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

The recent Senior Loan Officer Survey (SLOS) by the Federal Reserve Board indicates that U.S. banks are continuing to ease their lending standards on consumer loans (please note the reverse scale on the chart). Consumer confidence is also on the rise.

Sources: FRED; Federal Reserve Board; Plexus Asset Management.

Furthermore, the yield gap between 30-year home mortgage bonds and 30-year government bonds are again testing historical lows.

Sources: FRED; Plexus Asset Management.

By the looks of it the easier money and optimism will support the house market. But do they?

Well, surprise, surprise! Households continue to shun the house market as the SLOS indicates that banks are in fact experiencing a slowdown in demand for mortgage loans.

Sources: Federal Reserve Board; Plexus Asset Management.

At this stage banks are not yet relenting on their tight standards for mortgage loans, but who can blame them given the oversupply in the U.S. market? The question is whether QE2 is in fact producing the necessary results. Obviously not in so far as the housing market is concerned.

Sources: Federal Reserve Board; Plexus Asset Management.

U.S. consumers are probably also fretting about the surge in long-term interest rates and the recent jump in mortgage rates.

Sources: FRED; Plexus Asset Management.

There is some light at the end of the tunnel, though. It seems as if there is a reasonable correlation between house prices and consumer confidence. The latter turning for the better in the final quarter of last year and surging in January may turn out to be positive for the U.S. housing sector.

Sources: FRED; Standard & Poors; Plexus Asset Management.

The outlook for consumer confidence is upbeat if you believe long bond rates.

Sources: FRED; Plexus Asset Management.

Surely that means that the economy has strengthened further, you may ask? Yes, although volatile, the yield on the 10-year government note is in fact a reasonably good indicator of MZM (money zero maturity) and therefore the economy in general. The recent surge in long bond rates indicates that MZM velocity, and therefore the economy, is likely to surge in the current quarter.

Sources: FRED; Plexus Asset Management.

*Once more unto the breach, dear friends, once more.”

In yesterday’s early AM comments (The Battle of Bull vs Bear), I noted that “opening indications and actual closing prices are two very different animals.” And indeed, despite ugly futures and negative newsflows, markets managed to climb back to flat by the end of the day.

Regardless of what you attribute this to — excess liquidity, improving fundamentals, or as my pal Doug Kass states, sheer madness — it may be helpful to consider how these Futures vs Closes (AM/PM) divergences play out.

It is a war of attrition, and eventually, one side or the other will become exhausted.

The negative AM futures in the US reflect negative bets for a variety of reasons: Arbitraging selling in overseas bourses; bearish bets that selling momentum over there will pressure equity prices over here; general doubts about any global economic expansion. Or simple a bet that the doubling of US equity prices since March 2009 has run is course.

Regardless of the reasons, there are only so many dollars allocated to this trade. If it doesn’t pay off after a certain time period or magnitude of loss, traders move on to something else.

So too, with the opposite side of the bet: There is only so many billions allocated to countering the early morning weakness every single day, and buying that dip. Eventually, that pool of ammo will get exhausted.

I would be lying if I told you I know which side’s cash becomes exhausted first — I have no idea how this ends, but I have my inklings — hence, the 53%c cash position we have as evidence of that. But we are not all cash and we are not short (a small QID slug is our only hedge).

And as we have noted several times (here, here and here) watch the Hang Seng index — it is the canary in the coal mine . . .

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click for updated futures

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*Cry God for Harry, England, and Saint George!’ speech, Shakespeare’s Henry V, Act III, 1598

Freddie Mac made a terse announcement Wednesday in a securities filing about the resignation of its chief operating officer, Bruce Witherell. Freddie said that Witherell resigned “for personal reasons.” His departure was effective immediately and he received no termination benefits. He had been receiving several millions of dollars in annual compensation from Freddie. The Wall Street Journal reporter commented:

Efforts to attract and retain top managers at Freddie and its larger sibling, Fannie Mae, have been stymied by salary restrictions that are modest relative to comparable to private sector pay and by the fact that the firm’s federal overseers have effective veto rights over major decisions.

It is true that pay at Fannie and Freddie used to be even more criminogenic. According to the Los Angeles Times:

In 2007, then-Freddie Mac CEO Richard F. Syron had a base salary of $1.2 million and total compensation of $18.3 million, according to SEC filings. In the same year, Daniel Mudd, the chief executive of Fannie Mae, had a base salary of $987,000 and total compensation of $11.7 million.

Those were the days, when you could in a single year be made wealthy for destroying a company and causing scores of billions of dollars of losses to the taxpayers. The title of Akerlof & Romer’s famous 1993 article has never looked more prescient — “Looting: the Economic Underworld of Bankruptcy for Profit.”

I do not know why Witherell resigned. I hope he is not facing a family emergency. I write to ask why he was hired. Witherell’s principal experience was with Lehman. In particular, he was chief executive officer of Aurora Loan Services from 2003 to 2006. Lehman owned Aurora. Aurora specialized in purchasing and reselling “liar’s” loans.

I testified before the House Financial Services Committee on April 21, 2010 about Lehman and Aurora’s pervasive accounting fraud. A copy of that testimony can be found here.

The key point is that Aurora was a massive fraud — purchasing and selling often fraudulent mortgages. It is virtually certain that Freddie purchased material amounts of Aurora’s fraudulent mortgages (directly, or by purchasing collateralized debt obligations (CDOs) that were supposed to be backed by Aurora’s liar’s loans). As my colleague Randy Wray has emphasized, we need a new term for the toxic MBS (mortgage-backed securities) because they often weren’t backed by mortgages due to lender fraud.

Read the rest of this entry »

Part I

Does the Egyptian chaos have any impact on the U.S. stock market and the economy? Insight with Barry Ritholtz, Fusion IQ; Jim Lacamp, Macroportfolio Advisors and Douglas Kass, Seabreeze Partners Management.
Airtime: Thurs. Feb. 10 2011 | :13:0 11 ET

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Part II

Insight on whether the U.S. is in a mini-inflationary boom that will carry stocks a lot higher, with Mark Perry, University of Michigan School of Management; Doug Kass, Seabreeze Partners Management and Barry Ritholtz, Fusion IQ.
Airtime: Thurs. Feb. 10 2011 | :40:0 11 ET

Art Cashin points to a fascinating discussion about a speech by Richard Fisher, President of the Dallas Fed. The speech drew headlines on Mr. Fisher’s contention that he would be hard pressed not to dissent on any extension or expansion of QE2.

Kevin Ferry of Cronus Future’s suggested taking a closer look at the speech, not because of the QE2 bit, but because the speech contained rather blunt criticism of Congress and the Executive Branch.

The criticism centered on their handling (or rather non-handling) of the budget and the deficit:

“But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place.The Fed does not create government debt; Congress does. Deficits and the unfunded liabilities of Medicare and Social Security are not created by the Federal Reserve; they are the legacy of Congress. The Fed does not earmark taxpayer money for pet projects in local communities that taxpayers themselves would never countenance; only the Congress does that. The Congress and administration play the dominant role in creating the regulatory environment that incentivizes or discourages job creation.

It seems to me that those lawmakers who advocate “Ending the Fed” might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house.

A look within the United States makes clear the overriding influence of fiscal and regulatory policy. Monetary policy is uniform across the 50 states; the base rate of interest paid on a business or consumer loan or a mortgage in Michigan, California, Ohio or New York is the same as that paid in Texas. Yet there is a reason that Michigan and California each lost more than 600,000 jobs over the past decade while Texas added more than 700,000 over the same period. There is a reason that the population of Ohio grew by only 183,000 residents over the past 10 years, while Texas grows by that number every five and a half months. There is a reason that with each passing census, the state of New York has been losing congressional seats and Texas has been adding them; a reason that, in the recent census, California failed to gain any while Texas gained four. There is a reason that, as documented in the Jan. 12 issue of the Wall Street Journal, college graduates—the best and brightest of the successor generation—are leaving New York and Cleveland and Detroit and moving to Austin, Texas. There is a reason no state in the union houses more Fortune 500 headquarters than Texas. There is a reason for the disparate employment growth that has taken place in the 12 Federal Reserve districts over the past two decades, data that are documented in the graph at your place setting.

That reason has nothing to do with monetary policy. It has everything to do with the taxation and fiscal and regulatory policies of the states. The cost of capital does not explain the different economic performances of the states; the cost of doing business has everything to do with those differences. However well-meaning tax and regulatory initiatives in the laggard states may have been when they were conceived and levied, they have had unintended consequences that have led to economic under-performance and job destruction.

Similarly, the key to correcting the under-performance of the American economy and American job creation does not presently rest with the Federal Reserve. It is in the hands of those who make fiscal and regulatory policy.

A bit later he turns to how severe the problem may be:

We shall see if the new Congress will prove worthy of the power the American people have “loaned” them, and, together with the president, actually draw the spirits of fiscal reform and sanity from the “vasty deep” to at long last implement meaningful fiscal and regulatory policy that incentivizes private-sector job creation here at home while arresting the hemorrhaging of our Treasury. If they do, then more Americans will find work and be better off, better paid and freer to make their own decisions about the economy.

If they don’t, then woe to our children, their children and the American Dream.
It’s a great and insightful presentation. Go to the Dallas Fed website and pull it up. While you’re there pull up his prior speech filled with more “straight from the shoulder” discussions.

Thanks Mr. Fisher and thank you, Art & Kevin, for the re-direct.

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Back on the Kudlow Report at 7:00 pm this evening with Doug kass. We will be discussing the Markets, Egypt, Kevin Marsh’s resignation, Inflation and NYSE merger.

My takeaway:

• My Market view is here

• This Marsh resignation makes the Fed even more dovish. Good for speculators, bad for savers.

• We have early signs of upticks in inflation — but nothing like the hyperinflation some of the loons are arguing about (Where were these dolts in the 2000s when inflation was rampant?)

• I don’t know what impact Egypt has on markets, though the potential to spiral throughout the Middle East is intriguing

• My view of the NYSE merger is here ; After all they have done for investors, I am sad to “buh-bye and good riddance.”

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Videos posted here

February 9th marks the 50th Anniversary of The Beatles’ first performance. Fans are gathering in Liverpool to celebrate one of the most historic first gigs in music at the city’s most iconic venue.

The Cavern, reproduced in 1984 after being demolished in the 1970s, is the centerpiece of the the celebration.

The Liverpool Council intends to unveil a new canopy of lights over Mathew Street, where the club resides, affectionately dubbed “Lucy in the Sky with Diamonds.”

Source:
Beatles Fans Celebrate 50th Anniversary of First Gig
Wyndham Wyeth
Paste, February 9, 2011
http://www.pastemagazine.com/articles/2011/02/beatles-fans-celebrate-50th-anniversary-of-first-g.html

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The recent a merger chatter between the NYSE and the Deutsche Börse got us wondering: How might life at the NYSE change under their new German management?

10. Effective immediately: No more bell ringing when Chairman David Hasselhoff has a hangover.

9. NYSE changes its tagline to “Das Equities.”

8. Sylvia Wadhwa on the cover of the annual NYSE Calendar

7. All Dark Pools will be delicious Bavarian Chocolate

6. Dick Grasso’s honorary new title: der Führer

5. Merger is the last of Germany’s wartime reparations to the Jews (And they really mean it this time!)

4.  The new Art Cashin Biergarten presents ‘Stocktoberfest’!

3. Parisian counter-parties surrender rather than take the other side of trades.

2.  Color-coded lederhosen for specialists, runners and floortraders.

1.  Once a year, pretend Nasdaq is Poland and invade.

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by Barry Ritholtz and Josh Brown

Any other changes we missed?

Bloomberg