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

Oct CPI rose .2% m/o/m headline and was flat ex f&f, both .1% below expectations. The housing component, which makes up 42% of CPI, was up just .1% mostly due to a .1% rise in Owners Equivalent Rent. Also keeping a lid on the rise in the housing component was a 1% drop in price of hotel rooms. Energy prices rose 2.6% but food by just .1%. As CPI lags the rise in commodity prices, food prices may not continue being this tame. Also, apparel prices fell by .3% and down for a 3rd straight month but rising cotton and polyester prices will likely reverse that too. Vehicle prices fell by .4%. Commodity prices, which make up 40% of CPI, rose by .5%. Bottom line, the Fed makes policy based on the CPI and PCE readings and this data will make them think again that QE2 was the right thing to do but this data is backward looking and I fully expect the rise in commodity prices to filter into inflation readings over the next 3-6 months.

In response to our earlier mention of Altman, a regular BP reader and current DC insider sends along the following:

“Roger has one goal in life—to be Treasury secretary. He has been trying as hard as he can to get it since the Carter administration and made it as far as the No. 2 spot. Now he’s hoping to follow Bob Rubin’s steps and finally get the No. 1 spot. If I were Tim, I would start watching my back if Roger gets the NEC job. Instead of having Larry there protecting him, he will have someone who wants him out ASAP.”

Obama, like Bush before him, cannot break the habit of working backwards through prior administrations errors.

I could not care any less about the Machiavellian intrigue, but if he takes Timmy’s job, is that an improvement or a step backwards?

James Bianco:

• The Wall Street Journal – Bond Market Defies Fed
  Bucking the Federal Reserve’s efforts to push interest rates lower, investors are selling off U.S. government debt, driving rates in many cases to their highest levels in more than three months. The Fed’s $600 billion program to buy Treasury bonds began late last week and is kicking into high gear this week, with the central bank buying up tens of billions of dollars of debt. That should have driven prices up on those bonds and lowered their interest rates, or yields, which move opposite to the price. Instead, yields on almost every Treasury have been rising. The trend is a potential problem for the economy and the Fed. Rates had fallen sharply for months in anticipation of a Fed buying program, and in a short time much of that effect has been lost, spelling an unwelcome rise in borrowing costs throughout the economy. That could throw a wrench in what the Fed is trying to accomplish: to use low rates to encourage more borrowing and risk-taking by consumers, businesses and investors, thereby reviving growth. Still, it is far too early to declare that the Fed’s plan is failing, and many rates remain near historic lows.

Comment

<Click on chart for larger image>

EU and IMF officials begin talks with Ireland tomorrow and with a blessing for additional help from the UK (UK banks have the biggest exposure in Europe to Ireland), it seems that the Irish fire will be temporarily put out and bondholders will be saved again. With respect to Greece, Austria said they will not block their portion of the next tranche of aid. Commodity prices are trading lower again as concerns grow that China will step up their tightening steps with talk that price controls on food may soon be implemented (a dangerous policy indeed). The rise in US mortgage rates over the past week was immediately felt as the MBA said refi’s fell 15.1% to a 4 month low and purchases fell by 5%. Bankrate last night said the avg 30 yr rate rose to 4.55%. ABC confidence fell 1 pt to -47, 1 pt below the one yr avg.

After the report from AAII last Thursday that individual investor bullishness rose to the highest since Jan ’07, II followed today with the news that bullishness amongst newsletter writers rose to the highest since Dec ’07 at 56.2, up sharply from 48.4 last week. Bears fell to a 6 month low to 20.2 from 23.1 last week.

I have been a fan of Felix Zulauf’s approach to investing for many years. The longstanding Barron’s roundtable member is a straight shooter, with a superlative track record. That was why I was thrilled to do an extensive interview with this Summer (Interview, Transcript).

Felix is advising on a new fund (Disclosure: We are investors in that fund). He describes the fundamental beliefs that drive his investment philosophy:

• Cyclicality: Economies and markets move in recurring cycles;

• Valuation: Relative valuation between asset classes reverts to a mean over long periods of time;

• Sentiment: Sentiment is a useful contrary indicator, especially at extremes;

• Momentum: Over the medium term, cyclical trends can develop their own sustaining momentum;

• Risk Management: Minimizing losses and managing exposure are crucial components of positive returns;

The way these factors play out over time can be seen in the following graphic depicting the various phases of the investment cycle:

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Economic and Business Cycles Drives Investing Decisions

click for larger graphic

Summers was a disaster. He torpedoed real reform, and kept the Obama White House on the same path as the Bush White House when it came to bailouts.

Bloomberg: Roger Altman, founder of Evercore Partners Inc. and a former deputy treasury secretary, is a leading candidate to replace Lawrence Summers as director of President Barack Obama’s National Economic Council, according to two people familiar with the matter.

WSJ: Roger Altman, a Wall Street executive who was deputy Treasury secretary early in the Clinton administration, visited the White House on Tuesday to discuss leading the president’s National Economic Council. The administration’s interest in Mr. Altman is a sign that the White House is still pursuing a top corporate executive to succeed economist Lawrence Summers.

I’d like to learn more bout Altman. Is he a creature of Wall Street, or can he be an objective policy maker?

See also:
Altman Is Said to Be a Leading Candidate to Replace Summers
Hans Nichols
Bloomberg, Nov. 172010
http://noir.bloomberg.com/apps/news?pid=20601108&sid=agEenQ7PgVMg

Altman Is a Candidate to Succeed White House’s Summers
ELIZABETH WILLIAMSON
WSJ, NOVEMBER 17, 2010
http://online.wsj.com/article/SB10001424052748704312504575618980662463928.html

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Source:
California Will Default On Its Debt, Says Chris Whalen
Henry Blodget
Yahoo Tech Ticker, Nov 16, 2010

http://finance.yahoo.com/tech-ticker/california-will-default-on-its-debt-says-chris-whalen-535616.html

US markets took a minor shellacking today, down pretty substantially across the boards.

It appeared that today was a 90/10 day, with the overwhelming run of trading to the downside (I have not verified this).

The VIX popped 2.38 points — leaping 11.78%; the Put/Call Ratio also spiked, rising +21.52%. A-D Line and Highs-Lows were similarly negative.

So — is this merely a healthy pullback in a market that ram 18% without so much as a 2% dip, or is this the start of something more ominous?

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What say ye?

Interactive graphic of asset returns in light of QE2.

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click for interactive

I feel compelled to correct an embarrassing grammatical error in the Washington Post.

The paper, whose grammar is usually outstanding, wrote this morning that “The [foreclosure] problems came to light this fall as firms such as Ally Financial, Bank of America and J.P. Morgan Chase halted foreclosures because of revelations about shoddy documentation and other questionable practices.”

It came to light because the banks were embarrassed by public disclosures of the half-arsed, slip shod operations they were running — and because courts started kicking out foreclosure proceedings because of this.

As to the grammatical error: Forgery, fraud, and criminal contempt of court are not mere “questionable practices” — the word you are having some difficulty recalling is Felony. If the editors at Washington Post do not know how to spell the word, perhaps we can help them out:

The word is Felony.

Spelling bee contestant: “Can you use that in a sentence?”

Yes: “Felony. The bank executive was convicted of a felony involving fraud, went to prison, and was sodomized daily. Felony”

Felony. F-E-L-O-N-Y.

Congratulations, you spelled the word correctly.

WaPo excerpt:

“A congressional oversight panel is set to warn on Tuesday that a widespread problem of flawed and fraudulent foreclosure paperwork could upend the housing market and undermine the nation’s financial stability, just as the issue is coming under greater scrutiny this week in Washington.

The report, issued by the Congressional Oversight Panel, which monitors the government’s bailout program, marks the first time a federal watchdog has weighed in on the nationwide foreclosure mess.

The panel echoed concerns raised by consumer advocates and financial analysts, who have said that although the consequences of the foreclosure debacle remain unclear, the problems could throw into doubt the ownership not only of foreclosed properties but also the millions of ordinary mortgages that were pooled and traded by investors around the world.”

The possible legislative response to this ranges from doing nothing, to encouraging more mortgage mods (a waste of time and money), proposed bank cramdowns, and even an unconscionable MERS pardon.

If we see any sort of MERS pardon, I will be forced to send a team of Ninjas out into the night to do some paid lobbying of my own . . .

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Source:
Don’t underestimate foreclosure crisis, watchdog to warn
Brady Dennis and Ariana Eunjung Cha
Washington Post , November 16, 2010
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/16/AR2010111600022.html