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Stock markets – keep an eye on confidence measures

It is important that confidence be restored for the recent stock market gains to be more enduring. A few comments regarding this issue are highlighted in this post.

As shown in Sunday’s “Words from the Wise” review, there is a strong historical relationship between the US Consumer Confidence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direction of consumer confidence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the relationship indicates a S&P 500 decline of 30-35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896 by mid-year.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Interestingly, a report from Franklin Templeton Investments has just arrived, also showing that when confidence was low in the past, it had been time to buy. For example, on average, stocks returned 12.5% a year following consumer confidence of 66 or lower. The consumer confidence reading at the end of February was 25.

Another confidence indicator worth monitoring, is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been an improvement in the ratio since its all-time low in December, showing that bond investors are growing somewhat more confident and have started opting for more speculative bonds over high-grade bonds.

Source: I-Net Bridge

Not surprisingly, a strong historical relationship also exists between the Barron’s Confidence Index and the S&P 500′s 12-month rate of change. But unlike consumer confidence that has not yet bottomed, the Barron’s indicator has already been working its way higher over the three months.

Source: Plexus Asset Management (based on data from I-Net Bridge)

As mentioned before, taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve.

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If you have not done so, read MATT TAIBBI’S excellent piece in Rolling Stone on the political implications of the bailout:

The Big Takeover

Taibbi has done a very thorough job of research on this piece.  For example, he illustrates some of the bizzare legal protections given the Fed over the years, protections that make the central bank immune from congressional oversight:

“None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn’t like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include “deliberations, decisions and actions on monetary policy matters.” The exemption, as Foss notes, “basically includes everything.” According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.”

Article provides excellent overview of AIG scandal and political angles.

BTW, I am hearing that Rahm Emanuel is bought and sold by Goldman Sachs.  More confirmation that we need to change the caption on the money to read “In Goldman Sachs We Trust,” a la Galbraith, of course.

– Chris

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Source:
The Big Takeover
MATT TAIBBI
Rolling Stone, Mar 19, 2009 12:49 PM

http://www.rollingstone.com/politics/story/26793903/the_big_takeover

The NYPost reports the two biggest banking wrecks, CitiGroup amnd Bank of America, have been aggressively buying toxic assets with bailout money, and goosing the MBS auctions.

You can imagine why this might get people upset. I suspect its rather unavoidable. These banks have investment wings, and they are trolling for opportunities.

“As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post. . . But the banks’ purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids . . .”

If anything, this argues against bailouts and in favor of nationalization, firing management, wiping out S/Hs, zeroing out debt, haircutting bond holders, etc.

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Source:
CITI, BOFA BUYING BACK LAUNDERED LOANS AT LOWER RATES
MARK DeCAMBRE
NYPost, March 25, 2009

http://www.nypost.com/seven/03252009/business/double_dippers_161157.htm

Here is video and statements from the Senate Banking Committee hearing on “Modernizing Bank Supervision and Regulation, Part II,” including yours truly.  My testimony starts around 0:50 in the webcast.

What was truly amazing to me was that both Dems and Repubs were seething angry against Uncle Ben, Geithner, et al.  Senator Bunning (R-KY) a former big league pitcher BTW, asked if I thought the Fed was an independent agency.  Not. And nobody pushed back when I suggested we take the Fed out of bank supervision entirely.  It is very clear to me that officials of the Fed and Treasury have not been forthcoming with information needed by the Committee.

Tuesday, March 24, 2009
10:00 AM – 01:00 PM
538 Dirksen Senate Office Building, room 538

[View Archive Webcast]

The testimony of the four witnesses is below, including:

Majority Statements

• Christopher J. Dodd [view statement]
• Tim Johnson [view statement]
• Charles E. Schumer [view statement]

Minority Statements

• Richard C. Shelby [view statement]

Witnesses

Panel 1

• Mr. William Attridge [view testimony]
  President, Chief Executive Officer and Chief Operating Officer
  Community River Community Bank, on behalf of the Independent Community Bankers of America
• Mr. Daniel A. Mica [view testimony]
  President and Chief Executive Officer
  Credit Union National Association
• Mr. Aubrey Patterson [view testimony]
  Chairman and Chief Executive Officer
  BancorpSouth, Inc., on behalf of the American Bankers Association
• Mr. Richard Christopher Whalen [view testimony]
  Senior Vice President and Managing Director
  Institutional Risk Analytics
• Ms. Gail Hillebrand [view testimony]
  Senior Attorney
  Consumers Union of U.S., Inc.

http://dilbert.com/strips/comic/2009-03-25/

An update on the economy Part I

Daniel Alpert is a managing director of Westwood Captial and Thomas F Steyer is Co-Managing Partner of Farallon Capital Management

Part II

Monday, March 23, 2009

Fascinating chart from Citigroup, showing its history from 1812 (City Bank of NY) to present, including all of the various acquisitions, mergers, etc.

One odd thing: They got the entire “tree” metaphor wrong. The older companies should be their roots, and the latest version is where its grown to. Instead, its upside down!

Someone should tell Citi that trees grow up, not downwards . . .

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Use zoom to see details
Citi tree11x17

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Source:
Citigroup.com

http://www.citigroup.com/citi/corporate/history/data/tree11x17.pdf?ieNocache=159

An interview with David Crowe of the National Association of Home Builders talking about the housing market.

A pleasure to hear an honest industry spokesperson:

4:42

Bloomberg, March 25, 2009

From BCA:

China currently has about 64% of its foreign reserves in U.S. assets, a level that has declined gradually from as high as 84% in 2003. The majority of Chinese holdings of U.S. assets are risk free and long-term in nature, but there has been a clear trend in China’s reserve holdings that shows a persistent increase in exposure to risky assets and non-U.S. assets over the past five years.

Although, China’s net purchases of risky U.S assets have dropped sharply since mid-last year, while its net purchases of Treasurys have jumped. This underscores the authorities’ reduced risk appetite amid the ongoing global storm. Their reserve diversification process could accelerate again when global financial markets stabilize. Importantly, China’s net purchases of short-term U.S. Treasurys have jumped dramatically over the past year, accounting for the majority of the country’s total net purchases of U.S.government paper. This is an unprecedented development and a situation that warrants close attention going forward.

11:08:00, March 23, 2009
Demystifying Chinese Holdings Of U.S. Assets

Source:

In researching the Citigroup section of Bailout Nation, I came across this improbable 1998 William Safire essay on the Citicorp-Travelers merger. Surprisingly, Safire makes a strong case against the merger, making several points (below).

It is most likely the most prescient thing he ever wrote:

• No private enterprise should be allowed to think of itself as ”too big to fail.” Federal deposit insurance, protecting a bank’s depositors, should not become a subsidy protecting the risks taken by non-banking affiliates. If a huge ”group” runs into trouble, it should take the bank down with it; no taxpayer bailouts should allow executives or stockholders to relax.

• Let’s not be in such a big rush to knock down barriers. The Government’s biggest financial mistake of the past generation was to raise deposit insurance to $100,000 while allowing housing S.& L.’s to plunge into commercial lending. That all but removed the element of risk from foolish or corrupt loans and helped bring on the S.& L. debacle. Good fences make good banks.

• Beware the slippery slope to crony capitalism. Paul Volcker, former Fed chairman, is less troubled than I am about an amalgam of financial services, provided the Fed is the supervisor. ”But there is an Anglo-Saxon tradition separating banking and commerce,” he says. ”I’d continue to draw the line between finance and business.”

Fascinating stuff . . .

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Source:
Essay; Don’t Bank On It
WILLIAM SAFIRE
NYT: Thursday, April 16, 1998

http://www.nytimes.com/1998/04/16/opinion/essay-don-t-bank-on-it.html