A conversation about the economy with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP, Kate Kelly of The Wall Street Journal, Andrew Ross Sorkin of The New York Times and Joseph Stiglitz, economist and a member of Columbia University faculty
Note the question mark in the title — is this the same gig as yesterday? Yesterday morn also had Dow Futures off triple digits, but it was less of a sell off than implied.
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But it didn’t seem to matter much– markets rallied after the open, and closed much better than the futures would have suggested.
Is today more of the same, or is the overdue correction imminent.
I suspect the latter.
This should be the last of it! The upgrade to WP2.7 seems to have caused a few problems, and they are now (mostly) resolved.
The following glitches have been repaired:
MacroNotes – is working! Look for automatic updates throughout the day.
Email This — has returned.
« Older Entries — is functioning again
Anything else not working right? Please let me know.
Good Evening: The major U.S. stock market averages declined on light volume today, and an outbreak of a new strain of swine flu was deemed the primary culprit. Upon closer inspection, however, it seems as if the sloppy — even hoggish — bank lending practices of the previous up cycle are as much to blame for today’s pullback as any potential pandemic.
While I was away late last week, stocks tried to best the recent highs they had set in anticipation of Friday’s release of the “stress test” parameters. The less than stressful reality of these tests for large banks proved anticlimactic, and equities were unable to muster the energy to reach fresh, post-March 6 highs. As such, the averages may have been looking for an excuse to retreat when the news from Mexico made the rounds over the weekend. A strain of swine flu known as H1N1 was reported to be responsible for more than 100 deaths in Mexico. Though no deaths have been reported in other countries, tests have confirmed that this flu has spread to parts of the U.S. and as far away as New Zealand.
In reaction to these reports, the World Health Organization raised its alert level and investors accordingly raised their level of concern during today’s trading. Fears surfaced that global travel would be disrupted and that overly cautious trade sanctions (e.g. pork imports) would be put in place. The playbook from the 2003 SARS outbreak was dusted off and put to use, with hotels, airlines, cruise lines, and casinos among the day’s biggest losers. Since H1N1 appears to be treatable with Tamiflu and other anti-viral drugs, it came is no surprise that biotech and assorted health care names were among Monday’s winners. Eyebrows were raised, though, when GM managed to gain 20% in the wake of an equity-for-debt swap offer that will likely gain little traction (see below). Short-covering and capital structure arbitrage strategies aside, GM common and the company itself will need enormous measures of both luck and skill to survive in anything resembling current form.
Stock index futures were indicating losses of up to 2% prior to this morning’s open, but the actual damage was approximately half that amount when the opening bell rang in New York. Market participants were soon of a mind that the media was over-hyping the flu story, and they managed to push equities back above unchanged before lunchtime. The averages then resumed sinking during a relatively quiet afternoon before closing just above their worst levels of the day. Helped by GM, the Dow (–.65%) suffered least, while the Dow Transports (-4.7%) understandably brought up the rear. Just as they did during the SARS outbreak in 2003, Treasurys performed well. A large 2 year note auction was quite well received, and yields fell between 4 and 8 basis points. The dollar was somehow deemed a beneficiary of the swine flu, and it rose 1.4% today. Commodities were much less fortunate, as fears of protectionism hiding behind a fig leaf of health concerns hurt almost every major sector. The CRB index declined more than 2%.
While it’s still early by flu outbreak standards, most health experts seem to believe that the H1N1 strain of swine flu is unlikely to reach pandemic proportions. If so, and I’m particularly unqualified to doubt medical professionals, to what can we better attribute to today’s decline in the stock market? I have two candidates and the first is a piggish rise in bullishness among large institutional investors. The latest “Barron’s Big Money Poll” came out this weekend, and the results display anything but doubt for the future of either U.S. stocks or the U.S. economy. Fully 59% of portfolio managers in the survey counted themselves as bullish on equities, while only 13% said they were negative. Readings of 4-1 bulls over bears are usually reserved for the frothier portions of bull markets — or, perhaps, at the peak of a vigorous bear market rally. As BAC-MER economist, David Rosenberg, points out in his piece below, the figures are even more striking (in the opposite direction) for Treasurys. 84% are bearish on securities issued by our government while a mere 3% are constructive. I may not be bullish on U.S. debt, but maybe the overwhelmingly bearish sentiment means it’s a bit too early to short them.
Given today’s 5% drop in the KBW bank stock index, my other candidate for an old affliction that might be responsible for weighing down stock prices today is the epidemic of shoddy bank lending practices during the previous boom. Infecting far more than just subprime residential real estate, this contagion spread to commercial real estate, leveraged loans, junk bonds, CDS, and even plain old corporate bonds. This strain of poor lending was evident in the narrow spreads seen for all types of credit in the run up to mid 2007, and despite repeated assurances from so many government officials and bank CEOs to the contrary, this problem is still not contained. The contagious desire among banks to extend credit to so many parties with hardly more upside than the generation of upfront fees is the real swine flu of our generation. And, just like its pandemic namesake, this strain of sick lending can be found all over the world.
Let’s look at Wells Fargo, a bank that has been in the news quite a bit of late.. The Bank of Buffett, according to the Oracle himself, stayed mostly out of trouble during the last cycle by avoiding doing the “dumb things” that so many of its competitors felt an irresistible urge to do on the lending side. “But they’ve never felt compelled to do anything because other banks were doing it, and that’s how banks get in trouble, when they say, ‘Everybody else is doing it, why shouldn’t I?’” (source: Fortune article below). As a Wells Fargo mortgagee myself, I agree with Mr. Buffett that Wells maintained a unique sense of discipline during the last cycle. But now WFC is lugging around the old Wachovia, which was a poster child of “me too” credit practices prior to its merger with Wells. Strictly because it now owns Wachovia, I’m a lot less sanguine about the future of Wells Fargo, a sentiment apparently shared by Dick Bove (see below).
This Rochdale Securities analyst has been favorably disposed toward banks for quite some time (read: bullish at much higher prices than these institutions fetch today). For Mr. Bove to cut Wells Fargo from a buy to a hold and question WFC’s cash levels and ability to digest the Wachovia transaction may thus actually be news. Mr. Bove agrees with Mr. Buffett that Wells is very well run, but he also agrees with me that Wells will be hampered by Wachovia going forward. Trying to keep up with the Joneses in New York, the Charlotte-based bank caught the “everybody else is doing it” syndrome so abhorred by the management of Wells and its famous shareholder. Let me repeat: I’m not saying Mr. Buffett is wrong and I’m not advocating anyone be short of Wells Fargo. What I am saying is that bullish market sentiment is already running a fever just as a flu scare strikes a global economic sentiment that is already bedridden. H1N1 may or may not have much of an impact on the world, but the real swine flu is still wreaking havoc.
– Jack McHugh
U.S. Stocks Fall as Swine Flu Drags Down Travel, Hotel Shares
GM Bondholder Group Says Offer Isn’t ‘Reasonable’
Checked your 401k lately? The recent financial collapse has devastated this retirement resource. Older workers are hardest hit, as their financial futures may now be at risk. Steve Kroft reports.
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Watch CBS Videos Online
13:01 April 19, 2009 4:04 PM
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Source:
Retirement Dreams Disappear With 401(k)s
Older Americans’ 401(k)s Have Plummeted; Many Fear They Will Never Get To Retire
60 Minutes, April 19, 2009
http://www.cbsnews.com/stories/2009/04/17/60minutes/main4951968.shtml
Fascinating stuff:
“All of this garbage paper that’s going bad — the troubled residential mortgage backed securities (RMBS), the commercial mortgage backed securities (CMBS), the asset backed securities (ABS), the Fannie Mae bonds, the corporate loans, and so on — hasn’t just gone “Poof.”
Instead, more and more of it has been landing on the Fed’s doorstep — either through direct ownership or as collateral against Fed loans that keep getting rolled over.
The result? The Fed’s once pristine balance sheet is starting to look more and more like the balance sheet of a troubled financial institution.”
The quality of the balance sheet of the U.S. central bank is deteriorating. The Fed is now heavily burdened by the same kind of crappy paper that has been hammering private U.S. banks for several quarters.
And the Fed banks are holding total capital of just $45.7 billion against the sum total of $2.19 trillion in assets, meaning the Fed is leveraging its capital 48-to-1. That compares to only 27-to-1 two years ago…
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Source:
The Fed: Our Next Troubled Bank?
Friday, April 24, 2009 11:46 AM
http://www.istockanalyst.com/article/viewarticle/articleid/3206140
Compilation of clips from Max Keiser’s news appearances for 24 & 25 April to discuss: the New Revolution in France as boss-nappings are all the rage and the G7 finance ministers meeting in Washington DC
3:45
Mon. Apr. 27 2009 | 10:13 AM ET
What the stress test results will mean for financials going forward, with Paul Miller, FBR Capital Markets and Christopher Whalen, Institutional Risk Analytics.
"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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