters:

Markets can be compared with gambling at Las Vegas. When you gamble at Vegas, you are bucking the house odds. Which is why if you play long enough at Vegas, you will always lose your money. Vegas is stacked that way. Las Vegas is constructed to separate players from their money. The stock market is a bit classier. When you buy stocks, you are at least buying something. It feels good to say, "I bought 500 shares of Johnson & Johnson."

When you put your money down at Las Vegas, you are not buying anything, but with a slim chance (the odds are against you) of winning more than you put down. Las Vegas is one of the few places where you pay your dollars, and are guaranteed to receive NOTHING of any value.

"Gambling is a tax on people who don't understand money," that's my favorite adage about gambling. Investing in the stock market is a long-term tax on people who want something (profits) without doing any real work for those imaginary profits.

Market Reflections 4/7/2009

Stocks fell a steep 2.4 percent to 815.15 on the S&P 500 on profit taking which more and more are warning may bite into half of the market's month-long rally, a move that would put the S&P in the mid 700s. The dollar rose nearly 1-1/2 cents to $1.3268 as the euro was pressured by weak economic data out of Europe. Money moved into the Treasury market where yields were several basis points lower including 0.54 percent for the 52-week bill. There was heavy demand in the session for $25 billion of new 52-week bills in a good sign for all markets. Crude was ending just over $49 while gold, bouncing from sharp losses, rose more than $10 to nearly $885.

More Banking trouble - Mike Mayo

Mike Mayo is a guy that really threw a cat among the pigeons yesterday, causing a BIG scare and sell off of risk assets... Currencies that is... His name is Mike Mayo, and he used to work at Deutsche Bank, and now is a banking analyst at Caylon Securities... And brother can he ever move a market! To make a long story short... Mr. Mayo basically said yesterday in a report that "Bank Loan Losses Will Exceed Depression Levels"... So, all that James Brown, feeling good, that went on last week with the G-20 singing everything is beautiful, all went down the drain after Mr. Mayo spoke... The Wall Street Journal printed the following.... "One reason why he (Mayo) believes the banks will face more pressure is because the legacy loans they hold on their balance sheets have not been marked to market - he estimates the marks at about 98 cents on the dollar, a much higher estimate than what others would come up with. We see more downside with government programs regarding those bank stocks with more traditional banking since this business - aside from when involving an acquisition - is not marked to market," he writes. As a result, he believes the government's help will either result in rosier-than-expected projections that allow the banks to maintain their unwanted assets on their balance sheets, or hammer them with demands for more capital, which will "hurt traditional banking more."

Market Reflections 4/6/2009

Stocks fell on long liquidation ahead of the earnings season which begins at mid-month. The S&P 500 ended 0.8 percent lower at 835.43. Losses were heavy in gold which fell more than $20 to end just above $870. The prospect of IMF gold sales tied to last week's G-20 stimulus agreements sank prices as did rising talk that global stimulus, led by the Obama administration, may successfully pull the global economy out of recession. The dollar firmed nearly 1 cent to end at $1.3400 against the euro. Treasuries were little changed with the 2-year yield ending at 94 basis points. Oil fell nearly $1 to just over $51 for May WTI.

Weekly Market Update (4/3/09)‏

Payden & Rygel (paydenrygel@payden-rygel.com)
HEADLINE NEWS WEEK ENDING 4/3/09

Overview
The US labor market continues to deteriorate at an alarming rate. According to the latest figures from the Bureau of Labor Statistics, the US economy shed 663,000 jobs in March and the unemployment rate rose to a 25-year high of 8.5% during the month. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

US MARKETS
Treasury/Economics
US Treasuries traded within a very narrow range this week showing a tendency towards higher yields. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Large-Cap Equities
The stock market rallied for the fourth consecutive week due to positive news from the Group of 20 (G-20) meeting in London and the relaxing of mark-to-market accounting rules. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Corporate Bonds
Investment grade primary issuance slowed down considerably this week as economic data and the automakers ruled the headlines. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Mortgage-Backed Securities
Agency mortgages outperformed Treasuries as yields drifted higher and the focus shifted from agency products to the credit sensitive asset classes. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Municipal Bonds
AAA-rated bond yields were 10 to 12 bps lower in the 2-5 year maturity range over the last week. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

High-Yield
The high yield market finished the month of March in solid form, despite mixed economic data towards month end and continuing uncertainty about the eventual fate of two high yield companies: General Motors and Chrysler Automotive. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

INTERNATIONAL MARKETS
Western European Equities
Stocks in Western Europe gained ground over the past week. The stocks with the best performance were construction and materials (+11.8%) and travel and leisure (+11.8%). more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +10.0% this week, while the Russian stock index RTS went up by +3.4%. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Global Bonds and Currencies
Major sovereign bond markets declined over the past week, mainly on the view that the G-20’s stimulus package would prove sufficient to stabilize the global economy. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week. The constructive outcome of the G-20 summit and a US $1 trillion commitment to IMF reserves resulted in a continuation of the positive tone in risk markets seen over the past few weeks. more...http://payden.com/library/weeklyMarketUpdateE.aspx#highyield

For more information, please contact 800 5-PAYDEN or visit payden.com.

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All rights reserved. Legal terms. Payden & Rygel respects your privacy. Privacy policy.

The investment strategy and investment management information presented on this email and related Web site, payden.com, should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. Payden.com is an informative Web site designed to provide information to the general public based on our recommendations of investment management and investment strategies and is not designed to be representative of your own financial needs. Nor does the information contained herein constitute financial management advice. The firm makes no warranty or representation regarding the accuracy or legality of any information contained in this Web site, and assumes no liability for the use of said information. Be advised that as Internet communications are not always confidential, you provide our Web site your personal information at your own risk. Please do not make any decisions about any investment management or investment strategy matter without consulting with a qualified professional.

Very bearish: World's largest gold buyer halts imports

India, the world's largest buyer of gold, has stopped importing the precious metal as residents are scrapping jewelry and coins to take advantage of high prices.

Dealers said there were no gold imports in February or March.

Even in January - the middle of the gift-giving wedding season - India imported just 1.8 million tonnes, down nearly 90 percent from a level of 14 tonnes a year earlier, industry data showed.

Jobs Jamboree Friday

It's A Jobs Jamboree Friday! But before we go there... Let's recap this week's employment numbers leading up to the Jobs Jamboree, eh? First we had the ADP report show 742K jobs were lost in March... Then yesterday we had the Weekly Initial Jobless Claims show that 669K new claims were filed, and that the previous week's 630K figure was revised up to 672K... What's really scary here folks is that the 4-week moving average is now up to 649.5K... All the King's Men and all the King's Horses that believe the Humpty Dumpty economy will be recovering by the end of this year, might want to look over those forecasts and come clean on what they really think, not what the Gov't wants them to say, to make it look like everything will be right on the night, because... These unemployment numbers are not shaping up to be anything close to a recovering economy!

There is not much good news in the March employment report, and that is not surprising. Payrolls fell 663,000. That was in-line with an expected 650,000 decline.

There were widespread losses by employment category. Education and health care managed an 8,000 increase, but manufacturing dropped 161,000 jobs.

The unemployment rate shot to 8.5% from 8.1%. It is now already well above the average 8.1% average for 2009 as forecast in the Obama budget presented just weeks ago. The trend in employment suggests that the projected deficit is thus already no longer operative.

The other components of the release also reflected weakness. The average workweek fell 0.1 to 33.2 hours. The workweek tends to lead payroll changes, as employers adjust hours before payrolls.

The manufacturing workweek fell 0.2 to 39.3. This suggests a significant reduction in industrial production in March.

Average hourly earnings rose 0.2%. The year-over-year change is 3.4%.

The data can be considered about as expected, but are also clearly very weak. The market has been anticipating an improved economic environment, and payrolls lag demand, so the degree to which this undermines the recent optimism is uncertain.

Commercial meltdown: Companies dumped 25 million square feet

How the commercial real estate meltdown will destroy the insurance industry... Your policies could be at risk.

From Calculated Risk:

Companies struggling to cut costs dumped a near-record 25 million square feet of office space in the first quarter, driving vacancy up and rents down, according to data to be released today by Reis Inc.

The office vacancy rate nationwide rose to 15.2% from 14.5% in the previous quarter, and likely will surpass 19.3% over the next year, according to Reis, a New York firm that tracks commercial property. That would put the vacancy rate above the level during the real-estate bust of the early 1990s, the worst on record.

April 2009, Zacks Economic Report‏

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

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

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.

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

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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


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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

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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

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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.

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.

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.

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.

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.**

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.

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.

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.

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.

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.

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

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

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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.

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.

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.

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.

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.

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.

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.

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.