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

In an effort to explain the government’s handling of the financial crisis to the American public, Federal Reserve chairman Ben Bernanke is stepping outside of insider financial circles. WSJ’s Jon Hilsenrath reports.

If you blinked, you missed it and that was last week’s 11.1% rise in the purchase component in the weekly MBA data, a 3 month high, as today the MBA said it fell back down by 11.3% and is just 1% above the level right before the Fed announced their MBS purchase plan. This is even as mortgage rates remain near record lows at 4.7% for a 30 yr. Refi’s for the week fell by 10.9%.

Yes, one can argue that the housing sector would be much worse if rates weren’t this low but is flooding the Fed’s balance sheet of tough to sell longer term MBS worth the cost especially after seeing how effective lower prices are in spurring foreclosure purchases.

The 25%+ rally in equities off the low has successfully turned sentiment as the weekly II data reveals that Bulls rose to 43.2 from 36, a hair above its highest level since June while Bulls fell to 34.1 from 37.1 to the lowest since the 1st week in Jan. Y/o/Y CPI is expected to fall for the 1st time since ’55.

Jim Welsh of Welsh Money Management has been publishing his monthly investment letter, “The Financial Commentator”, since 1985. His analysis focuses on Federal Reserve monetary policy, and how policy affects the economy and the financial markets.

~~~

Investment letter – April 3, 2009

In the last three weeks, three significant policy announcements have been made. The Federal Reserve stated it is firmly committed to Quantitative Easing and will double its balance sheet before the end of 2009. Treasury Secretary Geithner announced a plan to get toxic assets off of bank balance sheets. And yesterday, FASB announced it is going to give bankers the discretion of valuing their toxic assets. Although the market initially responded favorably to each announcement, it did subsequently sell off after the Fed’s and Geithner’s announcements in the following days. This indicates that there is still a fair amount of selling pressure in the market.

The market has also been responding to economic news that has been viewed as being ‘positive’. On Tuesday, consumer confidence went up from 25.3 to 26 in February. Yippee! Too bad that the 25.3 in January was lowest number ever recorded since they started keeping records in 1967. On Wednesday, construction spending was reported down .9% in February, rather than the -1.5% expected. Good news!
But if one bothers to look at the data a different picture shows up. In January, non-residential construction was down -4.3%, largest drop in 15 years. In February, non-residential spending was up .3%, which is why the overall number wasn’t as negative. In effect, it declined 14 times as much in January as it rose in February, and that’s good news?

This morning the Labor Department announced that another 663,000 jobs were lost in March, bringing the total job losses since December 2007 to 5.1 million. The average work week dropped to 33.2 hours, a new record low. In the next six months, the economy will lose at least another 2 million jobs, and the unemployment rate will exceed 10%. The jobs decline and lower personal income will cause default rates on every type of credit to increase, which will increase bank losses, and curb consumer demand. This will continue to be a very difficult environment for most companies to generate earnings.

The announcements by the Fed, Treasury, and FASB will provide some incremental help for the banking system. But they will not keep home prices from falling further, credit card default rates from climbing, commercial real estate values from declining either, and another 2 million jobs will be lost in the next 6 months. The charts below show that the credit markets for residential and commercial real estate have not improved despite these announcements.

As I wrote in the March 23 letter, “Between 1966 and 1982, the absolute price low was made in December 1974 when the DJIA traded at 577, even though the secular bear market ran for almost 8 more years. My hope is that the March 6 low will be the low for this secular bear market.” The odds have increased that the March 6 low will hold for an extended time. However, the challenges are still so great that preservation of capital should remain the primary goal. Bull markets climb a wall of worry. But can this market jump the crater that persists in the banking system, credit market, and real economy? Not without a correction. My guess is that the initial rally off the March 6 low is just about over, since there are no more policy rabbits to be pulled from the government’s hat. I don’t think the S&P will get over 860, without first undergoing a correction. Although the market may hold up for a week or two, a pullback to 760-775 is coming. And if those rabbits prove to be scarecrows, and fail to deliver the help needed and now expected, a decline to lower levels is not out of the question.

-E. James Welsh

So much for voluntary foreclosure abatement:

“Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration’s housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers’ payments to affordable levels. Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws.

Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process. The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off.

Some of the mortgage companies are themselves receiving funds under the government’s financial-sector bailout, which could make their actions politically sensitive. But mortgage companies say they are taking steps to keep borrowers in their homes, and are only resorting to foreclosure when there are no other options.”

We saw foreclosure sales drop in the second half of 2008 as banks employed all manners of accounting tricks to avoid actually reporting delinquencies. We’ve previously mentioned that the voluntary foreclosure abatements were merely kicking the can down the road. So to, were the bank gimmicks like extending the date of delinquencies from 60 to 120 to 180 days. As they run out of tricks, foreclosure-related filings increased in February 2009 almost 30% from February 2008, according to RealtyTrac.

And the backlog of “seriously delinquent loans” keeps growing . . .

>

Previously:
“Reluctant Banks” Let Defaulted Borrowers Stay in Homes (April 2008)

http://www.ritholtz.com/blog/2008/04/reluctant-banks-let-defaulted-borrowers-stay-in-homes/

Source:
Banks Ramp Up Foreclosures
RUTH SIMON
WSJ, APRIL 15, 2009

http://online.wsj.com/article/SB123975395670518941.html

Here’s some news: TBP will be hosting a conference in NY in June, discussing a variety very fascinating topics with a terrific line up of speakers. The conference’s working title is Capitalism After Crisis & Crash.

There are some big name guests already lined up — including Dylan Ratigan, Nassim Taleb, Doug Kass, Chris Whalen, and others.

The discussions will focus on the state of the banking and credit system, the cause of the financial crisis, the role of the media, the future of hedge funds, and opportunities for building a new, stronger financial system.

Prices have not yet been set, but the space is limited to 300 attendees.

There will be several keynote speeches, and at least 3 panels

>

• Financial Media and the Crisis: How’d they do?

• Hedge Funds: Performance & Regulation in the Post Crisis Era

• The Banking System After TARP & PPIP

>

One of the cool things about having a blog sponsor a conference is the interactive nature of the format. For the panels and Q&A, blog readers can submit queries. And some of the video will be posted here, too. I am very jazzed about it.

Save the date: June 3rd, 2009
New York Athletic Club (Sixth Ave. and 59th St

Full details to follow next week.

Any ideas or suggestions, please use comments.

An anonymous (but known) friend writes me:

“I’m watching CNBC for the first time in about two weeks this morning. They seem to be actually surprised that retail sales dropped in March

Lets see, economy shrinking at 6% rate, unemployment climbing to 25 year high, 600K+plus jobs lost, car sales off 50%, and every discretionary retailer reporting shitty results.

AND SOMEHOW IT’S SURPRISING THAT RETAIL SALES FELL?”

Peter Bookvar fleshes out the details:

Retail sales were weaker than expected with the headline figure dropping 1.1% and ex autos dropping .9%. Digging beneath the headline, there were declines in most categories including motor vehicles and parts which fell for the second straight month even as unit auto sales rose for the month. Furniture fell, electronics got shellacked and there were further declines in clothing which had seen a bit of a rebound thanks to the early year discounts. With many of those discounts abating as the year progresses, the conversation will again return to whether the consumer is in a place to pay full price for goods that were very recently 70-80% off. Additionally, both non store retailers and department stores saw declines meaning people weren’t going out to buy stuff and didn’t buy stuff while staying home either.

On the inflation front, headline PPI fell 1.2% while core PPI was flat. Both readings were less than expected. For some reason, people have gotten optimistic about short term inflation but as I noted last month, the prospect of further price declines as we enter warmer months is very real and that prospect has not abated at all. There continues to be deflation in the pipeline with intermediate goods dropping 1.5% and crude goods, those at the earliest stage of production, dropping .3%. On the crude goods front, the .3% decline is a bit less of a price drop than we’ve seen lately so maybe there will be a let up in the future in terms of the deflation on this indicator. But for now, producer prices continue to contract and as best as I can tell, they will continue to do so for the immediate future.

Chairman Ben S. Bernanke
Federal Reserve
At the Morehouse College, Atlanta, Georgia
April 14, 2009
~~~

I am pleased to have the privilege of speaking today to the students and faculty of Morehouse College, the only all-male historically black institution of higher learning in the United States. It is sufficient to note that Martin Luther King, Jr., was a graduate of Morehouse. Yet a roster of distinguished alumni that also includes former Atlanta Mayor Maynard Jackson, former U.S. Surgeon General David Satcher, and filmmaker Spike Lee testifies to the success of your stated mission of “producing academically superior, morally conscious leaders for the conditions and issues of today.”

My remarks today will focus on the ongoing turmoil in financial markets and its consequence, the global economic recession. The financial crisis, the worst since the Great Depression, has severely affected the cost and availability of credit to both households and businesses. Credit is the lifeblood of market economies, and the damage to our economy resulting from the constraints on the flow of credit has already been extensive. With recent job losses exceeding half a million per month, this year’s college graduates are facing the toughest labor market in 25 years. In the communities in which you and I grew up, many families are trying to cope with lost employment and depleted savings or are facing foreclosure on their homes. Firms have shut factories and cancelled construction projects. States and municipalities are scrambling to find the funding to provide critical services. And although we naturally tend to be most aware of conditions in the United States, we should not overlook the impact that the crisis is having virtually everywhere in the world, particularly on many citizens of countries that struggle economically even when the global economy is doing well.

In the midst of all of these concerns, many Americans have recently celebrated Easter or Passover. As you may know, a highlight of the traditional Passover meal occurs when the youngest child asks four questions, the answers to which tell the history of the Jews when they were slaves in Egypt and during their exodus to the Promised Land. In the spirit of the holiday, today I will pose and answer four important questions about the financial crisis. Of course, my answers will have to be brief, but we will have more time for additional questions at the conclusion of my prepared remarks.

How Did We Get Here?
The first question I would like to address is: How did we get here? What caused our financial and economic system to break down to the extent it has? Not surprisingly, the answer to this question is complex, and experts disagree on how much weight to give various explanations. In my view, however, to tell the story fully–and, in particular, to understand its international scope–we need to consider how global patterns of saving and investment have evolved over the past decade or more, and how those changes affected credit markets in the United States and some other countries.

At the most basic level, the role of banks and other financial institutions is to take the savings generated by households and businesses and put them to use by making loans and investments. For example, financial institutions use the funds they receive from savers to provide loans that help families buy homes or allow businesses to finance inventories and payrolls. Financial markets, such as the stock and bond markets, perform a similar function, as when a firm raises funds for a new factory by selling a bond directly to investors. When the financial system is working as it should, it allocates funds both prudently (that is, with proper attention to risk) and efficiently (to the most productive uses).
Read the rest of this entry »

Another good chart from Ron Griess of Thechartstore.com, highlighting changes in trailing 4 quarterly earnings of the S&P500:

>

Leave it to the clever boys at Goldman Sachs to turn dross into gold: They have come up with a way to hide massive losses so clever, it requires special comment: The Orphan Month.

Yesterday, we noted that the bulk of their profits had come from AIG transfer payments — the theft from taxpayers AIG 100% payouts funded via bailout monies that saw Goldie as one of the largest recipients. Floyd Norris notes that most of the AIG effect was in December. “For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.”

How is it possible that this occurred? Isn’t GS on a December to February calendar? Well, there is a small asterisk about that. It seems that GS is moving from a December to a quarterly calendar. Meaning their latest Q is January thru March.

But what of December, with all t he AIG monies and the comparison to the strong December 2007 and all?

In a word, Orphaned:

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s news release, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ending in February.

The orphan month featured — surprise — lots of writeoffs. The pre-tax loss was $1.3 billion, and the after-tax loss was $780 million.

Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?

Truly astounding . . . the word Chutzpah simply does not do it justice . . .

>

Source:
The Case of the Missing Month
Floyd Norris
NYT, April 14, 2009, 6:55 am

http://norris.blogs.nytimes.com/2009/04/14/the-case-of-the-missing-month/

Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).

This is his most recent commentary:

~~~

Let’s be clear about something here: GS earned twice what the street expected in a period of time that should have been among the worst in the company’s history. I’m not a conspiracy theorist or someone who believes we should have let bank after bank declare bankruptcy but GS’s profits were, in many cases, the result of being made whole on a variety of transactions where the counterparty was AIG. These transactions were settled at par, 100% on the dollar, despite the prospect of an AIG bankruptcy that would have surely resulted in bank after bank taking a haircut on many of these securities, swaps and other transactions. So lets be clear about this; GS is one of the major beneficiaries of our tax payer dollars and the great irony is in an alternate universe, the quarter in which GS’s reported earnings were twice street expectations would have been the quarter in which GS declared bankruptcy.

At the same time, let’s not forget that the entire reason we originally injected $85B into AIG was because it was systemically important and its failure could have jeopardized the entire financial system. Whether that actually would have come to pass, I don’t know. But what’s done is done and GS was one of those institutions that benefitted. So before people throw up their arms ranting and raving, let us remind ourselves that this is exactly the outcome the government wanted when it handed AIG the original $85 billion. They wanted that money to filter through the global banking system and help get capital to financial institutions that were in need. But once again we are reminded of the fleecing of the American public by bondholders and counterparties the world over. While we are on the hook for billions upon billions of dollars, these creditors have not taken one penny of losses despite, in theory, being on the hook for billions. I once again refer you to Tyler Cowen’s NY Times article on the subject. http://www.nytimes.com/2009/04/05/business/economy/05view.html?_r=1

Lastly, I would just add Good for GS! Pay back that TARP money. There is no reason to allow government intrusion into your business one second longer than absolutely necessary and absent everything else, an organization that does not need government assistance and does not want government assistance should not get government assistance.

All around the world

Mixed trading around the world with the Nikkei trading lower and Europe, open once again today, trading generally higher. Over in Japan, UBS is out with a report suggesting that Mizuho Financial, which has already raised over $4 billion, may need as much as $14 billion more in order to shore up its capital base. As well, the Japanese government may start borrowing money in three and seven year increments in order to help fund its latest stimulus plan. Over in Europe, markets are up about 1%. And ECB member signaled that further rate cuts may be in order to combat rising deflation risks. The Euro is generally lower as a result. In Germany, Woolworth which employs 11,000 people filed for insolvency. Not much else is going on.

Macroeconomic

There are a few important data points today beginning at 8:30 with PPI and Retail sales. In the case of PPI, expectations are for no gain on the headline and a .1% gain at the core which would put the YOY figures at -2.2% and 4.0% respectively. Its difficult to predict the individual components but lets keep an eye on motor vehicle prices. They seem to be trending higher as of late. In the case of retail sales, expectations are for a .3% gain on the headline and no gain at the core although I would guess the bias is to the downside. Like the PPI, let’s keep an eye on unit vehicle sales which were up for March. That said, core sales are probably due for a pullback after the relatively strong start to the year and perhaps March will see some moderation.

And lastly, at 10 is business inventories which are expected to fall again, down 1.2%. This would be the sixth consecutive month of inventory declines which, in the longer term, certainly bodes well for economic performance but as always, the short term catches the brunt of the negative repercussions. This is a February figure and if in line, continues to set up the first quarter as the worst on the inventory front in some time, not that the fourth quarter was a day at the beach.