Posts filed under “Think Tank”
Good Evening: U.S. stock averages opened and closed near the unchanged mark today, but those levels belie quite a bit of activity between the bells. Tales of falling home prices and concerns about the freshening supply of equity issuance pushed stocks lower during the first half of the session, while some positive comments from Alan Greenspan about housing and the economy supported an afternoon comeback. The rally left market participants hoping today’s dip cum reversal was a successful test of support at the 900 level in the S&P 500. But why anyone still listens to the Maestro is a mystery to me; I much prefer reading the thoughtful views of John Hussman.
Stocks overseas were on the mushy side overnight, but our stock index futures were pointing to a higher open in New York prior to the release of the latest trade deficit figures. For once, the economists had it right, as the U.S. balance of trade did indeed worsen only slightly in March. That both imports and exports fell and damaged some green shoots in the process generated little concern, except among those who trade the greenback for a living. The dollar continued its recent slide as is now back down to where it was in early January. The only other economic release came in the form of a home price survey that indicated foreclosures were hurting home prices in the many U.S. cities not covered by the Case-Shiller survey (see below).
This report spawned some fresh concerns about the banks, which were already a little woozy from all the secondary deals that keep marching across the tape. After opening 0.5% higher, the major averages started to leak in sympathy with the weakness in bank stocks. Fresh supply and fears of dilution have been the province of financial institutions since this bear market started, but today brought new supply from both Ford and GM. In Ford’s case, the company hit the market with a 300 million share secondary that left F shareholders more than 17% poorer by day’s end. And because it’s common for those occupying the executive suites in Detroit to copy one another, it should have come as little surprise that GM’s executives also decided to offer shares to the public — in this case, their own! There’s been no word yet how the move by GM’s top executives to dump every last share prior to the June 1 restructuring deadline will be received in Washington, but the news sent GM common down to levels not seen since 1933.
With this news flow as the backdrop, investors added some equity supply of their own in the form of sell tickets. By 1 pm edt, the averages were off between 0.75% and 3%, and the S&P 500 had broken below the psychologically important 900 mark. An attempt to retake the 900 level was already under way when the Maestro’s latest “views” started scrolling across the screens (see below). After trying to bail out a broken stock bubble that he couldn’t see with a housing bubble he said couldn’t happen, and then unapologetically retiring to leave others to clean up what has become a multi-trillion dollar mess, how our former Fed Chairman’s latest forecast of an improving economy can find any willing listeners at all leaves me flummoxed. Most of the averages scooted up until they were in the green before settling back a bit at the close. Even if we leave aside his easy money policy errors, Mr. Greenspan’s track record for predicting the economy displays a consistent lack of foresight.
Whether it was because the Maestro said what investors wanted to hear, or whether the market was ready for a bounce doesn’t really matter. Stocks rallied enough to enable the Dow to finish with a gain of 0.6%, while their cousins in the Dow Transport average (-2.25%) continued to lag. The other averages finished somewhere in between these two results, though it should be noted that the Maestro’s rosy scenario did little to help the banks (the BKX was down 4.2%). Treasurys were a mirror image of stocks, as a morning rally sputtered in the afternoon and left yields little changed. The sinking dollar seemed to buoy commodities a bit, though. Plus, quietly, and with little fanfare, the precious metals are creeping higher. Smallish gains in the energy complex also contributed as the CRB index finished almost 0.5% higher.
Though his pieces are always thoughtful and do much to teach investors the importance of patience and a disciplined approach to investing, John Hussman’s “Banks Pass Stress Test — Regulators Fail Ethics Test” is a must read (see below). President of the investment funds that bear his name, Mr. Hussman tackles market action, valuation and his game plan for these variables going forward, but he saves his best ink for bailouts in general and the stress test in particular. He breaks down the components of the stress test and how politics morphed the process into an almost meaningless exercise. He leaves readers thinking the stress test and its results would be funny if they weren’t so misleadingly dangerous.
When his analytical stare focuses on the unintended consequences of financial bailouts and the ethical lapses by regulators, the insights really start to flow. The keenest of these is his argument that while saving the financial system is a worthy goal, we are going about it in a way that prevents the system from clearing. At the same time, and quite unfairly, we are handing the bill to taxpayers instead of to those who took risk throughout the capital structure (especially bond investors). In short, trying to bail out too much private debt with equally massive amounts of public debt won’t work — at least not without creating big problems of their own. But rather than placing my words in Mr. Hussman’s mouth, I will close with a two paragraph passage from his piece that I found especially enlightening:
“Notice that by bailing out the financial companies, there is a massive crowding out of private investment, because for every dollar of losses that should have been wiped off the ledger, we are forced to retain and service two dollars of overall debt – the debt securities owed by the financial companies to their bondholders continue to exist, and we now have an equal amount of new debt issued by the Treasury. The rescued bank debt is a drain on the public because it has to be serviced through a combination of higher interest rates to borrowers, and lower deposit rates to savers. Meanwhile, the Treasury debt is also a drain, because except for some income from the Treasury’s holdings of preferred stock, the debt has to be serviced from tax receipts.
“The bailout is not something “neutral” that cancels itself out, but instead amounts to a transfer of trillions of dollars of purchasing power directly and indirectly from those who didn’t finance reckless mortgage loans to those who did. Farewell to the projects, innovation, research, investment, and growth that might have been financed by the savings and retained earnings of good stewards of capital. Those funds are being diverted to the careless stewards who now stand to be made whole.” (source: Hussman Funds)
– Jack McHugh
Now that we are a few days removed from the release of the stress test results, let’s look at the markets view of the credit quality of the bigger institutions today versus where they were on Feb 10th, the day Geithner introduced the stress test. Interestingly, the CDS of each, except Citi, are near the…Read More
Wading in on the debate of whether this is a bear market rally or not one has to start differentiating among groups that have long term secular fundamental headwinds and those that have long term secular tailwinds. Consumer deleveraging and the shrinking of bank balance sheets will be a multi year process that will keep…Read More
keeping-score-cs-weekly-railroad-update Good Evening: After taking the weekend to reconsider last week’s celebrations over seeing less awful than expected economic data and the relief in feeling less angst than expected in the wake of the stress test results, investors decided to take profits on Monday. Financial companies led the downdraft in part due to the recent…Read More
Chairman Ben S. Bernanke
At the Federal Reserve Bank of Atlanta 2009 Financial Markets Conference, Jekyll Island, Georgia
May 11, 2009
My remarks this evening will focus on the Supervisory Capital Assessment Program, popularly known as the banking stress test. The federal bank regulatory agencies began the assessment program in late February and concluded their review with the release of the results just last Thursday. This initiative involved an unprecedented, simultaneous supervisory review of the 19 largest bank holding companies in the United States. Its objective was to ensure that these institutions have sufficient financial strength to absorb losses and to remain strongly capitalized, even in an economic environment more severe than currently anticipated. A well-capitalized banking system is essential for the revival of the credit flows that will underpin a sustainable economic recovery.
Objectives of Supervisory Capital Assessment Program
As you know, the abrupt end of the credit boom in 2007 has had widespread financial and economic ramifications, including a sharp slowdown in global economic activity and the imposition of substantial losses on banks and other financial institutions. Economic and financial weaknesses have fed on each other, as a declining economy has exacerbated credit losses and the resulting pressure on banks and other financial institutions has constrained the availability of new credit.
A number of significant steps have been taken to restore confidence in the nation’s financial institutions, including a substantial expansion of guarantees for bank liabilities by the Federal Deposit Insurance Corporation (FDIC), injections of capital by the Treasury in many institutions both large and small, and Federal Reserve programs to provide liquidity to financial institutions and support the normalization of key credit markets. These efforts averted serious threats to global financial stability last fall and have contributed to gradual improvement in key credit markets, though many markets remain stressed.
These steps, however, did not fully address market concerns over the depletion of bank capital caused by write-downs and increased reserving for potential losses. At the beginning of this episode, bank losses were focused in a few asset classes, such as subprime mortgages and certain complex credit products. Today, following the significant weakening in the global economy that began last fall, concerns have shifted to more-traditional credit risks, including rising delinquencies on prime as well as subprime mortgages, unpaid credit card and auto loans, worsening conditions in commercial real estate markets, and increased rates of corporate bankruptcy.
Category: Think Tank
Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc and a Fellow with the Economists for Peace and Security (http://www.epsusa.org/). He is a frequent contributor to the blog, Credit Writedowns, and the Japan Policy Research Institute (www.jpri.org) and a new contributor to The Big Picture.
Are Ben Bernanke’s “green shoots” metamorphosing into a fully fledged garden of economic recovery? Judging from the recent euphoria of the market, it certainly appears that way.
Whilst we have not been in the camp that has tended to see every green shoot as an overflowing weed, we certainly thought the market was increasingly pricing in economic oblivion in February, a Great Depression II, if you will. As we have studied the Great Depression, however, we have been increasingly struck by the differences between now and then. Whilst this is the most severe recession of the post W.W. II period, bear in mind that there has never been as vigorous monetary and fiscal policy response than what is now occurring. By way of illustration, let me point out that the amount of crude in the government Strategic Petroleum Reserve = 700 million barrels @ $50 =$35 billion.
The Treasury gold position is worth $235 billion. This week alone the treasury will sell over $100 billion of paper of which at least $70billion will be in notes.
So one can make a fairly compelling case that we have seen major lows, at least as far as the commodity complex goes. And there is increasing evidence of stabilisation in the housing market, notably in areas such as California. Additionally, we have seen a major inventory liquidation, which always happens in a slump, where production falls more rapidly than consumption does. Eventually you have to reorder.
With regards to the Fed, I’ve been highly critical of them over many years, believing that it was their unstable and easy money monetary policy that sowed the seeds for the massive credit bubble that has now popped. The FOMC’s policy response, led by Bernanke who was a key player in the Greenspan 1% fed…Read More
With the CRB index rising to within just 1% of its high of 2009, the implied inflation rate in the 10 yr TIPS has broken out to the highest level since Sept 30th at 1.575%. On Tuesday, Bernanke said that he expects inflation to be quite contained over the next couple of years while at…Read More
One of the definitions of “stress” offered by the Merriam-Webster dictionary is “bodily or mental tension resulting from factors that tend to alter an existent equilibrium”. Well, any bodily or mental tension investors might have been suffering from as a result of financial factors were shrugged off on Thursday with the announcement by US regulators that ten of the nation’s largest banks had to add a total of “only” $74.6 billion in equity following the completion of stress tests. However, whether this will indeed restore the equilibrium remains to be seen.
Source: Walt Handelsman
Source: Financial Times
As investors welcomed the less-than-feared stress-test results and their hopes for an early economic recovery mounted, they drove up the prices of risky assets such as equities, oil and commodities, precious metals, emerging-market bonds and currencies, and high-yielding corporate bonds. On the other hand, traditional safe havens like developed-market government bonds and the US dollar experienced selling pressure.
With investors’ confidence being buoyed up, the CBOE Volatility Index (VIX) declined by 9.2% during the week to 32.1 – a far cry from more than 80 in October and a sign that markets are returning to more normal behavior.
The performance of the major asset classes is summarized by the chart below.
Marking nine straight weeks of gains, the MSCI World Index surged by 6.4% (YTD +3.6%) on the week, the MSCI Emerging Markets Index by 9.4% (YTD +27.9%) and the S&P 500 Index by 5.9% (YTD +2.9%). Serving as a reminder of the severity of the bear market, these indices are still down by 43.3%, 45.8% and 40.6% respectively since the October 2007 bull market highs.
With the exception of the Dow Jones Industrial Average and the UK FTSE 100 Index, most major global stock markets have now moved into positive territory for the year to date.
Click here or on the table below for a larger image.
Returns around the world ranged from top performers Ukraine (+20.5%), Serbia (+20.0%), Kazakhstan (+19.4%), Peru (+17.9%) and Singapore (+16.6%) to Barbados (-4.1%), Slovakia (-2.3%), Bangladesh (-2.0%), Pakistan (-1.0%) and Tunisia (-0.9%) which experienced headwinds. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
With only a handful of US companies still to report first-quarter earnings, 62% of the companies that have reported have beaten analysts’ earnings expectations. According to Bespoke, this earnings season will be the first quarter-over-quarter increase in the “beat rate” since the third quarter of 2006. “When the ‘beat rate’ started to decline in 2007, it was definitely a warning signal for the market, and this quarter’s increase is hopefully the start of a new positive trend. As long as analysts remain behind the curve, and companies exceed expectations, stocks will have a solid foundation to build on,” said Bespoke.
As far as leadership since the start of the nine-week-old rally is concerned, the surging Financial SPDR (XLF) is by far the top performer among the economic sector exchange-traded funds (ETFs). Interestingly, cyclical sectors such as the Industrial SPDR (XLI), Consumer Discretionary SPDR (XLY) and Materials SPDR (XLB) all outperformed the S&P 500, whereas the traditional defensive sectors like Consumer Staples SPDR (XLP), Health Care SPDR (XLV) and Utilities SPDR (XLU) all lagged the broader market. This is the type of pattern one would expect typically to emerge during a market base formation development.
John Nyaradi (Wall Street Sector Selector) reports that the strongest ETFs on the week were KBW Bank (KBE) (+34.8%), PowerShares FTSE RAFI Financial (PRFF) (+30.6%) and Rydex S&P Equal Weight Financial (RYF) (+26.5%). On the other end of the performance scale ProShares Short Financial (SEF) (-15.9%), iShares Goldman Sachs Semiconductor (IGW) (-4.0%) and Vanguard Extended Duration Treasury (EDV) (-3.3%) were underwater.
On the credit front, the TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills – a measure of perceived credit risk in the economy) narrowed by 10 basis points during the past week. Since the TED spread’s peak of 4.65% on October 10 the measure has eased to an 11-month low of 0.76% – still well above the 38-point spread it averaged in the 12 months prior to the start of the crisis, but nevertheless a strong move in the right direction.