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

According to the MBA data, purchases still cannot get any traction in response to the multi decade low in mortgage rates and the seasonally busy time of the year. Purchases fell 4.2% to the lowest since the week ended Nov 14 which was right before the Fed announced their MBS purchase plan even though mortgage rates have fallen 144 bps since that time from 6.17% to 4.73%. Refi’s on the other hand rose 7.7% and remains near the highest level since ’03 when rates were between 5-5.5%.

The Feb FHFA home price index is out at 10am. ABC confidence rose 4 pts to -47 to a 5 week high and coincides with the recent action in the markets.

The WSJ is reporting that on Friday the Govt will release ‘an outline of how the stress test’s were conducted,’ especially the degree of stress they used in their assumptions. On May 4th, more details will be out on specific banks.

The Yen is quietly at a 3 1/2 week high after Japanese exports were a touch better that estimated.
 

No surprise here: Even amongst the most credit worthy borrowers — aka “Prime” — defaults are rising rapidly. Job losses, debt problems, loss of income are the primary causes.

Prime borrowers at least 60 days behind on mortgages — “Delinquent” is the official term for this period — rose from 497,131 in December to 743,686 in January, according to the Federal Housing Finance Agency. This is almost double the total for October.

The 3 step process is delinquency (60 days late), default (determined by the terms of the mortgage itself — but usually 90 or 120 days behind), leading to foreclosure.

Bloomberg:

“Fannie Mae and Freddie Mac mortgage delinquencies among the most creditworthy homeowners rose 50 percent in a month as borrowers said drops in income or too much debt caused them to fall behind, according to data from federal regulators . . .

Of all borrowers who ended up in default, 34 percent told Fannie and Freddie they were earning less money, about 20 percent cited excessive debt as a reason for missing mortgage payments, and 8.1 percent blamed unemployment, FHFA said.”

Note once again these are not Sub-prime or alt-A — they are Prime, the highest quality borrowers possible.

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Chart via Field Check Group

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Source:
Fannie, Freddie Defaults Rise as Borrowers Cite Lower Income
Dawn Kopecki
Bloomberg, April 21 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aw4.u4ryoAq0&

We seem to have buttoned down all of yesterday’s site issues (remind me to do major upgrades on weekends from now on!)

A database error was causing excess demand on a node of the server cloud we use (hosted by Mosso, a rackspace company). They were great, my tech guys did a great job running down the glitch  team I am working

We also upgraded to the latest version of WordPress at the same time. (Too ambitious to do all at once perhaps?)

Everything seems to be stable now — Macro-Notes is still not working, but we will button that down shortly.

Testimony Before the Joint Economic Committee
United States Congress
Thomas M. Hoenig
President and Chief Executive Officer
Federal Reserve Bank of Kansas City

Washington, D.C.
April 21, 2009 2

Madam Chair Maloney, Vice Chair Schumer, ranking members Brady and Brownback, and members of the committee. Thank you for the opportunity to testify at this hearing.

The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accepted the idea that some firms are just “too big to fail.” I do not.

Despite record levels of expenditures, we have not seen the return of confidence and transparency to financial markets, leaving lenders and investors wary of making new commitments. Until confidence is restored, a full economic recovery cannot be achieved. When the crisis began to unfold last year, and its full depth was not yet clear, substantial liquidity was provided to the financial system. With the crisis continuing and hundreds of thousands of Americans losing their jobs every month, it remains tempting to pour additional funds into large firms in hopes of a turnaround.

However, actions that strive to protect our largest institutions from failure risk prolonging the crisis and increasing its cost. Of particular concern to me is the fact that the financial support provided to firms considered “too big to fail” provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds.

Yes, these institutions are systemically important, but we all know that in a market system, insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations. In the rush to find stability, no clear process was used to allocate TARP funds among the largest firms. This created further uncertainty and is impeding recovery.

We have options that could provide a more successful outcome, but there are several hard steps to be taken. Here are two:

First, we must “triage” systemically important financial firms based on their current condition. For those that are well-capitalized, we move on. Those that are viable but need more capital either raise it privately or seek government assistance, with the taxpayer put in the senior position and the government determining the circumstances of the senior managers and directors. Second, nonviable institutions must be allowed to fail and could be put into a negotiated conservatorship, as was done in 1984 with the holding company Continental Illinois.

Such actions serve to ensure that when public funds are used, and they may well be needed, management and shareholders bear the full cost of their actions before taxpayer funds are committed. It would give the public confidence in the process and mitigate the need for the government to micromanage institutions.

Such a resolution process is equitable across all firms, has worked in the past, and favors taxpayers. Past experience also suggests this approach is much less costly than the alternative of not recognizing losses and allowing forbearance, as Japan initially did with its problem banks during the “lost decade” and as the United States initially did with thrifts in the 1980s.

As we look to the future, we will turn to the matter of regulatory reform. It is critical that we correctly diagnose the cause of this crisis. The structure of our regulatory system is neither the cause nor the solution. These “too big to fail” institutions are not only too big, they are too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions. When the recession ends, old habits will reemerge.

Thus, we should focus on defining the supervisory framework and operational rules that over the decades have provided the best outcomes no matter the complexities and dynamics of the market. For example, history has shown that strong limits on leverage ratios work.

Finally, the structure of the Federal Reserve System also is not the problem, as has been
recently suggested. It would be a sad irony if the outcome of a crisis initiated on Wall Street was to result in Wall Street gaining power at the expense of the other parts of the country. The 12 regional Federal Reserve Banks that make up the Federal Reserve System were established by Congress specifically to address the populist outcry against concentrated power on Wall Street.

Its structure reflects the system of checks and balances that serves us well at all levels of government, and it is the reason I am here today able to express an alternative view.

I look forward to your questions.

This is a test post — for you muscle car heads out there

Good Evening: While many investors felt stressed yesterday about the upcoming release of our government’s attempts to test bank balance sheets under various economic scenarios, today appeared to be an official attempt to mollify those worries. And it worked — somewhat. Treasury Secretary Geithner and Fed Vice Chair Kohn offered enough soothing words that our capital markets took back between 10% and 50% of yesterday’s moves. Watching each market retrace portions of Monday’s gyrations in almost lockstep fashion looked very much like the “countertrend Tuesday” moves I first learned about more than 20 years ago.

While the economic calendar was free of actionable data today, there were plenty of earnings reports for market participants to sift through. CAT, MRK, BK, TXN, and IBM were the headline grabbers overnight and this morning, and the general theme was one of disappointment. The subplot, however, called for all these names to open lower and then recover some or all of those early downticks (except for TXN, which did the exact opposite). The rest of the tape responded in kind. After a lower open, equities spent most of the day grinding higher.

Also providing a tailwind, at least to the financial stocks, were a couple of speeches made by Timothy Geithner and Donald Kohn. Testifying before a congressional oversight panel this morning, our Treasury Secretary sought to placate investors that were yesterday chewing their nails about the now infamous bank “stress tests”:

“In a prepared statement for the hearing in Washington, Geithner said ‘the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.’” (source: Bloomberg article below).

Though his successor offered an eerily similar endorsement for both Freddie and Fannie just prior to when the GSEs became wards of the State, most market participants took Mr. Geithner’s statement as a vote of confidence in our banking system. But I see this whole exercise as one morphing from a well intentioned peek under the hood of the banking system into one that resembles little more than CYA politics. Highly regarded bank analyst, Meredith Whitney, echoed similar sentiments on Bloomberg T.V.(see below). She feels the stress test will be far harder on the regional banks than on the money center institutions everyone is fretting about. The timing and methodologies (about which you can read below) have changed so often that this “test” is likely to show whatever Treasury deems most expedient. Benjamin Disraeli once quipped, “There are three kind of lies: lies, damned lies, and statistics”. I’m guessing we’ll safely be able to add the results of Treasury’s stress test to the former British Prime Minister’s famous list.

If Mr. Geithner’s testimony wasn’t enough to talk folks off of the ledge they wandered on to yesterday, Fed Vice Chairman, Don Kohn, chipped in with some federally sponsored advice of his own during a speech today. Mr. Kohn surmised that our economy was on the verge of a stabilization that could lead to an economic recovery in the second half of this year. Mr. Kohn’s forecasts have been wrong just as often as were those of his mentor, Alan Greenspan, but some investors actually tried to take him at his word and displayed some hope today.

Stocks opened down less than stock index futures had suggested they might. Churning around the unchanged mark until Mr. Geithner’s testimony hit the tape, equities spent the rest of the day in an uneven climb. By day’s end, the major averages had recouped almost exactly half of yesterday’s losses, with the Dow (+1.6%) lagging, and the Russell 2000 (+3.9%) leading the way. Even the bank stock index (BKX) followed the script by rising 8% in the wake of Monday’s 15% tumble. Treasurys also reversed course by dropping this afternoon. Yields rose 2 to 6 basis points as the coupon curve steepened. The dollar joined in, though it only edged lower, while commodities made it a clean sweep of reversals by rising today. Both the grain and energy complexes recorded gains, and the precious metals kept up their end of the bargain with a late day sinking spell. The CRB index rose 0.6%

I learned many things while working with CNBC’s Rick Santelli at the Chicago Board of Trade in the 1980s. He used technical analysis to help guide his views back then, and he was an early devotee of both Gann and Fibonacci. Constantly in search of patterns, he was the first to point out to me the concept of “countertrend Tuesday”. Though I don’t know if Rick invented the concept or not, he did notice that markets tended to forcefully trade in the direction of the underlying trend on Monday’s and Fridays. Wednesdays and Thursdays were less strongly correlated with the main directional trend, in his opinion, but Tuesdays were different. Tuesdays seemed to trade in the opposite direction of the main trend, and often with less force and less volume.

Santelli dubbed them, “countertrend Tuesdays” and I’ve rarely seen a better example of his theory at work than what the markets served up today. Each asset class on Tuesday moved in the opposite direction of the strong action posted Monday, as both magnitude (percentage move in price) and force (volume) backed off as they should. Since all these markets don’t always move in such perfect harmony, to which of them (stocks, bonds, currencies, commodities) do we turn to when trying to spy the main trend? It’s a bit of trick question, since it’s really risk appetites that are the driving force in our capital markets.

The urge to take on risky assets, ever more prevalent between 2003 and 2007, has been in a downtrend for 18 months now. Until Monday, those risk appetites were starting to grow after reaching the point of near starvation six weeks ago. The question before investors this evening is whether or not today’s “countertrend Tuesday” action is a tip off that the main trend to flee risk has resumed. It looks to me like risk aversion is about to reassert itself, but the next few days should give us more clues as to whether Monday or Tuesday was the real head fake.

– Jack McHugh

U.S. Stocks Advance as Geithner Says Banks Have Enough Cash

Fed’s Kohn Says Economy May Stabilize, Start Recovery This Year

U.S. Regulators Put Emphasis on Loan Quality in Tests

Whitney Says Stress Tests Will Be Harder for Regional Banks

I’m not sure if this was the reason or not but Geithner in the Q&A
seemed to be open to accepting back TARP money and would welcome it from
those institutions that have been confirmed by the regulators to be
fully able to do so. This is in contrast to recent newspaper articles
hinting that the condition of the whole ‘system’ will be the deciding
factor of whether to accept TARP money back rather than the fundamentals
of any individual bank. GS and JPM in particular have responded
positively.

I am in the midst of a major debate/discussion about the history and usage of GOLD — as a medium of exchange, a hedge against inflation, and as an investment.

What 3 things can you tell me about GOLD that most people do not realize?

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Its a golden open thread — what say ye –about Gold?

(1:58)

Barron’s Mike Santoli discusses the current expectations surrounding the ongoing stress tests for top banks and what will happen to the banks that can’t pass muster.