US industrial production for March declined 1.5% m/m and 12.8% y/y. This is the biggest y/y decline since the end of WWII. Q1industrial production collapsed 20% annualized. Since the recession ‘officially’ commenced in December 2007, industrial production is down 13.3% and factory production has declined 15.7%, which is also the largest decline since the end of WWII.
Q4 industrial production declined at a 12.7% annualized rate. So the past two quarters are showing a depression-like contraction in industrial production…Capacity Utilization fell to 69.3% in March. This is the lowest reading in the history of the series, which began in 1967.
The March industrial production data and February revision verifies our suspicious about too-good-to-be true auto production, industrial production and other economic data for February.
CPI fell 0.1% in March m/m and 0.4% y/y. This is the first annual decline since 1955.
As stock markets attempt to notch up a sixth consecutive week of gains, the debate as to the longevity of the nascent rally rages on. The featured video material sees Steve Leuthold stating that the S&P 500 Index will rise to 1,100 this year, but Laslo Birinyi taking a bearish stance and advising that the “odds are not with you”. Similarly, Jim Rogers expects more “bottoms”, Nouriel Roubini claims markets to be “way too optimistic” and acclaimed Cazenove chartist Robin Griffiths is looking for a retest of the March 9 lows.
As far as the economic outlook is concerned, Martin Feldstain refers to the “faux recovery”, whereas Wilbur Ross and Abby Cohen comment on the slowdown in the econimic deterioration. Adding to the economic debate and related issues such as bank stress tests, the blame game, Goldman Sachs and commercial real estate, this week’s harvest of videos also features Gary Shilling, Joseph Stiglitz, John Bogle, Muhammad Yunus, Ben Bernanke, Jach Welch, Mohamed El-Erian, Christia Romer, Sam Zell, Richard Bove and Nassim Taleb. A full house indeed!
A real gem is provided by outspoken hedge fund manager Hugh Hendry, who proclaimed: “I want to short people like me”. I guess he is not alone.
The selection below kicks off with a new song, “Dow Jones”, from Downsize’s new album “Going out of business”, and concludes with Jon Stewart interviewing William Cohan on his new book, “House of Cards” which details the fall of Bear Stearns.
YouTube: Dow Jones by Downsize
“Dow Jones” is Downsize’s first single off their album “Going Out Of Business”. The video also features Nicole O’Connell.
Bloomberg: Shilling favors disclosure of bank stress-test results
“Gary Shilling, president of A. Gary Shilling & Co., talks with Bloomberg’s Betty Liu and Peter Cook about the outlook for public disclosure of results of the “stress-tests” on US banks. Shilling, speaking in New York, also discusses the outlook for the US economy and investment strategy.”
The Wall Street Journal: Bank stress tests, explained
“Gauging a bank’s health by seeing how much capital it would need to get through a deep recession seemed a good idea at the time, says WSJ economics editor David Wessel. But things have not gone as planned.”
Bloomberg: Stiglitz sees “big” losses from US bank-rescue program
“Nobel-prize winning economist Joseph Stiglitz talks with Bloomberg’s Kathleen Hays about the US government’s Troubled Asset Relief Program for banks. Stiglitz, former chief economist at the World Bank and a professor of economics at Columbia University, also discusses the government’s stress tests for banks and the Obama administration’s strategy to bolster banks’ balance sheets to spearhead a recovery in an economy facing its longest recession in at least a quarter century.”
CNBC: Bogle – crisis: money managers deserve some blame
“Money managers deserve some of the blame for the financial crisis, says Jack Bogle, Vanguard Group CEO.”
Credit Suisse: What is the impact of G-20 Summit?
“On April 2, the G-20 announced a $1.1 trillion aid package and other measures aimed at boosting the global economy. Will this finally get us out of the crisis? Giles Keating, head of the Credit Suisse Global Economics and Strategy Group, explains the impact of this summit.”
Source: Dorothée Enskog and Joy Bolli, Credit Suisse, April 10, 2009.
Bloomberg: Yunus says loan repayment high during crisis
“Muhammad Yunus, founder and managing director of Bangladesh’s Grameen Bank, talks with Bloomberg’s Pimm Fox about the success of microfinance and the repayment rate of microborrowers during the global recession and financial crisis. Microfinance, or microcredit, shot to prominence in 2006 when Yunus and his Grameen Bank won that year’s Nobel Peace Prize for advancing social and economic development by giving loans to the poor without collateral. Yunus speaks from the World Health Care Congress in Washington.”
“The Public-Private Investment Program [PPIP] is a really bad program. You’re really bailing out the shareholders and the bondholders. Some of the people likely to be involved in this, like Pimco [Pacific Investment Management Co.], are big bondholders.
-Joseph Stiglitz
>
First Krugman, now Stiglitz; let’s call it “When Nobel Prize winners agree with Barry” day.
Over the past few months, I have criticized CEA director Lawrence Summers “Sacred Cows/Save the Banks” approach, rather than a save the financial system approach. And the mad attempts to bailout the bond holders also came in for some harsh words. Joseph Stiglitz agrees:
The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.
“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.
The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”
Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.”
I wonder what will happen if or when the public realizes the enormity of the theft that has taken place right out in plain view, before their very eyes. Don’t know? Don’t care? Sheeple? I simply don’t get the complacency . . .
The other issue according to Stiglitz is also something we’ve touched upon: “America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street. Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”
It was March 10th when Vikram Pandit told us that Citi was profitable for the first two months of the year and the S&P’s are up 28% from the March 9th close. After better than expected earnings from WFC, GS and JPM, Citi gave us details today of their earnings beat. What is clear from all 4 is that capital markets activity, commodity/currency/fixed income trading that benefited from volatile markets and kitchen sink accounting on the part of Wachovia/WFC all helped to provide us with the positive surprises.
What hasn’t changed though is the continued deterioration in credit quality in a variety of areas and one should not extrapolate too much the Q1 #’s into Q2. The $ is higher for a 4th day vs the Euro and is at one month high due to uncertainty of where the ECB goes from here since they don’t want to cut rates much more. The irony is that their lack of QE should be good for the Euro. UoM confidence is out today.
And the same damn fools who missed the oncoming freight train in the first place are now busy declaring its all clear. They were wrong before and they are wrong now.
Krugman:
Even when it’s over, it won’t be over. The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.
Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. In 1982, for example, housing was crushed by high interest rates, so when the Fed eased up, home sales surged. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.
Employment will eventually recover — it always does. But it probably won’t happen fast.
Ever notice how poorly Human Beings conceptualize time? The idea that events occur slowly, take patience, prudence, and above all the slow elapsing of the calendar seems to be beyond many people’s ability to comprehend. It makes me understand why some folks want to believe *all of this* is only 5,000 years old — they can wrap their heads around that number.
Good Evening: Keying upon a positive earnings announcement this morning from JP Morgan, stocks were able to overcome some mixed economic data and two fairly large corporate bankruptcies to once again post solid gains. Believers that the worst is now behind us still hold sway in our capital markets, and their presence could be seen if one peeks at the internal characteristics of today’s trading. As they have so often since the March lows, advancing issues outpaced decliners by a substantial margin ( today it was 4 to 1), and volume, while still not heavy, is picking up. The bulls have come out of hiding and now easily outnumber the bears — confirmation of which has been evident in the continuing slide in the volatility index, or VIX. Against this seemingly happy backdrop for investors is the mounting frustration many others feel as they eye the mountains of debt piling up in Washington, D.C.
Stock index futures were on the defensive this morning until JP Morgan reported its first quarter results. Jamie Dimon took on all comers during the ensuing conference call, and investors celebrated by pushing stock index futures back into the green. Interestingly, JPM’s opening print of 34.01 (+ 6%) proved to be its high for the day. Jamie Dimon’s pride and joy did finish more than 2% to the good, but it could not spark anything more than grudging gains among the rest of the financial stocks. Since the financial names have been the leaders since the March 6 low point, it will be interesting to see whether they are becoming winded after the 100% sprint in the BKX over the last six weeks.
After opening 0.5% higher, the major averages settled into a fairly narrow range around the unchanged mark. The economic data released this morning was less than helpful to those who like clarity (see below). A large drop in jobless claims and a decent rise in continuing claims were interpreted to be somewhere on the positive side of inconclusive. The teeter-totter went up and down again with a Philly Fed survey that was less bad than expected, while the housing starts figures fell well short of expectations. Perhaps tempering investor enthusiasm during the first half of the trading session were Chapter 11 filings by General Growth Properties and AbitibiBowater (see below). For readers who remember the 1990-1991 period, I’m sure they’ll agree with me that no real recession is complete without prominent casualties in the commercial real estate and the paper industries.
And yet, despite these bankruptcy filings, the mixed economic data, and the desultory action in the financial stocks, the major averages refused to venture very far into red territory. Whether they were comforted by the firm technical underpinnings described above or were just operating on the theory that won’t go down must go up, market participants sent stocks soaring during the final two hours of trading. Google was quite firm ahead of its earnings release tonight, and the NASDAQ was an obvious beneficiary.
The Dow Transports (+2.9%) snuck past the NASDAQ and Russell 2000 to finish as Thursday’s leading index, while the Dow Industrials (+1.2%) hung back a bit. Treasurys were on the heavy side and yields rose between 5 and 7 bps across the coupon curve. The dollar tacked on 0.5%, while commodities were moribund. Except for the precious metals, most sectors within the CRB had rising and falling components. Gold and silver, however, were smacked in the wake of another call to have the IMF liquidate its gold holdings, this time by officials in both China and India. Both nations have an interest in seeing the IMF dump its gold; India’s jewelry industry would benefit from any drop in the price of the yellow metal, while China would like to see the proceeds flow into the global economy via loans that could help revive their sagging exports. Even though any such sales are a long shot and months away at the earliest, it wouldn’t shock me a bit if China tapped the IMF on the shoulder and said “mine” to any bullion sales. The Mandarins in the People’s Bank of China might see such a move as a good way to hedge its large holdings of U.S. debt obligations. In any event, today’s drop in the precious metals were the difference maker in the 0.25% drop in the CRB index.
In closing let me share with you an interesting experience I had while trying to mail off my tax returns over the lunch hour yesterday. As I wandered over to the downtown post office, I ran smack into Chicago’s version of the “Tax Day Tea Party”. Having its praises sung by none other than CNBC’s Rick Santelli earlier that morning, this “tea party” swelled to fill most of the Federal Plaza around the post office. This was no dull gathering of a few disaffected rabble-rousers, either. The 2000 or so I saw were young and old, male and female; and looked like they came from different backgrounds. Though some wore suits and some wore hard hats, all of them were appalled with the amount of spending going on in Washington. If you’ve ever wondered how Ross Perot garnered 20% of the vote in the presidential election of 1992, the “tax day tea party” will help you understand.
It didn’t seem to matter to them whether the money gushing forth as if the Potomac had sprung a giant leak was earmarked for stimulus programs, loan guarantees, the TARP, or the PPIC — this crowd decried them all as wasteful bailouts. None of them enjoyed the prospect of paying higher taxes down the road to pay for it all, either. When I returned to my office with cheers from the Chicago Tea Party ringing in my ears, I decided to check the internet to see whether this gathering was simply a local phenomenon or something more. As you will see if you click on the final link below, there were “tea parties” taking place yesterday in every state in the Union. Curious to find out just how many cities were involved in each state, I clicked on South Dakota and saw tea parties planned for 3 different cities in the state Tom Daschle calls home. And despite the attention crowds like this are receiving from the Fox network, the crowd I saw was clearly displeased with politicians from both major parties. The root of the frustration I saw on display yesterday was fiscal, not political.
I’ve consistently agreed with those who’ve remarked that “the prudent are bailing out the reckless”. And the money is indeed leaving some wise pockets and winding up in the hands of those who took on more risk than they could handle. Unfortunately, without the TARP and some of the earlier programs, the financial system would likely have imploded. The whole mess is causing some of these prudent folks to find ways to vent their frustration. No doubt inspired by Rick Santelli’s famous rant on CNBC earlier this year, many of them are using the internet to organize. Below is a list of some of the more humorous signs I saw being hoisted in Chicago. The most prevalent aerial display was the old yellow flag with the coiled snake on it that says, “Don’t Tread on Me”. The prudent are starting to find their voices; let’s hope they don’t become reckless.
– Jack McHugh
Signs seen at the Chicago “Tax Day Tea Party”:
“I’ve listed the federal government as a dependent on my tax return”
“If Our Treasury Secretary Doesn’t Have to Pay His Taxes, Then Why Do I Have to?”
“You can’t borrow your way out of debt”
“Jesus Saves — Obama Spends”
“Read My Lips — No New Bailouts!”
“Free Markets, Not Freeloaders”
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@cumber.com.
~~~
Goldman Sachs’ ability to raise capital on Tuesday and its announced desire to pay back the funds obtained from the TARP program is forcing the administration and banking agencies to rethink how they plan to deal with the results of the stress tests they have been conducting. Initially, institutions were instructed not to disclose the results of the tests. The logic was essentially the same as the logic to provide TARP capital support to the major banks and investment banks. That is, if certain firms were singled out to take TARP funds and others declined because they didn’t need them, then the concern was that those firms that got the funds would be stamped as weak or fragile. As a consequence, they would have trouble obtaining or retaining their funds, and customers would be reluctant to do business with them. By forcing all large institutions to accept TARP funds, the belief was that this would blunt or eliminate any stigma that might be associated with the program.
However, it has turned out that TARP funds came with what have proved to be unanticipated and costly strings attached.1 They include not only warrants and the interest costs of the subordinated debt issued to the government, but also restrictions on executive pay, increased pressure to expand lending and to engage in mortgage foreclosure mediation, government involvement in boards of directors meetings, and other micro-management initiatives that seem to be expanding in scope as time goes on.
The original TARP program did not contemplate early repayment of the funds. Recipients would have been required to keep the funds for three years. However, the plan has been modified to permit early repayment, and several smaller banks have redeemed their preferred shares. But the exact conditions for repayment by the nation’s largest banks are still murky. Speculation has it that a successful stress test and the demonstrated ability to generate private-sector capital to replace the government capital are likely to be preconditions. Goldman’s efforts to repay the funds on a timetable shorter than had been anticipated will force the Treasury’s hand. If Goldman gets out from under the TARP program, its exit may signal to the market that it not only has passed the stress test but is deemed to be financially viable. But this could stigmatize those firms that are either unable or unwilling to also exit the program, facing the administration and regulators with a critical dilemma.
Not releasing the stress test results threatens to stigmatize the remaining TARP recipients, particularly if Goldman is allowed to leave the program. Furthermore, other firms not needing the support will have the incentive to rush to execute a Goldman-like exit, leaving only the weak behind. In finance, we would term this a separating equilibrium.
Should the government now releases the stress test results, this would simply serve as another explicit way to separate the weak from the strong. Release of the results might dampen incentives for stronger institutions to rush to leave the program, but the risk that the weaker institutions would be stigmatized could be heightened.
So, what should the administration and agencies do? First, we need to recognize that it was a mistake to have set up the program in such a way that participants were not first required to write off their bad assets before government funds were supplied. Weak institutions can’t be permanently insulated from market discipline by allowing them to hide among a group of healthy institutions. There is simply too much information being required of publicly traded firms for this to be a longer term or viable solution.
Second, as has already been noted, the costs to healthy institutions of participating in the program seem to clearly outweigh the benefits. Third, the solution does not lie in disclosing only aggregate or summary stress test results, because healthy institutions will have strong incentives to make themselves known, either through strategic leaks or through other revealing signals in their financial reports and disclosures.
All of this suggests that the agencies should release not only the results of the tests but how they were structured, implemented, and scored. Doing so would actually constitute a significant and tangible de facto strategy for weaning of our largest financial institutions from government support and be a baby step retreating from both the too-big-to-fail policy and the moral hazard risks that accompany government support.
The public benefit from Goldman’s exit may be that it jump-starts a return to reliance upon market incentives to do what the regulators have been reluctant to do. That is, to confirm what TARP participants’ financial disclosures are already likely to suggest about the relative health of the largest banks. This will be a good result and will hopefully accelerate a healing process that is long overdue.
1These were not anticipated in our previous commentaries on the TARP rescue program.
Bob Eisenbeis, Chief Monetary Economist, email: bob.eisenbeis@cumber.com
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Copyright 2009, Cumberland Advisors. All rights reserved.
The preceding was provided by Cumberland Advisors, 614 Landis Ave, Vineland, NJ 08360 856-692-6690. This report has been derived from information considered reliable but it cannot be guaranteed as to its accuracy or completeness.
For a list of all equity sales/purchases for the past year, please contact Therese Pantalione at 856-692-6690, ext. 315. This report is currently about 600 pages in length. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. This does not constitute an offer to sell or the solicitation or recommendation of an offer to buy or sell any securities directly or indirectly herein.
Financials — and, to a lesser extent, industrials — have not only accounted for a hefty share of the S&P 500 Index’s nearly 25% gain so far, but have also more than held their own vis-à-vis their index weighting.
By the same token, while the most heavily-weighted sector, information technology, has played a major role in the rally, it hasn’t pulled much more than its weight, so to speak, in terms of its market capitalization.
Name 3/9/2008 Close 4/15/2008 Last Net Change in Points Net Change in % % of Overall Move in SPX Cumulative % of Overall Move % Weight in Index Share as a % of weighting
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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