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

I met Eric Von Berg at an ING conference where I had just given a speech. Afterwards, he handed me a copy of this short book he wrote and illustrated: Mad Meat! How securitized lending collapsed the financial system which now exists on life-support.

As the plane waited in the queue for takeoff in Atlanta, I started reading it. Byt he time we hit 2000 feet, I had finished. I found it delightful, and I am pleased that Eric allowed me to share it with you here:

Eric Von Berg is a principal at Newmark Realty Capital in San Francisco, and widely respected as a leader in the field of Commercial Real Estate Finance and Development. A former Chairman of the California Mortgage Bankers Association, Eric now sits on the Commercial Board of Governors for the Mortgage Bankers Association of America. He holds degrees from U.C. Berkeley and the Wharton School of Business and is a licensed California Real Estate Broker and Certified Mortgage Banker. Read more from Eric on his blog Capital Wisdom

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MAD_MEAT! September 2010

For two weeks now, the Treasury market and the US$ have been showing signs of fully pricing in what the Fed will announce on Nov 3rd following the sharp moves after Bernanke’s Aug 27th Jackson Hole speech (10 yr yield now at 5 1/2 week high). Now that the reality of their action is upon us in one week and the WSJ is likely leaking what they will ultimately announce, “a few hundred billion dollars over several months,” equity investors must be more careful here in the short term and I repeat that I believe stocks will consolidate the 2 month gains at our below current levels for another few weeks at least. With that said, the US election is of course a potential market mover but assuming no major changes, the outcome is also likely priced in. Looking into yr end, the only event that is not priced in, just because we don’t know yet the outcome, is what the official tax rates on income, cap gains and dividends will be for ’11 and ’12.

Sept Durable Goods surprised to the upside because of large jumps in defense and non defense aircraft orders but taking these out new orders unexpectedly fell. The core cap ex reading of non defense capital goods ex aircraft fell by .6% vs an expected gain of .8%. A 4% drop in computers/electronics orders and declines in primary and fabricated metals were the main catalyst. Also vehicle/parts orders fell for a 2nd straight month by .4%. Shipments, which get directly plugged into GDP, fell for a 2nd month by .4%. Also of note, because of a .5% rise in inventories and a drop in shipments, the inventory to shipments ratio rose to 1.59 from 1.58 to the highest since Oct ’09. The inventory build story over the past 1 1/2 yrs and its contribution to GDP has likely run its course and today’s figure may reflect the beginning of some moderation in manufacturing looking out the next few months.

After an interest rate hike from the PBOC and little substance and ire pointed toward China at the G20 meeting, the Yuan is falling to a 3 week low vs the US$. For a 2nd day, European PIG debt are trading sharply lower with the Greek 10 yr yield in particular up by 55 bps, rising above 10% for the 1st time in 3 weeks. The Greek Finance Minister today is talking about the difficulty they are still having in collecting taxes in a country that hates to pay taxes. Also, Portugal’s government and main opposition party ended talks on their very important 2011 budget and the cost of insuring Portugal’s debt is moving higher. Back in the US, ABC confidence fell 1 pt to -47, 1 pt below the 1 yr avg. The MBA said refi’s rose 3% after last week’s decline and purchases were up 3.9% from last week’s 2 month low.

QE2: what’s an investor to do?
October 26, 2010
David R. Kotok

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Inflation, deflation? Higher interest rates, lower rates? QE2? What to do?

Option 1: Very short-term cash equivalents earn 10 basis points in a money market fund. Take no risk, get no return.

Option 2: 5-year zero-coupon TIPS, zero real rate. Consumer Price Index (CPI) goes up, you get paid the inflation rate. No inflation, you get zero. Get deflation and you pay a small fee to the government for the privilege of loaning it money.

Option 3: 5-year nominal US Treasury note earns 1.2% interest. Ugh!

Option 4: 30-year Treasury bonds earn 3.95% interest. Inflation and higher interest rates give you a large capital loss. Deflation and lower interest rates give you a large capital gain. Risk in both directions is high and symmetrical.

Option 5: Reject Options 1, 2, 3, and 4. Buy long-term, high-grade, tax-fee municipal or taxable Build America Bonds (BABs). Against the high-grade municipal bonds sell the US Treasury short, using leveraged ETFs. Match duration of long and short positions. This requires frequent rebalancing and real-time mathematical recalculation. Structure duration to match market-neutral position. Results: 2-3 % cash yield carry. There is a potential capital gain when markets get realigned and sector spreads resume normalcy. Note: this is a sophisticated trade and complex structure. Unskilled investors are advised to study it carefully before attempting a structure like this.

There are a variety of ways to approach the current extraordinary financial market conditions without reaching for yields by sacrificing credit quality. These ways are not easy. They exist because of the zero bound in policy-setting interest rates. We expect to have those rates near zero for a long time. Therefore, new investment structural options are necessary.

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David R. Kotok, Chairman and Chief Investment Officer

Greek 10-year bonds tumbled for a third consecutive day; yield jumped 58 bips 10.34% according to Bloomberg.

The EU revised Greek budget deficit above 15% of GDP. In a leading contender for understatement of the year, Finance Minister George Papaconstantinou said the nation had serious tax compliance issues.

Thus, the ongoing European drama between Greek tax scofflaws, German Industrial financiers, England/Ireland recession continues to play out — pressuring futures, widening spreads, and to leading towards the eventual denouement. Its hard to see how Greece avoids a Restructuring — which, truth be told, is merely a polite word for Default.

The most efficient productive player in Europe is Germany; they benefited the most from the dropping of trade barriers and the replacement of the strong Deutsche Mark with the Euro. (Plus, they absorbed all the cheap labor they needed when they were reunified with East Germany). Selling into the rest of Europe without the drag of a strong currency or any trade barriers has been a boon for Germany.

The calculus about any Greek default restructuring is the Moral Hazard threat. If the terms are too easy, it may encourage the remaining PIIGS — Portugal, Italy Ireland Spain — towards default restructuring their debts.

I place the survival of the EU in its current form at 50/50 . . .

Back in the saddle after a brief trip to Atlanta, where I met a great group of CRE execs from ING.

Of course, anytime you say something bullish in print, the next day should see the markets get spanked — the futures seem to be cooperating with that trading warning.

Be back shortly . . .

Fascinating discussion on divergent thinking:

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Hat tip MB

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Barron’s online has an absurdly nice column about yours truly:

IN RECENT YEARS, MONEY manager Barry Ritholtz has emerged as one of cable television’s most entertaining and compelling talking heads on topics of importance to investors.

But a visitor to Ritholtz’s understated offices in midtown Manhattan won’t find TV sets blaring CNBC or Fox Business News. According to Ritholtz, the CEO and research director of Fusion IQ, the quiet makes it easier for him and his team of researchers to think clearly and analytically about the markets.

In other words, he prefers not having to hear the kind of chatter that he and other market mavens routinely provide.

“With television, the sentiment virus will infect you,” says Ritholtz, who turned 49 last week. “What television does is best is pass along the emotions of the market.”

Along with his partner, Kevin Lane, Ritholtz uses a combination of fundamental and technical investment measures to pick stocks in the separately managed accounts of his private clients. Starting with only $15 million three years ago, Fusion now runs close to $500 million in private client money.

Ritholtz is also willing to make big-asset bets and most of them have been on target in the last two years. His market calls, way with words and outsized personality have helped him develop a following for his “Big Picture” blog. And his well-received book on the financial crisis, Bailout Nation, is now out in a paperback printing.

Shortly after the Dow hit its all-time high in October 2007, Ritholtz, a lawyer by training, began loading up on cash and he remained bearish on stocks through 2008. He thus spared his small base of clients much of the horror of the resulting meltdown in the stock market.

He says he began loading up in stocks again around the time the market bottomed in March 2009, because he and his team noticed that almost every stock in the S&P 500 was trading below its 200-day moving average – a contrarian bullish-technical sign that ended up paying off.”

That was embarrassingly lovely.

I have to get my partner Kevin to start doing more media again — he is as good a pure technician as there is — and he makes my job easier . . .

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Source:
Barry Ritholtz is Modestly Bullish Again
JOHN KIMELMAN
Barrons OCTOBER 26, 2010
http://online.barrons.com/article/SB50001424053111903697804575574231365253258.html

With the CRB index rising to its highest level in 2 years and after seeing retail price rises over the past month from Starbucks because of higher coffee prices, McDonalds in response to overall higher food commodity prices, General Mills due to higher grain prices, Goodyear and Cooper Tire because of higher rubber prices, Kimberly Clark on their earnings call today is saying that they just experienced the highest cost inflation increase in Q3 that they’ve ever seen, mostly from fiber but also from polymer resin and other oil based materials. In particular today, Cotton is at a fresh 145 year high and copper is up at a fresh 27 month high. Ahead of next week’s FOMC meeting where the Fed wants higher inflation, all will be ok as long as you don’t drive, eat, drink, wear cotton based clothes, use copper wire for any type of construction, blow your nose, diaper a kid or wipe your arse.

Oct Consumer Confidence was a touch above expectations at 50.2 vs the estimate of 49.9 and was up from a slightly revised 48.6 in Sept but is still below the 1 yr avg of 53.1. Both the Present Situation and Expectations components rose from Sept. Discouragingly, the labor market answers were weak. Those that said jobs were Plentiful fell .3 pts to 3.5, the lowest since Dec ’09 and those that said jobs were Hard to Get rose to the most since Mar. Positively, those that said Business Conditions were Good rose to a 3 mo high and those that said they were Bad fell to a 4 mo low. Those that plan to buy a home within 6 mo’s rose to 2.1 from 2.0 and those that plan to buy an auto was unchanged at 5.0. Those that plan to take a vacation within 6 mo’s rose to the most since Aug ’09. One year inflation expectations remained unchanged at 5.0% for a 3rd month. Bottom line, the labor market remains the main drag on consumer confidence.