Posts filed under “Think Tank”

CIT = Capitalism In Transition

Good Evening: U.S. stocks finished mixed for a second straight day on Wednesday, as positive earnings from Apple fought lingering credit concerns to a virtual draw. The NASDAQ did manage to advance, however, extending its streak of positive closes to eleven. The rest of the capital markets didn’t stray too far from unchanged, either, with bonds and the dollar modestly lower, and commodities flat. Financial stocks were initially quite heavy, but most of them staged comebacks as the day progressed. CIT was not among them, though, as word of the potentially onerous terms of a proposed private financing were leaked to the press. The media clucked quite a bit about the money bondholders stood to make on this deal, but when I last checked, that’s how capitalism is supposed to work

With another light day on the economic release calendar (mortgage purchase applications crept higher), investors once again focused on earnings. Apple announced last night that it had — surprise! — easily surpassed estimates. AAPL’s stock dutifully jumped in after hours trading. After listening to the conference call, investors then decided there wasn’t a whole lot in the company’s results that applied to the rest of the tape. U.S. stock index futures thus retreated when the bourses in Europe traded lower this morning. Morgan Stanley and Wells Fargo contributed to this sinking feeling when they reported less than stellar earnings (see below). Morgan Stanley’s results were hurt by the repayment of TARP capital and rising prices for its debt securities, while Wells Fargo was hurt by a large spike in delinquencies on mortgages and other types of loans. If the economy is truly healing, someone forgot to send the memo to WFC’s borrowers.

The net of the above news flow was a 0.5% drop in the major averages at the start of Wednesday’s trading. Stocks wasted little time, however, in vaulting back above unchanged, a level they then criss-crossed until lunchtime. Apple’s strength, as well as the aforementioned comebacks in the shares of MS and WFC, helped push the indexes higher in the early afternoon. The S&P 500, for example, was up more than 10% from its July 8 low at one point this afternoon before some late profit taking set in. The major averages eased back toward unchanged and then finished mixed. Treasurys were down ahead of the next refunding announcement, with yields rising between 2 and 7 bps. The dollar was off a few tenths of one percent, while commodities as a group treaded water. Emblematic of today’s action were the metals, since a decline in metals considered base was offset by a rally in those deemed precious. The CRB inched a fraction higher.

Earlier today, a headline on Bloomberg (since retracted) plaintively claimed that PIMCO and some other money managers stood to book an immediate, $100 million gain on their offer to help CIT through its current rough patch. A couple of other media outlets picked up on the story, also playing up the “quick buck” angle. Representative of the complaints about the terms offered to CIT by the free market — and not taxpayers — are the following two paragraphs, also courtesy of Bloomberg:

“CIT, the 101-year-old commercial lender struggling to retire $1 billion of debt maturing next month, agreed to pay a 5 percent fee to the creditors and annual interest of at least 13 percent. On top of that, the New York-based company pledged assets worth more than five times the amount of the loan as collateral.
“The terms are egregious,” said Dwayne Moyers, the chief investment officer at Fort Worth, Texas-based SMH Capital Advisors, which oversees $1.4 billion, including more than $70 million of CIT bonds. “They ripped the faces off everyone with these terms.” (source: Bloomberg article below)

Whoa, hold on there a second, Tex. Your pretense of outrage is silly. Why didn’t you, Mr. Moyers, offer to fund CIT on the same terms? Rather than disparaging private providers of capital, the media, investors, and, yes, other bond buyers, should be cheering the return of capitalism to our capital markets. This is how markets are supposed to work: Investors take risk (in this case, the bankruptcy of CIT), and they are rewarded for doing so. It’s that simple, though these lessons were forgotten during the credit bubble, when huge risks were sought without much thought — or reward. Predictably, losses and crisis ensued. It’s high time investors rediscovered the art of demanding return for the assumption of risk.

Getting the government out of the lending business should be celebrated, not scorned. Have we taxpayers been cheated out of an opportunity to make fabulous returns in CIT via yet another TARP “investment”? Of course not (the government employees at Treasury would never think of cutting such a sweet deal). This transition back to capitalism from the statism of bailouts will be bumpy, as Morgan Stanley’s earnings today will attest. Why even GE is trying to stop issuing FDIC-backed debt (see below). CIT may or may not live long enough to pay back everything it owes to its creditors, but it’s nice to see them trying to stand on their own two feet instead of settling for a TARP I.V. drip in the emergency ward at Treasury.

Ideally, the deal offered by PIMCO, Oaktree, Baupost, and others may actually act as a clarion call to other sources of capital. Reading about these terms will probably cause them to rub their eyes, and subsequently open their wallets. High prospective returns have a way of doing that to proper capitalists (as opposed to the bailout-seeking, crybaby capitalists). Again, the trip back from government sponsored finance will be neither quick nor easy. But here’s hoping that the “egregious” terms offered to CIT will some day be looked back upon as one of the turning point moments as our markets move away from their current reliance on government funding. Let CIT stand for “Capitalism In Transition”.

– Jack McHugh

U.S. Markets Wrap: Stocks Mixed; Bonds Drop Before Debt Sales
Morgan Stanley Loss Misses Estimates on Debt Costs
GE Capital Wins Approval of Plan to Exit FDIC Program
CIT Hit With Interest Rate More Than 25 Times Libor

Category: Markets, Think Tank

FHFA home price index

The May FHFA home price index rose .9% from April and is better than the expected decline of .2%. The y/o/y decline is 5.6%. From its record high in April 2007, prices are down 10.7%. This data measures only those single family homes that have mortgages backed by FNM and FRE and covers every region…Read More

Category: MacroNotes

Rate hike odds post Bernanke testimony

Following two days of testimony (and the WSJ editorial) from Bernanke where he repeated that interest rates will stay low for an extended period of time, that inflation will remain subdued for a few years more and that unemployment will remain elevated for a period of time, the odds of a year end rate hike…Read More

Category: MacroNotes

King Report: Paradox of Corporate Cost Cutting

> Because Ben is back in funny money mode, stocks & commodities are rallying.  But the dollar and the Chinese are not happy; and they are clearly expressing their anger. The FT: China will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies,…Read More

Category: Think Tank

Bernanke Campaigns for Reappointment

Good Evening: Stocks were poised to correct their recent gains today, but a late rally extended the winning streak for both the Dow and NASDAQ to seven straight. The earnings news was deemed positive by market participants, though the bottom line “beats” came even as top line revenue estimates fell short. Cost cutting can always…Read More

Category: Markets, Think Tank

Dennis Gartman, Ben Bernanke & Congress

Dennis Gartman’s letter today hit so many key points with an economy of words that I have excerpted it and scratched my own text on Bernanke’s testimony. Dennis doesn’t mention the changes in “velocity” which is too technical a subject for this missive. Maybe later. He does perfectly characterize our Congress. Go, Dennis, go. Give…Read More

Category: Federal Reserve, Think Tank

All’s Not Well in Kindleland

Here’s an excerpt from my latest update on the slow transition from printed books to electronic books. The course of technological innovation never did run smooth: When it comes to ebooks, no one seems to be able to keep a level head. Publishers are in self-induced swivet; Amazon is being a shortsighted bully, and the…Read More

Category: Think Tank

Bernanke’s testimony

Bernanke in his speech is saying most of what we already know about the economy and specifies that its the household/spending outlook that is the “important downside risk” which we know is the disease of the credit crisis. He says the unemployment rate will remain elevated even as the economy recovers (we need to generate…Read More

Category: MacroNotes

Ben comes to the Hill

If the front page article of today’s WSJ is any indication, Bernanke’s testimony on the economy and monetary policy will be anything but boring. Bernanke lays the groundwork for some of what he’ll say in an editorial that lays out “The Fed’s Exit Strategy.” It sounds great but if the Fed gets the timing wrong,…Read More

Category: MacroNotes

Should the Fed be Responsibly Irresponsible?

This week I offer two short essays for your reading pleasure in Outside the Box. The first is from Ambrose Evans-Pritchard writing in the London Telegraph. He gives some more specifics about the situation in Europe I wrote about this weekend.

He ends with the following sober quote: “My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.” This is a must read.

And the second piece? Last week in Outside the Box we looked at an “Austrian” (economic) view of the inflation/deflation debate from my friends at Hoisington. This week we look at the 180 degree opposite with Keynesian aficionado Paul McCulley, who argues that the Fed should be Responsibly Irresponsible and target higher inflation. This essay has brought some rather heated arguments in print and from some of the people who will be with Paul and me at the annual Maine fishing trip. And you can bet I will put them all together with a little wine to see how the argument ensues. I will report back.

And Paul ends with a great and what is a quite controversial line, “Yes, as Bernanke intoned, there are no free lunches. But no lunch doesn’t work for me. Or the American people. While it is true, as Keynes intoned, that we are all dead in the long run, I see no reason to die young from orthodoxy-imposed anorexia.”

And finally, this one last note on European banks: “European banks including Societe Generale SA and BNP Paribas SA hold almost $200 billion in guarantees sold by New York-based AIG allowing the lenders to reduce the capital required for loss reserves.” (Bloomberg). Want to think about the US taxpayer paying to bail out Europeans banks? Think that might be a tad controversial? This could be explosive.

John Mauldin, Editor
Outside the Box

Fiscal ruin of the Western world beckons
By Ambrose Evans-Pritchard

For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go….Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc….

No doubt Ireland has been the victim of a savagely tight monetary policy – given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

Read More

Category: Federal Reserve, Think Tank