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

With the backdrop of a 5 yr note yield at the highest level since mid Jan, the 5 yr auction was not good and the higher yield was still not tempting enough. The yield at 2.605% was well above the when issued level of about 2.56-2.57%. The bid to cover of 2.55 is above the one year average of 2.46 but is the lowest since Sept ’09. Indirect bidders totaled 39.7% which is the smallest since July ’09 and direct bidders came in at 10.8%. I don’t know if it was the healthcare bill and the budget/debt concerns associated with it, or the Fitch downgrade of Portugal, or a reaction to the slow recent creep up in LIBOR rates or a delayed reaction to the optimistic message the stock market has sent on the economy or a reaction to the improving economy, however modest but something has changed in the US Treasury market and the benchmark 10 yr rate is just within 1-2 bps of breaking out.

Here is a fascinating piece of investing arcana — from the St. Louis Fed FRASER archives.

A history of booms and busts from 1775- 1944. Emphasis is on post war economies.  As described by the paper:

A study of the reaction of business activity immediately following previous wars can, in a measure, act as a partial guide to the future — at least avoid a hasty step into the unknown. The general pattern of these reactions is outlined in this chart by the Red or Green squares which block out and high light the trends that have followed previous major wars.

These diagrams indicate a more or less definite pattern of reaction that points up as follows: first, a brief period of uncertainty, then a year or more of business recovery followed by a short depression; then a period of prosperity extending over several years.

Summing up a comparison of these postwar years we find that they cover a space of from eight to ten years each, showing less than three years of business recessions and an average of 7 years of prosperity.

The chart is quite complete and astonishing — rather than attempt to show the entire 170 year time line, here is a about a quarter of it:

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click for ginormous graphic

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Hat tip Invictus

You can download the PDF here.

Former New Jersey Governor Jon Corzine is back on Wall Street as the new chairman and CEO of MF Global.

Airtime: Wed. Mar. 24 2010 | 7:05 AM ET

We looked at the issue of home affordability as measured by the National Association of Realtors in July 2009. As always, the indices for both composite fixed/adjustable mortgages and fixed-rate mortgages (red columns, left-and right-hand charts, respectively) are a lagging function of existing home sales (blue line, both charts). The NAR has not published a separate affordability index for adjustable-rate mortgages since November 2008; quelle dommage.

If the observed eleven-month lead time holds, we should see a decline in affordable during the window when the first-time homebuyer’s tax and the Federal Reserve’s expire. If the market is left to its own devices, affordability will recover not when financing costs fall or when subsidies intended for the buyer but in fact captured by the seller increase but rather when sale prices fall.

This will have the effect of maintaining high levels of mortgagor delinquency. As mortgage financing has remained a public affair via the open-ended backstopping of Fannie Mae and Freddie Mac and via the mortgage-backed securities on the Federal Reserve’s balance sheet, the housing overhang will remain a drag on economic expansion for the foreseeable future.

Feb New Home Sales, a measure of contract signings, totaled 308k, 7k less than expected and down from an upwardly revised (by 6k) 315k last month, so taken together it’s in line but sales are at a record low. Taken with an increase of 3k in the absolute number of homes for sale, the inventory to sales ratio rose to 9.2 from 8.9, the highest since May ’09. Weather may have impacted traffic as sales fell in the Northeast and Midwest but they also fell in the South. The West however saw a gain to the most since Oct ’09. The median home price did rise 5.2% m/o/m and also 6.1% sequentially even with the depressed volume of sales. With tremendous competition from foreclosures, the law of diminishing returns with the first time home buying tax credit and still uncertain labor market, sales of course are suffering. Ideally with still high inventories, we don’t need any more new homes for the time being.

I spoke with several people who attended the Grant’s Interest Rate Observer Conference (“Grant’s”) — a regular event well regarded for the quality of the presentations and the intellectual heft — this is an overview of their take on the event:

Byron Wien started the conference with his 10 Unexpected Surprises. I would not call him Uber-Bullish, but the consensus was the better world was highly complacent.

Steve Galbraith was unimpressive — he’s smooth, but lacked intellectual heft. Anecdotal tales of Silicon Valley does not make for a good form of Macro analysis.  The basis for his bullishness was the “the deeper the drop, the steeper the rise” thesis. (I find it unpersuasive).

With the uber bullish ex-Morgan Stanley strategists portion of the show done, we moved to the brains behind the  John Paulson’s hedge fund, Paolo Pellegrini. He was cerebral, complex and professorial. No slides, just speaking from his notes.

After his presentation, which was sort of uber-macro level, Grant asked him what do you like/not like long and short term.  Pellegrini said, “long term, I don’t want to own USD-denominated debt, or US equities.” In a throw away line, he said “Short term, I think the market crashes.” It was almost an aside.

Jim Grant and David Rosenberg debated Treasuries. Jim is very bearish on the dollar, and there for does not like Treasuries here. David was the bond bull.  Our crowd of admittedly bearish attendees (though i would not describe the conference attendees that way) thought David’s argument was  more compelling in terms of mustering facts to back it.

Rosenberg officially, I guess, “won” the debate, based on a count of hands before and after.  John Dizard of the FT moderated, fyi.

A manager from the Brazilian fund Dynamo did a presentation, which mostly focused on the macro backdrop, but ended with a  look at several stocks.  The last was Banco Itau, and they noted at the end as follows, which was news to me:

Statutory directors, board members, and controlling shareholders of Brazilian banks have their entire net worth at stake if their banks fail.  All their personal assets are frozen for the duration of the liquidation process and may be used to cover any shortfall.

Fascinating stuff . . .

One of the interesting disconnects during the non stop US stock market rally over the past month was the action in US Treasuries as 10 yr yields were basically flat during the whole equity move, sort of a goldilocks scenario. What did begin to change over the past few weeks was a rise in short terms rates as US$ LIBOR and the 2 yr note headed higher and the yield curve experienced a bear flattener. Possibly in response to the Fitch downgrade of Portugal where we are all reminded again of sovereign debt issues, the 10 yr US yield is breaking out above the key 3.75% level and is now at the highest in a month. German bunds are also lower. The better Durable Goods report ex transports is also an influence and we’re seeing too a spike in 2 yr note yields to the highest since Jan 4th at 1.06%, up a large 8 bps on the day.

One of the interesting disconnects during the non stop US stock market rally over the past month was the action in US Treasuries as 10 yr yields were basically flat during the whole equity move, sort of a goldilocks scenario. What did begin to change over the past few weeks was a rise in short terms rates as US$ LIBOR and the 2 yr note headed higher and the yield curve experienced a bear flattener. Possibly in response to the Fitch downgrade of Portugal where we are all reminded again of sovereign debt issues, the 10 yr US yield is breaking out above the key 3.75% level and is now at the highest in a month. German bunds are also lower. The better Durable Goods report ex transports is also an influence and we’re seeing too a spike in 2 yr note yields to the highest since Jan 4th at 1.06%, up a large 8 bps on the day.

European stocks sold off at 6am after Fitch downgraded Portugal’s credit rating to AA- from AA with a negative outlook. They said “a sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness.” Yields in Portugal are up about 3 bps and 5 yr CDS is wider by 7 bps to 140 bps. In contrast, Fitch has Greece at a BBB+ rating and Greek CDS is trading at 325 bps. Helped by a weaker euro, Germany’s IFO business confidence # was 2.3 pts above estimates at 98.1, the highest since June ’08. The euro though is at the lowest since May ’09 vs the $ as Germany and France edge Greece towards the IMF. According to II, newsletter writers are almost as bullish as they were on Jan 20th, the day after the Jan high as Bulls rose to 48.9 from 46.1 and Bears fell to 20.5 from 21.3. ABC confidence rose 1 pt to -44. The MBA said purchases rose 2.7% but refi’s fell 7.1%.

Go figure:

Most people interviewed in the Bloomberg National Poll say they don’t like Wall Street, banks or insurance companies and favor letting the government punish bankers who helped cause the worst financial crisis since the Great Depression . . .

The poll also shows most Americans don’t like the nation’s top corporate bosses. Almost two-thirds say they have an unfavorable opinion of business executives, a rating that rivals the public’s disdain for Congress, which was viewed with disfavor by 67 percent of respondents . . .

Low esteem for financial firms was reflected in resentment of big paychecks on Wall Street. Fifty-six percent of those polled say they would support government action to limit compensation of those who helped cause the financial crisis, or to ban those people from working in the banking industry.

Won’t anyone come to the defense of Wall Street?

I have spent the better part of the past 5 years trashing the street — their poor asset management, biased research, over-compensation system, backdated options, gamed earnings, phony accounting, and earnings manipulation.

If no one else will defend the Street, am I going to have to do it? I think others might be (heh heh) less snide or sarcastic in what they say about the Street.  I’ll do it if no one else will — but lots of people will be very unhappy about what I write . . .

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Source:
Wall Street Despised in Poll Showing Majority Want Regulation
John McCormick and Alison Vekshin
Bloomberg, March 24
http://www.bloomberg.com/apps/news?pid=20601087&sid=a4nQoiYaj2ag&