The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Miller Tabak’s Dan Greenhaus discusses the benefits of the President Obamas stimulus package and the things that makes him conflicted. (Taking Stock)

Bloomberg, February 14, 2009

Chris Masse maintains the most complete website on prediction markets. He has slowly evolved his views on the utility and function of such markets.

He recently noted:

The reality check is that the social utility of the prediction markets is marginal. The added accuracy is minute, and, anyway, doesn’t fill up the gap betwteen expectations and omni-science (which is how people judge forecasters).

In our view, the social utility of the prediction markets lays in efficiency, not in accuracy. In complicated situations, the prediction markets integrate facts and expertise much faster than the mass media do. It is their velocity that we should put to work.

Nice quote, Chris!

>

Source:
The truth about prediction markets
Chris F. Masse
Midas Oracle .ORG, February 14th, 2009

http://www.midasoracle.org/2009/02/14/the-truth-about-prediction-markets/

Beyond the $700 billion bailout known as TARP, which has been used to prop up banks and car companies, the government has created an array of other programs to provide support to the struggling financial system. Through Feb. 10, the government has made commitments of nearly $8.8 trillion and spent $2 trillion. Here is an overview, organized by the role the government has assumed in each case.

>

>

Source:
Adding Up the Government’s Total Bailout Tab
NYT, February 10, 2009

http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html

Primary Dealers
February 17, 2009

The Federal Reserve is reportedly in negotiations to expand its shrunken list of Primary Dealers. Who are these firms? What do they do? Why are they important?

Each day the Federal Reserve enters financial markets to adjust the amount of Federal Funds (deposit balances of banks with the Federal Reserve) outstanding to keep the rate on overnight Federal Funds close to the target rate set by the Federal Open Market Committee. It does so by either buying or selling short-term US Treasury bills or by engaging in repurchase agreements or reverse repurchase agreements in which the Fed agrees to sell and then buy back, or buy and then sell back, Treasury securities to counterparties at a specified time in the future (eg. overnight, three days, twenty eight days, etc.).

These transactions are conducted by the Open Market Desk, which executes transactions on behalf of the FOMC through the SOMA or System Open Market Account. The Desk and SOMA are housed at the Federal Reserve Bank of New York, although technically they are not part of the bank. In fact, two of the past three presidents of the NY Fed were managers of the Open Market Desk – Bill McDunough and Bill Dudley (though you don’t have to be named Bill to hold that position).

Every business day morning, the Desk staff first prepares an estimate of the amount of reserves the banking system will need that day, in conjunction and in consultation with the Treasury and Federal Reserve Board staff in Washington, DC. That proposed program is shared on a phone call at about 9:10 AM with the Board staff, the Desk staff, and one of the voting Federal Reserve Bank presidents on the FOMC. A number of factors affect the size of the program for the day. This includes (a) estimates of float for the day (checks and electronic payments in process of collection but not yet cleared through the system), (b) Treasury disbursements of funds for the day, (c) transfers out of Treasury Tax and Loan Accounts (which are accounts at commercial banks into which tax receipts are aggregated), (d) the need to replace maturing transactions from previous days, and (f) additions or reductions in the SOMA to accommodate increased demands for currency. As it turns out, weather, especially in the winter, can cause significant unanticipated fluctuations in float, because planes carrying checks can be delayed. Once the needs have been determined, the Desk sends out a notice to the Primary Dealers and calls for bids to participate in that day’s program. This is where the so-called Primary Dealers come into the picture: they stand ready to buy or sell according to that day’s program.

The Primary Dealers are specially designated banks and investment banks who agree to submit bids and participate in the daily auctions that constitute the SOMA’s program. These are supposed to be large, well-capitalized, sound institutions. There are presently 16 such institutions, but that number has been much larger in the past. Who are these firms? The NY Fed provides the list, and it is attached at the end of this commentary. Interestingly, over half are either foreign institutions or US-chartered subsidiaries or affiliates of foreign parents. For example, Merrill-Lynch and Bear Stearns were Primary Dealers, as were Lehman Brothers and Countrywide, all of whom have disappeared.

Why would a firm want to become a Primary Dealer? Treasury securities can be bought and sold and used as collateral for interbank borrowings and for investments by both foreign and US citizens and companies. These securities trade at bid-ask spreads, and participants can engage in transactions with the Fed that are free of credit risk and make the bid-ask spread by redistributing securities and funds to other counterparties throughout the banking system. Put simply, the Primary Dealers are directly involved on a day-to-day basis with the major determinant of interest rates in the Federal Funds market and therefore have inside knowledge of trade volumes, etc. This access was especially important when the Fed didn’t publicly announce changes in monetary policy, and bid-ask spreads were wider. It is likely becoming more important again today because of the widening bid-ask spreads, the increase in outstanding Treasury borrowings due to the stimulus programs, and the Fed engaging in quantitative easing, with the Federal Funds rate allowed to float between 0 and 25 basis points.

Why only 16 firms? First, the current system structure is really an anachronism. It is rooted in the days before electronics, when bids were submitted on paper by runners and US government securities were all paper instruments that had to be shuffled between buyer and seller. That meant that bidders had to be in close proximity to the NY Fed, and this implied that they had to be major banks or investment banks. Keep in mind that in the early history of the NY money market, investment banks were major traders and distributors of US government obligations. Now, of course, bids are submitted electronically.

The NY Fed is now seeking to expand the number of primary dealers, for two principal reasons. The first is to make up for the shrinkage in the number of dealers, and the second is to increase liquidity in the market in anticipation of the flood of new Treasury obligations that will be coming onto the market.

Why so few? Interestingly, the ECB uses a different system and deals with over 500 counterparties located throughout Europe. It is possible that the strong linkage between the Primary Dealers and the Fed and the extreme financial difficulties that many of these key institutions experienced this past year and a half explain the special efforts made by both the Fed and Treasury to ensure the dealers’ continued existence, irrespective of the costs.

This is one area where the Fed should consider being more innovative.

There is no reason, for example, that any healthy Federal Reserve member bank in the US shouldn’t be able to participate in the auctions if it chose to do so. The bids are accepted electronically, and the securities are electronic book entries (not paper) and can be transferred daily over the Federal Reserve’s wire system. There is no need for those institutions to deal though a Prime Dealer intermediary and pay the bid-ask spread. Broadening the participation would make the market to be more liquid and deeper. Increasing the number of counterparties and would also lessen the Desk’s dependence upon the Primary Dealers, most of whom now aren’t the pillars of strength they once were. Finally, it would diversify operational risk both in terms of numbers and geographically, by lessening the dependence on NY-based institutions; a risk that the 9/11 experience suggests is very real. .

Primary Dealers

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Securities LLC
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC

~~~~

Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com. He may be reached at Bob.Eisenbeis -at- cumber.com.

On Sunday, we looked at a charting error in a JPM research piece that compared bank market caps, then and now. It appeared the JPM analyst erroneously selected area rather than diameter in Excel. (Data can be found here).

TBP Readers did a nice job taking JPM to school as to what the chart should have looked like:

>

Rene Corda suggested this as the the proper picture:

New & Improved Chart

(looks like JPM fixed their own chart)

>

QQQ Trader send this chart along (with averages!)

>

Ironman at Political Calculations gives us these two beauties:

Bar Chart:

>

Radar Plotting Chart:

>

And Mark McHugh of Across the Street came up with these two beauties:

>

>

Source:
Wall Street Can’t Count
Robert X. Cringely
February 12th, 2009

http://www.cringely.com/2009/02/wall-street-cant-count/

Unprecedented 4Q Loss For S&P 500 Companies, S&P 500 Companies Lost $10.34 a Share in 4Q, Nearly 150 Companies Increased Earnings in the 4Q;

First loss since 1936

1:17
Bloomberg, February 17, 2009

Speaking of Hope, here is a terrific bit of satire:

Clyde and Clark look over the country for our new president

Running on Hope from Douglas Sarine on Vimeo.

Running time 4:45

One of the best gauges of an economy is tax collections. No one pays taxes unless they have to, so collections are a real-world, real-time analysis of the US economy. And the best source I know of for tracking taxes is The Liscio Report, by Philippa Dunne & Doug Henwood.

Tax collections are down. Philippa and Doug give us the actual numbers, which are not pretty. Bottom line? “What does this all mean? It suggests that the consumer retrenchment in this recession will be deep and long, and will probably continue into any recovery. The American consumer is no longer the world consumer of last resort, and that’s an enormous change for both this country and the rest of the world to get used to.”

You can learn more about the Liscio Report at www.theliscioreport.com. Enjoy your week.

John Mauldin, Editor Outside the Box

The Liscio Report On the Economy

Holiday blues: Weakness unmatched in 35 years

In January, 21% of the states in our survey met or exceeded their forecasted sales tax collections, up from 9% in December. Our index is based on states meeting their forecasts, not reporting strong or even positive over-the-year collections, so we need to point out that the entire improvement came from a large state doing slightly better than the stunning decline they had forecast. This decline was partially calendar related, but January 2008 was 7% below forecast, so they had a very low bar. In the words of our contact in that state: “Bad economy, good forecast.” Had the revenue estimators in that state made a less dramatic forecast our survey would have slid to 6%, which we think is more in line with historical weakness reported for sales tax collections during the holiday season.

States reporting over-the-year growth fell to 3% from 15% in December. The average decline, weighted by state population fell from December’s –6% to –10%. (More on this in a bit.) Forecasts were negative in all but two of the states that met their projected collections. The exceptions include a state that collects sales taxes on groceries and attributes their relative strength to the spike in food prices, and another that put through a rate increase, which accounts for all of the growth. The energy-extraction states, which have held up the longest, are now weakening as well. To give you an idea of how powerful the surge in energy prices has been, our contact in one southern state told us that their Appalachian mine country is currently outperforming regions where manufacturing and research predominate.

Throughout the country, states are reporting historic weakness. One Midwestern state reported two months of double-digit declines, which just three months ago would have been “unthinkable.” A small southern state reports that never before has an entire year fall below the prior year; they are currently down 5.7% for the year, and have to go back 35 years to find similar monthly weakness. Calling the holiday season one “large discretionary item,” our contact in a large Midatlantic state reports that that item “imploded like never before” in his forty years of data. “Holiday receipts will make you say: OMG,” he promised, even if you’re too old to talk that way. There is one piece of potentially encouraging news. A few contacts remarked that they do not expect the current rate of decline to continue into the spring as spending swings back toward day-to-day needs and away from the discretionary shopping of the holiday season. But, of course, there is no guarantee that consumer spirits will improve much with the job market in rapid decline, the markets in disarray, and our leaders struggling to come up with a viable plan to get the credit markets moving. In addition to exceedingly weak sales receipts, our contacts are reporting record unemployment insurance payouts (in one state double what would formerly have been considered a “huge” month), plummeting corporate receipts, skyrocketing refunds, and evidence that withheld taxes may have been supported by employees opting out of retirement plan deductions, and even cashing out of 401K plans. (Hardship withdrawals trigger withheld taxes.)

Read the rest of this entry »

“The hope balloon is losing air. It points to how on-edge everybody is and how much emotionalism is still involved.”
-Henry Herrmann, chief executive at Waddell & Reed Financial

>

The above is only one of several oddities in the Abreast of the Market column in this morning’s WSJ. I am compelled to comment upon this, as it reflects a classic money losing strategy endemic to fund managers and traders.

The subhed of the article is Tepid Upturns Haven’t Stopped the Slide; ‘Hard to Make a Cheery Story’ and therein lies the basis of so many people’s losses: Denying reality, trying to make a bad story cheery.

We are always at the bottom, it seems. It is always a great entry into stocks, and valuations are the cheapest in years. We are at the depths of the recession (again); the housing bottom is here (again and again), the economic turn has come. The selloff means a snapback rally is coming any moment.

Rather than embrace the downturn, with all of the chaos induced opportunity it presents, too many people are trying to manage the narrative of the markets. They are fighting the tape, not going with it. Being an optimist should not preclude you from being a realist.

During the boom, you were exhorted to ignore the worst Employment cycle since WWII. Nevermind the reality of the now deceased Goldilocks economy. Pay no attention to the surprisingly low rates — they are a conundrum, not a warning. Ignore the $100+ oil, Core Inflation is never a problem. As things started to slide, we were told that subprime was contained, that the rest of the world would decouple from the US, that leveraged derivatives were merely fantasies of the Doom and Gloomers. And when the fit hit the shan, the immediate instinct was to buy the dip.

Why? Its a function of the long-only complex that is Wall Street. Mutual Fund have no choice but to embrace every dip as a buying opportunity; fee-based bulge bracket firms are too colossal to nimbly to take advantage of the disruption; they can’t possibly get stopped out to avoid much of the blood shed.

What did BlackRock, one of the biggest (long only) management houses, manage before the crash, a trillion plus dollars? If they had market stops in place, what would 500 billion hitting the market as a stop loss do? It might take the Dow down 1000 points at the open.

Hence, why we see BlackRock’s CIO on CNBC’s Squawk Box for what feels like everyday for a year. Is it just me, or is he always talking about what a great buying opportunity this has been? I haven’t seen all of his appearances — just the ones where he likes stocks. If this keeps up, he may become the David Lereah of investing, as its always a great time to be buying stocks.

In investing, Hope is a four letter word. It reflects wishful thinking, not sober analysis. It is a function of your book, not an objective read of reality.

And its killing many investors.

>

>

Source:
Market’s ‘Hope Balloon’ Loses Air
Tepid Upturns Haven’t Stopped the Slide; ‘Hard to Make a Cheery Story’
E.S. BROWNING
WSJ, FEBRUARY 17, 2009

http://online.wsj.com/article/SB123481023090593823.html

Barron’s presents its annual the World’s Most Respected Companies. And Johnson & Johnson tops the survey for the second year in a row.

3:00
Barron’s 2/16/2009