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

Interesting map, showing what each state charges in taxes for gasoline, per gallon. My home state, New York, appears to have highest gasoline taxes in the Nation. For those of you (us) who favor a Pigou tax, this is somewhat sobering . . .

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via API.org

Contract signings of existing homes rose 8.2% m/o/m in May, well above expectations of a gain of 3% and compares with an 11.3% drop in April. All 4 regions saw gains led by a 12.9% jump in the West, the region most associated with foreclosures. While a positive data point relative to expectations, the index is still at the 2nd lowest level since last Nov and we need to see how many of these contracts turn into closings as bank mortgage approval has become a much tougher process. Another factor in whether things close that the NAR is pointing out today is related to HUD. The NAR says, “a nonsensical situation has developed recently in some states with HUD unable to complete foreclosure deals because of insufficient funds to pay attorney fees at closing, even with buyers offering the full listing price.” Point being, the home buying process is tough with no signs it will ease up soon and add this on top of an already difficult jobs market which is the key factor in whether someone decides to buy a home.

Jim Rogers, chairman of Rogers Holdings, talks about his investment strategy. Rogers also discusses Europe’s sovereign debt crisis and Federal Reserve monetary policy. He speaks from Singapore with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.”

Source: Bloomberg, June 29

Today’s reading list:

• BofA Nears Huge Settlement (WSJ)
• Biggest Tax Avoiders Win Most Gaming $1 Trillion U.S. Tax Break (Bloomberg)
• Shadow spreading across international banking (FT) see also Basel Regulators Said to Scrutinize Banks’ ‘Flawed’ Risk-Weighting Methods (Bloomberg)
• Is Brazil’s economic boom a bubble ready to burst? (BBC)
• Soggy Corn Fields Curb Planting as Demand for Ethanol, Feed Grow (Bloomberg)
• BIS’s Prescription: Wrong for What Ails the U.S. and U.K. (Barron’s)
• Black Swan Author Taleb: Greece is ‘Peanuts,’ the U.S. a ‘Time Bomb’ (WSJ)
• Buffett’s Forgotten $20 Helps Californians Bridge State’s $10 Billion Gap (Bloomberg)
• The Shocking True Tale Of The Mad Genius Who Invented Sea-Monkeys  (The Awl)
• Crazy picture of the day: the S.S. Eastland Disaster 1915 (Ephemera)

What are you reading?

Leen’s Lodge, FDIC, The Fed
David Kotok
June 29, 2011

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“Bank reserves are slightly below $1.6trn despite the Treasury’s high cash balance at the central bank. The Treasury’s cash balance has averaged $130bn in the past two weeks compared with about $70bn over the same period in 2010. A higher Treasury cash balance at the Fed drains more bank reserves. We suspect the Treasury is keeping a thick liquidity cushion at the central bank in preparation for any potential volatility associated with the debt ceiling. Nevertheless, we expect bank reserves to reach $1.7trn by time QE ends later this month. The distribution of bank reserves has attracted a great deal of attention recently. Most analysts focus on the level of cash assets held by the largest domestic institutions compared with the US branches of foreign organizations. The cash assets of the non-US banks currently exceed $1trn compared with roughly half that amount at the 25 largest domestic banks. Moreover, these cash balances started rising sharply once QE began last November. Accordingly, there has been some speculation that the Fed’s liquidity expansion has mainly ended up on the balance sheets of the largest non-US institutions.” Source: Barclays Capital Weekly Federal Reserve Balance Sheet Update (24 June 2011).

We visited Leen’s Lodge on the weekend after Father’s Day. As part of a small group, we convened to prepare and strategize for the larger consortium of economic and financial-market experts who will gather during the first weekend in August.

We were: two lawyers, all investors, one Washington expert on energy and a political analyst, one retired ophthalmologist, one automobile marketer, and two bond managers (my colleague Peter Demirali and me).

We reviewed the uncertainty we see in the world. We fretted about the circumstances that have led us to worry – worry for our children and our grandchildren. Four of us are over 70. We had to monitor the amount of fried fish we ate over the campfire and limit the wine we took with dinner.

Never did we think we would be seeing a central bank policy that gives a $1 trillion edge to foreign banks over US banks. The quote above tells enough for the casual reader to understand the issue. We dug into some detail. The banking institutions abroad have double the money on deposit with the Federal Reserve than the largest twenty-five banks in the United States. Why? This occurs because of an action of the Federal Deposit Insurance Company. The FDIC changed the formulation of its assessments to expand to assets, not just deposits. The assets that are assessed include those that are excess reserve deposits of American banks placed at the Federal Reserve. Those deposits earn twenty-five basis points. American subsidiaries of foreign institutions are not subject to that assessment. That is the outcome since the FDIC introduced this fee assessment mechanism on April 1st.

The spread between the interest on excess reserves and Federal Funds has widened, because the Fed Funds rate is falling. Why?

Simply put, banks will not act at the margin in a way that loses money. Who can blame them? And so banks that were arbitraging monies they could obtain from various funding sources, including Fannie Mae and Freddie Mac, found the imposed assessment sufficiently large to cease this behavior. We are beginning to see enough change to estimate how much impact this FDIC fee assessment precipitated. The revelations above that are cited in Barclays’ research speak for themselves.

We have had an intervention that countered the Federal Reserve’s stimulus program. The intervention persists through today. The QE2 Federal Reserve program is ending momentarily. There is turmoil in the sovereign debt arena that we read about in the headlines. We have a slowing economy, exacerbated by weakness in the labor force and the housing sector, that has not healed.

What more uncertainty could one ask for?

An additional uncertainty came in the form of a political intervention in the oil price, where an agency decided with other agencies and political bodies to release reserves of oil in an attempt to drive the price down. It caused an immediate response in the marketplace, as one would expect. Examination of this suggests that the weakness in oil attributable to a reserve release that is a nonrecurring event can only be temporary. It will perhaps slightly improve the economic situation in the United States, because the oil price acts like a tax. Every penny a gallon in the gasoline price is roughly $1.25 billion in annual spending power, which is either inserted into the consumer’s pocketbook if the price goes down or extracted if the price goes up. It is only policy changes concerning drilling, substitution, alternative fuels, or natural gas that will make the real difference.

Our group sat at Leen’s Lodge. We observed the natural beauty of our surroundings: clear, pristine water teeming with bass and pickerel; wildlife, including moose and bald eagles. We contemplated the future and worried.

Maybe it is the nature of elders to worry. Maybe this is true of all generations, past and present; maybe concern grows with age. I have no way to know; I have only been sixty-eight years old once. I look at my three children and their spouses, my two grandchildren, and the world to come, and I worry for them.

Leen’s Lodge is a comfortable place. The food is delicious; the owner and manager, Charles Driza, is a hospitable innkeeper. Summer visitor business is 30% off from last year, suffering the results of the recession. There is no recovery in Washington County, Maine. Anyone who wants to take a trip to a delightful, quiet place might want to look into Grand Lake Stream, Maine, Leen’s Lodge, and these environs. Visit www.leenslodge.com for more information.

I’m back at my desk, working to sort through the knowns, the known unknowns, and the unknown unknowns.

The vote on bankruptcy vs economic depression in Greece awaits but the markets aren’t waiting around as the assumption that bad choice 2 will prevail is apparent with Greek stocks rallying to a 4 week high and the 2 yr yield plunging by 180 bps. Today’s vote will be followed by another one tomorrow that will focus on the actual implementation of the budget, including the privatization plan. Japan’s manufacturing sector is experiencing somewhat of a V type bottom as Industrial Production in May rose 5.7% m/o/m, a touch better than expected and follows a 1.6% gain in April after the 15.5% drop in March. The gain was specifically led by the auto sector and the Nikkei is responding positively, rallying to a 7 week high. Inflation in Canada rose to the most since March ’03, up 3.7% y/o/y in May, above expectations of 3.3% and well above the benchmark rate of the BoC of 1%. Negative real interest rates are not just in the US but are a global phenomenon notwithstanding rate hikes everywhere except here. Following two days of lackluster demand, the US Treasury will try for a 3rd time today, selling 7 yr paper. With Bernanke Capital Management largely stepping away from Treasury purchases, Geithner is going to have to make some new friends.

With 6 of the past 7 weeks in the red, the markets have managed to string together a series of winning days. Daily gains both this week and last have ranged between 0.50% and 1.25%. Indeed, the Dow’s gains on Monday and Tuesday represent the first consecutive triple digit gain for the Industrials  since December 1- 2, 2010. This was the fourth triple digit rally since the April 29th highs.

Are we making a major turn? Has psychology become so bad its a contrary indicator? Has the 200 day moving average proved to be inviolable?

Perhaps any of those explanations might prove to be the case, although I have my suspicions otherwise. I suspect it is simply a case of funds marking up stocks into the close of the 2nd quarter.

What data supports this thesis? I would point to 2 things: Psychology and Trading Volume. Most metrics are showing psychology is either neutral or optimistic. This tends to be supportive of a short term trading bounce, and not a longer-lasting rally.

Second, the volume has been anemic, even by the unusually low levels we have seen all year. The overall volume on Monday was well below the 30-day average on both NYSE and Nasdaq. Tuesday was even lower. Rallies on increasingly lighter volume are not signs of aggressive institutional buying. Rather, it supports the Window dressing thesis.

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Explaining the short term noise is often a Fool’s Errand,. In my experience, it tends to reveal more about the speaker’s book than it says about the market conditions. But in the present case, I cannot help but be concerned that the long side trade is a bit of a suckers bet much beyond June 30th . . .

Limey Beans

The English are moaning about how expensive things are. They don’t know the half of it. A small Bag of Starbuck’s Italian Roast Beans at my local (ground at 4-1/2 for my lovely, well-machined stainless Alessi stove-top expresso device) in Switzerland sets one back CHF8.50 (more than USD$10 for American readers). Same bag (though sometimes I go for the even-darker Sumatra or French-Roast) in “high-priced” London is GBP3.70 (more or less USD $6.00. ). For the operationally challenged (who shouldn’t have a CMC or ForexPro account nor be trading currencies in any event), this is a 66% premium for the Helvetian-sourced variety of Starbucks finest, deliciously-oily beans.

The Baristas in London, I can tell you, seem only to keen to ground the purchased beans, and it is also unlikely that Starbucks is magnanimously selling their bags at a loss there (though I read this week their >600 outlets are just breaking even). Yes, there are VAT differences, and labour-market differentials, but my bag’o'beans from Geneva was more or less the same price three years ago (as are the Limey Beans). Prices, evidently, are indeed sticky downwards, and profit margins evidently variable at the other end of the spectrum.

Firmly ensconced at the small end of the vanity spectrum, sporting an ancient anorak, failing footwear, tattered trousers, and a seriously-old-and-simple early-generation Swatch, I must confess to having  modest needs when it comes to trimming my locks – not because I resemble James Carville, but primarily – because I just do not care. A quick run through with a Number-3 razor and I’ll be out the door five minutes later – perhaps ten minutes with a shampoo and a straight-blade scrape. The median in London (from my non-scientific experience) is GBP17.50 (USD$28) though the truly brave can do better at the risk of emerging a butchered Mohican.  Median men’s price to be quickly coiffed in Geneva is CHF50 (USD$60). When in the dollar-zone, I used to pay $10, though admittedly I had to endure the incessant complaints and xenophobic right-wing politics that was part-and-parcel of the service.

There are no shortage of decent Pizzerias in London replete with iconic red-chequered table-cloths, wood-burning ovens and genuinely-accented servers. The median price for a reasonable fresh-cooked bubbling edible disc is somewhere in the GBP7.50 (USD12-) though this can rise to USD15 depending upon the venue and extras.  Our favourite (and we are not alone as it can be annoyingly busy and raucous) Geneva-based pizza fabricator, Luigia, will spin and prep his freshly-made offerings for CHF16.50 (nearly USD$20) with a topping or two taking you to CHF22 (USD26). Two glasses of Nero d’Avola (USD13ea) , a shared generous plate of Calamari (USD35!!!!), and departs significantly poorer than one entered. I would pity the Swiss, except most of the patrons are NOT local Helvetians. For they, I can tell you, are all in France shopping.

One could reasonably argue these examples have been cherry-picked. And they might be right. But they are the most obvious every-day manifestations of The Wrong Price I see in my weekly travels. One could of course, go on: UK airport sandwich $5; Swiss airport sandwich $9; Swiss modern italian chaise USD1,500, indentical in UK USD800. And so on. Switzerland is – in its entirety – the The Wrong Price. And not by a little. Perhaps sterling is cheap. Perhaps the dollar is VERY cheap. Yet Americans seem more than willing to supply both labour and goods as well as services at what seem like – on a relative basis – to be absurdly cheap prices and rates. And for the most part, this does not look set to change dramatically, not on the scale discrepancies. Granted taxes, energy and social costs are much diminished, but this is not so in the UK. It seems to be purely a matter of the Wrong Price, driven by financial flows, with the real economy apparently ignorant of these flows – excepting those who live on borders.

I am not saying the specs seeking a turn, the fearful who are paranoid, sovereign accumulators who are unspoiled for alternative choice-of-stores, nor the unsavoury who are delivering bucket-fulls as a patrimony for posterity into hopefully-safe-and-untouchable coffers are wrong to be doing WHAT they are doing. It is however worth scrutinizing whether WHAT they are doing, is being done at a decidedly WRONG price….

The conventional wisdom is that Wall Street has turned its back on President Obama. But DealBook examines whether financial leaders are simply hedging their bets.

See: On Obama, Wall St. Shows a Reluctance to Commit

My email is down, my Windows PC is a damned mess, and I have for the last time wasted hours dealing with this junk.

I was on a deadline all day today for a REALLY big project, and I was forced into sneaker net / memory stick form of communication.

I’ve been a Mac guy for decades, back when no one knew if they were going to survive, but I always had a Windows PC on my desk in the office.

I think my next office PC is going to be the new iMac . . .

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There’s your problem right there! Your using a CRT instead of an LCD!