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

Repaying TARP and what that means, with Bob Jones, Old National Bancorp; Lou Brien, DRW Trading Group strategist; and Jim Bianco, Bianco Research president.

Now that the bulk of the crisis has passed, and the panic has subsided, the banks want to return the money, no strings attached. Return the cash, leave the regulatory environment alone, write downt h warrants, and move on with our lives.

My response is, “Not so fast.”

Let’s not forget how this occurred: A radical deregulatory scheme let these companies operate with little or no oversight. Without adult supervision, they promptly blew themselves up, destroyed billions of dollars in shareholder value, cost the global economy trillions, and scared the beejesus out of everyone else.

When these companies were circling the drain, nobody but Uncle Sam (and the Taxpayers) — and for only Goldman Sachs and GE, Warren Buffett — was willing to fund these companies. The risk levels were extremely high, the potential damage to the dollar, the taxpayer, inflation, and the US credit rating was also very high. As is, the US is still out of pocket trillions of dollars, and are likely to see major losses. Prudent well managed firms are seeing their expenses go thru the roof — especially FDIC insurance.

This is not money that you get to return and say, Thanks, but we no longer need this.

Instead, there are several things that should happen, if our elected officials and regulators have any savvy:

1) The Warrants should be placed into a Trust for the benefit of taxpayers, where it will be held for 5 or 10 years. Then, it can be liquidated for the benefit of the Treasury.

2)Re-instate Glass Steagall, revert the leverage rules, repeal CFMA;

3) Adequately fund and staff the SEC;

4) Remove the incentives for excess risk taking  (i.e., private profits but socialized losses)

5) Align compensation systems with actual risk adjusted profits.

Lastly, I would like to see a bi-partisan, Blue Ribbon panel put together analyzing why this occurred. Put an Elizabeth Warren or a Paul Volcker in charge, and give them 6 months to create a comprehension assessment of what went wrong, along with recommendations on how to fix it.

But a no-strings-attached, return-of-the-money, back-to-business-as-usual ? Not so fast . . .

>

Source:
U.S. Weighs How to Let Banks Give Money Back
LOUISE STORY and ERIC DASH
NYT, May 19, 2009

http://www.nytimes.com/2009/05/20/business/20repay.html

Banks seeking to repay TARP billions must wait until June 8
Ronald D. Orol
MarketWatch, May 19, 2009, 5:22 p.m.

http://www.marketwatch.com/story/goldman-morgan-stanley-ask-to-repay-tarp-reports

Fed to Respond to TARP-Repayment Applications in June
Scott Lanman
Bloomberg, May 19 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7MkO._fo1fw&

Stock prices are consolidating after their recent strong rally. So where are they going next?

5/20/2009

While some recent housing data has shown some signs that the housing
market is close to a bottom, the purchase component of the weekly MBA
data still is evidence that natural buyers are not responding to
historically low interest rates. Mortgage applications for purchases
fell 4.4% for the week and are only 7.6% above the low in this cycle.
Refi’s rose 4.5%. The disconnect between the pick up in sales in certain
markets and the still sluggish level of purchases in this weekly data
can be partially explained by the large level of foreclosures that are
making up about 50% of sales and are being done many times in cash.
Today’s WSJ article highlights this as they report that 38% of
foreclosure sales are in cash in the Phoenix area, 67% in Punta Gorda,
FL and 39% in the Vegas area. The homebuyer that plans to live in the
home still seems to be cautious. ABC confidence fell 3 pts after 4 weeks
of gains.

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

~~~~~

May 20, 2009

Some bullets on different asset classes follow.

US Stocks

It appears that the March 9 low is seriously established. Since then, the market has powered higher with broadened participation. The market has confirmed a determined upward bias. We can see evidence of this broadening by examining the S&P 500 Index and its component parts four different ways. Let’s look at four ETFs to support this view.

RSP is the stellar performer among them; it is the equal-weighted version of the S&P 500 stocks. From March 9 through May 18 it delivered a total return of 50%. Compare this with RWL, the revenue-weighted version of the same S&P 500 index; it delivered a total return of 43.5% for the same period. SPY is the ETF that tracks the cap-weighted S&P 500 index; it was up 35%. OEF is the cap-weighted largest 100 stocks within the S&P 500 index; it was up 32.7%. Conclusion: market leadership has been broadening, which is why the specially designed ETFs are outperforming the standard cap-weighted ETF. Disclosure: RSP is Cumberland’s largest ETF position and a current core holding in US ETF portfolios.

Contrast the above with the performance of these same four ETFs during the period of January 1, 2009 through March 9. Then the market was in steep decline. Selling was uniform and impacted all four ETFs nearly equally. RSP declined 28.4%, RWL was off 29.3%, SPY fell 26.7%, and OEF declined 26.8%. Conclusion: during the sell-off nearly all stocks fell; after the bottom was formed on March 9 the market leadership changed, which is why the highly correlated performance during the decline morphed into the diverse and less-correlated outcome of the recovery.

International Stocks

Emerging markets have been the stellar performers in the rally since March. Brazil and China have been leaders among them. Many believe that China’s stimulus response to the global financial crisis has been and remains more effective than that in the US. Cumberland has been overweight China and overweight the emerging markets in international ETF accounts. Bill Witherell will be writing about the details. Cumberland continues to overweight this sector.

Tax-Free Bonds

Read the rest of this entry »

I mentioned the weak housing starts yesterday (New Construction Falls 54%: Less is More), but here is a great chart from RM that puts it into perspective:

>

>

Building permits in April 2009 decreased 3.3% from March and declined 50.2% from April 2008, to 494,000.  Housing starts in March 2009 decreased 12.8% from the prior month and declined 54.2% from the prior year, to 458,000.

>

Sources:
NEW RESIDENTIAL CONSTRUCTION IN APRIL 2009
Census.gov
MAY 19, 2009 AT 8:30 A.M. EDT

http://www.census.gov/const/newresconst.pdf

http://www.census.gov/const/startsua.pdf

http://www.census.gov/const/www/newresconstindex.html

Good Evening: On the surface, the tiny changes in asset prices in the U.S. on Tuesday might not seem like much to write about. Mixed earnings results, debatable economic data, and dwindling volatility levels may indicate a snoozer, but real asset prices (i.e. our standard of living) actually fell today because our currency continues to fade. And while the U.S. government keeps trying to find new ways to restart borrowing and lending, China has apparently decided to do something about their large exposure to the greenback. They’re buying raw commodities and cutting long term deals for access to more. I hope we as a nation learn to stop creating paper and the unsustainable debt load the resulting dollars support.

U.S. Economy: Housing Starts Drop on Apartments, Condominiums

Equities in overseas markets responded to yesterday’s rally in Wall Street with one of their own last night, but the accompanying uptick in U.S. stock index futures didn’t last once the April housing starts figures were released. Starts were down; permits were down; and both set new record lows in the process. While I agree with those who tried to spin this release as a positive development in that fewer starts will lessen the supply of unwanted new homes, the optimists then tried to have it both ways. Some pointed out that single family starts actually rose (condos & apartment construction tanked), saying it was further evidence the housing market had reached bottom. Nice try, but not quite.

Derivatives Market Declines for First Time on Record

There were some positives to report. LIBOR continued to recede, even though many other credit spreads were napping today. SKS was able to convince investors its earnings report was worthy of a buy ticket or two, but HD was unable to pull off the same trick when they reported. The good news, at least to me, was that the total number of outstanding OTC derivative contracts is starting to shrink (see above). We still have a long way to go before this time bomb is defused, and I applaud Congress and the Obama administration for trying to tackle this issue. Contracts need to be more standardized and they need to be moved on to proper exchanges, but at least this situation is starting to improve.

Fed to Add Older CMBS to TALF Lending Program in July

Equities opened near the unchanged mark and then proceeded to spend the day within sight of it. Reports of frayed and/or decaying CMBS structures hurt financial shares, but even this news had an offsetting announcement. The Fed has decided to further loosen the TALF eligibility to now include existing CMBS paper (see above). The news couldn’t prevent the BKX from declining 3.5%, but it did seem to help hold the rest of the tape together. As the closing bell approached, however, stocks retreated from their highs for the day to finish mixed. Every index finished less than 0.5% away from yesterday’s close, and a new, post-panic low in the VIX reflected it. Treasurys, too, were virtually unchanged. The 10 year note saw its yield rise a mere 1 basis point. The dollar was the only scene of any real action, and the greenback suffered another loss that approached 1%. The precious metals finally awoke with a small stir to the upside, but, like stocks, the rest of the commodity complex remained mired near the flat line. The CRB index rose all of 0.1% today.

China’s Stockpiles Are New Sovereign Wealth Strategy, RBC Say

As last summer’s Olympic games in China were coming to a close, so did that nation’s appetite for commodities. Oil, iron ore, base metals, grains — just about any raw material that could be shipped — all saw Chinese demand disappear. Cramer fretted that FCX and other materials names were “doomed until China comes back”, and prices of all global commodities fell between 30% and 80%. Now that the rest of the world is on its back, this large and getting larger Asian nation is back buying commodities and taking advantage of the large price discounts on offer. Economists have pointed to this new demand from China as proof positive that these orders signal an upswing in China that will soon lift the rest of the globe out of its economic funk.

Not so fast, at least according to RBC analyst, Brian Jackson. He sees China’s recent purchases as not only a stockpiling effort to take advantage of lower prices, but also as a sovereign hedge against dollar depreciation. In the article above he states: “Increased spending on commodities represents a reallocation of China’s sovereign wealth away from the accumulation of financial assets,” Jackson said in a May 15 research note (source: Bloomberg.com). Some may pooh-pooh this analysis because it doesn’t make sense for a nation to buy raw materials for anything other than current production. What these folks forget is that China has pulled off similar moves in the past, albeit on a much smaller scale.

Back in the 1970′s and 1980′s, the large orders for various grains by the PRC would often roil the commodities pits. As a command economy, the government oversaw all purchases of grain imports, and they would sometimes try to game the system they felt was trying to game them. Just when analysts and speculators thought they had Chinese demand figured out, the authorities in Beijing would pull the plug and forego a major shipment or two. Prices would plummet, and, after a time, the Chinese would come back in and buy their fill at lower prices. It’s a neat trick, and we might be seeing something similar writ large here in 2009. The clinching evidence that China is serious about the long term value of commodities is in all the deals they’re cutting with commodity producing nations. From Central Asia to South America, the Chinese have their checkbooks open while the G-7 nations have their central bank vaults open.

What’s important is that, just as Mr. Jackson points out, this move might signal something other than economic demand in China. They know they will eventually need these items; what they fear is that the dollar price of them might rise. Buying up global commodities in excess of what their economy actually needs is a hedge — against either inflation, a falling dollar, or both. The message this sovereign wealth hedge sends to those of us here in the U.S. is that China sees raw materials as an offset to what might happen if we continue to run the printing presses as hot as we have of late. As the greenback declines, our standard of living declines in relation to China and the rest of the world. Mineral-bearing rocks and other raw materials are productive goods that have uses. As such, they might just be a better store of value than the paper currency known as the U.S. dollar. The rules of the competitive child’s game don’t apply to the Chinese. For them, rock beats paper.

– Jack McHugh — for an outstanding explanation of why our nation’s policies might give the Chinese a reason to prefer commodities over our paper for now, please read John Mauldin’s latest edition of “Outside the Box”. In “The End Game Draws Nigh — The Future Evolution of the Debt-to-GDP ratio”, Horace “Woody” Brock does a first rate job of bringing together many of the themes I’ve been writing about in a cohesive and meaningful way. You can subscribe to John Mauldin’s site here. It’s a must read, especially for our leaders. JJM

Felix Salmon asks an oddly interesting question:

“As befits a book from such an assiduous source-citer as Ritholtz, Bailout Nation comes with 17 pages of endnotes, most of them with URLs. But here’s the funny thing: the number of blogs cited is tiny. Paging through the notes, I see Barry citing himself a couple of times, there’s one reference to TPM Muckraker, and that’s about it.

A blog entry by John Carney does make it into the book, but is cited at its Yahoo Finance address, complete with annoyingly auto-playing video. Occasionally bloggers appear — me, Arianna Huffington, Paul Krugman — but never for our blog entries, only for more formal things we’ve written (in my case, my NYT op-ed). And we’re all more or less part of the mainstream media anyway. “Pure” bloggers are I think entirely absent from the book. Meanwhile, columnists in more mainstream outlets get cited quite frequently.”

I find that intriguing that Felix noticed this. It was not at all a conscious decision.

But this post may we think about it, and the answer is surprisingly simple: I wanted to keep all of my references to either the original source material (Federal Reserve, Treasury, etc.) or first hand observations.

Why?

Well, a lot of the book is laying out the facts in as objective fashion as possible. From there, I engaged in my own analysis and interpretation and commentary, none of which was objective at all. That is the point — to have a perspective, one that is backed up by the data and facts.

Hence, I used Wall Street research, and internal bank memos. I cited investigative journalists who had discovered new information (American Banker, Bloomberg, WSJ, NYT, NY Sun, Oregonian and Portfolio and others). I referenced authors who had done a lot of original research and had written entire books on their relevant subjects.

We are entitled to our own opinion, but not our own facts, I was vey insistent on making sure the facts stood clearly apart from the opinion and analysis.

But when it came to commentary, opinion and criticism, I wanted to ensure the prose was original and in my voice; quoting other bloggers would have defeated that goal.

Note that the bloggers I referenced had produced original material, rather than comments on other people’s original material. These included Calculated Risk, WallStats, Stereo Hell and The Chart Store. Their original art/charts did a great job communicating a particular point I was trying to make . . .

>

Source:
Barry Ritholtz’s book: Where are the bloggers?
Felix Salmon
Reuters Blogs, May 19th, 2009

http://blogs.reuters.com/felix-salmon/2009/05/19/barry-ritholtzs-book-where-are-the-bloggers/

We’ve had a great response to The Big Picture Conference, particularly to the video which will be available (for a fee) on the site this Summer.

To accommodate the filming, we’ve decided to run the event in a more intimate setting and allow the discussions a little more room to evolve. So we have reduced the number of attendees and narrowed the panels to Nassim Taleb’s presentation with a Q & A period; the media panel; and a discussion of the themes surrounding Barry’s book.

The conference is on June 3rd. It is open to people who have already registered, press and invited guests.

There are a few remaining spots. If you’d like to attend, click here for registration or send an email to big.picture@greybirch.com or call 866-826-2507 with questions.

The sense of optimism that the worst of the economic downturn has passed
and the outlook looking forward is much improved continues to spread
around the globe. Today the affirmation of this belief was reflected in
Germany as the ZEW investor confidence expectations # in their economy
rose to the highest level since June ’06, rising to 31 from 13 and well
above the consensus of 20. However, the jump was solely in the outlook
as the current situation fell and was almost 3 pts less than expected.
Less bad gives hope that things turn into good sooner rather than later
but there is still an acknowledgement that conditions are still
difficult and uncertain. The Euro is rallying to near its highest level
since early Jan in response, German bund yields are rising to the
highest since Nov ’08 and US yields are also higher as a result. Apr US
Housing Starts are expected to total 520k with Permits at 530k. Lower
will be better in terms of inventories.