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

Attention Fed Wonks: Don’t overlook the terrific and informative table via the public section of the WSJ:

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click for interactive table

Last week I mentioned the key yield level of 3.95% in the 10yr that we were fast approaching which is the highest since June ’09 and would match the highest level since Oct ’08. Today, the 30 yr bond yield at 4.79% has broken above its key June ’09 level of 4.76% and is now matching the highest since June ’08 which is the most since Oct ’07. The yield spread today between the 2 yr and 30 yr is at 375 bps, the highest since March 10th and is just 10 bps from the record high of 385 bps reached on Feb 17th.

A few interesting charts today that look at the question Where is the Nasdaq going ?

Up first, this beaut from Ron Griess at The Chart Store. Ron shows a parallel between the post 2000 crash Nasdaq and the post 1989 crash Nikkei Dow:

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click for larger graphs

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Next, we have this look at the Nasdaq/SPX ratio from Mike Panzner. Mike thinks this intriguing relationship is back to prior high levels:

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Last,  this trend chart from Lindsay Holt — although there are arguments to be made by both bulls and bears alike from this one:

From How To Get Focused comes this simple yet usable guide to email:

Hat tip Mike Panzner

Art Cashin, head of floor operations at UBS, has the latest buzz from the NYSE

Airtime: Mon. Mar. 29 2010 | 9:18 AM ET

I am having a hard time reconciling the claims of excess sentiment with lots of other data and anecdotal evidence. Consider for example this Bloomberg article, with the telling title Americans Say They Missed 73% Rise in S&P 500 as Economy Surged.

Of course they missed it!  They were either a) listening to Wall Street analysts and strategists; 2) were watching financial TV coverage of the crisis; III) were normal emotional Human Beings unable to detach themselves from their own neurobiology.

In all three examples above, the related thread was the behavior of organic matter. When it comes to investment, Carbon based goo tends to be a poor element in the decision making process.

Here is an excerpt:

“Americans are down on the economy and the markets even as stocks and growth indicators are up.

By an almost 2-to-1 margin Americans believe the economy has worsened rather than improved during the past year, according to a Bloomberg National Poll conducted March 19-22. Among those who own stocks, bonds or mutual funds, only three of 10 people say the value of their portfolio has risen since a year ago.

During that period, a bull market has driven up the benchmark Standard & Poor’s 500 Index more than 73 percent since its low on March 9, 2009. The economy grew at a 5.9 percent annual pace during last year’s fourth quarter.”

The most intriguing data point to me is the belief that the economy has worsened over the past 12 months. The public is technically correct; much of the data is modestly lower than it was 12 months ago. However, the rate of change is far, far less than it was. The parachute has opened, and the free fall is over.

However, unlike Phil Gramm, I cannot dismiss the public’s concern as a mere mental recession. The obvious missing element is job creation, and that is the most likely reason for the negative sentiment.

Public sentiment is a very important factor impacting spending decisions. I suspect that if we were to get three or four months of 100k plus job creation, that would go a long way towards moving the sentiment needle.

Until then, we meed to closely watch retail sales data for evidence people are coming out of their bunkers. I see it already in Manhattan, but we have lots of Wall Street bonus cash sloshing around. When the rest of the country feels better about the economy, it might create a virtuous cycle of hiring and spending . . . Or, hiring and spending will make the rest of the country feel better about the economy.

Either way, retail sales might be the early signal . . .

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Source:
Americans Say They Missed 73% Rise in S&P 500 as Economy Surged
Mike Dorning
Bloomberg, March 24 2010
http://www.bloomberg.com/apps/news?pid=20603037&sid=aTp.Sf7cvYvU

See also:
New York Helicopter Commute for $200 a Day Signals Revival
Esmé E. Deprez
Bloomberg, March 26 2010
http://www.bloomberg.com/apps/news?pid=20601109&sid=aWz55bmEsxa8&

David A. Rosenberg is Chief Economist & Strategist at Gluskin Sheff,where he focused on providing a top-down perspective to the Firm’s investment process. Prior to joining Gluskin Sheff, David was Chief North American Economist at Bank of America-Merrill Lynch in New York:

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For the first time in this year-long bear market rally, the S&P 500 has not endured a daily decline of at least 1% over a one-month time frame. January was no more than a hiccup and has seemed to have emboldened the view that any decline is a blip and a buying opportunity.

The mantra is that after breaking technical threshold over technical threshold in what can only be described as a classic 1930-style bounce off a depressed low, we will now see a 61.8% retracement of the October 2007-to-March 2009 plunge, which would put 1,230 as the next key resistance point for the S&P 500. Interestingly enough, that would take the market back to where it was when Lehman collapsed. Of course, back then:

• The dividend yield was 2.4%, not 2.0%;
• The unemployment rate was 6.2%, not 9.7%;
• Industry operating rates were 73%, not 69%;
• Housing starts were 822k annual rate, not 575k;
• New home sales were running at a 436k annual rate, not 308k;
• The Case-Shiller home price index was 162, not 146;
• The level of retails sales was $366 billion, not $356 billion;
• Auto sales were running at a 12.5 million annual rate, not 10.3 million;
• The level of employment was 136.3 million, not 129.5 million;
• Real personal income excluding government transfers was $9.5 trillion, not $9 trillion
• The level of manufacturing shipments was $429 million, not $384 million
• Consumer confidence levels were at 61, not 46
• Credit card delinquency rates were 4.6%, not 5.8%
• Bank-wide residential loan default rates were 5.3%, not 10.1%
• Commercial bank credit was $7.3 trillion, not $6.6 trillion
• The fiscal deficit was $500bln, not $1.5 trillion.

It makes absolutely perfect sense for the market to head back to those 2008 levels if and only if the broad array of macro indicators can manage to head back to the levels prevailing at that time as well. The jury, shall we say, is still out on that one; with deference to the impressive surge the market has managed to turn in and the wall of worries it has either been able to climb or merely dismiss out of hand.

Feb Personal Income was flat vs expectations of a gain of .1% but Jan was revised up by .2% of a pt to a gain of .3%. Because Spending rose .3%, in line with forecasts, the personal Savings Rate fell to 3.1% from 3.4% and to the lowest level since Oct ’08. While this can sustain short term economic growth, the long term health of the economy in a deleveraging world needs higher savings rates, especially with exploding public sector debt. The headline PCE price deflator was unchanged, therefore REAL income was flat with REAL spending was up .3%. The core PCE was also flat. Bottom line, the Fed will take comfort in the inflation statistics even though the energy component in particular will reverse higher in March but income growth running higher by 2% y/o/y with spending up 3.4% y/o/y can only last for so long with access to credit not what it used to be.

Following a month of free pass data where the Feb economic data was seen as ‘weather related,’ this week brings us a batch of weather clean March news with the highlight being the ISM and Payroll figures. While supply and credit issues were last weeks bond factors, this week will be the economic data. US$ 3 mo LIBOR rose again and hasn’t fallen in 7 weeks. The reflation trade has a bid after Chinese stocks rallied to a 9 week high (copper at near 3 mo high) and was followed by a euro rally after Euro zone Economic Confidence rose to the highest since May ’08. Greece is quickly taking advantage of their new found IMF/Euro Zone support system by coming to market with a 7 yr note. S&P reaffirmed UK’s credit rating at AAA but kept its negative outlook and said “In the absence of a strong fiscal consolidation plan, the UK’s net general government debt burden may approach a level incompatible with a AAA rating.”

I wanted to address a glaring error in a David Leonhardt NYT Sunday Magazine article, titled Heading Off the Next Financial Crisis,

In the column, Leonhardt wrote:

“But there was a fatal flaw in the new system. The banks’ new competitors received scant oversight. They were not directly bound by Roosevelt’s restrictions. “We had this entire system of outside banks that had no meaningful constraints on capital and leverage,” Geithner says. Investment banks like Lehman Brothers were able to make big profits in part by leveraging themselves more than traditional banks. To use the down-payment analogy again, it was as if Lehman were allowed to put down only 3 percent of a house’s purchase price while traditional banks were still making larger down payments. When the house’s value then rose by just 3 percent, Lehman doubled its investment. A.I.G., similarly, created a highly leveraged derivatives business that regulators essentially ignored…

The deregulation of the last few decades has come in for a lot of blame for the current financial crisis. It deserves some blame, too. If Citigroup and Bank of America were still operating under the New Deal rules, they might not have flirted with bankruptcy. But take a minute to think about which firms had the biggest problems. They were the shadow banks: stand-alone investment banks like Lehman, Bear Stearns and Merrill Lynch; and other firms, like A.I.G., that were not banks at all. They were never fully covered by the New Deal regulation, and they were not the ones most affected by the deregulation.” (emphasis added).

This is not precisely right.

And as applied to AIG, it is absolutely, totally wrong.

Thanks to the The Commodity Futures Modernization Act of 2000 (CFMA), the universe of structured derivatives were completely exempt from ALL regulation. Whether it was Collateralized Debt Obligations (CDOs) or Credit Default Swaps (CDSs), the CFMA put them into the world of shadow banking.

How? The CFMA mandated it.  No supervision was allowed, no reserve requirements for potential future payouts were mandated, no exchange listing requirements were put into effect, all capital minimums were legally ignored, there was no required disclosures of counter-parties. Derivatives were treated differently from every other financial asset — stocks, bonds, options, futures. They were uniquely unregulated.

Indeed, even state insurance regulators were prevented from oversight — including normal  reserve requirements. That was how AIG Financial Products was able to ramp up their derivative exposure to more than three trillion dollars.  This was directly due to radical deregulation.

Even the most basic reserves would have kept their derivative exposure to much more modest numbers. With absolutely zero capital requirements, AIG FP went wild. Tom Savage, the president of FP, summed up what the lack of reserve requirements meant to the firm: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy.”

To the tune of $3 trillion dollars.

All in all, this wasn’t so much a case of Washington DC failing to keep up with Wall Street, rather, it was a case of DC actively granting what Wall Street (Enron, AIG and other derivative traders) wanted — precisely zero oversight.

Hence, it was deregulation that made the AIG disaster possible.

As to the investment houses (Bear, LEH, MER, etc.), all you need to do is look one step upstream in the securitized mortgage process. There, you see the impact of the radical deregulation mindset.

Consider the mass of subprime loans that the investment houses were securitizing. The majority of these came from non-bank lenders. These were the firms that Fed Chair Alan Greenspan described as innovators.

He elected not to regulate them. I called this “Nonfeasance” in Bailout Nation. No lending standards: Zero income checks, ignore the debt load, eliminate LTV, even fail to do a simple simple FICO credit check. Just a lend-to-anyone-then-sell-to-securitizers business model.

Securitization wasn’t the problem, it was simply Garbage in, Garbage out. Had Greenspan required nonbank lenders to maintain normal lending standards (As was his official duty), much of the crisis could have been avoided. At the very least, all of the subprime related loans, derivatives, and default swaps built on top of these garbage mortgages would have been dramatically reduced.

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Bottom line: Radical Deregulation is what allowed most of the worst actions to take place. This wasn’t a case of DC failing to keep up with Wall Street — its more accurate to observe that DC rolled over for Wall Street, and gave the Street precisely what it asked for.

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Source:
Heading Off the Next Financial Crisis
DAVID LEONHARDT
NYT, March 22, 2010
http://www.nytimes.com/2010/03/28/magazine/28Reform-t.html