Prolific author, lawyer and former banker Charles Morris presciently laid out a likely course of write-downs and defaults on assets — a year ago — well before Lehman collapsed in September 2008, followed by the global credit meltdown. But given this year’s stock market bull run, all is OK, no?
Hardly, says Morris. “We may have reached a trough” in the economy, he says, but we’ll likely “bottom bounce” for some time.
Morris notes the subprime crisis and credit meltdown still are unraveling, and American consumers won’t be able to spend their way out of the mess this time. For years, consumer spending has driven about 70 percent of GDP, or U.S. economic activity. “We have to get a different model,” says Morris, author of “The Two Trillion Dollar Meltdown.”
James Bianco has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors.
Prior to founding Bianco Research, Jim spent time in New York as Market Strategist for UBS Securities, and Equity Technical Analyst at First Boston and Shearson Lehman Brothers. He is a Chartered Market Technician (CMT) and a member of the Market Technicians Association (MTA).
Bloomberg.com – Vanguard to Use Floating Benchmarks Some index funds to use Barclays Capital float-adjusted bond indexes Several of Vanguard’s index funds will be switching to Barclays Capital’s float-adjusted bond indexes from the Barclays indexes that currently serve as the funds’ target benchmarks. According to Vanguard, the new benchmarks better represent actual liquidity in the marketplace and should help insulate Vanguard’s bond index funds from securities whose prices may be distorted by significant reduction in supply as a result of Federal Reserve buybacks. The term “float” refers to the amount of a given security available for public trading; it excludes amounts such as those held by company insiders, affiliates, or governments. “We believe that float-adjusted indexes more accurately represent an investor’s opportunities in a particular market,” said Gus Sauter, Vanguard’s chief investment officer, in a release announcing the shift. “Whenever possible, Vanguard’s index funds will seek to track benchmarks that follow this best practice.”
Dow Jones – Vanguard Shifts Bond Index Due To Fed Buys The Vanguard Group plans to switch 12 of its bond index funds to benchmarks designed to exclude the hefty chunk of bonds the government has purchased through its buyback program. Other fund providers may follow suit. Eight existing and four proposed Vanguard bond index mutual funds and exchange-traded funds will switch to tracking the Barclays Capital U.S. Aggregate Float Adjusted Index and its sub-indexes by year’s end. Unlike the indexes now in use, the new indexes adjust for so-called float, or the number of shares currently available for trading, a practice more commonly associated with stock benchmarks that seek to disregard shares owned by governments, company insiders or corporations, which have no intention of selling. Vanguard says the new bond benchmarks more closely represent actual liquidity in the market, and thus should help insulate the funds from price distortions created by the Fed’s buybacks. The money manager says it expects no significant change in the risk attributes, including duration, of the bond index funds.Barclays – (July 30) Barclays Capital Announces the Creation of the US Aggregate Float Adjusted Index
A New Benchmark of the Dollar-Denominated Investment Grade Bond Market
Barclays Capital, the investment banking division of Barclays Bank PLC and publisher of leading broad market bond benchmarks, today announced the launch of the US Aggregate Float Adjusted Index, a new benchmark of the dollar denominated investment grade bond market that excludes Treasuries, agencies and MBS held in Federal Reserve accounts. The new index will be published alongside the firm’s other leading indices, including the Global Aggregate, US Aggregate, Pan European Aggregate and Asian Pacific Aggregate. With an inception date of July 1, 2009, the new benchmark will offer investors a rules-based market value weighted index as a complementary alternative to the flagship US Aggregate Index, which includes agencies and MBS held in government accounts. The underlying constituents of the US Aggregate Float Adjusted Index will be the same as those of the US Aggregate Index, but net purchases and sales by the Federal Reserve will be excluded from the float adjusted index on a monthly basis, thereby reducing the market value weight of these securities. Sub-indices of the new index will also be available, including a US MBS Float Adjusted Index created specifically for mortgage investors.
The indexers are correct in including the MBS bought by the Federal Reserve as part of the float if they assume these securities will be sold back into the market once the economy improves. For now, this seems to be a likely scenario once the Federal Reserve wants to unwind its balance sheet. See the story above as it sure implies the Federal Reserve is going to eventually see these purchases back into the marketplace.
If, however, the Federal Reserve changes its mind and decides to hold these securities to maturity, then the float has been permanently reduced and the indexers have their weightings wrong.
Apparently bond managers are now concluding the Federal Reserve is not going to sell their holdings acquired through their QE operations. So, they are demanding the calculation of, and in the case of Vanguard, the adopting of “float-adjusted” indices as their benchmarks.
If this is the beginning of a trend, it has the potential to be a big deal. As the Federal Reserve buys, weightings in the float-adjusted indices fall (see the first table below). Managers seeking to keep their weightings constant will then sell the same securities the Federal Reserve purchases. Effectively this “undoes” the Federal Reserve purchases and defeats the purpose of the program. In the end, it merely changes the ownership of securities and does little to push yields lower.
The Final reading of the Sept U of Michigan confidence number was 3 points higher than expected at 73.5, up from the initial figure of 70.2 and from 65.7 in Aug. It’s at the highest level since Jan ’08. Both Current Conditions and the Economic Outlook rose from the preliminary report and from Aug. Of interest, one year inflation expectations fell to 2.2% from 2.8% in Aug and 2.6% in the preliminary Sept survey. It’s the lowest since March. Confidence is always anecdotal in nature and the question is always whether consumers act on how they feel in terms of spending money based on how they feel about the economy, their personal finances and the cost of goods.
Aug New Home Sales totaled 429k annualized 11k less than expected and up a touch from a revised 426k in July. Months supply fell to 7.3 from 7.6 and is the lowest inventory to sales ratio since Jan ’07. The absolute number of homes for sale fell to 262k from 270k, the lowest since 1983. Sales fell in the Northeast and Midwest, remained unchanged in the South and rose in the West. The median price fell 11.7% y/o/y. Today’s figure measures the contract signings of new homes and builders have been in major competition with foreclosures but have been helped by the tax credit whose fate is now uncertain past Nov 30th. Buyers who sign a contract to buy a home today will likely not be able to close by Nov 30th and will not be able to capture the credit and it’s possible that the Aug housing sales data began to show the hangover from the initial tax credit sales boost in Q2.
The credit rating agencies have been widely criticized for overly positive ratings, and next week Congress is taking them on. Eric Kolchinsky, of Moody’s, shares his insight.
For the past 42 years, Bob Bronson has applied a disciplined, analytical approach to understanding and forecasting capital markets and advising investment advisors. Through his rigorous analysis of capital markets and economic data and his background in mathematics and financial economics, he has developed a number of unique investment concepts and refined portfolio-management techniques that improve returns and lower downside-volatility risk. To learn more, read his BIO.
~~~
SPX has made a top very close to the power shortcut projection (magnitude times duration) for UVR as illustrated by the equal-area blue triangles, which is consistent with a completed Growth Cycle ABC pattern for the end of the “green shoots” rally since the Mar 6 intraday low.
More precisely, using integral calculus (for a discrete non-analytic function) the actual UVR of the C uptrend is 74% of that of the A uptrend, which is close enough to confirm a top if and when other necessary, but not necessarily sufficient, price-related indicators trigger, like the crossing of at least two of the three more black lines in the chart below.
Of course, to make that call we also track many other proprietary and non-proprietary shorter term indicators as summarized in the table further below.
Bankslaughter n. The crime of driving a bank out of business by making excessively risky investments. As proposed by Oxford University economist Paul Collier, prosecutors would become the new bank regulators.
>
I like it!
>
Sources: A law to tame wild bankers A crime of bankslaughter would give reckless City workers pause in their renewed bonus chase Paul Collier
Guardian 30 June 2009 22.30 BST
August new orders of Durable Goods unexpectedly fell 2.4% headline vs a consensus rise of .4% and were flat ex transportation vs expectations of a gain of 1%. The prior month was revised a hair. Non Defense Capital Goods ex Aircraft, the core cap ex component, fell .4% after a 1.3% drop in July. Vehicles and parts orders rose .4% as production of auto’s ramp up after the Q2 lull. Machinery, primary and fabricated metals also rose but there were declines in computers/electronics and electrical equipment. Shipments, which get directly plugged into GDP, fell 1.4%. Inventories fell for a 12 straight month and the inventory to shipments ratio was unchanged at 1.80, the lowest since Nov ’08. Bottom line, with final consumer demand still muted, business investment outside of refilling shelves remains sluggish but those companies with large overseas exposure likely have more growth visibility than those that are more focused on the US.
Who? The Fed, the ECB, the BoE, etc, What? Unwind the large amount of policy accommodation. When? We don’t know but when the time comes whenever that might be. Fed Gov Warsh in the WSJ laid out what’s ahead for the Fed and said they will be aggressive in raising rates when the time comes. With US debt to GDP at 360%, we’ll see about that. Geithner said the US has an obligation to make sure “we are unwinding and reversing the extraordinary actions we were forced to take.” He also said “a strong dollar is very important in the US.” The FX market trades $3T daily so only actions not words will influence the $’s direction and today the $ is lower even with the comments. The Yen is at a 7 month high as the Japanese Minister reiterated that they don’t mind a strong Yen and the Euro is up after German consumer confidence rose to the most since June ’08. The Pound is the only currency the $ is seeing continued gains against.
"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...
Tweet
Facebook
Reddit
Digg this!
