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

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“Economics was the only profession where a person could be considered an expert without having once been right.”

-George Meany

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Source:
Nixon’s Freeze and the Mood of labor
Time, September 06, 1971

http://www.time.com/time/magazine/article/0,9171,943845,00.html

Non voting member Fisher of the Fed is giving his own ‘personal’ opinion on the continuation of the Fed’s purchase plan of US Treasuries in a speech he’s giving on the economy. He does not wish “to expand or extend our purchases of Treasuries beyond the cumulative $300b planned by this fall.” He said “we dare not come to be viewed as a handmaiden to the Treasury. By loosening the anchor we have established for long term inflation expectations, we could create the perception that monetary policy is subject to political imperatives, doing lasting damage to our ability to maintain price stability and restore full employment. I believe we have come as close as we dare to the line between acceptable and unacceptable risk in this regard.”

Last week, we looked at the Total Credit Market Debt to GDP ratio.  Here’s another variation of the chart showing, looking at 2 differing periods –pre-1981 and post-1981.

Note that as debt rises, so too did financial firm profits.

Low Debt Era vs Rising Debt Era

GMO chart via New Observations

Although the U.S. equity market has had an impressive run since the July 7th lows, what many investors might find less-than-reassuring is how narrow the advance has been.

In the Nasdaq-100 index, for example, one stock, Apple, accounts for nearly one-fifth of the 11-percent gain. It has also pulled much more than its already hefty weight in the index. Otherwise, just nine stocks are responsible for more than half the move in the technology-laden bellwether.

While that doesn’t mean the rally can’t carry on, it’s another reason to be cautious on reading too much into the advance we’ve seen so far.

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Since I am still up North, let’s go to David Rosenberg for a look at how the current bounceback compares with the 2002 / 2003 bottom:

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chart courtesy of Gluskin Sheff

I am traveling today, about to hop onto an Air Canada flight out of Vancouver — but I had to share this one WSJ article:

The job market is doing even worse than the overall economy, prompting concern inside and outside the government that deeper-than-expected joblessness could persist once the recession ends.

Breaking from historical patterns, the unemployment rate — currently at 9.5% — is 1 to 1.5 percentage points higher than would be expected under one economic rule of thumb, says Lawrence Summers, President Barack Obama’s top economic adviser. Since the recession began in December 2007, the economy has lost 6.5 million jobs, 4.7% of total employment. The unemployment rate has jumped five percentage points, while the economy has contracted by roughly 2.5%.

I have a few goodies planned for throughout the day.

Spam filter in highest setting; I’ll sift thru the net later.

Catch y’all Stateside . . .

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Source:
Job Cuts Outpace Economic Decline
JON HILSENRATH and DEBORAH SOLOMON
WSJ, July 23, 2009

http://online.wsj.com/article/SB124830700226074069.html

As the sustainability and depth of an US economic recovery will come down to the financial health of households and home prices, today we get data on Existing Home Sales and Jobless Claims. Jobless Claims may have one more week of seasonal distortions due to auto plant shutdowns that didn’t occur in July because they were restarted after months of closings at Chrysler and GM. Initial Claims are expected to rise 35k to 557k while Continuing Claims are expected to jump by 117k but after last week’s huge drop also influenced by seasonals. Also beginning to have an influence are those who are passing the 26 week expiration of benefits and are no longer included in the calculation even though many get extensions for up to 79 weeks. June Existing Home Sales are expected to total 4.84mm, up 70k from May and would be the most since Oct ’08 even as mortgage rates moved higher in June. Months supply will also be key.

Good Evening: U.S. stocks finished mixed for a second straight day on Wednesday, as positive earnings from Apple fought lingering credit concerns to a virtual draw. The NASDAQ did manage to advance, however, extending its streak of positive closes to eleven. The rest of the capital markets didn’t stray too far from unchanged, either, with bonds and the dollar modestly lower, and commodities flat. Financial stocks were initially quite heavy, but most of them staged comebacks as the day progressed. CIT was not among them, though, as word of the potentially onerous terms of a proposed private financing were leaked to the press. The media clucked quite a bit about the money bondholders stood to make on this deal, but when I last checked, that’s how capitalism is supposed to work

With another light day on the economic release calendar (mortgage purchase applications crept higher), investors once again focused on earnings. Apple announced last night that it had — surprise! — easily surpassed estimates. AAPL’s stock dutifully jumped in after hours trading. After listening to the conference call, investors then decided there wasn’t a whole lot in the company’s results that applied to the rest of the tape. U.S. stock index futures thus retreated when the bourses in Europe traded lower this morning. Morgan Stanley and Wells Fargo contributed to this sinking feeling when they reported less than stellar earnings (see below). Morgan Stanley’s results were hurt by the repayment of TARP capital and rising prices for its debt securities, while Wells Fargo was hurt by a large spike in delinquencies on mortgages and other types of loans. If the economy is truly healing, someone forgot to send the memo to WFC’s borrowers.

The net of the above news flow was a 0.5% drop in the major averages at the start of Wednesday’s trading. Stocks wasted little time, however, in vaulting back above unchanged, a level they then criss-crossed until lunchtime. Apple’s strength, as well as the aforementioned comebacks in the shares of MS and WFC, helped push the indexes higher in the early afternoon. The S&P 500, for example, was up more than 10% from its July 8 low at one point this afternoon before some late profit taking set in. The major averages eased back toward unchanged and then finished mixed. Treasurys were down ahead of the next refunding announcement, with yields rising between 2 and 7 bps. The dollar was off a few tenths of one percent, while commodities as a group treaded water. Emblematic of today’s action were the metals, since a decline in metals considered base was offset by a rally in those deemed precious. The CRB inched a fraction higher.

Earlier today, a headline on Bloomberg (since retracted) plaintively claimed that PIMCO and some other money managers stood to book an immediate, $100 million gain on their offer to help CIT through its current rough patch. A couple of other media outlets picked up on the story, also playing up the “quick buck” angle. Representative of the complaints about the terms offered to CIT by the free market — and not taxpayers — are the following two paragraphs, also courtesy of Bloomberg:

“CIT, the 101-year-old commercial lender struggling to retire $1 billion of debt maturing next month, agreed to pay a 5 percent fee to the creditors and annual interest of at least 13 percent. On top of that, the New York-based company pledged assets worth more than five times the amount of the loan as collateral.
“The terms are egregious,” said Dwayne Moyers, the chief investment officer at Fort Worth, Texas-based SMH Capital Advisors, which oversees $1.4 billion, including more than $70 million of CIT bonds. “They ripped the faces off everyone with these terms.” (source: Bloomberg article below)

Whoa, hold on there a second, Tex. Your pretense of outrage is silly. Why didn’t you, Mr. Moyers, offer to fund CIT on the same terms? Rather than disparaging private providers of capital, the media, investors, and, yes, other bond buyers, should be cheering the return of capitalism to our capital markets. This is how markets are supposed to work: Investors take risk (in this case, the bankruptcy of CIT), and they are rewarded for doing so. It’s that simple, though these lessons were forgotten during the credit bubble, when huge risks were sought without much thought — or reward. Predictably, losses and crisis ensued. It’s high time investors rediscovered the art of demanding return for the assumption of risk.

Getting the government out of the lending business should be celebrated, not scorned. Have we taxpayers been cheated out of an opportunity to make fabulous returns in CIT via yet another TARP “investment”? Of course not (the government employees at Treasury would never think of cutting such a sweet deal). This transition back to capitalism from the statism of bailouts will be bumpy, as Morgan Stanley’s earnings today will attest. Why even GE is trying to stop issuing FDIC-backed debt (see below). CIT may or may not live long enough to pay back everything it owes to its creditors, but it’s nice to see them trying to stand on their own two feet instead of settling for a TARP I.V. drip in the emergency ward at Treasury.

Ideally, the deal offered by PIMCO, Oaktree, Baupost, and others may actually act as a clarion call to other sources of capital. Reading about these terms will probably cause them to rub their eyes, and subsequently open their wallets. High prospective returns have a way of doing that to proper capitalists (as opposed to the bailout-seeking, crybaby capitalists). Again, the trip back from government sponsored finance will be neither quick nor easy. But here’s hoping that the “egregious” terms offered to CIT will some day be looked back upon as one of the turning point moments as our markets move away from their current reliance on government funding. Let CIT stand for “Capitalism In Transition”.

– Jack McHugh

U.S. Markets Wrap: Stocks Mixed; Bonds Drop Before Debt Sales
Morgan Stanley Loss Misses Estimates on Debt Costs
GE Capital Wins Approval of Plan to Exit FDIC Program
CIT Hit With Interest Rate More Than 25 Times Libor

The May FHFA home price index rose .9% from April and is better than the expected decline of .2%. The y/o/y decline is 5.6%. From its record high in April 2007, prices are down 10.7%. This data measures only those single family homes that have mortgages backed by FNM and FRE and covers every region of the country. The S&P/Case-Shiller in contrast includes condo’s, jumbo loans and focuses on the 20 big cities. If there is a question on which index is more relevant to the markets, the US Treasury answered it when they used the Case-Shiller as a benchmark indicator in their stress tests of 19 large banks. The banking sector and every home owner should be so lucky to have home prices down just 10.7% from its highs.

Following two days of testimony (and the WSJ editorial) from Bernanke where he repeated that interest rates will stay low for an extended period of time, that inflation will remain subdued for a few years more and that unemployment will remain elevated for a period of time, the odds of a year end rate hike are down to 13% from 27% one week ago and 46% one month ago. A 25 bps hike to .50% is not fully expected until the March ’10 meeting. The January ’10 meeting rate hike odds are at 60%. In the discussion on exit strategies too over the past few days, ending QE and many of its liquidity facilities will be a cake walk compared to normalizing the fed funds rate in terms of its impact on the economy.