Posts filed under “Think Tank”

Bernanke!

Bernanke!
August 24, 2009

Markets will like the removal of uncertainty now that President Obama has committed to Fed Chairman Bernanke’s reappointment. Confirmation by the US Senate is expected without much difficulty.

History shows that uncertainty is the enemy of markets. Much speculation about Bernanke and a possible Summers succession has swirled in market analysis circles. That is over.

Bernanke’s reappointment makes Fed policy a little more predictable. Bernanke clearly responded to the Lehman failure and the cascade that followed with unprecedented stimulus and imaginative and creative use of new Fed tools. Agree or not, the types of applications and the size of intervention are now established in the annals of Fed policy making as one of the most dramatic responses ever. This is the hallmark of the Bernanke regime.

We can expect this approach to continue now that the cloud of uncertainty has been lifted. Will the policy succeed in stemming more economic damage and returning the economy to a growth path, without substantial inflation? That remains to be seen. But we do know that Bernanke is committed to stimulus without limits in order to avoid deflation and depression.

We do not expect this news to trigger any extended market movement. About 70% of those market professionals polled were assuming Bernanke’s reappointment. Others were wondering whether the Obama administration would see this as a benefit to their politic agenda. Clearly the internal power at the White House has decided that reappointing Bernanke is in the president’s political interest. So be it.

The Fed still faces a daunting task. It must persist in easy policy for a protracted period and then turn attention to the inflationary threats that may arise. That is a difficult task under any circumstances and even more so when the economy and the financial system have experienced a crisis of the proportions we have seen.

We wish the reappointed chairman success. Meanwhile we remain vigilant and recognize that, in a globally linked world, financial integration means that no single central bank and no one chairman of it has ultimate and dominant power. Bernanke needs to find a path for coordinated action when the time to remove the stimulus is at hand.

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com

Category: Think Tank

To be sure, this may be much ado about nothing and Goldman shares rallied sharply early Monday, before fading in the afternoon with the broader market. Still, if nothing else, this “trading huddle” story is another black eye for the white shoe firm, whose summer of discontent has so far featured:

  • Matt Taibbi’s blistering “vampire squid” feature in Rolling Stone.
  • Rumors of Goldman front-running the market via high-frequency trading software after one of its former developers was arrested for allegedly trying to steal is proprietary trading code.
  • A New York Times story detailing former Goldman CEO Hank Paulson’s numerous calls to current CEO Lloyd Blankfein last fall, when Paulson was Treasury Secretary and Goldman was one of many firms in line for government largess.

Category: Think Tank, Video

Zombie Dance Party: Q2 Update and Stress Test Preliminaries

Earlier today we announced the preliminary Q2 stress test results for all US banks.  Gretchen Morgenson gave us great ink yesterday in the NY Times:  “What the Stress Didn’t Predict.”

The preliminaries are of interest because they exclude the large banks and thus give you a regional/community bank view. In Q2 2009 the preliminary bank safety and soundness ratings calculated by the IRA Bank Monitor using the data from the FDIC indicate a dramatic climb in the stress in the US banking industry, up 23% to 6.87 in Q2 2009 (1995=1) vs. the preliminary Stress Index value of 5.57 in Q1 2009.   The rate of change in the preliminary Bank Stress Index was lower than in the previous quarter, but the absolute stress test score is at record levels.  The final industry aggregate average Bank Stress Index calculated by IRA was 1.8 at the end of Q4 2008 and 2.36 as of Q1 2009, illustrating the degree of subsidies flowing into the larger banks, as discussed below.

IRA’s unique automated system enables us to gather and process CALL reports in real time, as they become available on the FDIC CDR web facility.  This facility cuts several weeks off the wait time for the public to access FDIC data, but some of the largest banks are still not released until the FDIC releases its own analysis of the quarterly data, roughly 60 days after the quarter close.  Since the largest banks and/or the FDIC deliberately hold back the release of certain bank CALL reports until just prior to the press conference, the sample of CALL reports available via the FDIC CDR facility just prior to the FDIC press conference allows us to view the rest of the US banking industry “ex-big bank.”

Q2 2009 “Ex-Big Bank”:  Less Worse Than Previous Quarter, But Still Climbing

Prior to the FDIC press conference in Q1 2009, IRA for the first time calculated a preliminary Banking Stress Index rating for the industry using the bank CALL reports that were available on the FDIC web site about 50 days after the quarter close.   This preliminary Bank Stress Index rating included over 7,000 institutions, but excluded the largest banks and therefore provided a perspective on the rest of the industry.
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Category: Markets, Think Tank

more on the differing messages between stocks and US Treasuries

As a follow up to my morning comment, today is another of mixed messages being sent by the stock market and the US Treasury market as stocks continue to power higher while the 10 yr bond yield moves lower. Just since the Friday Aug 7th close, the S&P 500 has rallied 2.1% while the 10…Read More

Category: MacroNotes

Bank of Israel the first to raise interest rates

The Bank of Israel has become the first global central bank to raise interest rates as they moved their benchmark to .75% from .50%. They cite 3 main factors for moving. 1)Over the past few months, inflation data was above the target range of price stability, 2)the most recent economic data has shown a turnaround…Read More

Category: MacroNotes

King Report: Sympathy for Traditional Managers

> Our sympathies go out to traditional managers of public funds because they are being forced to abandon prudence and reason in order to generate short-term performance in a rigged casino. Deceit and duplicity are encouraged if not demanded. Earnings are crafted; balance sheets cannot be trusted; government economic data is illegitimate. Case in point:…Read More

Category: Think Tank

Stock market and US Treasury market sending different signals

RIP the CFC program as of tonight and we’ll now get to see what the natural supply and demand dynamic is in the auto industry. The other major program, the Cash for Shelter plan providing tax credits for home purchases, runs to Nov 31st but there is already talk of enlarging its size and making…Read More

Category: MacroNotes

Andy Xie is a former Morgan Stanley economist now living in China; The following is from the South China Morning Post: > The A-share market is collapsing again, like many times before. It takes numerous government policies and “expert” opinions to entice ignorant retail investors into the market but just a few days to send…Read More

Category: Think Tank

Oil! The price forecasts vary. Why?

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More

Category: Think Tank

Words from the (investment) wise August 23, 2009

Words from the (investment) wise for the week that was (August 17 – 23, 2009)

After starting the week with a broad-based sell-off, stock markets resumed their five-month uptrend as investors’ confidence in the recovery prospects of the global economy gained traction. With risky assets back in favor, a number of bourses and crude oil closed at fresh highs for the year, showing resilience in the face of a sharp correction in China on Monday (-5.8%) and Wednesday (-4.3%). Safe-haven assets such as government bonds and the US dollar received a cold shoulder.

23-08-09-01

Source: Walt Handelsman, August 20, 2009.

Referring to the nascent economic recovery, Paul Kasriel and Asha Bangalore (Northern Trust) said: “There is concern being voiced that after the fiscal stimulus wears off, the economy will lapse back into a recession. Anything is possible, but that does not necessarily make it highly probable. In the post-WII era, once the US economy has gained forward motion, it has maintained that forward motion until the Federal Reserve has intervened to halt it.

“We believe that the earliest the Fed will begin to take action to brake the pace of nominal economic activity will be late-June of 2010. And if it begins to take action then, it will do so only tentatively. If, in fact, economic activity is flagging from a lack of additional fiscal stimulus, then the Fed is unlikely to commence tightening or would reverse course. We believe that the next recession, whenever it occurs, will be precipitated by the lagged effects of Fed tightening, not by the economy ‘running out of gas’ on its own.”

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates renewed investor appetite for risky assets.

23-08-09-02

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+1.6%) and MSCI Emerging Markets Index (-0.8%) followed separate paths last week as China and a number of emerging markets came under pressure during the first few trading days. Emerging markets have now underperformed developed markets for three weeks running.

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Category: Think Tank