From Ambrose Evans-Pritchard of the Telegraph. Click on header for full story. A very interesting read.
As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.
Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).
The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.
People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.
Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.
Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.
As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.
Tuesday, July 27, 2010
Ford works with the SEC on a sale of bonds backed by auto loans
Politicians, in their naieve zeal to regulate, have forced a pre-birth exception to the new law that is likely to become permanent:
Ford Motor Credit delayed a sale of bonds backed by auto loans last week because of regulatory uncertainty caused by the financial overhaul. On Monday, Ford sold a billion-dollar bond by working with the Securities and Exchange Commission. Ford and
the SEC created a reprieve to a part of the law that holds credit rating agencies liable for ratings they issue. "Clearly, the SEC recognizes the importance of the public [asset-backed securities] markets, and we are glad the staff is taking temporary measures to ensure public markets continue to be available by establishing a transitional period through Jan. 24, 2011," a spokeswoman wrote.
The Wall Street Journal
The SEC realizes the importance of keeping credit markets open; laws written by lobbyists and political operatives with no actual experience of real life business operations are inevitably going to harm the economy. They will force "exceptions" until the reality of daily business makes a mockery of the law now administered by an increased burocracy at immense permanent additional expense to the taxpayer.
Ford Motor Credit delayed a sale of bonds backed by auto loans last week because of regulatory uncertainty caused by the financial overhaul. On Monday, Ford sold a billion-dollar bond by working with the Securities and Exchange Commission. Ford and
the SEC created a reprieve to a part of the law that holds credit rating agencies liable for ratings they issue. "Clearly, the SEC recognizes the importance of the public [asset-backed securities] markets, and we are glad the staff is taking temporary measures to ensure public markets continue to be available by establishing a transitional period through Jan. 24, 2011," a spokeswoman wrote.
The Wall Street Journal
The SEC realizes the importance of keeping credit markets open; laws written by lobbyists and political operatives with no actual experience of real life business operations are inevitably going to harm the economy. They will force "exceptions" until the reality of daily business makes a mockery of the law now administered by an increased burocracy at immense permanent additional expense to the taxpayer.
Regulatory reform will affect municipal and corporate bonds differently
The overhaul of financial regulation will affect corporate bonds and municipal bonds differently, partly because corporate bonds are registered securities. That difference is meaningful as market participants work to unravel the law and its
unintended consequences, according to CNBC.
unintended consequences, according to CNBC.
Report: Chinese local governments probably will default on bank loans
China's banks loaned more than $1 trillion to provincial financing agencies to stimulate the economy, but many of the loans are expected to go into default, according to Century Weekly, citing information from the China Banking Regulatory Commission. Almost a quarter of the loans are at risk of going unpaid, according to the publication. Many of the borrowers are of "questionable credit quality," a Standard & Poor's analyst said.
Google
U.S. new-home sales rebound, but builders are forced to slash prices
New-home sales increased 23.6% last month compared with May, topping economists' forecasts, but the sales level, 330,000, was the second-lowest since the government started tracking such data in 1963. Builders were forced to keep cutting prices to get those sales. The average selling price dropped to $242,900, the lowest for June since 2003.
The Christian Science Monitor
The Christian Science Monitor
Analysis: Geithner and Bernanke differ on a tax issue
U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke have been in sync on most issues during the past three years, but recent comments from the officials suggest they are on opposite sides of a tax issue, according to The Wall Street Journal. Bernanke told lawmakers that he supports continuing tax rates that expire early next year.
Geithner, on the other hand, said those tax rates should be allowed to expire.
The Wall Street Journal
Geithner, on the other hand, said those tax rates should be allowed to expire.
The Wall Street Journal
Friday, July 23, 2010
Fed not looking to buy more mortgage securities, NY Times
So how in Gods name is the mortgage market to recover?
The Fed holds mortgage securities worth more than $1T, and is not eager to expand that portfolio further at this point, according to the New York Times
http://www.nytimes.com/2010/07/23/business/23banks.html?_r=2&adxnnl=1&ref=todayspaper&adxnnlx=1279881242-Cv3ErJ2b9rjLjOjVZUkfww
The Fed holds mortgage securities worth more than $1T, and is not eager to expand that portfolio further at this point, according to the New York Times
http://www.nytimes.com/2010/07/23/business/23banks.html?_r=2&adxnnl=1&ref=todayspaper&adxnnlx=1279881242-Cv3ErJ2b9rjLjOjVZUkfww
Need for electricity drives soaring global demand for coal
Coal consumption to produce electricity is expanding at a phenomenal rate worldwide, and the International Energy Agency projected that demand will keep growing rapidly for at least the next 20 years. Carbon capture and storage technology might solve the
problem of greenhouse-gas emissions, according to Der Spiegel, but they create another one -- a location for the captured gas, which can be dangerous in high concentration. Der Spiegel
problem of greenhouse-gas emissions, according to Der Spiegel, but they create another one -- a location for the captured gas, which can be dangerous in high concentration. Der Spiegel
The immediate fallout from "Financial Reform"
Umintended consequences strike again. Dodd-Frank is already an economic disaster: German Banks are fleeing the NYSE, parts of the Mortgage market are shut down or operating with emergency exemptions and under temporary rules from the SEC, Fannie and Fredie are bankrupt..why dont they have to operate under the same rules?
.At least 2 issuers pull sales of asset-backed bonds: Ford Motor Credit and at least one other issuer reacted to problems with credit rating agencies by pulling planned sales of asset-backed bonds, fund managers and traders said. Rating agencies are no longer allowing issuers of asset-backed securities to use their ratings in bond
prospectuses because of liability raised by the regulatory overhaul. Reuters
.SEC temporarily eases rules for issuers of asset-backed bonds The Securities and Exchange Commission is aiming to help issuers of asset-backed bonds comply with rules that are part of the regulatory revamp by temporarily allowing them to omit credit ratings on their filings. Meredith Cross, director of the corporatefinance
division at the SEC, said credit rating agencies are not allowing borrowers to include rankings in registration statements. "This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply," Cross said. Bloomberg
.Germany's corporate giants pull out of the U.S. stock market The biggest companies in Germany are walking away from the New York Stock Exchange and other U.S. securities markets, deciding that financial regulation, lawsuits and accounting rules in the country are more trouble than they're worth. Deutsche Telekom and Allianz are the latest German blue-chip corporations to flee Wall Street. Germany's DAX index of prestigious, household-name firms once had 11 companies on the NYSE, but the number has fallen to four.
Spiegel Online
.At least 2 issuers pull sales of asset-backed bonds: Ford Motor Credit and at least one other issuer reacted to problems with credit rating agencies by pulling planned sales of asset-backed bonds, fund managers and traders said. Rating agencies are no longer allowing issuers of asset-backed securities to use their ratings in bond
prospectuses because of liability raised by the regulatory overhaul. Reuters
.SEC temporarily eases rules for issuers of asset-backed bonds The Securities and Exchange Commission is aiming to help issuers of asset-backed bonds comply with rules that are part of the regulatory revamp by temporarily allowing them to omit credit ratings on their filings. Meredith Cross, director of the corporatefinance
division at the SEC, said credit rating agencies are not allowing borrowers to include rankings in registration statements. "This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply," Cross said. Bloomberg
.Germany's corporate giants pull out of the U.S. stock market The biggest companies in Germany are walking away from the New York Stock Exchange and other U.S. securities markets, deciding that financial regulation, lawsuits and accounting rules in the country are more trouble than they're worth. Deutsche Telekom and Allianz are the latest German blue-chip corporations to flee Wall Street. Germany's DAX index of prestigious, household-name firms once had 11 companies on the NYSE, but the number has fallen to four.
Spiegel Online
The Tax Tsunami On The Horizon
Todays Investors Business Daily Editorial says it all...goodbye any economic recovery
Many voters are looking forward to 2011, hoping a new Congress will put the country back on the right track. But unless something's done soon, the new year will also come with a raft of tax hikes — including a return of the death tax.
Through the end of this year, the federal estate tax rate is zero — thanks to the package of broad-based tax cuts that President Bush pushed through to get the economy going earlier in the decade.
But as of midnight Dec. 31, the death tax returns — at a rate of 55% on estates of $1 million or more. The effect this will have on hospital life-support systems is already a matter of conjecture.
Resurrection of the death tax, however, isn't the only tax problem that will be ushered in Jan. 1. Many other cuts from the Bush administration are set to disappear and a new set of taxes will materialize. And it's not just the rich who will pay.
The lowest bracket for the personal income tax, for instance, moves up 50% — to 15% from 10%. The next lowest bracket — 25% — will rise to 28%, and the old 28% bracket will be 31%. At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.
But the damage doesn't stop there.
The marriage penalty also makes a comeback, and the capital gains tax will jump 33% — to 20% from 15%. The tax on dividends will go all the way from 15% to 39.6% — a 164% increase.
Both the cap-gains and dividend taxes will go up further in 2013 as the health care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year and joint filers making more than $250,000. Other tax hikes include: halving the child tax credit to $500 from $1,000 and fixing the standard deduction for couples at the same level as it is for single filers.
Letting the Bush cuts expire will cost taxpayers $115 billion next year alone, according to the Congressional Budget Office, and $2.6 trillion through 2020.
But even more tax headaches lie ahead. This "second wave" of hikes, as Americans for Tax Reform puts it, are designed to pay for ObamaCare and include:
The Medicine Cabinet Tax. Americans, says ATR, "will no longer be able to use health savings account, flexible spending account, or health reimbursement pretax dollars to purchase nonprescription, over-the-counter medicines (except insulin)."
The HSA Withdrawal Tax Hike. "This provision of ObamaCare," according to ATR, "increases the additional tax on nonmedical early withdrawals from an HSA from 10% to 20%, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10%."
Brand Name Drug Tax. Makers and importers of brand-name drugs will be liable for a tax of $2.5 billion in 2011. The tax goes to $3 billion a year from 2012 to 2016, then $3.5 billion in 2017 and $4.2 billion in 2018. Beginning in 2019 it falls to $2.8 billion and stays there. And who pays the new drug tax? Patients, in the form of higher prices.
Economic Substance Doctrine. ATR reports that "The IRS is now empowered to disallow perfectly legal tax deductions and maneuvers merely because it judges that the deduction or action lacks 'economic substance.'"
A third and final (for now) wave, says ATR, consists of the alternative minimum tax's widening net, tax hikes on employers and the loss of deductions for tuition:
• The Tax Policy Center, no right-wing group, says that the failure to index the AMT will subject 28.5 million families to the tax when they file next year, up from 4 million this year.
• "Small businesses can normally expense (rather than slowly deduct, or 'depreciate') equipment purchases up to $250,000," says ATR. "This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be 'depreciated.'"
• According to ATR, there are "literally scores of tax hikes on business that will take place," plus the loss of some tax credits. The research and experimentation tax credit will be the biggest loss, "but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs."
• The deduction for tuition and fees will no longer be available and there will be limits placed on education tax credits. Teachers won't be able to deduct their classroom expenses and employer-provided educational aid will be restricted. Thousands of families will no longer be allowed to deduct student loan interest.
Then there's the tax on Americans who decline to buy health care insurance (the tax the administration initially said wasn't a tax but now argues in court that it is) plus a 3.8% Medicare tax beginning in 2013 on profits made in real estate transactions by wealthier Americans.
Not all Americans may fully realize what's in store come Jan. 1. But they should have a pretty good idea by the mid-term elections, and members of Congress might take note of our latest IBD/TIPP Poll (summarized above).
Fifty-one percent of respondents favored making the Bush cuts permanent vs. 28% who didn't. Republicans were more than 4 to 1 and Independents more than 2 to 1 in favor. Only Democrats were opposed, but only by 40%-38%.
The cuts also proved popular among all income groups — despite the Democrats' oft-heard assertion that Bush merely provided "tax breaks for the wealthy." Fact is, Bush cut taxes for everyone who paid them, and the cuts helped the nation recover from a recession and the worst stock-market crash since 1929.
Maybe, just maybe, Americans remember that — and will not forget come Nov. 2.
Many voters are looking forward to 2011, hoping a new Congress will put the country back on the right track. But unless something's done soon, the new year will also come with a raft of tax hikes — including a return of the death tax.
Through the end of this year, the federal estate tax rate is zero — thanks to the package of broad-based tax cuts that President Bush pushed through to get the economy going earlier in the decade.
But as of midnight Dec. 31, the death tax returns — at a rate of 55% on estates of $1 million or more. The effect this will have on hospital life-support systems is already a matter of conjecture.
Resurrection of the death tax, however, isn't the only tax problem that will be ushered in Jan. 1. Many other cuts from the Bush administration are set to disappear and a new set of taxes will materialize. And it's not just the rich who will pay.
The lowest bracket for the personal income tax, for instance, moves up 50% — to 15% from 10%. The next lowest bracket — 25% — will rise to 28%, and the old 28% bracket will be 31%. At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.
But the damage doesn't stop there.
The marriage penalty also makes a comeback, and the capital gains tax will jump 33% — to 20% from 15%. The tax on dividends will go all the way from 15% to 39.6% — a 164% increase.
Both the cap-gains and dividend taxes will go up further in 2013 as the health care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year and joint filers making more than $250,000. Other tax hikes include: halving the child tax credit to $500 from $1,000 and fixing the standard deduction for couples at the same level as it is for single filers.
Letting the Bush cuts expire will cost taxpayers $115 billion next year alone, according to the Congressional Budget Office, and $2.6 trillion through 2020.
But even more tax headaches lie ahead. This "second wave" of hikes, as Americans for Tax Reform puts it, are designed to pay for ObamaCare and include:
The Medicine Cabinet Tax. Americans, says ATR, "will no longer be able to use health savings account, flexible spending account, or health reimbursement pretax dollars to purchase nonprescription, over-the-counter medicines (except insulin)."
The HSA Withdrawal Tax Hike. "This provision of ObamaCare," according to ATR, "increases the additional tax on nonmedical early withdrawals from an HSA from 10% to 20%, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10%."
Brand Name Drug Tax. Makers and importers of brand-name drugs will be liable for a tax of $2.5 billion in 2011. The tax goes to $3 billion a year from 2012 to 2016, then $3.5 billion in 2017 and $4.2 billion in 2018. Beginning in 2019 it falls to $2.8 billion and stays there. And who pays the new drug tax? Patients, in the form of higher prices.
Economic Substance Doctrine. ATR reports that "The IRS is now empowered to disallow perfectly legal tax deductions and maneuvers merely because it judges that the deduction or action lacks 'economic substance.'"
A third and final (for now) wave, says ATR, consists of the alternative minimum tax's widening net, tax hikes on employers and the loss of deductions for tuition:
• The Tax Policy Center, no right-wing group, says that the failure to index the AMT will subject 28.5 million families to the tax when they file next year, up from 4 million this year.
• "Small businesses can normally expense (rather than slowly deduct, or 'depreciate') equipment purchases up to $250,000," says ATR. "This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be 'depreciated.'"
• According to ATR, there are "literally scores of tax hikes on business that will take place," plus the loss of some tax credits. The research and experimentation tax credit will be the biggest loss, "but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs."
• The deduction for tuition and fees will no longer be available and there will be limits placed on education tax credits. Teachers won't be able to deduct their classroom expenses and employer-provided educational aid will be restricted. Thousands of families will no longer be allowed to deduct student loan interest.
Then there's the tax on Americans who decline to buy health care insurance (the tax the administration initially said wasn't a tax but now argues in court that it is) plus a 3.8% Medicare tax beginning in 2013 on profits made in real estate transactions by wealthier Americans.
Not all Americans may fully realize what's in store come Jan. 1. But they should have a pretty good idea by the mid-term elections, and members of Congress might take note of our latest IBD/TIPP Poll (summarized above).
Fifty-one percent of respondents favored making the Bush cuts permanent vs. 28% who didn't. Republicans were more than 4 to 1 and Independents more than 2 to 1 in favor. Only Democrats were opposed, but only by 40%-38%.
The cuts also proved popular among all income groups — despite the Democrats' oft-heard assertion that Bush merely provided "tax breaks for the wealthy." Fact is, Bush cut taxes for everyone who paid them, and the cuts helped the nation recover from a recession and the worst stock-market crash since 1929.
Maybe, just maybe, Americans remember that — and will not forget come Nov. 2.
Thursday, July 22, 2010
Joblessness is down in 39 states, but few jobs are being created
A decline in unemployment in 39 U.S. states and the District of Columbia last month is another sign that job seekers are giving up the hunt, not that the labor market is strengthening, experts said. Only 21 states posted a net job gain in June, compared with 41 in May, the Labor Department said. Nationwide, private employers added 83,000 workers.
Another sign of a failure of current US economic policy.
Another sign of a failure of current US economic policy.
Rising yuan pushes China's exporters to innovate and introduce tech
A strengthening yuan is forcing China's exporters to move up the value chain and become more innovative, said Zhang Yansheng, a researcher for the National Development and Reform Commission. Ge Yafang, head of Black Peony, which exports clothing to the U.S. and Japan, said if the firm hadn't shifted from dependence on cheap labor to a technology-driven operation, the rising yuan would haven driven it into bankruptcy.
Xinhuanet.com
An opportunity for US companies to gain sales in China?
Xinhuanet.com
An opportunity for US companies to gain sales in China?
Weaker EU members' dependence on the ECB is at a record high
Data show that weaker members of the EU are more dependent on the European Central Bank than ever before. The revelation comes as European regulators prepare to release results of stress tests on 91 banks, part of efforts to reassure markets
about the stability of the financial sector. However, sources said some regulators are urging that results be released before the start of trading in Europe, rather than after, as planned. The Wall Street Journal
about the stability of the financial sector. However, sources said some regulators are urging that results be released before the start of trading in Europe, rather than after, as planned. The Wall Street Journal
Bernanke discusses the Fed's stance on economic uncertainty
Ben Bernanke, chairman of the Federal Reserve, said the central bank is prepared to stimulate growth if the U.S. economy deteriorates, but officials are also ready to increase interest rates and rein in its balance sheet. "We will continue to carefully
assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability," Bernanke told the Senate banking committee. Bloomberg
assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability," Bernanke told the Senate banking committee. Bloomberg
Wednesday, July 21, 2010
America's AAA Rating Is Cut in Land of Bubbles
“While Moody’s and S&P ignore the wreckage that America’s finances have become, Beijing-based Dagong Global Credit Rating Co. is uncorrupted by the system that enables developed-world debt addicts to appear fiscally clean. It rates U.S. debt AA, two levels below the top grade.
Dagong is right to turn the world of A- and Baa1 on its head even though rating China higher than the U.S. is hubristic at best. Anyone who thinks China deserves a top rating or is devoid of debt landmines isn’t looking very hard.”
William Pesek
Dagong is right to turn the world of A- and Baa1 on its head even though rating China higher than the U.S. is hubristic at best. Anyone who thinks China deserves a top rating or is devoid of debt landmines isn’t looking very hard.”
William Pesek
Reform bill might halt the ABS market, insiders say
Another unintended consequence of legislation stifling another desperately needed industry.... pushing economic recovery further out into the ether.
Bank analysts and an industry group said regulatory reform legislation heading to President Barack Obama might hurt the asset-backed securities market by bolstering credit raters' liability risk. The major credit rating agencies informed the industry that underwriters will no longer be allowed to use their ratings in bond-registration statements because their risk of being sued has increased. Bloomberg
Bank analysts and an industry group said regulatory reform legislation heading to President Barack Obama might hurt the asset-backed securities market by bolstering credit raters' liability risk. The major credit rating agencies informed the industry that underwriters will no longer be allowed to use their ratings in bond-registration statements because their risk of being sued has increased. Bloomberg
U.K. seems to be moving to monetize its debt
What makes you think the Fed (here in the USA) is not doing the same thing? Watch what is done, not what is said.
The British government denied that it plans to inflate away debt, but its actions suggest that is exactly what it intends to do, according to The Economist. A program
by the government's National Savings and Investments that paid the rate of inflation plus 1% was closed because of its runaway popularity. Meanwhile, the Bank of England recently bought more than enough debt to fund the deficit for a year, a classic debt-monetization technique that dates back to Germany's Weimar republic, The Economist notes.
The British government denied that it plans to inflate away debt, but its actions suggest that is exactly what it intends to do, according to The Economist. A program
by the government's National Savings and Investments that paid the rate of inflation plus 1% was closed because of its runaway popularity. Meanwhile, the Bank of England recently bought more than enough debt to fund the deficit for a year, a classic debt-monetization technique that dates back to Germany's Weimar republic, The Economist notes.
The Statist Truth About China
China's Anxiety About Successful Companies ... China is turning independent coal-mines into state-run operations, showing its impatience with private companies that get too big. China's high-profile battle with foreign companies makes it seem as though those businesses keep the nation's economic planners awake at night. It has arrested a Rio Tinto executive on trumped-up charges, blocked Facebook and YouTube, and restricted (in practice if not in name) foreign firms from key industries such as oil, media, and metals. ... While the government has claimed it's putting forth better companies at the expense of weaker ones, the root cause remains that an ever-insecure China wants to rein in independent sources of influence (and wealth) that it feels have become too independent to control. This trend, known in Chinese as "the country advances and the private retreats," allows the government to increase its control over the economy by funneling resources and growth potential into more pliable state companies. – Newsweek
Tuesday, July 20, 2010
No relief is in sight for the U.S. housing market
It is clear that the U.S. housing supply was too big to be affected much by the tax credit for buyers, and for that reason, a bleak future awaits the market, according
to The Economist. "A durable solution to the crisis in housing needed to involve an answer to the epidemic of negative equity and a meaningful labour market recovery," The Economist notes. "America has neither."
The Economist
I'm concerned my outlook for further house price declines may be too conservative
to The Economist. "A durable solution to the crisis in housing needed to involve an answer to the epidemic of negative equity and a meaningful labour market recovery," The Economist notes. "America has neither."
The Economist
I'm concerned my outlook for further house price declines may be too conservative
Monday, July 19, 2010
NYU STERN SYSTEMIC RISK RANKINGS
The RISK page of the Volatility Laboratory presents a variety of risk measures for top US Financial Firms. These measures are updated daily and reveal several dimensions of risk. Some measure the risks of individual firms and others are firm contributions to the risk of the financial system and the economy as a whole. Historical estimates of each of these risk measures can be plotted to see the changing performance of individual firms.
The heart of the analysis is the analysis of Marginal Expected Shortfall or MES. This is a prediction of how much the stock of a particular financial company will decline in a day, if the whole market declines by 2%. The measure incorporates the volatility of the firm and its correlation with the market, as well as its performance in extremes. To estimate the equity losses in a future financial crisis, the debt equity ratio of the firm is combined with the MES to reflect the decline that might be expected in a crisis when many firms are undercapitalized. This is called ERISK. Finally, the ERISK measure is used to determine the capital shortfall that a firm would face in a crisis. When equity values fall below prudential levels, the debt loses value and creditors throughout the economy are impacted. The Systemic Risk Contribution, SRISK%, is the percentage of all capital shortfall that would be experienced by this firm in the event of a crisis. Firms with a high percentage of capital shortfalls in a crisis are not only the biggest losers in a crisis but also are the firms that create or extend the crisis. This SRISK% is the NYU Stern Systemic Risk Ranking of the US Financial sector. Some of the firms on this list are already under government protection. Their risk status is a reflection of the costs to the system if the government guarantees were suddenly withdrawn.
To sort the firms by any of these categories, simply click on the heading. To plot any of the series, click on the firm name and select the series to be plotted. You can select the time horizon of the plot. To see help, click on the "?s" in the page.
http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MES
Systemic Risk Top Five
Bank Of America 15.86%, Citigroup 14.86%, Freddie Mac 10.46%, Fannie Mae 10.05%, JP Morgan Chase 7.71%
The Top Ten is rounded out with AIG, Goldman Sachs, Morgan Stanley, Prudential Financial, Hartford Financial Services Group.
The heart of the analysis is the analysis of Marginal Expected Shortfall or MES. This is a prediction of how much the stock of a particular financial company will decline in a day, if the whole market declines by 2%. The measure incorporates the volatility of the firm and its correlation with the market, as well as its performance in extremes. To estimate the equity losses in a future financial crisis, the debt equity ratio of the firm is combined with the MES to reflect the decline that might be expected in a crisis when many firms are undercapitalized. This is called ERISK. Finally, the ERISK measure is used to determine the capital shortfall that a firm would face in a crisis. When equity values fall below prudential levels, the debt loses value and creditors throughout the economy are impacted. The Systemic Risk Contribution, SRISK%, is the percentage of all capital shortfall that would be experienced by this firm in the event of a crisis. Firms with a high percentage of capital shortfalls in a crisis are not only the biggest losers in a crisis but also are the firms that create or extend the crisis. This SRISK% is the NYU Stern Systemic Risk Ranking of the US Financial sector. Some of the firms on this list are already under government protection. Their risk status is a reflection of the costs to the system if the government guarantees were suddenly withdrawn.
To sort the firms by any of these categories, simply click on the heading. To plot any of the series, click on the firm name and select the series to be plotted. You can select the time horizon of the plot. To see help, click on the "?s" in the page.
http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MES
Systemic Risk Top Five
Bank Of America 15.86%, Citigroup 14.86%, Freddie Mac 10.46%, Fannie Mae 10.05%, JP Morgan Chase 7.71%
The Top Ten is rounded out with AIG, Goldman Sachs, Morgan Stanley, Prudential Financial, Hartford Financial Services Group.
Firms cancel health coverage:
The relentlessly rising cost of health insurance is prompting some small Massachusetts companies to drop coverage for their workers and encourage them to sign up for statesubsidized care instead, a trend that, some analysts say, could eventually weigh heavily on the state’s alreadystressed budget. Boston.com
Given that Obamacare is based on the Mass model, then we are about to "bend the cost curve" the wrong way.
Given that Obamacare is based on the Mass model, then we are about to "bend the cost curve" the wrong way.
Direct investors are outbidding bond dealers for U.S. Treasurys
Wall Street bond dealers have been the major buyers of U.S. Treasurys since 2003, when the government started releasing data on buyers, but the pattern is changing. U.S. banks, mutual funds and foreign central banks purchased 57% of the $1.26 trillion in Treasury notes and bonds auctioned this year. Bloomberg•
Soething is changing in the world! But what prompts this, do you suppose?
Soething is changing in the world! But what prompts this, do you suppose?
Collapse of talks for a Hungarian rescue might trigger market panic
The sovereign-debt market might remain in turmoil for a while, after the International Monetary Fund and the EU walked away from discussions with Hungary regarding its budget deficit, experts said. The decision puts the IMF's $25.8 billion bailout for Hungary on the back burner. Bloomberg Businessweek so far market taking this in stride. There should be caution with Greece ahead of next disbursement of funds in August.
Friday, July 16, 2010
Persian Isolation: setting up for a war against IRAN?
By Alexander Smoltczyk and Bernhard Zand FROM THE MAGAZINE DER SPIEGEL (English Edition)
Israel and the Arab states near the Persian Gulf recognize a common threat: the regime in Tehran. A regional diplomat has not even ruled out support by the Arab states for a military strike to end Iran's nuclear ambitions.
"The Jews and Arabs have been fighting for one hundred years. The Arabs and the Persians have been going at (it) for a thousand,"
Almost all Arab neighbors have a hostile relationship with the Islamic Republic. Saudi Arabia suspects Iran of stirring up the Shiite minority in its eastern provinces. The Arab emirates accuse Iran of occupying three islands in the Persian Gulf. Egypt has not had regular diplomatic relations with Iran since a street in Tehran was named after the murderer of former Egyptian President Anwar el-Sadat.
Jordanian King Abdullah II warns against the establishment of a "Shiite crescent" between Iran and Lebanon. And Kuwait, fearing the Iranians, installed the Patriot air defense missile system in the spring.
Closely Aligned
Arab governments are concerned about a strong Iran, its nuclear program and the inflammatory speeches of Iranian President Mahmoud Ahmadinejad. They share these concerns with another government in the Middle East -- Israel's.
Never have the strategic interests of the Jewish and Arab states been so closely aligned as they are today. While European and American security experts consistently characterize a military strike against Iran as "a last option," notable Arabs have long shared the views of Israel's ultra-nationalist foreign minister, Avigdor Lieberman. If no one else takes it upon himself to bomb Iran, Saudi cleric Mohsen al-Awaji told SPIEGEL, Israel will have to do it. "Israel's agenda has its limits," he said, noting that it is mainly concerned with securing its national existence. "But Iran's agenda is global."
But Arab countries are pursuing a delicate seesaw policy. The UAE cannot afford to openly offend Iran, which explains why Ambassador Otaiba was promptly ordered to return home on Wednesday.
This caution only conceals the deep divide between the Arabs and the Persians. Despite their public expressions of outrage over Israeli behavior, such as the blockade of the Gaza Strip, Arab countries in the region continue to pursue their pragmatic course. On June 12, The Times in London wrote that Saudi Arabia had recently "conducted tests to stand down its air defenses to enable Israeli jets to make a bombing raid on Iran's nuclear facilities" -- in the event of an attack on the nuclear power plant in Bushehr. In March, Western intelligence agencies reported that there were signs of secret negotiations between Jerusalem and Riyadh to discuss the possibility.
"We are aligned (with the United States) on every policy issue there is in the Middle East," Ambassador Otaiba said in Aspen.
Israel and the Arab states near the Persian Gulf recognize a common threat: the regime in Tehran. A regional diplomat has not even ruled out support by the Arab states for a military strike to end Iran's nuclear ambitions.
"The Jews and Arabs have been fighting for one hundred years. The Arabs and the Persians have been going at (it) for a thousand,"
Almost all Arab neighbors have a hostile relationship with the Islamic Republic. Saudi Arabia suspects Iran of stirring up the Shiite minority in its eastern provinces. The Arab emirates accuse Iran of occupying three islands in the Persian Gulf. Egypt has not had regular diplomatic relations with Iran since a street in Tehran was named after the murderer of former Egyptian President Anwar el-Sadat.
Jordanian King Abdullah II warns against the establishment of a "Shiite crescent" between Iran and Lebanon. And Kuwait, fearing the Iranians, installed the Patriot air defense missile system in the spring.
Closely Aligned
Arab governments are concerned about a strong Iran, its nuclear program and the inflammatory speeches of Iranian President Mahmoud Ahmadinejad. They share these concerns with another government in the Middle East -- Israel's.
Never have the strategic interests of the Jewish and Arab states been so closely aligned as they are today. While European and American security experts consistently characterize a military strike against Iran as "a last option," notable Arabs have long shared the views of Israel's ultra-nationalist foreign minister, Avigdor Lieberman. If no one else takes it upon himself to bomb Iran, Saudi cleric Mohsen al-Awaji told SPIEGEL, Israel will have to do it. "Israel's agenda has its limits," he said, noting that it is mainly concerned with securing its national existence. "But Iran's agenda is global."
But Arab countries are pursuing a delicate seesaw policy. The UAE cannot afford to openly offend Iran, which explains why Ambassador Otaiba was promptly ordered to return home on Wednesday.
This caution only conceals the deep divide between the Arabs and the Persians. Despite their public expressions of outrage over Israeli behavior, such as the blockade of the Gaza Strip, Arab countries in the region continue to pursue their pragmatic course. On June 12, The Times in London wrote that Saudi Arabia had recently "conducted tests to stand down its air defenses to enable Israeli jets to make a bombing raid on Iran's nuclear facilities" -- in the event of an attack on the nuclear power plant in Bushehr. In March, Western intelligence agencies reported that there were signs of secret negotiations between Jerusalem and Riyadh to discuss the possibility.
"We are aligned (with the United States) on every policy issue there is in the Middle East," Ambassador Otaiba said in Aspen.
"Inflating War: Central banking and militarism are intimately linked".
The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.
A most urgent question : will the current President have the courage to do what is right for the good of the nation as Warren Harding did, or will he succumb to baser instincts and refuse to cut spending and taxes dramatically?
Thomas DiLorenzo lays out the disasterous historical connection between politics, militarism and central banking. Heed the warnings contained or this nation will again see its wealth devestated.
Government can finance war (and everything else) by only three methods: taxes, debt, and the printing of money. Taxes are the most visible and painful, followed by debt finance, which crowds out private borrowing, drives up interest rates, and imposes the double burden of principal and interest. Money creation, on the other hand, makes war seem costless to the average citizen. But of course there is no such thing as a free lunch.
As a general rule, the longer a war lasts, the more centrally planned and government-controlled the entire economy becomes. And it remains so to some degree after the war has ended. War is the health of the state, as Randolph Bourne famously declared, and the growth of the state means a decline in liberty and prosperity. (Think Socialism, Communism, Totalianarism as epitomized by North Korea, Nazi Germany...who would want to live in a regime like those?)
Special interests joined the political coalition that created the Federal Reserve Board in 1913, which became an important source of finance for America’s disastrous participation in World War I four years later. The Fed did not just print greenbacks, as was the case during the Civil War. It printed enough money to purchase more than $4 billion in government bonds that were used to finance the war. The amount of money in circulation doubled between 1914 and 1920—as did prices. This was an enormous hidden war tax on the American people: wealth was cut in half, along with real wages, and just about everything consumers purchased became more expensive.
The boom created by the Fed’s war financing inevitably caused a bust—the Depression of 1920, the first year of which was even worse than the first year of the Great Depression of the 1930s. Gross domestic product declined by 24 percent from 1920-21, while the number of unemployed Americans more than doubled, from 2.1 million to 4.9 million. The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.
A most urgent question : will the current President have the courage to do what is right for the good of the nation as Warren Harding did, or will he succumb to baser instincts and refuse to cut spending and taxes dramatically?
Thomas DiLorenzo lays out the disasterous historical connection between politics, militarism and central banking. Heed the warnings contained or this nation will again see its wealth devestated.
Government can finance war (and everything else) by only three methods: taxes, debt, and the printing of money. Taxes are the most visible and painful, followed by debt finance, which crowds out private borrowing, drives up interest rates, and imposes the double burden of principal and interest. Money creation, on the other hand, makes war seem costless to the average citizen. But of course there is no such thing as a free lunch.
As a general rule, the longer a war lasts, the more centrally planned and government-controlled the entire economy becomes. And it remains so to some degree after the war has ended. War is the health of the state, as Randolph Bourne famously declared, and the growth of the state means a decline in liberty and prosperity. (Think Socialism, Communism, Totalianarism as epitomized by North Korea, Nazi Germany...who would want to live in a regime like those?)
Special interests joined the political coalition that created the Federal Reserve Board in 1913, which became an important source of finance for America’s disastrous participation in World War I four years later. The Fed did not just print greenbacks, as was the case during the Civil War. It printed enough money to purchase more than $4 billion in government bonds that were used to finance the war. The amount of money in circulation doubled between 1914 and 1920—as did prices. This was an enormous hidden war tax on the American people: wealth was cut in half, along with real wages, and just about everything consumers purchased became more expensive.
The boom created by the Fed’s war financing inevitably caused a bust—the Depression of 1920, the first year of which was even worse than the first year of the Great Depression of the 1930s. Gross domestic product declined by 24 percent from 1920-21, while the number of unemployed Americans more than doubled, from 2.1 million to 4.9 million. The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.
Fed's volte face sends the dollar tumbling,economy in decline, QE II to start soon?
The very respected Ambrose Evans-Pritchard writes in the Telegraph fom London:
"Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar."
I also note that "quantative easing" is mentioned in this article.
The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.
"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.
"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."
The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.
This is a must read. Its a little long but compelling. Click on the heading above for the link.
"Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar."
I also note that "quantative easing" is mentioned in this article.
The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.
"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.
"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."
The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.
This is a must read. Its a little long but compelling. Click on the heading above for the link.
Thursday, July 15, 2010
Thomas Jefferson said it all
I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them. - Thomas Jefferson
Is the wipeout in offshore drillers over?
Time to buy offshore drillers?
DO Diamond Offshore bounced off its early June bottom of $60 and is at $64.43 today... after a pullback of nearly $1.50 intraday.
It is 7.4% above its 3-month low and yesterday it was as near as dammit is to swearing, to being up 10%!!
Its in the buy range for me.
DO Diamond Offshore bounced off its early June bottom of $60 and is at $64.43 today... after a pullback of nearly $1.50 intraday.
It is 7.4% above its 3-month low and yesterday it was as near as dammit is to swearing, to being up 10%!!
Its in the buy range for me.
"Wall of debt" could hurt the fragile economic recovery
U.S. and European governments are expected to sell about $4 trillion in bonds this year, creating a "wall of debt" that could course through the global financial
system for years. One concern is whether the market and the fragile economy could absorb the debt or whether the situation would result in a Greek-style crisis for less creditworthy governments. Analysts differ on their assessment of the issue.
The Washington Post
system for years. One concern is whether the market and the fragile economy could absorb the debt or whether the situation would result in a Greek-style crisis for less creditworthy governments. Analysts differ on their assessment of the issue.
The Washington Post
Signs of things getting better?
From Zacks Update July 2010
Sentiment on The Street has begun to turn positive as the stock market has enjoyed a sustained 7 day rally. Fears of a double dip recession are subsiding as companies report better than expected earnings this week.
The BP oil well has been capped, and durability testing is underway which proved to be a strong psychological hurdle for the market, and seems to have renewed hope that better times are ahead.
Update In Brief
Corporate cash and equivalent assets as a percentage of total assets are at their highest level in decades. This is a vast improvement from 2008 when we had a highly leveraged corporate sector.
As recovery in the market slowly continues, positive signs that the economy is also well on its way are beginning to firm up. Treasury rates have maintained their historic low levels for some time now, which of course begs the question of what the Federal Reserve’s short term move may be, if anything.
For full Zacks Market Commentary click on the heading above
Sentiment on The Street has begun to turn positive as the stock market has enjoyed a sustained 7 day rally. Fears of a double dip recession are subsiding as companies report better than expected earnings this week.
The BP oil well has been capped, and durability testing is underway which proved to be a strong psychological hurdle for the market, and seems to have renewed hope that better times are ahead.
Update In Brief
Corporate cash and equivalent assets as a percentage of total assets are at their highest level in decades. This is a vast improvement from 2008 when we had a highly leveraged corporate sector.
As recovery in the market slowly continues, positive signs that the economy is also well on its way are beginning to firm up. Treasury rates have maintained their historic low levels for some time now, which of course begs the question of what the Federal Reserve’s short term move may be, if anything.
For full Zacks Market Commentary click on the heading above
Wednesday, July 14, 2010
Interest rate dilemma
"At 4.6 percent, 30-yr mortgage rates are already at historic lows, yet housing demand cratered as soon as the government's homebuyer tax credit expired in April. If you think lowering long-term rates and reducing the spread between short and long rates will stimulate the economy,think again. The steep yield curve is the most powerful thing the economy has going for it right now."
Caroline Baum
Caroline Baum
Monday, July 12, 2010
Chinese credit rating agency rates the 50 biggest economies
Dagong Global Credit Rating released sovereign-debt ratings for 50 countries that account for 90% of the world's economy, in a move to break the credit rating monopoly of Moody's Investors Service, Standard & Poor's and Fitch Ratings. The Chinese firm gave the U.S. an AA rating, lower than the top AAA rating it assigned to Norway, Denmark, Luxembourg, Switzerland, Singapore, Australia and New Zealand. Xinhuanet.com
U.S. debt could "destroy the country from within," officials say
Erskine Bowles, a member of U.S.
President Barack Obama's deficit commission, delivered a stark warning that the runaway deficit "is like a cancer." Bowles, previously chief of staff for President Bill Clinton, was joined by former Sen. Alan Simpson in saying that debt "will destroy the country from within" if left unchecked.
The Washington Post
President Barack Obama's deficit commission, delivered a stark warning that the runaway deficit "is like a cancer." Bowles, previously chief of staff for President Bill Clinton, was joined by former Sen. Alan Simpson in saying that debt "will destroy the country from within" if left unchecked.
The Washington Post
Saturday, July 10, 2010
Actions should be shaped by beliefs and values
Actions should be shaped by beliefs and values, not emotions. When investors understand volatility, they can manage market movements better and make better decisions. They can steer their financial ship with confidence, rather than sitting powerless and being pushed around by the market’s powerful tides.
Index Summary
The major market indices were higher this week. The Dow Jones Industrial Index rose 5.28 percent.
The S&P 500 Stock Index gained 5.41 percent, while the Nasdaq Composite finished 5.00 percent higher.
Barra Growth underperformed Barra Value as Barra Value finished 5.57 percent higher while Barra Growth rose 5.25 percent. The Russell 2000 closed the week with a gain of 5.09 percent.
The Hang Seng Composite finished higher by 2.99 percent; Taiwan was up 4.32 percent and the Kospi advanced 3.06 percent.
The 10-year Treasury bond yield closed at 3.05 percent, up 9 basis points for the week.
Index Summary
The major market indices were higher this week. The Dow Jones Industrial Index rose 5.28 percent.
The S&P 500 Stock Index gained 5.41 percent, while the Nasdaq Composite finished 5.00 percent higher.
Barra Growth underperformed Barra Value as Barra Value finished 5.57 percent higher while Barra Growth rose 5.25 percent. The Russell 2000 closed the week with a gain of 5.09 percent.
The Hang Seng Composite finished higher by 2.99 percent; Taiwan was up 4.32 percent and the Kospi advanced 3.06 percent.
The 10-year Treasury bond yield closed at 3.05 percent, up 9 basis points for the week.
Friday, July 9, 2010
Geithner indicates good news on taxes for capital gains and dividends
Treasury Secretary Timothy Geithner said the White House wants to keep the top tax rate on dividends and capital gains at a proposed 20%.
The rate is 15%, so 20% would be a large increase, but it would be less than the 39.6% rate congressional Democrats want for dividends.
The Wall Street Journal
The rate is 15%, so 20% would be a large increase, but it would be less than the 39.6% rate congressional Democrats want for dividends.
The Wall Street Journal
Optimizing Social Security: It's More Complicated Than You Think
Christine Benz of Morningstar suggests (for full article click on heading - a must read)deferring the collection of Social Security benefits as long as you can...at least until 70 years of age if practical.
Rally in Stocks Starts Now
Ninety-eight percent of the time, when we've been in this situation, stocks end up higher three months later.
By "this situation" I mean when investor pessimism is high…
When pessimism is high, it's time to buy.
Right now, only 21% of individual investors are bullish on stocks, according to the latest weekly survey by the American Association of Individual Investors. That's "one of the lowest readings in the last 15 years," says my friend Jason Goepfert, who tracks these things at his website: SentimenTrader.
According to Jason, stocks were up an average 8.5% three months after hitting bullish readings of 21% or lower. That's data going back to 2003. Going back to 1987, this indicator has been at 21% or below just 47 times. And 46 out of 47 times (98% of the time), stocks were higher three months later.
When you combine that pessimism with Wednesday's 3% "up" move, you've got a recipe for a big rally. Jason said, "When we get a buying surge like yesterday, coming off a multi-month low, it has usually led to dramatic gains long term."
Stocks are a great value right now, particularly in relation to interest rates. Your money earns nothing in the bank, but you get paid a 5% dividend to own stocks like Pfizer.
Pfizer, for just one example, trades at a forward P/E ratio of 6.5. What that means is, if you bought that business privately, the earnings of the business would pay off your entire investment in 6.5 years – and all the rest of your earnings out to infinity would be "free."
That is crazy. You never get buys like that. And drug stocks like Pfizer aren't the only cheap sector… Big banks (like Citigroup and Bank of America) trade at single-digit forward P/Es. And so do big oil companies (like Exxon and Chevron).
My point is, many blue-chip stocks are super cheap. Based on the latest poll of individual investors, stocks are hated now. And with Wednesday's 3% move, it could be the start of the uptrend – the start of "dramatic gains" as Jason Goepfert described it.
By "this situation" I mean when investor pessimism is high…
When pessimism is high, it's time to buy.
Right now, only 21% of individual investors are bullish on stocks, according to the latest weekly survey by the American Association of Individual Investors. That's "one of the lowest readings in the last 15 years," says my friend Jason Goepfert, who tracks these things at his website: SentimenTrader.
According to Jason, stocks were up an average 8.5% three months after hitting bullish readings of 21% or lower. That's data going back to 2003. Going back to 1987, this indicator has been at 21% or below just 47 times. And 46 out of 47 times (98% of the time), stocks were higher three months later.
When you combine that pessimism with Wednesday's 3% "up" move, you've got a recipe for a big rally. Jason said, "When we get a buying surge like yesterday, coming off a multi-month low, it has usually led to dramatic gains long term."
Stocks are a great value right now, particularly in relation to interest rates. Your money earns nothing in the bank, but you get paid a 5% dividend to own stocks like Pfizer.
Pfizer, for just one example, trades at a forward P/E ratio of 6.5. What that means is, if you bought that business privately, the earnings of the business would pay off your entire investment in 6.5 years – and all the rest of your earnings out to infinity would be "free."
That is crazy. You never get buys like that. And drug stocks like Pfizer aren't the only cheap sector… Big banks (like Citigroup and Bank of America) trade at single-digit forward P/Es. And so do big oil companies (like Exxon and Chevron).
My point is, many blue-chip stocks are super cheap. Based on the latest poll of individual investors, stocks are hated now. And with Wednesday's 3% move, it could be the start of the uptrend – the start of "dramatic gains" as Jason Goepfert described it.
Kitco just came out with a new investment product for rhodium. Why rhodium? What's the appeal for investors?
John nadler of KITCO explains in an interview linked above ( click on the heading)
Platinum group metals, as a niche (and as opposed to gold), are endowed with decent fundamentals. They've got a tenuous supply of metal, coming primarily out of South Africa and Russia, and decent demand from their primary usage in autocatalysts. These make sense as part of the global economic recovery story. You're talking about a sector (automotive applications) that nobody has figured out substitutions or new technologies for. If the crisis doesn't completely throw the world into a second recessionary dip, then the fundamentals argue that these metals have not only been neglected, but also underpriced.
With rhodium, we looked at even more of a tight market. It's a tiny market of 900,000 ounces per annum, and one where carmakers can't substitute with cheaper metal, because it is the only such noble metal that can remove the nitrous oxide from tailpipe emissions. When you add that together, you get a good picture, especially as the U.S. and European carmakers come out of their "car recessions." And then there's China and India, who are in the driver's seat in the recovery of auto sales.
It's also a market that doesn't have futures or options trading available at the moment. But because of that, it's a bit thinner and a bit more volatile, and the spreads are wider. But it doesn't mean that an individual investor cannot participate in it. Our situation was that we had pool accounts in rhodium for years, but we saw increasing interest from investors for this in the longer- to medium-term trade, three to five years. So since it's really costly and difficult to create 1 ounce coins, we decided to take the really basic refined material (called "sponge"—a gray powder, really) that the refiners use and literally bottle it, seal it and put it into safekeeping with a custodian.
It's not for everyone, by any means. You should definitely understand the market and where the supply and the demand come from. But as a recovery play, and as a medium-term speculative play, I think it deserves a closer look.
Platinum group metals, as a niche (and as opposed to gold), are endowed with decent fundamentals. They've got a tenuous supply of metal, coming primarily out of South Africa and Russia, and decent demand from their primary usage in autocatalysts. These make sense as part of the global economic recovery story. You're talking about a sector (automotive applications) that nobody has figured out substitutions or new technologies for. If the crisis doesn't completely throw the world into a second recessionary dip, then the fundamentals argue that these metals have not only been neglected, but also underpriced.
With rhodium, we looked at even more of a tight market. It's a tiny market of 900,000 ounces per annum, and one where carmakers can't substitute with cheaper metal, because it is the only such noble metal that can remove the nitrous oxide from tailpipe emissions. When you add that together, you get a good picture, especially as the U.S. and European carmakers come out of their "car recessions." And then there's China and India, who are in the driver's seat in the recovery of auto sales.
It's also a market that doesn't have futures or options trading available at the moment. But because of that, it's a bit thinner and a bit more volatile, and the spreads are wider. But it doesn't mean that an individual investor cannot participate in it. Our situation was that we had pool accounts in rhodium for years, but we saw increasing interest from investors for this in the longer- to medium-term trade, three to five years. So since it's really costly and difficult to create 1 ounce coins, we decided to take the really basic refined material (called "sponge"—a gray powder, really) that the refiners use and literally bottle it, seal it and put it into safekeeping with a custodian.
It's not for everyone, by any means. You should definitely understand the market and where the supply and the demand come from. But as a recovery play, and as a medium-term speculative play, I think it deserves a closer look.
So what is the "right" price for gold?
John Nadler of KITCO( click on title for full article) opines:
Of course, now we've heard that such a price should be anywhere between $8,000 and even $15,000, but I still think that between $680 and $880, or in that range, gold would be much more in balance with its fundamentals.
Eight hundred is a number that you saw come up in the GFMS surveys as a potential target, and they gave it up to two years (even with the potential overshoot of up to $1,320).
Yeah, that could still happen, but it's all a cycle, a phase in the markets. It's currently driven by a circumstance (Europe), but not some "new dynamic" (a return to a gold-based world) that has suddenly become the new paradigm.
You also have had Barclays Wealth Management coming out, saying they envision $800 gold by January 2012, and saying in an interview on TheStreet.com that they're "shorting the GLD and buying put options on gold for Jan 2012."
Further, what am I to make of Societe Generale, which also said in April of this year that $800 gold is in the cards before the end of 2010? And so on; I am not alone in computing such figures.
Of course, now we've heard that such a price should be anywhere between $8,000 and even $15,000, but I still think that between $680 and $880, or in that range, gold would be much more in balance with its fundamentals.
Eight hundred is a number that you saw come up in the GFMS surveys as a potential target, and they gave it up to two years (even with the potential overshoot of up to $1,320).
Yeah, that could still happen, but it's all a cycle, a phase in the markets. It's currently driven by a circumstance (Europe), but not some "new dynamic" (a return to a gold-based world) that has suddenly become the new paradigm.
You also have had Barclays Wealth Management coming out, saying they envision $800 gold by January 2012, and saying in an interview on TheStreet.com that they're "shorting the GLD and buying put options on gold for Jan 2012."
Further, what am I to make of Societe Generale, which also said in April of this year that $800 gold is in the cards before the end of 2010? And so on; I am not alone in computing such figures.
How Government idiocy steals future prosperity for all: The Underfunded Pension scandal
The fix for all underfunded pension liabilities (Scial Security included) is to use a realistic assumption for return on investment. Thomas DeMarco, CFA, FCM Market Strategist in a Market Note today discusses this in some detail.
His analysis is to the point and a must read for all citizens concerned about their financial future and that of their children:
"In a recent Market Note I highlighted the abysmal condition of State pensions and the inappropriate (my opinion) discount rate used to measure those liabilities. At the risk of being overly repetitive I thought I would highlight a few items from another report on the topic, this one titled ‘Valuing Liabilities in State and Local Plans’ from the Center for Retirement Research (CFRR; Boston College).
1. The author agrees that the generic 8% assumed rate of return on investments is inappropriate to PV pension liabilities and instead argue for use of a risk free rate. The paper succinctly raised the following points: “…adopting a riskless rate has clear advantages: it would accurately reflect the guaranteed nature of public sector benefits; it would increase the credibility of public sector accounting with private sector analysts; and it could well forestall unwise benefit increaseswhen
the stock market soars” . I can’t stress the last two points enough.
2. Furthermore, “Benefits promised under a public plan are accorded a higher degree of protection than those under a private sector plan because, under the laws of most states, the sponsor cannot close down the plan for current participants”. Investors should pay attention to this as a recent issue of The Economist bluntly points out that several state constitutions (including Illinois and NY) make state pensions senior to bond debt.
3. In my prior note I mentioned that pension benefit obligations were no longer a distant worry – that a peak in obligations was coming around 2020 (only 10yrs from now).
4. To hammer the point about accurately measuring liabilities and forestalling unwise benefit increases the author points to CalPERS as a poster child: “in 1999, the California Public Employees’ Retirement System (CalPERS) reported that assets equaled 128 percent of liabilities, and the California legislature enhanced the benefits of both current and future employees. It reduced the retirement age, increased benefit accrual rates, and shortened the salary base for benefits to the final year’s salary. If CalPERS liabilities had been valued at the riskless rate,the
plan would have been only 88 percent funded. An accurate reporting of benefits to liabilities would avoid this type of expansion for current employees” (emphasis mine).
5. The author also brings up the point that the discipline of making state and local governments pay the annual costs discourages governments from awarding “excessively generous pensions in lieu of current wages”. I agree in theory, but the problem is a number of states/localities do not make the required annual payments and some even use the most brazen gimmickry to make said “payments” that bondholders should be insulted, repulsed, and afraid (I am thinking of a recent New York proposal to allow the state and municipalities to borrow about $6B from the state pension fund to, wait for it, make their payments to the same fund!).
6. The authors did point out one system that appears to be run more conservatively (outside of the discount rate question): Florida. “Despite being more than fully funded from 1998 through 2006, Florida succeeded in restraining benefit increases through statutory stabilization methods. Article X of the Florida constitution, passed in 1976, requires that any proposed benefit increase must be accompanied by actuarially sound funding provisions. The subsequent addition of Part VII of
Chapter 112 of the Florida statutes stipulates that total contributions must cover both the normal cost and an amount sufficient to amortize the unfunded liability over no more than 40 years. What is more, the combination of an employee’s pension and Social Security benefits cannot exceed 100 percent of final salary. As a result of this legislation, Florida has not increased benefits substantially since the late 1970s”.
Its far past the time for State Legislatures and the Congress to take the obvious lessons from this and reform all Government pension practises.
His analysis is to the point and a must read for all citizens concerned about their financial future and that of their children:
"In a recent Market Note I highlighted the abysmal condition of State pensions and the inappropriate (my opinion) discount rate used to measure those liabilities. At the risk of being overly repetitive I thought I would highlight a few items from another report on the topic, this one titled ‘Valuing Liabilities in State and Local Plans’ from the Center for Retirement Research (CFRR; Boston College).
1. The author agrees that the generic 8% assumed rate of return on investments is inappropriate to PV pension liabilities and instead argue for use of a risk free rate. The paper succinctly raised the following points: “…adopting a riskless rate has clear advantages: it would accurately reflect the guaranteed nature of public sector benefits; it would increase the credibility of public sector accounting with private sector analysts; and it could well forestall unwise benefit increaseswhen
the stock market soars” . I can’t stress the last two points enough.
2. Furthermore, “Benefits promised under a public plan are accorded a higher degree of protection than those under a private sector plan because, under the laws of most states, the sponsor cannot close down the plan for current participants”. Investors should pay attention to this as a recent issue of The Economist bluntly points out that several state constitutions (including Illinois and NY) make state pensions senior to bond debt.
3. In my prior note I mentioned that pension benefit obligations were no longer a distant worry – that a peak in obligations was coming around 2020 (only 10yrs from now).
4. To hammer the point about accurately measuring liabilities and forestalling unwise benefit increases the author points to CalPERS as a poster child: “in 1999, the California Public Employees’ Retirement System (CalPERS) reported that assets equaled 128 percent of liabilities, and the California legislature enhanced the benefits of both current and future employees. It reduced the retirement age, increased benefit accrual rates, and shortened the salary base for benefits to the final year’s salary. If CalPERS liabilities had been valued at the riskless rate,the
plan would have been only 88 percent funded. An accurate reporting of benefits to liabilities would avoid this type of expansion for current employees” (emphasis mine).
5. The author also brings up the point that the discipline of making state and local governments pay the annual costs discourages governments from awarding “excessively generous pensions in lieu of current wages”. I agree in theory, but the problem is a number of states/localities do not make the required annual payments and some even use the most brazen gimmickry to make said “payments” that bondholders should be insulted, repulsed, and afraid (I am thinking of a recent New York proposal to allow the state and municipalities to borrow about $6B from the state pension fund to, wait for it, make their payments to the same fund!).
6. The authors did point out one system that appears to be run more conservatively (outside of the discount rate question): Florida. “Despite being more than fully funded from 1998 through 2006, Florida succeeded in restraining benefit increases through statutory stabilization methods. Article X of the Florida constitution, passed in 1976, requires that any proposed benefit increase must be accompanied by actuarially sound funding provisions. The subsequent addition of Part VII of
Chapter 112 of the Florida statutes stipulates that total contributions must cover both the normal cost and an amount sufficient to amortize the unfunded liability over no more than 40 years. What is more, the combination of an employee’s pension and Social Security benefits cannot exceed 100 percent of final salary. As a result of this legislation, Florida has not increased benefits substantially since the late 1970s”.
Its far past the time for State Legislatures and the Congress to take the obvious lessons from this and reform all Government pension practises.
Gold and silver push to fresh highs
09-Jul-10
10:22 COMDX
Gold now up $17.70 to $1213.80; silver is higher by 31.3 cents to $18.185
10:22 COMDX
Gold now up $17.70 to $1213.80; silver is higher by 31.3 cents to $18.185
Thursday, July 8, 2010
• Behind the gold takedown… central banks
Mystery solved. We think.
Given the news cycle and the buying habits of the world’s central banks of late, we’ve been wondering why gold has traded down nearly $40 bucks from its near-historic high last Thursday. And has stayed there…
Today, we believe, despite becoming net buyers of gold for the first year since 1988, central banks are “pawning” that gold at the Bank for International Settlements (BIS) -- the central bankers’ central bank -- and helping to depress the price.
“When Reserve Bank of India bought 200 tonnes of International Monetary Fund (IMF) gold in November last year,” confirms a report from International Business Times, “the bullion market received one of the biggest boosts ever and the gold prices soared in the subsequent weeks to new record heights. Reason for this was that all central banks across the globe have been increasing their gold holdings fearing the recession looming large over the world.”
Commercial banks, too, appeared to be getting into the game. For individual buyers of the yellow metal, the arrival of the big global institutions signaled the next phase of a sustained bull market in gold that would, in turn, vindicate years of nail-biting insecurity and the endurance of hushed cocktail party snickers.
Why then the reversal in the price over this past week?
While it’s not clear if India’s is among them, central banks have swapped 349 metric tons of the yellow metal with the BIS, according to The Wall Street Journal -- 82% of all the gold that central banks snapped up last year.
In exchange, the BIS has handed out $14 billion in paper cash, agreeing to sell the gold back to the central banks sometime in the future, just like your friendly neighborhood tattoo parlor/pawnshop.
“At this rate,” IBT asserts “the BIS holdings represent the biggest gold swap in history.”
As you well know, “gold is often regarded as a protection against inflation and is thought to benefit from the inflationary impact of governments’ economic stimulus packages. It has also been used as a haven against another financial meltdown.”
The fear is now if banks that lent their gold are for any reason unable to make good on the loan, “the BIS could opt to sell the gold in order to get its money back, which would amount to flooding the market with an unexpected boost to the global supply.”
Worth keeping an eye on.
Given the news cycle and the buying habits of the world’s central banks of late, we’ve been wondering why gold has traded down nearly $40 bucks from its near-historic high last Thursday. And has stayed there…
Today, we believe, despite becoming net buyers of gold for the first year since 1988, central banks are “pawning” that gold at the Bank for International Settlements (BIS) -- the central bankers’ central bank -- and helping to depress the price.
“When Reserve Bank of India bought 200 tonnes of International Monetary Fund (IMF) gold in November last year,” confirms a report from International Business Times, “the bullion market received one of the biggest boosts ever and the gold prices soared in the subsequent weeks to new record heights. Reason for this was that all central banks across the globe have been increasing their gold holdings fearing the recession looming large over the world.”
Commercial banks, too, appeared to be getting into the game. For individual buyers of the yellow metal, the arrival of the big global institutions signaled the next phase of a sustained bull market in gold that would, in turn, vindicate years of nail-biting insecurity and the endurance of hushed cocktail party snickers.
Why then the reversal in the price over this past week?
While it’s not clear if India’s is among them, central banks have swapped 349 metric tons of the yellow metal with the BIS, according to The Wall Street Journal -- 82% of all the gold that central banks snapped up last year.
In exchange, the BIS has handed out $14 billion in paper cash, agreeing to sell the gold back to the central banks sometime in the future, just like your friendly neighborhood tattoo parlor/pawnshop.
“At this rate,” IBT asserts “the BIS holdings represent the biggest gold swap in history.”
As you well know, “gold is often regarded as a protection against inflation and is thought to benefit from the inflationary impact of governments’ economic stimulus packages. It has also been used as a haven against another financial meltdown.”
The fear is now if banks that lent their gold are for any reason unable to make good on the loan, “the BIS could opt to sell the gold in order to get its money back, which would amount to flooding the market with an unexpected boost to the global supply.”
Worth keeping an eye on.
Mid-Year Update: Taxation should be about raising the maximum amount of revenue for the government in the least economically disruptive way.
Equities of all persuasion saw mid-year losses after a first quarter surge.
MARKET RETURNS
Year-to-date (1/1/10-07/02/10)*
Dow Jones Indus Avg. -7.38%
S&P 500 -8.44%
NASDAQ -7.96%
Russell 2000 -4.23%
MSCI World Index -11.33%
DJ STOXX Europe 600 -6.55%
Year-to-date (1/1/10-07/01/10)
90 Day T-Bill 0.09%
2-Year Treasury 1.46%
10-Year Treasury 5.91%
ML High Yield Index 2.79%
JPM EMBI Global Diversified 5.40%
JP Morgan Global Hedged 4.42%
Year-to-date (1/1/10-07/01/10)
U.S. $ / Euro (1.26) -11.9%
U.S. $ / British Pound (1.52) -6.2%
Yen / U.S. ($ 87.74) -5.7%
Gold ($/oz) ($1,210.68) 10.4%
Oil ($72.01) -9.3%
*Returns reported as of 9:15 a.m. Pacific Standard Time
What accounts for the second quarter downturn?
Various theories are being put forward.
One is that corporations are pulling pro fits forward into 2010 to avoid the higher taxes coming in 2011. Yes, it is still possible to manipulate earnings despite Sarbanes-Oxley, you just have to be smarter than before.
Another possible reason for the decline is the fear of a double dip recession starting early next year. This is supported in part by numerous factors including robbing 2011 results by the earnings manipulations described above, expiration of the Federal economic stimulus (yes, even bad stimulus has some effect on the economy) and uncertainty arising from the fallout expected from the financial reform legislation now pending in Congress and the actual fallout from the health care legislation.
Finally, there is the expectation that corporate earnings and competitive position internationally will be negatively affected by the higher corporate tax rates
in 2011. The often repeated mantra that ‘the more you tax something the less of it you get’ is running into opposition by the Obama administration which is more concerned with ‘fairness’.
Taxation should be about raising the maximum amount of revenue for the government in the least economically disruptive way. Fairness should be addressed on the spending side of the ledger. To mix the two politicizes revenue raising and invites special interests to corrupt the taxation process with social engineering thereby doing greater harm to the economy.
Individual investors have still to be heard from since they are expected to take profits on their holdings before year-end to avoid higher tax rates.
Such individuals may well opt to sit on the cash proceeds from such tax sales until the outlook clarifies. This will only add to short term market weakness.
Despite the fact that Congress seems to be playing a losing hand, they seem unlikely to change course before the November elections.
Should the Democrats lose control of the House of Representatives, we can expect a major market rally since a stalemated Congress would be a welcome relief for the markets.
This may be short lived, however, since a lame duck Congress may well try to finish their agenda before leaving office (think carbon tax or a VAT). In short, equities don’t look promising between now and November and don’t look all that great for next year.
A healthy position in cash and gold still look like safe bets.
Interest Rate Outlook
At mid-year we see ten year Treasuries below 3% and thirty year Treasuries below 4%.
What would possess an asset manager to buy 30 year Treasuries with a locked in yield of 4% when the outlook for inflation over the next few years promises to make this a loosing proposition if not a disastrous one?
The only answer I can devise is fear and special situations.
Fear by those who have gotten burned in the financial crisis and therefore consider credit risk in the short term more important than market risk over the longer term.
Special situation buyers include insurance companies who are matching long term
payout commitments on annuities with the interest payments on the Treasuries.
Other special situation players would be hedge funds playing the carry trade game where they buy these Treasuries with short term loans at 25 basis points. It is this group who represent the greatest threat to the interest rate outlook since they
will unload their positions en masse the moment they see a turn in rates.
This is why I feel an interest rate rise will come suddenly and not be dependant on actual inflation. It may in fact be a cause of the inflation.
Considerable media attention has been given to the municipal bond market in recent weeks.
We see yields on ten year AAA munis going from 3.91% at year end 2008 to 3.25% at year end 2009 to 3.13% at mid-year 2010.
Much of this decline is due to the high demand for tax free munis by individual investors in high tax states as well as generally, given the pending tax rate rises in 2011.
The decline in muni yields is also influenced by the continued perception that munis are safe because they have always been so. This perception is due some re-evaluation.
Municipalities have rarely faced the kind of budget pressures they are experiencing today because of the revenue declines resulting from the recession. Added to this is the retirement of government employed baby boomers, whose pension liabilities have gone mostly unfunded.
This is an increase in current expenditures which is not discretionary and growing rapidly. It promises to create a budget crisis at the city and county level since these entities now face a cash expense they can no longer ignore.
Warren Buffet, who rushed into the bond insurance business during the financial crisis has since backed away. He notes that in the coming budget crunch, municipalities will likely stiff insurers or bondholders before firing employees. Bankruptcy filings may also prove to be more palatable politically than cutting services.
In any case, don’t think that past history is the best indication of what the future holds for municipal bonds.
Thanks to Richard Lehmann at incomesecurities.com and Payden & Rygel [paydenrygel@payden.com]for the data tables
MARKET RETURNS
Year-to-date (1/1/10-07/02/10)*
Dow Jones Indus Avg. -7.38%
S&P 500 -8.44%
NASDAQ -7.96%
Russell 2000 -4.23%
MSCI World Index -11.33%
DJ STOXX Europe 600 -6.55%
Year-to-date (1/1/10-07/01/10)
90 Day T-Bill 0.09%
2-Year Treasury 1.46%
10-Year Treasury 5.91%
ML High Yield Index 2.79%
JPM EMBI Global Diversified 5.40%
JP Morgan Global Hedged 4.42%
Year-to-date (1/1/10-07/01/10)
U.S. $ / Euro (1.26) -11.9%
U.S. $ / British Pound (1.52) -6.2%
Yen / U.S. ($ 87.74) -5.7%
Gold ($/oz) ($1,210.68) 10.4%
Oil ($72.01) -9.3%
*Returns reported as of 9:15 a.m. Pacific Standard Time
What accounts for the second quarter downturn?
Various theories are being put forward.
One is that corporations are pulling pro fits forward into 2010 to avoid the higher taxes coming in 2011. Yes, it is still possible to manipulate earnings despite Sarbanes-Oxley, you just have to be smarter than before.
Another possible reason for the decline is the fear of a double dip recession starting early next year. This is supported in part by numerous factors including robbing 2011 results by the earnings manipulations described above, expiration of the Federal economic stimulus (yes, even bad stimulus has some effect on the economy) and uncertainty arising from the fallout expected from the financial reform legislation now pending in Congress and the actual fallout from the health care legislation.
Finally, there is the expectation that corporate earnings and competitive position internationally will be negatively affected by the higher corporate tax rates
in 2011. The often repeated mantra that ‘the more you tax something the less of it you get’ is running into opposition by the Obama administration which is more concerned with ‘fairness’.
Taxation should be about raising the maximum amount of revenue for the government in the least economically disruptive way. Fairness should be addressed on the spending side of the ledger. To mix the two politicizes revenue raising and invites special interests to corrupt the taxation process with social engineering thereby doing greater harm to the economy.
Individual investors have still to be heard from since they are expected to take profits on their holdings before year-end to avoid higher tax rates.
Such individuals may well opt to sit on the cash proceeds from such tax sales until the outlook clarifies. This will only add to short term market weakness.
Despite the fact that Congress seems to be playing a losing hand, they seem unlikely to change course before the November elections.
Should the Democrats lose control of the House of Representatives, we can expect a major market rally since a stalemated Congress would be a welcome relief for the markets.
This may be short lived, however, since a lame duck Congress may well try to finish their agenda before leaving office (think carbon tax or a VAT). In short, equities don’t look promising between now and November and don’t look all that great for next year.
A healthy position in cash and gold still look like safe bets.
Interest Rate Outlook
At mid-year we see ten year Treasuries below 3% and thirty year Treasuries below 4%.
What would possess an asset manager to buy 30 year Treasuries with a locked in yield of 4% when the outlook for inflation over the next few years promises to make this a loosing proposition if not a disastrous one?
The only answer I can devise is fear and special situations.
Fear by those who have gotten burned in the financial crisis and therefore consider credit risk in the short term more important than market risk over the longer term.
Special situation buyers include insurance companies who are matching long term
payout commitments on annuities with the interest payments on the Treasuries.
Other special situation players would be hedge funds playing the carry trade game where they buy these Treasuries with short term loans at 25 basis points. It is this group who represent the greatest threat to the interest rate outlook since they
will unload their positions en masse the moment they see a turn in rates.
This is why I feel an interest rate rise will come suddenly and not be dependant on actual inflation. It may in fact be a cause of the inflation.
Considerable media attention has been given to the municipal bond market in recent weeks.
We see yields on ten year AAA munis going from 3.91% at year end 2008 to 3.25% at year end 2009 to 3.13% at mid-year 2010.
Much of this decline is due to the high demand for tax free munis by individual investors in high tax states as well as generally, given the pending tax rate rises in 2011.
The decline in muni yields is also influenced by the continued perception that munis are safe because they have always been so. This perception is due some re-evaluation.
Municipalities have rarely faced the kind of budget pressures they are experiencing today because of the revenue declines resulting from the recession. Added to this is the retirement of government employed baby boomers, whose pension liabilities have gone mostly unfunded.
This is an increase in current expenditures which is not discretionary and growing rapidly. It promises to create a budget crisis at the city and county level since these entities now face a cash expense they can no longer ignore.
Warren Buffet, who rushed into the bond insurance business during the financial crisis has since backed away. He notes that in the coming budget crunch, municipalities will likely stiff insurers or bondholders before firing employees. Bankruptcy filings may also prove to be more palatable politically than cutting services.
In any case, don’t think that past history is the best indication of what the future holds for municipal bonds.
Thanks to Richard Lehmann at incomesecurities.com and Payden & Rygel [paydenrygel@payden.com]for the data tables
The New Trend - Asia ascendant
Get long Asia.
The long-term case for owning Asian assets versus assets in the U.S. and Western Europe is simple. Over the past 40 years, the Western world has cooked up a hellish stew of huge, unfunded entitlement programs, monstrous government debts, and vast populations who've adopted the "something for nothing" way of life. This produces a headwind for stock and property prices.
Asia isn't burdened with parasitic welfare states. Most Asians are poor… but they're working and saving like crazy in order to catch up to the rich Westerners they see on TV and YouTube. This produces a tailwind for stock and property prices.
Singapore sits in the center of Asian trade. It's one of the world's top-five financial centers. It's home to the world's largest water port. Most importantly, it's considered the world's easiest place to set up and conduct business.
While stocks of all kinds are suffering through massive selling pressure right now, EWS sits comfortably near a new 52-week high. Expect this "Asia up, the West not so much" trend to continue for decades.
You can see this uptrend at work with this chart Click on the heading above). It shows the price action in the Singapore investment fund (EWS).
The long-term case for owning Asian assets versus assets in the U.S. and Western Europe is simple. Over the past 40 years, the Western world has cooked up a hellish stew of huge, unfunded entitlement programs, monstrous government debts, and vast populations who've adopted the "something for nothing" way of life. This produces a headwind for stock and property prices.
Asia isn't burdened with parasitic welfare states. Most Asians are poor… but they're working and saving like crazy in order to catch up to the rich Westerners they see on TV and YouTube. This produces a tailwind for stock and property prices.
Singapore sits in the center of Asian trade. It's one of the world's top-five financial centers. It's home to the world's largest water port. Most importantly, it's considered the world's easiest place to set up and conduct business.
While stocks of all kinds are suffering through massive selling pressure right now, EWS sits comfortably near a new 52-week high. Expect this "Asia up, the West not so much" trend to continue for decades.
You can see this uptrend at work with this chart Click on the heading above). It shows the price action in the Singapore investment fund (EWS).
Gold will soar - heres why
From Richard Russell in Dow Theory Letters:
learn more about Dow Theory Letters here http://ww2.dowtheoryletters.com/
...As I've said a thousand times, Fed Chief Bernanke will absolutely not accept deflation...
Shrewd gold-accumulators are well aware of [this]. As the deflationary and deleveraging forces press on the US economy, the Bernanke Fed is ready to devalue the US dollar in its ("whatever it takes") battle to hold back deflation.
Let's boil the whole thing down to three sentences.
(1)The Fed will not tolerate the growing forces of deflation.
(2) To combat the deflationary forces, the Fed will devalue the dollar by printing trillions more of Federal fiat money.
(3) Once it is realized that the Fed is on the path to devalue the dollar, there will be a panic to buy and own gold.
learn more about Dow Theory Letters here http://ww2.dowtheoryletters.com/
...As I've said a thousand times, Fed Chief Bernanke will absolutely not accept deflation...
Shrewd gold-accumulators are well aware of [this]. As the deflationary and deleveraging forces press on the US economy, the Bernanke Fed is ready to devalue the US dollar in its ("whatever it takes") battle to hold back deflation.
Let's boil the whole thing down to three sentences.
(1)The Fed will not tolerate the growing forces of deflation.
(2) To combat the deflationary forces, the Fed will devalue the dollar by printing trillions more of Federal fiat money.
(3) Once it is realized that the Fed is on the path to devalue the dollar, there will be a panic to buy and own gold.
Government not true to its Founding Principles?
Rather than remaining true to its founding principles, successive leaderships have led the country deeper and deeper into foreign entanglements, and further and further down the road of populism of the sort that has left Europe gasping for breath.
The situation has now reached a crossroads. In one direction, the direction we here at Casey Research steadily advocate, there is real hope. That hope is based on remembering the principles of self-reliance that made America so economically powerful in its early career – a haven with a relatively short list of reasonable laws and regulations, administered by a minimal bureaucracy supported by a modest and simplified tax code.
Economic historian Niall Ferguson recently commented on the surprising lack of dialogue about this path in America. You can, and should, watch this video by clicking on the headline above.
The situation has now reached a crossroads. In one direction, the direction we here at Casey Research steadily advocate, there is real hope. That hope is based on remembering the principles of self-reliance that made America so economically powerful in its early career – a haven with a relatively short list of reasonable laws and regulations, administered by a minimal bureaucracy supported by a modest and simplified tax code.
Economic historian Niall Ferguson recently commented on the surprising lack of dialogue about this path in America. You can, and should, watch this video by clicking on the headline above.
The Gold Bull market
The U.S. turned 234 years old yesterday, and yet over half of the nation's money supply was created since Helicopter Ben took over the flight controls four years ago. No wonder gold is in a full fledged bull market.
David A. Rosenberg, Chief Economist & Strategist, Gluskin Sheff & Associates Inc.
David A. Rosenberg, Chief Economist & Strategist, Gluskin Sheff & Associates Inc.
Allstate CEO Says State Borrowing 'Out of Control
This should be no surprise to you, dear reader. “Nobody has the intestinal fortitude to actually move forward to try to change anything,” CEO Wilson said of government debt at the federal, state and local levels. “They’re just sort of sitting there waiting for disaster to happen.” And disaster is exactly what they're going to get.
Read the whole story here:
http://www.bloomberg.com/news/2010-07-07/allstate-ceo-says-government-borrowing-out-of-control-munis-may-suffer.html
or just click on the headline above
Read the whole story here:
http://www.bloomberg.com/news/2010-07-07/allstate-ceo-says-government-borrowing-out-of-control-munis-may-suffer.html
or just click on the headline above
Recovery does not require more stimulus, Fed officials say
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, and Richard Fisher, head of the Federal Reserve Bank of Dallas, indicated that although economic growth is cooling, more stimulus is not necessary. Hoenig also reiterated his stance that the Fed should increase its key interest rate to 1% to keep inflation at bay and counter the threat of asset-price bubbles. Meanwhile, Fisher said additional asset purchases by the Fed are not needed.
Bloomberg
Yes Mr Hoenig, it is time for the Fed to stop buying financial assets and to start buying real assets... try real property so that the Dollar is backed by something in addition to gold.
Bloomberg
Yes Mr Hoenig, it is time for the Fed to stop buying financial assets and to start buying real assets... try real property so that the Dollar is backed by something in addition to gold.
China won't flee U.S. debt and shift to gold, a regulator says
China will not use its $2.45 trillion in foreign reserves to pressure other nations and has no intention of dumping U.S. Treasury securities, the State Administration of Foreign Exchange said. "Any increase or decrease in our holdings of US Treasuries is a normal investment operation," according to a statement from the foreign exchange regulator. The agency said China is a long-term investor that "doesn't seek the power to control recipients of its investment."
Xinhuanet.com
Were his fingers crossed behind his back as he made this statement?
Click on the headline to see a full story
Xinhuanet.com
Were his fingers crossed behind his back as he made this statement?
Click on the headline to see a full story
Fed worries about economic slowdown, considers taking a stimulus role
The U.S. Federal Reserve is considering taking a stronger role in boosting economic growth, with Congress deadlocked on how to cope with a troubling slowdown. Options being weighed include buying more mortgage securities and cutting interest paid to banks that are putting funds on deposit with the central bank from 0.25% to zero, giving financial institutions more incentive to loan.
The Washington Post.
As usual the Federal Government is culpablly and dangerously late in diagnosing the problem. Of course banks are not lending to the public.
They would be sued for imprudent business practises by shareholder activists. After all, it is the height of managerial irresponsibility to make loans to risky borrowers when a risk free, high profit margin alternative borrower - The US Treasury - is panting at the door.
No, Mr Geithner, any first year MBA student will identify correctly that the problem is NOT the interest rate paid to banks, it is the very incentive to replace bad mortgage assets with pristine capital so regulatory capital levels are acceptable.
Until the real problem, which is the continual drop in value of the real estate collateral that is the bulk of assets of lending institutions is addressed this kind of Govertnment meddling will make the problem worse and worse.
The Washington Post.
As usual the Federal Government is culpablly and dangerously late in diagnosing the problem. Of course banks are not lending to the public.
They would be sued for imprudent business practises by shareholder activists. After all, it is the height of managerial irresponsibility to make loans to risky borrowers when a risk free, high profit margin alternative borrower - The US Treasury - is panting at the door.
No, Mr Geithner, any first year MBA student will identify correctly that the problem is NOT the interest rate paid to banks, it is the very incentive to replace bad mortgage assets with pristine capital so regulatory capital levels are acceptable.
Until the real problem, which is the continual drop in value of the real estate collateral that is the bulk of assets of lending institutions is addressed this kind of Govertnment meddling will make the problem worse and worse.
Wednesday, July 7, 2010
Avertible catastrophe
This is from The Financial Post of Canada.Full story linked above.
Lawrence Soloman makes the case ( I find it very plausible) that the contamination from the BP oil spill disaster was entirely avoidable.
The implication is that BP is responsible for the rig explosion and its consequences, but the US Federal Government headed by Barack Obama is culpable in the disaster that the contamination has caused on the Gulf Coast.
Lawrence maintains that the bulk of the contamination could have been avoided by taking up the Dutch offer of FREE equipment and expertise that was offered immediately the spill extent was known.
Had we accepted the help there would likely have been little or no oil reaching shore.
Lawrence maintains that side political issues prompted the US to refuse the offers of help and that refusal is the proximate cause of the vast contamination that subsequently occurred.
He is probably right. In an emergency I want the people with the expertise to put the fire out. I want them on the spot as soon as possible...the very last thing I want is a political intervention. Remember Nero?
He fiddled while Rome burned. Just like our emperor.
Lawrence Soloman makes the case ( I find it very plausible) that the contamination from the BP oil spill disaster was entirely avoidable.
The implication is that BP is responsible for the rig explosion and its consequences, but the US Federal Government headed by Barack Obama is culpable in the disaster that the contamination has caused on the Gulf Coast.
Lawrence maintains that the bulk of the contamination could have been avoided by taking up the Dutch offer of FREE equipment and expertise that was offered immediately the spill extent was known.
Had we accepted the help there would likely have been little or no oil reaching shore.
Lawrence maintains that side political issues prompted the US to refuse the offers of help and that refusal is the proximate cause of the vast contamination that subsequently occurred.
He is probably right. In an emergency I want the people with the expertise to put the fire out. I want them on the spot as soon as possible...the very last thing I want is a political intervention. Remember Nero?
He fiddled while Rome burned. Just like our emperor.
DOW up 2.82% or nearly 275 points!
WHOPPEEEE!
3-month Market Momentum is trending UP and getting stronger;
3-week Market Momentum is trending UP and getting stronger;
Short term momentum is currently supporting this momentum trend
The Fearless ultra-short term forecast is for The Market to continue present trend
The Fearless short term forecast is for The Market to continue present trend
Price is UP and Volume is UP.
We have a first tentative BUY signal for tomorrow ( it triggered on the close today)
Lets see if there is any follow through tomorrow.
3-month Market Momentum is trending UP and getting stronger;
3-week Market Momentum is trending UP and getting stronger;
Short term momentum is currently supporting this momentum trend
The Fearless ultra-short term forecast is for The Market to continue present trend
The Fearless short term forecast is for The Market to continue present trend
Price is UP and Volume is UP.
We have a first tentative BUY signal for tomorrow ( it triggered on the close today)
Lets see if there is any follow through tomorrow.
Answer to the financial crisis is less regulation, an economist says
Forrest Capie, professor emeritus of economic history at the Cass Business School, said government officials and regulators dealing with the financial crisis should find inspiration from the 19th century. "The story I have to tell you is a story of caution, depression and the world of debt," Capie said. "Caution is the big lesson to be learnt from the financial crisis, and the other is there is nothing new." He said the answer to the crisis is not over-regulation but an appropriate, proportionate application of regulation.
Risk.net/Risk magazine
Risk.net/Risk magazine
Young workers' jobless rate in the U.S. is reminiscent of the 1930s
A bleak reality awaits young Americans trying to get into the workforce, with 14% not finding a job and 23% not even trying anymore. The total, 37% without employment, is in a range that the U.S. hasn't seen since the 1930s.
The New York Times
The New York Times
Tuesday, July 6, 2010
The US stimulus resembles the ineffective Japan model. Same Results inevitable?
From the Financial Times:
Fiscal stimulus was equivalent to 4.4 per cent of world growth last year but will amount to a negative 1.6 per cent next year, according to data from JPMorgan. “Beyond the current quarter, growth momentum will be coming down as fiscal policy moves from net stimulus to drag,” the bank’s recent Global Data Watch warns …
Still, the problem with much of the fiscal policy is about substance as well as scale. How is it possible to spend almost $800bn and not have more lasting effects to show for it?
Unfortunately, the US fiscal spending plan more closely resembles that of Japan than China – and is likely to have the same minimal or even counter-productive impact
American citizens are increasingly voting with their feet. In Hong Kong, so many US passport holders fear the deluge of US taxes that will inevitably follow the spending binge that it can now apparently take as much as 11 months to secure an appointment at the US consulate to surrender US citizenship.
And the conclusion drawn:
Given the lack of lasting effects from the US stimulus other than a huge tax bill down the (poorly paved) road, the lines at the consulate in Hong Kong are likely to get longer.
Fiscal stimulus was equivalent to 4.4 per cent of world growth last year but will amount to a negative 1.6 per cent next year, according to data from JPMorgan. “Beyond the current quarter, growth momentum will be coming down as fiscal policy moves from net stimulus to drag,” the bank’s recent Global Data Watch warns …
Still, the problem with much of the fiscal policy is about substance as well as scale. How is it possible to spend almost $800bn and not have more lasting effects to show for it?
Unfortunately, the US fiscal spending plan more closely resembles that of Japan than China – and is likely to have the same minimal or even counter-productive impact
American citizens are increasingly voting with their feet. In Hong Kong, so many US passport holders fear the deluge of US taxes that will inevitably follow the spending binge that it can now apparently take as much as 11 months to secure an appointment at the US consulate to surrender US citizenship.
And the conclusion drawn:
Given the lack of lasting effects from the US stimulus other than a huge tax bill down the (poorly paved) road, the lines at the consulate in Hong Kong are likely to get longer.
Earnest Hemingway on solving our problems
The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists. - Earnest Hemmingway
Analysis: China makes progress in turning yuan into global currency
China is moving systematically toward its goal of becoming a major force in the financial system by expanding the role of the yuan to become a global currency, according to Reuters. The nation extended a pilot program to allow importers and exporters to settle international transactions in the yuan. The government is creating opportunities to invest within China using the yuan, including yuan-denominated corporate bonds and insurance policies. Reuters
The idea of disbanding Fannie and Freddie raises questions
U.S. government officials and housing experts are discussing the idea of eliminating or overhauling Fannie Mae and Freddie Mac. Either move would cause significant change for the banking system, and they also prompt the question of who will step in to buy mortgage-backed securities if Fannie and Freddie are not guaranteeing the mortgage payments. CNBC
Thursday, July 1, 2010
Bernanke and Geithner, did they deliberately mis-inform Congress?
From a story in Bloomberg today
Fed Made Taxpayers Unwitting Junk-Bond Buyers
By Caroline Salas, Craig Torres and Shannon D. Harrington - Jul 1, 2010
Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money.
“Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact,” Senator Sherrod Brown, an Ohio Democrat and member of the Senate Banking Committee, said in an e-mail when informed about the credit quality of holdings in the Maiden Lane LLC portfolio. The committee held the April 3 hearing.
If "the Fed did not understand the distressed state of some of the assets that it was purchasing from banks.." then we are allowing incompetent entities and disingenuous people to write rules and spend taxpayer money on another scam perpetrated on we the people by the smartest manipulators on earth.
Fed Made Taxpayers Unwitting Junk-Bond Buyers
By Caroline Salas, Craig Torres and Shannon D. Harrington - Jul 1, 2010
Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money.
“Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact,” Senator Sherrod Brown, an Ohio Democrat and member of the Senate Banking Committee, said in an e-mail when informed about the credit quality of holdings in the Maiden Lane LLC portfolio. The committee held the April 3 hearing.
If "the Fed did not understand the distressed state of some of the assets that it was purchasing from banks.." then we are allowing incompetent entities and disingenuous people to write rules and spend taxpayer money on another scam perpetrated on we the people by the smartest manipulators on earth.
Foreclosed Homes Sell at 27% Discount as Supply Grows
From a story by Dan Levy - Jun 30, 2010 on Bloomberg News, excerpts below
"Homes in the foreclosure process sold at an average 27 percent discount in the first quarter as almost a third of all U.S. transactions involved properties in some stage of mortgage distress, according to RealtyTrac Inc."
"The average price of a distressed property was $171,971, according to the Irvine, California-based data seller."
“The discount will probably stay between 25 percent and 30 percent as lenders carefully manage the number of new foreclosure actions in order to avoid flooding the market,” Rick Sharga, RealtyTrac’s senior vice president for marketing, said in an interview.
"The discount reflects the average sales price of homes in the foreclosure process compared with the average sales price of properties not in distress. About 31 percent of all U.S. sales in the quarter were of homes in some stage of foreclosure, RealtyTrac said. "
"Home foreclosures set a record for the second straight month in May, with increases in every state, as lenders stepped up property seizures, RealtyTrac said earlier this month. Bank repossessions climbed 44 percent from a year earlier and will probably set a record in the second quarter, the company said."
You have to ask yourself: are economic conditions that much worse or have banks found another outlet to dispose of these distressed properties?
Do I smell the stink of vulture investors again? How about buying a property for a third or so less than it is worth, slapping on a coat of paint and reselling it at a 50% profit (still way below what its market value might be)? And you dont even have to watch This Old House to find out how, or even get your hands dirty...there is an unlimited supply of undocumented workers literally dying to work for less than minimum wage paid in cash under the table to do the dirty work.
Who has the kind of resources to do this? Those dastardly hedge funds? Wilbur Ross ( owner of a mortgage servicer empire with inside access to the cherries of distressed homes) Carl Icahn? George Soros ( who undoubtedly has the ear of the Administration)?
And of course, those banks are being paid by the Government (TARP remember) using our tax dollars and servicers and banks are being given free money incentives to "try" and modify mortgages. These are the same banks that bought insurance against default on these mortgages from AIG.
And they were paid out 100% by the NY Federal Reserve under Tim Geithner, on these contracts so that they possibly have already been made whole on these home mortgages that they are now foreclosing.Do they even own them anymore? Shouldnt AIG have been given the collateral?
Double dipping, nay triple dipping comes to mind. The mortgage crisis was caused by irresponsible lending...but it was legal lending for the most part.
Today it appears that a nasty unintended consequence of the bailout of the banks is very likely a collusion between Government (in its burocratic ignorance), the Too Big To Fail crowd,the uber-Rich, those nasty Wall Street Types and compliant Politicians creating legislation written by lobbyists for those same beneficiaries that is setting up another scandalous rip off of the helpless populace.
"Homes in the foreclosure process sold at an average 27 percent discount in the first quarter as almost a third of all U.S. transactions involved properties in some stage of mortgage distress, according to RealtyTrac Inc."
"The average price of a distressed property was $171,971, according to the Irvine, California-based data seller."
“The discount will probably stay between 25 percent and 30 percent as lenders carefully manage the number of new foreclosure actions in order to avoid flooding the market,” Rick Sharga, RealtyTrac’s senior vice president for marketing, said in an interview.
"The discount reflects the average sales price of homes in the foreclosure process compared with the average sales price of properties not in distress. About 31 percent of all U.S. sales in the quarter were of homes in some stage of foreclosure, RealtyTrac said. "
"Home foreclosures set a record for the second straight month in May, with increases in every state, as lenders stepped up property seizures, RealtyTrac said earlier this month. Bank repossessions climbed 44 percent from a year earlier and will probably set a record in the second quarter, the company said."
You have to ask yourself: are economic conditions that much worse or have banks found another outlet to dispose of these distressed properties?
Do I smell the stink of vulture investors again? How about buying a property for a third or so less than it is worth, slapping on a coat of paint and reselling it at a 50% profit (still way below what its market value might be)? And you dont even have to watch This Old House to find out how, or even get your hands dirty...there is an unlimited supply of undocumented workers literally dying to work for less than minimum wage paid in cash under the table to do the dirty work.
Who has the kind of resources to do this? Those dastardly hedge funds? Wilbur Ross ( owner of a mortgage servicer empire with inside access to the cherries of distressed homes) Carl Icahn? George Soros ( who undoubtedly has the ear of the Administration)?
And of course, those banks are being paid by the Government (TARP remember) using our tax dollars and servicers and banks are being given free money incentives to "try" and modify mortgages. These are the same banks that bought insurance against default on these mortgages from AIG.
And they were paid out 100% by the NY Federal Reserve under Tim Geithner, on these contracts so that they possibly have already been made whole on these home mortgages that they are now foreclosing.Do they even own them anymore? Shouldnt AIG have been given the collateral?
Double dipping, nay triple dipping comes to mind. The mortgage crisis was caused by irresponsible lending...but it was legal lending for the most part.
Today it appears that a nasty unintended consequence of the bailout of the banks is very likely a collusion between Government (in its burocratic ignorance), the Too Big To Fail crowd,the uber-Rich, those nasty Wall Street Types and compliant Politicians creating legislation written by lobbyists for those same beneficiaries that is setting up another scandalous rip off of the helpless populace.
Wednesday, June 30, 2010
Municipal Bonds..a bargain or a huge risk waiting to swat you?
The following are excerpts from a Bloomberg article (link above)
Municipal bonds underperformed U.S. Treasuries in the first half as default speculation drove state and local government yields to the highest level relative to government bonds in 13 months.
Ten-year municipal bond yields rose to 100 percent of Treasuries for the first time since May 2009, from 80 percent six months ago, according to Municipal Market Advisors data.
Financial pressure on states and municipalities has built as revenue fell in the wake of the recession. More than two- thirds of states had a drop in revenue last quarter over the same period in 2009, the Nelson A. Rockefeller Institute of Government said this month. States will have confronted $296.6 billion of budget deficits from 2009 to 2012, the National Governors Association and National Association of State Budget Officers said.
Municipal bonds underperformed U.S. Treasuries in the first half as default speculation drove state and local government yields to the highest level relative to government bonds in 13 months.
Ten-year municipal bond yields rose to 100 percent of Treasuries for the first time since May 2009, from 80 percent six months ago, according to Municipal Market Advisors data.
Financial pressure on states and municipalities has built as revenue fell in the wake of the recession. More than two- thirds of states had a drop in revenue last quarter over the same period in 2009, the Nelson A. Rockefeller Institute of Government said this month. States will have confronted $296.6 billion of budget deficits from 2009 to 2012, the National Governors Association and National Association of State Budget Officers said.
Some thoughts on Bankers, Keynes and the markets
A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him. - John Maynard Keynes, 1931 ....Sound familiar?
Internet gets the brain thinking short term
Research increasingly suggests that one of the prices paid for the convenience of the Internet is a fundamental change in the way the brain operates. "Hypermedia"
skimming, skipping and clicking is redirecting the brain's energy to short-term thinking and away from a deeper, long-term process. "Only by combining data stored deep within our brains can we forge new ideas,"
The Economist notes. "No amount of magpie assemblage can compensate for this slow, synthetic creativity."
The Economist
Its not the data you look at, its the information you get from studying that data.
This takes contemplation...think about it!
CoreCap
skimming, skipping and clicking is redirecting the brain's energy to short-term thinking and away from a deeper, long-term process. "Only by combining data stored deep within our brains can we forge new ideas,"
The Economist notes. "No amount of magpie assemblage can compensate for this slow, synthetic creativity."
The Economist
Its not the data you look at, its the information you get from studying that data.
This takes contemplation...think about it!
CoreCap
"Do more of what's working, and less of what's not."
Dennis Gartman, Louis Navellier,the late Louis Rukeyser ( remember him on Friday's Wall Street Week?) and many other successful traders and advisors recommend you do this.
CoreCap has always recommended you do this too. Its the right advice. Gartman has oft opined that half the gain you will get in a bull market you will get in the last 10% of its span.
So if you find what sector, security, commodity etc is in an uptrend and you buy into that trend, your chances of making big gains are very good.
So where's an uptrend now? What's working today?
Try these sectors (based on our market monitoring process):
Metals & Mining - think gold stocks:El Dorado Gold, Barrick, Buenaventura and Randgold come to mind as does GDX the Market Vectors gold mining fund and Silver Wheaton of course. Gold stocks are cheap relative to gold. Most people don't own them. And, importantly, gold stocks are working right now. Remember, you want to own more of what is working and less of what is not.
Banking - Corpbanca, Bancolombia and locally Credicorp and M&T Bank look interesting
Computer Software - Cognizant is worth looking to see if it suits you and also Microsoft
Computer Hardware - Apple of course! Verizon will be a service provider for all things Apple come January 2011
DISCLAIMER
These are suggestions for your further inquiry (with your investment advisor please) NOT reccommendations, which may not be suitable for you. CoreCap thinks these are working now. He could be wrong (not the first time) and he claims no responsibility if you act on these suggestions.
CoreCap has always recommended you do this too. Its the right advice. Gartman has oft opined that half the gain you will get in a bull market you will get in the last 10% of its span.
So if you find what sector, security, commodity etc is in an uptrend and you buy into that trend, your chances of making big gains are very good.
So where's an uptrend now? What's working today?
Try these sectors (based on our market monitoring process):
Metals & Mining - think gold stocks:El Dorado Gold, Barrick, Buenaventura and Randgold come to mind as does GDX the Market Vectors gold mining fund and Silver Wheaton of course. Gold stocks are cheap relative to gold. Most people don't own them. And, importantly, gold stocks are working right now. Remember, you want to own more of what is working and less of what is not.
Banking - Corpbanca, Bancolombia and locally Credicorp and M&T Bank look interesting
Computer Software - Cognizant is worth looking to see if it suits you and also Microsoft
Computer Hardware - Apple of course! Verizon will be a service provider for all things Apple come January 2011
DISCLAIMER
These are suggestions for your further inquiry (with your investment advisor please) NOT reccommendations, which may not be suitable for you. CoreCap thinks these are working now. He could be wrong (not the first time) and he claims no responsibility if you act on these suggestions.
Tuesday, June 29, 2010
Crisis of Capitalism?
Here it is in a nutshell: the economic problems we face today are a failure of capitalism ....and we should explore a new order.
I am NOT a socialist but this animation is engaging and thought provoking.
I am NOT a socialist but this animation is engaging and thought provoking.
Americans' savings rate rises to highest level in almost a year
Americans pushed up their savings rate last month to 4%, the highest level in nearly a year. Meanwhile, consumer spending increased 0.2% compared with April. Almost all of the economic growth in the U.S. is coming from spending by the government or businesses that are getting stimulus money, analysts said. The Washington Post
This is not high by international standards and not very healthy in my opinion. I had been looking for the rate to move to 7-8%; I have been wrong.
This is not high by international standards and not very healthy in my opinion. I had been looking for the rate to move to 7-8%; I have been wrong.
Monday, June 28, 2010
The European PIIGS problem clearly explained
Clark and Dawes ...; the equivalent to Who's on First
you gotta watchy this
you gotta watchy this
A little sanity in the pursuit of Big Tobacco
A win for MO (Altria). Huge penalties avoided.This makes muni tobacco settlement bonds more secfure too.
U.S. Bid for Tobacco Company Damages Rejected by Supreme Court
2010-06-28 14:05:09.230 GMT
By Greg Stohr
June 28 (Bloomberg) -- The U.S. Supreme Court rejected the Justice Department’s bid for as much as $280 billion in tobacco company profits, refusing to hear an Obama administration appeal in the decade-old government suit against the industry.
The rebuff all but ensures that the racketeering suit first pressed by former President Bill Clinton’s administration won’t result in financial penalties against Altria Group Inc.’s Philip Morris USA and Reynolds American Inc.’s R.J. Reynolds Tobacco Co. It’s the second time the high court has refused to hear government arguments in the case.
The court also rejected a group of industry appeals aimed at overturning a trial judge’s finding that the cigarette makers defrauded the public about the dangers of smoking for more than 50 years.
U.S. District Judge Gladys Kessler’s ruling could open companies to continuing judicial oversight and impose more stringent limits on their business practices than the 2009 law that let the Food and Drug Administration regulate tobacco.
For Related News and Information:
For more Supreme Court stories: NI SUP BN.
For top legal news: TOP LAW.
--Editors: Jim Rubin, Laurie Asseo.
To contact the reporter on this story:
Greg Stohr in Washington at (1) (202) 624-1841 or gstohr@bloomberg.net.
To contact the editor responsible for this story:
Mark Silva at 1-202-654-4315 or msilva34@bloomberg.net.
U.S. Bid for Tobacco Company Damages Rejected by Supreme Court
2010-06-28 14:05:09.230 GMT
By Greg Stohr
June 28 (Bloomberg) -- The U.S. Supreme Court rejected the Justice Department’s bid for as much as $280 billion in tobacco company profits, refusing to hear an Obama administration appeal in the decade-old government suit against the industry.
The rebuff all but ensures that the racketeering suit first pressed by former President Bill Clinton’s administration won’t result in financial penalties against Altria Group Inc.’s Philip Morris USA and Reynolds American Inc.’s R.J. Reynolds Tobacco Co. It’s the second time the high court has refused to hear government arguments in the case.
The court also rejected a group of industry appeals aimed at overturning a trial judge’s finding that the cigarette makers defrauded the public about the dangers of smoking for more than 50 years.
U.S. District Judge Gladys Kessler’s ruling could open companies to continuing judicial oversight and impose more stringent limits on their business practices than the 2009 law that let the Food and Drug Administration regulate tobacco.
For Related News and Information:
For more Supreme Court stories: NI SUP BN
For top legal news: TOP LAW
--Editors: Jim Rubin, Laurie Asseo.
To contact the reporter on this story:
Greg Stohr in Washington at (1) (202) 624-1841 or gstohr@bloomberg.net.
To contact the editor responsible for this story:
Mark Silva at 1-202-654-4315 or msilva34@bloomberg.net.
Friday, June 25, 2010
Who is on First?
Go on, take a break, click on the title above and enjoy a little classic Abbott and Costello.
By the way, the intro dancers include a guy that looks like a very young ex-president. See if you can find him.
By the way, the intro dancers include a guy that looks like a very young ex-president. See if you can find him.
Summary Of Major Provisions In Financial Overhaul Bill
WASHINGTON -(Dow Jones)- The sweeping financial overhaul legislation negotiators wrapped up early Friday morning would constitute the biggest overhaul of U.S. financial regulations since the 1930s. The legislation, broadly, is designed to close the regulatory gaps and end the speculative trading practices that contributed to the 2008 financial market crisis. Major components of the bill include:
NEW REGULATORY AUTHORITY: Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm's collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Treasury would supply funds to cover the up-front costs of winding down the failed firm, but the government would have to put a "repayment plan" in place. Regulators would recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets.
FINANCIAL STABILITY COUNCIL: Would establish a new, 10-member Financial Stability Oversight Council, comprising existing regulators charged with monitoring and addressing system-wide risks to the nation's financial stability. Among its duties, the council would recommend to the Fed stricter capital, leverage and other rules for large, complex financial firms that are judged to threaten the financial system. In extreme cases, it would have the power to break up financial firms.
VOLCKER RULE: Would curb propriety trading by the largest financial firms, though banks could make de minimus investments in hedge and private-equity funds. Those investments would be limited to 3% or less of a bank's Tier 1 capital. Banks would be prohibited from bailing out a fund in which they are invested.
DERIVATIVES: Would for the first time extend comprehensive regulation to the over-the-counter derivatives market, including the trading of the products and the companies that sell them. Would require many routine derivatives to be traded on exchanges and routed through clearinghouses. Customized swaps could still be traded over-the-counter, but they would have to be reported to central repositories so regulators could get a broader picture of what's going on in the market. Would impose new capital, margin, reporting, record-keeping and business conduct rules on firms that deal in derivatives.
SWAPS SPIN-OFF: Would require banks to spin off only their riskiest derivatives trading operations into affiliates, in a late-night compromise struck to scale back a controversial provision championed by Sen. Blanche Lincoln (D., Ark.). Banks would be able to retain operations for interest-rate swaps, foreign-exchange swaps, and gold and silver swaps among others. Firms would be required to push trading in agriculture, uncleared commodities, most metals, and energy swaps to their affiliates.
CONSUMER AGENCY: Would create a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses; banks and credit unions with assets of more than $10 billion in assets; pay day lenders, check cashers and certain other non-bank financial firms. Auto dealers won a hard-fought exemption from the Bureau's reach.
PRE-EMPTION: Would allow states to impose their own stricter consumer protection laws on national banks. National banks could seek exemption from state laws on a case-by-case, state-by-state basis if a state law "prevents or significantly interferes" with the bank's ability to do business - a higher bar than federal regulators currently must meet to pre-empt state rules. State attorneys-general would have power to enforce certain rules issued by the new consumer financial protection bureau.
FEDERAL RESERVE OVERSIGHT: Would mandate a one-time audit of all of the Fed's emergency lending programs from the financial crisis. The Fed also would disclose, with a two-year lag, details of loans it makes to banks through its discount window as well as open market transactions - activity the Fed currently doesn't disclose. Would eliminate the role of bankers in picking presidents at the Fed's 12 regional banks. Would also limit the Fed's 13(3) emergency lending authority by barring the central bank from using it to aid an individual firm, requiring the Treasury Secretary to approve any lending program and prohibiting the participation of insolvent firms.
OVERSIGHT CHANGES: Would eliminate the Office of Thrift Supervision, but after a fight, the Fed retained oversight of thousands of community banks. Would empower the Fed to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.
BANK CAPITAL STANDARDS: Would set new size- and risk-based capital standards, including a prohibition on large bank holding companies treating trust-preferred securities as Tier 1 capital, a key measure of a bank's strength. Would grandfather trust-preferred securities for banks with less than $15 billion in assets, enabling them to continue treating the securities as Tier 1 capital. Larger banks would have five years to phase-out trust-preferred securities as Tier 1 capital.
BANK FEE: Would mandate the Oversight Council to impose a special assessment on the nation's largest financial firms to raise up to $19 billion to offset the cost of the bill. The fee would apply to financial institutions with more than $ 50 billion in assets and hedge funds with more than $10 billion in assets, with entities deemed high risk paying more than safer ones. The fee would be collected by the FDIC over five years, with the funds placed in separate fund in the Treasury and would not be usable for any other purpose for 25 years, after which any left-over funds would go to pay down the national debt.
DEPOSIT INSURANCE: Would permanently increase the level of federal deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008.
MORTGAGES: Would establish new national minimum underwriting standards for home mortgages. Lenders would be required for the first time to ensure that a borrower is able to repay a home loan by verifying the borrower's income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans.
SECURITIZATION: Banks that package loans would, broadly, be required to keep 5% of the credit risk on their balance sheets. Would direct bank regulators to exempt from the rules a class of low-risk mortgages that meet certain minimum standards. Regulators could permit alternative risk-retention arrangements for the commercial mortgage-backed securities market.
CREDIT RATING AGENCIES: Would revamp the credit-rating industry, establishing a new quasi-government entity designed to address conflicts of interest inherent in the credit-rating business after the SEC studies the matter. Would also allow investors to sue credit-rating firms for a "knowing or reckless" failure to conduct a reasonable investigation, a lower liability standard than the firms were lobbying to get. Would establish a new oversight office within the SEC with the ability to fine ratings agencies and empowers the SEC to deregister a firm that gives too many bad ratings over time.
INVESTMENT ADVICE: Would give the SEC the authority to raise standards for broker dealers who give investment advice after the agency studies the issue. Would permit, but not require, the SEC to hold broker dealers to a fiduciary duty similar to the standard to which investment advisers are held.
CORPORATE GOVERNANCE: Would give shareholders of public corporations a non- binding vote on executive pay and "golden parachutes," and would give the SEC the authority to grant shareholders proxy access to nominate directors.
HEDGE FUNDS: Would require hedge funds and private equity funds to register with the SEC as investment advisers and to provide information on trades to help regulators monitor systemic risk.
INSURANCE: Would create a new Federal Insurance Office within the Treasury Department to monitor the insurance industry, recommending to the systemic risk council insurers that should be treated as systemically important. Would require the new office to report to Congress on ways to modernize insurance regulation.
-By Victoria McGrane, Dow Jones Newswires; 202-862-9267; victoria.mcgrane@ dowjones.com
(Michael R. Crittenden, Sarah N. Lynch and Jessica Holzer contributed to this story)
(END) Dow Jones Newswires
06-25-100616ET
Copyright (c) 2010 Dow Jones & Company, Inc.
NEW REGULATORY AUTHORITY: Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm's collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Treasury would supply funds to cover the up-front costs of winding down the failed firm, but the government would have to put a "repayment plan" in place. Regulators would recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets.
FINANCIAL STABILITY COUNCIL: Would establish a new, 10-member Financial Stability Oversight Council, comprising existing regulators charged with monitoring and addressing system-wide risks to the nation's financial stability. Among its duties, the council would recommend to the Fed stricter capital, leverage and other rules for large, complex financial firms that are judged to threaten the financial system. In extreme cases, it would have the power to break up financial firms.
VOLCKER RULE: Would curb propriety trading by the largest financial firms, though banks could make de minimus investments in hedge and private-equity funds. Those investments would be limited to 3% or less of a bank's Tier 1 capital. Banks would be prohibited from bailing out a fund in which they are invested.
DERIVATIVES: Would for the first time extend comprehensive regulation to the over-the-counter derivatives market, including the trading of the products and the companies that sell them. Would require many routine derivatives to be traded on exchanges and routed through clearinghouses. Customized swaps could still be traded over-the-counter, but they would have to be reported to central repositories so regulators could get a broader picture of what's going on in the market. Would impose new capital, margin, reporting, record-keeping and business conduct rules on firms that deal in derivatives.
SWAPS SPIN-OFF: Would require banks to spin off only their riskiest derivatives trading operations into affiliates, in a late-night compromise struck to scale back a controversial provision championed by Sen. Blanche Lincoln (D., Ark.). Banks would be able to retain operations for interest-rate swaps, foreign-exchange swaps, and gold and silver swaps among others. Firms would be required to push trading in agriculture, uncleared commodities, most metals, and energy swaps to their affiliates.
CONSUMER AGENCY: Would create a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses; banks and credit unions with assets of more than $10 billion in assets; pay day lenders, check cashers and certain other non-bank financial firms. Auto dealers won a hard-fought exemption from the Bureau's reach.
PRE-EMPTION: Would allow states to impose their own stricter consumer protection laws on national banks. National banks could seek exemption from state laws on a case-by-case, state-by-state basis if a state law "prevents or significantly interferes" with the bank's ability to do business - a higher bar than federal regulators currently must meet to pre-empt state rules. State attorneys-general would have power to enforce certain rules issued by the new consumer financial protection bureau.
FEDERAL RESERVE OVERSIGHT: Would mandate a one-time audit of all of the Fed's emergency lending programs from the financial crisis. The Fed also would disclose, with a two-year lag, details of loans it makes to banks through its discount window as well as open market transactions - activity the Fed currently doesn't disclose. Would eliminate the role of bankers in picking presidents at the Fed's 12 regional banks. Would also limit the Fed's 13(3) emergency lending authority by barring the central bank from using it to aid an individual firm, requiring the Treasury Secretary to approve any lending program and prohibiting the participation of insolvent firms.
OVERSIGHT CHANGES: Would eliminate the Office of Thrift Supervision, but after a fight, the Fed retained oversight of thousands of community banks. Would empower the Fed to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.
BANK CAPITAL STANDARDS: Would set new size- and risk-based capital standards, including a prohibition on large bank holding companies treating trust-preferred securities as Tier 1 capital, a key measure of a bank's strength. Would grandfather trust-preferred securities for banks with less than $15 billion in assets, enabling them to continue treating the securities as Tier 1 capital. Larger banks would have five years to phase-out trust-preferred securities as Tier 1 capital.
BANK FEE: Would mandate the Oversight Council to impose a special assessment on the nation's largest financial firms to raise up to $19 billion to offset the cost of the bill. The fee would apply to financial institutions with more than $ 50 billion in assets and hedge funds with more than $10 billion in assets, with entities deemed high risk paying more than safer ones. The fee would be collected by the FDIC over five years, with the funds placed in separate fund in the Treasury and would not be usable for any other purpose for 25 years, after which any left-over funds would go to pay down the national debt.
DEPOSIT INSURANCE: Would permanently increase the level of federal deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008.
MORTGAGES: Would establish new national minimum underwriting standards for home mortgages. Lenders would be required for the first time to ensure that a borrower is able to repay a home loan by verifying the borrower's income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans.
SECURITIZATION: Banks that package loans would, broadly, be required to keep 5% of the credit risk on their balance sheets. Would direct bank regulators to exempt from the rules a class of low-risk mortgages that meet certain minimum standards. Regulators could permit alternative risk-retention arrangements for the commercial mortgage-backed securities market.
CREDIT RATING AGENCIES: Would revamp the credit-rating industry, establishing a new quasi-government entity designed to address conflicts of interest inherent in the credit-rating business after the SEC studies the matter. Would also allow investors to sue credit-rating firms for a "knowing or reckless" failure to conduct a reasonable investigation, a lower liability standard than the firms were lobbying to get. Would establish a new oversight office within the SEC with the ability to fine ratings agencies and empowers the SEC to deregister a firm that gives too many bad ratings over time.
INVESTMENT ADVICE: Would give the SEC the authority to raise standards for broker dealers who give investment advice after the agency studies the issue. Would permit, but not require, the SEC to hold broker dealers to a fiduciary duty similar to the standard to which investment advisers are held.
CORPORATE GOVERNANCE: Would give shareholders of public corporations a non- binding vote on executive pay and "golden parachutes," and would give the SEC the authority to grant shareholders proxy access to nominate directors.
HEDGE FUNDS: Would require hedge funds and private equity funds to register with the SEC as investment advisers and to provide information on trades to help regulators monitor systemic risk.
INSURANCE: Would create a new Federal Insurance Office within the Treasury Department to monitor the insurance industry, recommending to the systemic risk council insurers that should be treated as systemically important. Would require the new office to report to Congress on ways to modernize insurance regulation.
-By Victoria McGrane, Dow Jones Newswires; 202-862-9267; victoria.mcgrane@ dowjones.com
(Michael R. Crittenden, Sarah N. Lynch and Jessica Holzer contributed to this story)
(END) Dow Jones Newswires
06-25-100616ET
Copyright (c) 2010 Dow Jones & Company, Inc.
Why Keynes is wrong
This is a summary of by Jack Crooks excerpted from his daily comment on Friday May 28 this year.
It discusses Jacks opinion of a masterpiece of Economic thought that argues, in my opinion very convincingly, that John Maynard Keynes and the whole Keynsian economic philosophy that Western governments have based their economic policies on is the cause of our present economic woes.
This is the book:
The Failure of the “New Economics,” written by Henry Hazlitt, published in 1959.
The entire book deconstructs John Maynard Keynes masterpiece —The General Theory of Employment Interest and Money, published in 1936.
Henry Hazlitt did the seemingly impossible, something that was and is a magnificent service to all people everywhere. He wrote a line-by-line commentary and refutation of one of the most destructive, fallacious, and convoluted books of the century. The target here is John Maynard Keynes's General Theory, the book that appeared in 1936 and swept all before it.
In economic science, Keynes changed everything. He supposedly demonstrated that prices don't work, that private investment is unstable, that sound money is intolerable, and that government was needed to shore up the system and save it. It was simply astonishing how economists the world over put up with this, but it happened. He converted a whole generation in the late period of the Great Depression. By the 1950s, almost everyone was Keynesian.
But Hazlitt, the nation's economics teacher, would have none of it. And he did the hard work of actually going through the book to evaluate its logic according to Austrian-style logical reasoning. The result: a 500-page masterpiece of exposition.
This book is available on Amazon.com
You economist wonks should devour it. The rest of us should heed the lessons of this man and Milton Friedman.
It discusses Jacks opinion of a masterpiece of Economic thought that argues, in my opinion very convincingly, that John Maynard Keynes and the whole Keynsian economic philosophy that Western governments have based their economic policies on is the cause of our present economic woes.
This is the book:
The Failure of the “New Economics,” written by Henry Hazlitt, published in 1959.
The entire book deconstructs John Maynard Keynes masterpiece —The General Theory of Employment Interest and Money, published in 1936.
Henry Hazlitt did the seemingly impossible, something that was and is a magnificent service to all people everywhere. He wrote a line-by-line commentary and refutation of one of the most destructive, fallacious, and convoluted books of the century. The target here is John Maynard Keynes's General Theory, the book that appeared in 1936 and swept all before it.
In economic science, Keynes changed everything. He supposedly demonstrated that prices don't work, that private investment is unstable, that sound money is intolerable, and that government was needed to shore up the system and save it. It was simply astonishing how economists the world over put up with this, but it happened. He converted a whole generation in the late period of the Great Depression. By the 1950s, almost everyone was Keynesian.
But Hazlitt, the nation's economics teacher, would have none of it. And he did the hard work of actually going through the book to evaluate its logic according to Austrian-style logical reasoning. The result: a 500-page masterpiece of exposition.
This book is available on Amazon.com
You economist wonks should devour it. The rest of us should heed the lessons of this man and Milton Friedman.
This economic stuff really isn’t hard.
This economic stuff really isn’t hard.
“Taxing moves money and spending moves resources.”
In other words, why on God’s green earth would anyone with a pulse believe taking money (taxes) from the most productive side of the economy (private sector), which uses resources efficiently thanks to the invisible hand of the market, and give it to the most unproductive side of the economy (government) who continually wastes finite resources (spending), thanks to the visible boot of the market?
Three answers:
1) Brainwashed by the Temples of Keynesian Hell, often referred to as Ivy League economics departments
2) Hubris, and a deep-seated belief in one’s ability to structure the lives of others
3) Pay off political cronies and “interest” groups
I had the privilege of listening to the Nobel Prize winning economist Milton Friedman in a lecture series during my MBA Economics classes say much the same thing.
This opinion is courtesy of Jack Crooks at Black Swan Capital and the link to the full discussion is above. An interesting argument.. read it, it dosnt take long.
“Taxing moves money and spending moves resources.”
In other words, why on God’s green earth would anyone with a pulse believe taking money (taxes) from the most productive side of the economy (private sector), which uses resources efficiently thanks to the invisible hand of the market, and give it to the most unproductive side of the economy (government) who continually wastes finite resources (spending), thanks to the visible boot of the market?
Three answers:
1) Brainwashed by the Temples of Keynesian Hell, often referred to as Ivy League economics departments
2) Hubris, and a deep-seated belief in one’s ability to structure the lives of others
3) Pay off political cronies and “interest” groups
I had the privilege of listening to the Nobel Prize winning economist Milton Friedman in a lecture series during my MBA Economics classes say much the same thing.
This opinion is courtesy of Jack Crooks at Black Swan Capital and the link to the full discussion is above. An interesting argument.. read it, it dosnt take long.
Thursday, June 24, 2010
Technically speaking, the market looks bad
Courtesy of Steve Reitmeister, Executive VP, Zacks Investment Research quoted from Zacks.com Profit from the Pros - 6/24/10
Technically speaking, the market looks bad given a 2nd straight close under the 200 day moving averages. Fundamentally speaking, I did not care for the change in the Fed's language today. They are no longer saying that the economy is "strengthening". Rather they said that the economic rebound is "proceeding". This may sound like semantics, but the Fed is VERY particular about their choice of words and this marks a clear change in their sentiment. To make matters worse they stated; "financial conditions have become less supportive of economic growth ... largely reflecting developments abroad (read: Europe)." The smart money took this as a signal to move more cash to safety as can be seen by the further drop of the yield on 10 year treasuries to the lowest level since May 2009 (when it looked like the world was going to fall off a cliff). And perhaps many investors feel that is going to happen again. So I am taking this as a sign to lighten up my long positions. I even added a hefty ETF short position into the mix. I believe it will be hard for the market to press higher until we get forward looking guidance from Corporate America that makes us feel better about the economy. That won't happen for another few weeks. That says to me that the market is more likely to head lower over the next few weeks.
Technically speaking, the market looks bad given a 2nd straight close under the 200 day moving averages. Fundamentally speaking, I did not care for the change in the Fed's language today. They are no longer saying that the economy is "strengthening". Rather they said that the economic rebound is "proceeding". This may sound like semantics, but the Fed is VERY particular about their choice of words and this marks a clear change in their sentiment. To make matters worse they stated; "financial conditions have become less supportive of economic growth ... largely reflecting developments abroad (read: Europe)." The smart money took this as a signal to move more cash to safety as can be seen by the further drop of the yield on 10 year treasuries to the lowest level since May 2009 (when it looked like the world was going to fall off a cliff). And perhaps many investors feel that is going to happen again. So I am taking this as a sign to lighten up my long positions. I even added a hefty ETF short position into the mix. I believe it will be hard for the market to press higher until we get forward looking guidance from Corporate America that makes us feel better about the economy. That won't happen for another few weeks. That says to me that the market is more likely to head lower over the next few weeks.
US home forfeitures
This page is about distressed sales of homes. Its a little dry but is vital reading for all.
The main questions are whether the backlog is being cleared and whether distressed sales are affecting prices.
Thank you Clear on Money.
http://www.clearonmoney.com/dw/doku.php?id=public:us_home_forfeitures
Summary
23 Jun 2010.
The underlying trend in US distressed home sales has been upward for about a year. Despite some ambiguity and incompleteness in the seven available data series, it is clear that the upward trend remains intact.
House prices are inversely related to the fraction of all sales that is distressed, where bank sales and short sales constitute the distressed category. The rate of change in house prices is inversely related to the inventory of existing homes, measured in months of supply. Both of these measures now suggest falling prices.
The main questions are whether the backlog is being cleared and whether distressed sales are affecting prices.
Thank you Clear on Money.
http://www.clearonmoney.com/dw/doku.php?id=public:us_home_forfeitures
Summary
23 Jun 2010.
The underlying trend in US distressed home sales has been upward for about a year. Despite some ambiguity and incompleteness in the seven available data series, it is clear that the upward trend remains intact.
House prices are inversely related to the fraction of all sales that is distressed, where bank sales and short sales constitute the distressed category. The rate of change in house prices is inversely related to the inventory of existing homes, measured in months of supply. Both of these measures now suggest falling prices.
Investor demand climbs for Fannie, Freddie, Ginnie debt
Investors continue to look for safe investments,
pushing up prices of mortgage securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The agency
bonds are trading at more than their face value, yielding about 1.5% more than comparable Treasurys. Foreign
investors are attracted to the bonds because they are guaranteed by the government. The Wall Street Journal
pushing up prices of mortgage securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The agency
bonds are trading at more than their face value, yielding about 1.5% more than comparable Treasurys. Foreign
investors are attracted to the bonds because they are guaranteed by the government. The Wall Street Journal
Fannie Mae plans to crack down on "strategic defaulters"
Fannie Mae plans to get tough on borrowers who
can afford to make their mortgage payments but walk away because the loan balance is bigger the the
property's value. People who engage in a "strategic default" would be banned from Fannie loans for seven
years. In some cases, the U.S. government-controlled company would tell loan servicers to go to court to get
back money owed to Fannie. Los Angeles Times
can afford to make their mortgage payments but walk away because the loan balance is bigger the the
property's value. People who engage in a "strategic default" would be banned from Fannie loans for seven
years. In some cases, the U.S. government-controlled company would tell loan servicers to go to court to get
back money owed to Fannie. Los Angeles Times
Analysis: U.S. home sales crash after tax credit ends
Sales of homes in the U.S., along with their prices,
soared after Congress gave first-time buyers an $8,000 tax credit. When the subsidy expired, so did the boost,
with only 28,000 home sold in May, the lowest number recorded for that month. The tax credit did nothing
about high inventory, unemployment close to 10% and millions of underwater homeowners, according to The
Economist. "And Americans are now left wondering when housing's second dip will find its bottom and real
recovery begin," The Economist notes. The Economist
soared after Congress gave first-time buyers an $8,000 tax credit. When the subsidy expired, so did the boost,
with only 28,000 home sold in May, the lowest number recorded for that month. The tax credit did nothing
about high inventory, unemployment close to 10% and millions of underwater homeowners, according to The
Economist. "And Americans are now left wondering when housing's second dip will find its bottom and real
recovery begin," The Economist notes. The Economist
Wednesday, June 23, 2010
Mortgage Workout 4: The real urgency
Its no longer inauguration day. There is no more hope in the air. Change....it has not come. HAMP and HARP are failed solutions to the wrong problem. They simply dont work.Forcing a refinancing on a homeowner that consumes 60% or more of disposable income is not a sustainable solution. It is a depressing process without a hopeful ending.
Where is the incentive for that homeowner, often innocent of any wrongdoing and merely a victim of relentlessly reducing home values,to stay in an unaffordable home?
The sensible thing to do is to hand back the keys to the house to whomever can prove they own the note on it and move on to find housing for the family that IS affordable.
It is time for politicians to be patriotic and not parochial.
Everyone must acknowledge that the problem is NOT how to rejigger the current mortgage to somehow cajole the homeowner to pay up. The current mortgage modification practises are structured to encourage the exact opposite result...because that is where the money lies for the banks and mortgage servicers. These guys get fees every step of the way.
Servicers get to charge fees to try and modify a mortgage; they get subsidies from the government to give it a try. The big five banks get to charge interest and just have no incentive to kill the cash cow that borrowing from the Government at effectively zero cost and lending the money right back at a 2+% profit with no risk, has become.
Why should anyone lend to some risky person offering collateral that is declining in value when they can lend the free money right back at a risk free profit?
Government MUST rescue the homeowners of this great nation or the American Dream of home ownership will be lost forever.
Government cannot abandon its citizens!
This is a moment in history that a simple, transparent process of mortgage normalization could turn into a triumph of affordable prosperity for this great nation and for the world!The United States MUST lead!
They must do this for the benefit of the country. To do anything other than a clean fix aimed laserlike at the problem of home valuation is to charge the country headlong out of the current recession into a second Great Depression of unimagined magnitude and consequence.
Here is an example of how this would work, without using additional bailout money, without cramping the style of politicians who want to free up money for stimulating economic activity and would restore the great hope of prosperity for this great nation and the world:
EXAMPLE:
John Smith Family owns a house with a current mortgage of $700,000. It is their primary residence (they live in it).
Smith household income reported on 2009 Federal tax return was $125,000 gross before any deductions ( NOT their taxable income, their take home pay with tax added back).
Current US 30 year Treasury Bonds have an interest rate of 4.059%.
Principle no 1: 30% of $125,000 means Smith can afford to pay no more than $37,500 per year or $3,125 per month for Principal & Interest on the mortgage.
Smith gets a new mortgage under this program with a 30 year term at 4.55% (4.059+0.5 servicing fee) for a nominal value of approx $600,000.(arrived at through Discounted Cash Flow analysis based on what Smith can afford to pay). The Government gets the right to 80% of the difference between $600,000 and the original mortgage amount of $700,000 when the house is sold.
Ten years from now Smith sells the house for $700,000
He has paid about $2,900/month in interest for 10 yrs or $348,000 that has gone back into the US treasury.
He has paid about $27,000 in principal. He owes $573,000 on the new government mortgage, and $100,000 difference between his old and new mortgage originally financed by the US govt.
His gross profit on the sale of his house is $127,000. He owes 80% of this or $101,600, under his mortgage contract so that the Government gets the $573,000 and its $100,000 back and $1,600 more.
Smith has had his property written down to a reasonable value and his mortgage therefore becomes valuable in a resale. The Federal Reserve can resell it if they wish. Smith has lived with a new lower payment and still got the tax deduction for interest. He has made a profit on the sale of the home!
Most importantly, Smith is not tempted to hand the keys of the house to the bank because he is upside down in the mortgage. The Bankruptcy/foreclosure process is completely avoided.
There is a very real potential for gain by the Government( thats us - the taxpayer). Interest and principal payments on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established. The Fed will hire the necessary personnel to administer the program.
The banking system is unclogged and consumer confidence is restored.
Just imagine the rush of consumer confidence unleashed! Homeowners with new purchasing power!
Banks with capital to lend to credit worthy businesses who can hire new employees who now have an income! Hundreds of thousands of people seperating from the Government Welfare rolls!
This can happen, now. It must happen... anything that has been tried up to now has failed and will lead this nation and the world over the cliff to oblivion.
Change course now!
Where is the incentive for that homeowner, often innocent of any wrongdoing and merely a victim of relentlessly reducing home values,to stay in an unaffordable home?
The sensible thing to do is to hand back the keys to the house to whomever can prove they own the note on it and move on to find housing for the family that IS affordable.
It is time for politicians to be patriotic and not parochial.
Everyone must acknowledge that the problem is NOT how to rejigger the current mortgage to somehow cajole the homeowner to pay up. The current mortgage modification practises are structured to encourage the exact opposite result...because that is where the money lies for the banks and mortgage servicers. These guys get fees every step of the way.
Servicers get to charge fees to try and modify a mortgage; they get subsidies from the government to give it a try. The big five banks get to charge interest and just have no incentive to kill the cash cow that borrowing from the Government at effectively zero cost and lending the money right back at a 2+% profit with no risk, has become.
Why should anyone lend to some risky person offering collateral that is declining in value when they can lend the free money right back at a risk free profit?
Government MUST rescue the homeowners of this great nation or the American Dream of home ownership will be lost forever.
Government cannot abandon its citizens!
This is a moment in history that a simple, transparent process of mortgage normalization could turn into a triumph of affordable prosperity for this great nation and for the world!The United States MUST lead!
They must do this for the benefit of the country. To do anything other than a clean fix aimed laserlike at the problem of home valuation is to charge the country headlong out of the current recession into a second Great Depression of unimagined magnitude and consequence.
Here is an example of how this would work, without using additional bailout money, without cramping the style of politicians who want to free up money for stimulating economic activity and would restore the great hope of prosperity for this great nation and the world:
EXAMPLE:
John Smith Family owns a house with a current mortgage of $700,000. It is their primary residence (they live in it).
Smith household income reported on 2009 Federal tax return was $125,000 gross before any deductions ( NOT their taxable income, their take home pay with tax added back).
Current US 30 year Treasury Bonds have an interest rate of 4.059%.
Principle no 1: 30% of $125,000 means Smith can afford to pay no more than $37,500 per year or $3,125 per month for Principal & Interest on the mortgage.
Smith gets a new mortgage under this program with a 30 year term at 4.55% (4.059+0.5 servicing fee) for a nominal value of approx $600,000.(arrived at through Discounted Cash Flow analysis based on what Smith can afford to pay). The Government gets the right to 80% of the difference between $600,000 and the original mortgage amount of $700,000 when the house is sold.
Ten years from now Smith sells the house for $700,000
He has paid about $2,900/month in interest for 10 yrs or $348,000 that has gone back into the US treasury.
He has paid about $27,000 in principal. He owes $573,000 on the new government mortgage, and $100,000 difference between his old and new mortgage originally financed by the US govt.
His gross profit on the sale of his house is $127,000. He owes 80% of this or $101,600, under his mortgage contract so that the Government gets the $573,000 and its $100,000 back and $1,600 more.
Smith has had his property written down to a reasonable value and his mortgage therefore becomes valuable in a resale. The Federal Reserve can resell it if they wish. Smith has lived with a new lower payment and still got the tax deduction for interest. He has made a profit on the sale of the home!
Most importantly, Smith is not tempted to hand the keys of the house to the bank because he is upside down in the mortgage. The Bankruptcy/foreclosure process is completely avoided.
There is a very real potential for gain by the Government( thats us - the taxpayer). Interest and principal payments on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established. The Fed will hire the necessary personnel to administer the program.
The banking system is unclogged and consumer confidence is restored.
Just imagine the rush of consumer confidence unleashed! Homeowners with new purchasing power!
Banks with capital to lend to credit worthy businesses who can hire new employees who now have an income! Hundreds of thousands of people seperating from the Government Welfare rolls!
This can happen, now. It must happen... anything that has been tried up to now has failed and will lead this nation and the world over the cliff to oblivion.
Change course now!
Mortgage Workout 3: Benefits to Mortgage Holders and Homeowners under water on the Mortgage
a. Current law-abiding households who are are seeing negative real value of their primary residence will be able to remain in their homes at affordable cost with a potential for some upside appreciation in the value of their property; and they get to see a participation in the realization of that potential together with Government on sale of their property.
b. Banks and other mortgage owners will have a value, real and ascertainable, assigned to each and every such distressed mortgage. AND they will have, therefore a viable asset to sell to mortgage repackagers on Wall Street; this frees up capital to lend out on new mortgages under more appropriate terms (20% downpayment, 30% max housing cost to household income)
c. Government gets a real, visible path to recovery of money appropriated to this program, with interest.
d. Government will be helping citizens who most need help and restoring their confidence in The American Dream.
e. Government will restore confidence in the banking system worldwide by establishing a system of mortgage valuation that establishes a valuation methodology that could easily be cloned by private investors and capitalized on by the Financial Services industry worldwide.
f. Bankers and other lenders will now have a method of assessing the value of collateral offered interbank and lending between institutions, currently effectively at a trickle, can be reinvigorated.
g. No new government burocracy needed. FNMA/FHLMC become effective arms of the Federal Reserve who is charged with housing stability as a third mandate.
The result will be a very viable, self-funding solution to the current housing/banking crisis.
Mortgages then become easy to value as the underlying properties have a recognized value. Homeowners have an affordable mortgage payment, freeing up discretionary income for spending on other goods and services.
Most importantly, homeowners will not be tempted to walk away from unaffordable payments, or houses worth less than they owe. Foreclosure or bankruptcy can be avoided completely.
There is a very real potential for gain for the Government. Interest on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established.
The banking system is unclogged and consumer confidence is restored. All without requiring additional tax burdens on unborn generations.
b. Banks and other mortgage owners will have a value, real and ascertainable, assigned to each and every such distressed mortgage. AND they will have, therefore a viable asset to sell to mortgage repackagers on Wall Street; this frees up capital to lend out on new mortgages under more appropriate terms (20% downpayment, 30% max housing cost to household income)
c. Government gets a real, visible path to recovery of money appropriated to this program, with interest.
d. Government will be helping citizens who most need help and restoring their confidence in The American Dream.
e. Government will restore confidence in the banking system worldwide by establishing a system of mortgage valuation that establishes a valuation methodology that could easily be cloned by private investors and capitalized on by the Financial Services industry worldwide.
f. Bankers and other lenders will now have a method of assessing the value of collateral offered interbank and lending between institutions, currently effectively at a trickle, can be reinvigorated.
g. No new government burocracy needed. FNMA/FHLMC become effective arms of the Federal Reserve who is charged with housing stability as a third mandate.
The result will be a very viable, self-funding solution to the current housing/banking crisis.
Mortgages then become easy to value as the underlying properties have a recognized value. Homeowners have an affordable mortgage payment, freeing up discretionary income for spending on other goods and services.
Most importantly, homeowners will not be tempted to walk away from unaffordable payments, or houses worth less than they owe. Foreclosure or bankruptcy can be avoided completely.
There is a very real potential for gain for the Government. Interest on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established.
The banking system is unclogged and consumer confidence is restored. All without requiring additional tax burdens on unborn generations.
Mortgage Workout 2, Updated: Funding
FUNDING for this Program:
Congress will authorize Treasury to issue up to $700 billion annually in 30 year Treasury bonds, at prevailing rates, to implement this program. ( and use the unspent $300 Billion unused funds already voted in the TARP)
These funds will be placed in a separate segregated Federal Reserve Bank administered fund that cannot be invaded by anyone or used for any other purpose than mortgage refinancing. These funds will be used to purchase mortgages on PRIMARY RESIDENCES from homeowners at the value of the amount of principal outstanding on these mortgages.
Chairman of Fed to be responsible for disbursements and oversight of the program so co-ordination with Monetary policy will be maximized.
Reporting: to Congress on program status twice a year.
Congress will authorize Treasury to issue up to $700 billion annually in 30 year Treasury bonds, at prevailing rates, to implement this program. ( and use the unspent $300 Billion unused funds already voted in the TARP)
These funds will be placed in a separate segregated Federal Reserve Bank administered fund that cannot be invaded by anyone or used for any other purpose than mortgage refinancing. These funds will be used to purchase mortgages on PRIMARY RESIDENCES from homeowners at the value of the amount of principal outstanding on these mortgages.
Chairman of Fed to be responsible for disbursements and oversight of the program so co-ordination with Monetary policy will be maximized.
Reporting: to Congress on program status twice a year.
A Mortgage Workout for the People of the USA 1: The Plan Revised and updated
This is a plan I first suggested two years ago and again on Inauguration day, to help every citizen of the USA whose current mortgage obligation exceeds the value of their primary home.
Principle no 1: No household should pay a housing cost (mortgage payment: principal + Interest only) that exceeds 30% of their gross income( before any deductions) as reported on their latest Federal Tax Return.
Principle no 2: The Federal Government will refinance existing mortgages, through The Federal Reserve Bank; (buy the existing mortgage and reissue a new mortgage to homeowner). This will apply ONLY to homeowners whose mortgage debt on their PRIMARY residence is larger than the current value of their property.
Principle no 3: New mortgages issued under this program, based on household ability to pay, will contain a provision that allows The Federal Reserve Bank to recover, on sale of secured property, 80% of the difference between the nominal value of the new mortgage issued and the then sale price of the property, until full amount of original refinanced mortgage is recovered. The Federal Reserve Bank will be allowed to charge a 0.5% fee in addition to 30yr Treasury Bond rate to cover cost of implementing the program.
Principle no 4: Federal Reserve Bank will be allowed to continue to repackage these new mortgages in CMO’s etc for resale through traditional resale channels.
Principle no 1: No household should pay a housing cost (mortgage payment: principal + Interest only) that exceeds 30% of their gross income( before any deductions) as reported on their latest Federal Tax Return.
Principle no 2: The Federal Government will refinance existing mortgages, through The Federal Reserve Bank; (buy the existing mortgage and reissue a new mortgage to homeowner). This will apply ONLY to homeowners whose mortgage debt on their PRIMARY residence is larger than the current value of their property.
Principle no 3: New mortgages issued under this program, based on household ability to pay, will contain a provision that allows The Federal Reserve Bank to recover, on sale of secured property, 80% of the difference between the nominal value of the new mortgage issued and the then sale price of the property, until full amount of original refinanced mortgage is recovered. The Federal Reserve Bank will be allowed to charge a 0.5% fee in addition to 30yr Treasury Bond rate to cover cost of implementing the program.
Principle no 4: Federal Reserve Bank will be allowed to continue to repackage these new mortgages in CMO’s etc for resale through traditional resale channels.
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