Posts filed under “Think Tank”

Bulls Win Today; Watson’s Example is Timeless

Good Evening: U.S. stocks stretched their recent winning streak to six straight today, as some good economic news and some potential help for CIT combined to lift share prices. With more investors becoming convinced the worst is over for our economy, the major averages all tacked on gains of 1% or more. The S&P 500 posted its highest close of 2009 on Monday, and though we haven’t exactly seen a buying panic yet, those who are either short or underinvested are getting increasingly uncomfortable. The swelling ardor for equities should remind bulls and bears alike of the need to be patient and flexible in this unprecedented environment, but I wonder if we would even be in this fix if financial professionals at all levels were more like Tom Watson.

Stock markets overseas were on the firm side overnight, as were our stock index futures this morning. Much of the credit for this early rise went to a pending capital infusion by CIT’s current bondholders (see below). This privately financed rescue package would be a costly one for CIT (indications are LIBOR +1000 bps), but it’s good news in that 1) hundreds of small and medium sized businesses will see less disruption to their operations, and 2) the U.S. government is not involved. With $2 billion out of a total of $3 billion already committed, a CIT rescue is not exactly a done deal, but word that Seth Klarman’s Baupost Group is on board will probably give other bondholders the comfort (and cover) they need to participate.

Adding to the warm and fuzzy feelings before the bell was a stronger than expected print for the leading economic indicators. Up 0.7% versus consensus estimates of 0.5%, the leading indicators figures have now been strongly positive for three straight months — a streak usually associated with the end of recessions in the post WWII period. This post-bubble recession may be a different animal than ones populating econometric models, but the strength in the LEI was enough to cause BAC-MER to once again opine that the worst is most assuredly over for the U.S. economy (see report at bottom). Other firms offered similar sentiments, and stocks wasted little time in rallying 1% once trading commenced in New York.

When the S&P was unable to surmount the 950 level, a quick bout of profit taking took the major averages back toward unchanged. That was it for the downside, though, and equities spent the balance of the session marching higher. By day’s end the S&P did manage to close above 950, and the rest of the averages closed with gains ranging from 1.1% (S&P, Dow) to 2.1% (Dow Transports). Treasurys for once didn’t suffer at the hands of a strong equity tape, and yields fell between 2 and 5 basis points. Dollar holders had their pockets picked by approximately 1%, while commodities continued their confident run to the upside. Recently acting more like a tech-laden ETF than a basket of tradable goods, the CRB index levitated a further 1.2% today.

It was nerves, pure and simple. I refer not to yesterday’s British Open, but to the time 13 years ago when I stood on the first tee of the 445 yard first hole at Cog Hill Golf Club. Through a series of fortunate events, I had the honor of playing in the Pro-Am of the Western Open, one of the PGA tour’s oldest tournaments. Before I could even swing my driver on that opening hole, I had warmed up on the range with household names; I had my photo taken with a future member of golf’s Hall of Fame; and my brother/caddie was sporting a bib with my name on it. Greg Norman’s group had just teed off ahead of us, and the group including Tiger Woods, then an amateur, was set to tee off in the group behind us. The fairways were lined with people on both sides, the loudspeaker had called my name, and I suddenly realized this was a very big deal.

I barely made contact, and the ball skittered just far enough along the ground for me to escape the indignity of not getting past the ladies’ tee box. As my group headed toward the fairway, I asked our pro for advice. “Tom, how can I deal with nerves on the golf course?” The legendary Tom Watson turned to me and smiled, saying, “just take a deep breath, finish your backswing, and then fire. You’ll be fine”. And he was right; it worked.

Though he was trying to prepare for the tournament that would start the next day, Tom Watson spent the entire afternoon engaging everyone in our group. Want golf advice? He gave it. Prefer to figure it out for yourself? Tom let you play. Ask him a question, and he’d look you in the eye before giving you a straight answer. He told golf stories, a couple of jokes, and was not above playing a practical joke on one of his playing partners. Coming off the 18th green, our whole group agreed that Watson was a consummate gentleman from the old school, the type of man who understood it is the fans, volunteers, and pro-am donors who transform the game he loves into a great way to make a living. He tried very hard to make everyone — including the marshals and sign holders — feel special. He was a class act, a man of character.

I relate this vignette not because I’m a golf fanatic (though I am). Nor is it some ode to Tom Watson, though it would be fitting after watching him almost beat the world in the Open Championship this past weekend at the ripe age of 59. I write not to say how much I feel for a man who gave it his all against long odds in an attempt to make sports history. No, I write to say that I wish there were more Tom Watsons on this planet. Had the executive suites in Wall Street been populated by men with his character, and had policy makers in Washington (e.g. in the corner office of the Eccles building) possessed even a fraction of his values, then we might have avoided the worst of the financial crisis.

It’s been said, and I agree, that you learn a lot about a person during a round of golf. Honor, grace, dignity, and a penchant for doing what’s right because it’s the right thing to do — those were the things I learned about Tom Watson that day in 1996. That he couldn’t win a record sixth British Open when almost eligible for Social Security is a shame, but it’s not a tragedy. As Mr. Watson himself said in mock admonishment to the press after letting the title slip away in a playoff yesterday, “C’mon, this isn’t a funeral!” No, the tragic loss I bemoan is that there aren’t more people like him, and not just on the PGA tour. Whether in high places in Wall Street or in high office in Washington, we need more role models like Tom Watson.

– Jack McHugh

U.S. Stocks Gain, S&P 500 Jumps to Highest Level Since November
CIT Said to Get $3 Billion Rescue Financing From Bondholders
Leading Index Shows U.S. Economy Nearing Slump’s End
Tom Watson Not Ready to Mourn After British Open Loss to Cink
LEI suggest economy passed the bottom.pdf

Category: Markets, Think Tank

On the Economic Outlook and the Commitment to Price Stability

On the Economic Outlook and the Commitment to Price Stability

Dennis P. Lockhart
President and Chief Executive Officer
Federal Reserve Bank of Atlanta

Rotary Club of Nashville
Nashville, Tennessee
July 20, 2009

Photo of Dennis LockhartFor my remarks this afternoon, I’ll talk about how I see the economy at this juncture, the near- and medium-term outlook, and the growing concern about inflation. Let me add at this point my usual disclaimer that my remarks are my thoughts alone and may not necessarily reflect the views of my colleagues on the Federal Open Market Committee (FOMC).

It’s especially important that I mention this caveat the day before Chairman Ben Bernanke makes his semiannual monetary policy report to Congress. Tomorrow the chairman will speak for the Federal Reserve System. Today, I am speaking just for myself, informed by advice from my colleagues at the Federal Reserve Bank of Atlanta.

Current economy
Current economic conditions are mixed at best, but the economy appears to be in stabilization mode. Stabilization necessarily precedes recovery. A recovery has not yet taken hold but should begin before too long.

I’ll start with a look at manufacturing, which has been hard hit in this recession. Just last week we learned that manufacturing production was down 0.6 percent in June, month over month. In the past year, manufacturers have cut production by more than 15 percent, and the manufacturing capacity utilization rate dropped to about 65 percent, a record low.

Here in middle Tennessee, manufacturing accounts for about 12 percent of employment. The number of manufacturing jobs here declined by about 12 percent on a year-over-year basis in May, the most recent data available. I know that many of you here today have directly felt the troubles in this important sector.

Recent indicators of business investment are also down but are a bit less discouraging. Durable goods orders increased this spring and in May reached the highest levels in four months. On the other hand, the most recent data showed the liquidation of business inventories continuing, but the pace has slowed.

Consumer spending absorbs about two-thirds of economic output, and the recent picture in this area is mostly negative. After taking price changes into account, it appears that retail spending fell again in June. Restaurants, department stores, and building materials retailers all posted month-to-month declines. Overall, retail results are in line with the ongoing weakness in consumer spending we have been seeing.

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Category: Federal Reserve, Think Tank

Fed member Lockhart calling a mea culpa on Fed policy

I believe for the very first time, a Fed member is admitting that it was an artificially low fed funds rate that ‘helped create the housing bubble’ (I’m quoting Bloomberg). Voting member Lockhart just made the comment in a Q&A after a speech on the US economy. He took office as head of the Atlanta…Read More

Category: MacroNotes

Commercial and Industrial Loans

With CIT garnering headlines over the past week in terms of its own fate but that of many small businesses reliant on it, on Friday the Fed released its weekly balance sheet data for commercial banks for the week ended July 8th and we can see what the business lending trends are. Commercial and Industrial…Read More

Category: MacroNotes

Getting Full Value for Bailout Warrants

From a friend on the Hill:

Good news today. Some of you have noted that it is somewhat outrageous for the Treasury to privately price and sell warrants back to the banks that got TARP money instead of doing an open auction that will fetch the best price for the taxpayer. The Congressional Oversight Panel claims that the currently used secret process returns only 66 cents on the dollar to the taxpayer.

Mary Jo Kilroy, a freshman Democrat from Ohio, introduced a bill (HR 3232) to compel an open auction of these warrants with six cosponsors: Brad Sherman, John Boccieri, Betty Sutton, Jackie Speier, Marcia Fudge and Alan Grayson.

All of these members except Brad Sherman are in their first or second term in Congress, and all are Democrats. Sherman was the leader of the little noted but important ‘skeptics caucus’ that attempted to stop the $700B bailout in September.

There is also a hearing on the TARP warrant repayments on Wednesday. Many of you don’t have faith in Congress, but there are lots of crosscurrents and sometimes people here do show leadership.

Information on the bill is below.

PROFIT Act to Make Taxpayers, Transparency Priority in Bank Bailout Payback
July 16, 2009 4:21 PM

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Category: Bailouts, Politics, Think Tank

King Report: Looking more Closely at Earnings

> The Washington Post: The huge profits reported this week by some of the nation’s largest banks showed that the government is succeeding in its rescue of the financial industry, but the details of those earnings reports made it clear that the broader economy is not seeing the benefits… Washington once celebrated such profits as…Read More

Category: Earnings, Think Tank

Superman doesn’t have to be a public sector bureaucrat

While it’s not official yet, a private sector rescue of CIT is welcome news to many small businesses, especially many retailers and their vendors weeks before the back to school season begins. Also, many take cues from the trends in BTS in planning their year end holiday season and having CIT’s factoring business alive to…Read More

Category: MacroNotes

Europe on the Brink

Europe on the Brink
And Then There Was Leverage
Too Big To Save
Those Wild and Crazy Swiss
A Positive Third Quarter?
New York and Maine

We have avoided Armageddon, at  least for now. The cost to the US taxpayer has been a few trillion. Some in the media are loudly announcing the end of the recession. But we are not out of the
woods yet. There are a few more bumps in the road. Actually, some of them are quite steep hills. As big as the subprime problem? Maybe.

When asked a few weeks ago what was my biggest short-term concern, I quickly replied, “European banks have the  potential to create significant risk for the entire worldwide system.” This week we will glance “over the pond” to see what gives me cause for concern. Then we briefly look at a few of the bumps I mentioned, which are likely to stretch out any recovery, and maybe even dip us back into recession.

But first, a quick announcement. We are making dramatic changes to my free Accredited Investor E-Letter and service, and will have a new web site and much improved content in a month or
so. But in the meantime, I have just finished a new letter; and if you sign up at the current site, you will of course get all the new services and benefits when we make the changes, as well as this new letter. Basically, this service is for accredited investors (net worth of $1.5 million or more) who are interested in learning more about and investing in alternative funds like hedge funds, commodity funds, and so on. You will get a call from one of my worldwide partners (Altegris Investments in the US, Absolute Return Partners in Europe, Nicola Asset Management in Canada, Plexus Asset Management in Africa, and Fynn Capital in Latin America) and gain access to a lot of information and an easy way to preview what I think is a great line-up of quality funds and managers. You can go to and sign up today. Don’t procrastinate!

And for those of you in the US who are on your way to becoming accredited investors (but not there yet), my friends at CMG have a platform of alternative managers that can be tailored to your specific needs. You really owe it to yourself to see the managers on their platform. The link to their form is
And now, let’s jump into the letter.

Europe on the Brink

Globalization is a two-edged sword. On balance, it has brought prosperity to those who have
embraced it, with rising lifestyles, better health, longer lives, and more. The
more we need each other, the less likely it is that we’ll shoot each other.
Shooting your customers is not a good business strategy. And while the growth
has not been even or smooth, only a Luddite would want to return to the early
1800s or 1900s, or even 1975.

The other edge of that sword? We are connected in so very many ways, far more than
most of the world suspected. Who thought that insane lending policies at US
mortgage banks would bring the world financial system to its knees, increasing
unemployment and leading to a global recession? World trade is down 20% or
more. US railroad shipments are down more than 20% year-over-year. Chinese (and
Asian) factories have seen their orders drop, as US consumers have gone on
strike. The US trade deficit was just $25 billion last month; and while our
exports are still dropping, our imports are dropping more. Oil is becoming a
bigger and bigger share of imports, and that does not come from Asian

The US is far and away the country with the largest gross domestic product (GDP).
California would be the 7th largest country, but few think of California
in such terms. For this letter, at least, I would like to think of Europe as a
whole rather than as 27 countries. From that perspective, Europe is as
economically important to the world as the US. What happens in Europe makes a
difference in the US.

Last week we looked at the precarious position of Japan, the second largest economy
(or third if you think of Europe as a whole). It was a sobering letter. When
you realize the extent to which Japan has funded Asian expansion, what is
happening there cannot be good for the world.

But Europe’s banks have been much more aggressive in funding emerging-market
expansion than US or Japanese banks. Western European banks have lent $4.5
trillion to various emerging-market countries, businesses, and consumers. Many
Eastern European businesses borrowed in low-interest-rate euros. New homeowners
in Hungary and the rest of Eastern Europe borrowed in Swiss francs and euros,
and as their currencies have collapsed they now find they owe more on their
homes than they’re worth.

And here’s the problem. Europe’s banking system is in far worse shape than the US system. The losses may be bigger, and their capital to meet those losses is certainly less. Let’s look
at some charts. Remove sharp objects or pour another adult beverage.

As I noted last week, one of the
real benefits of writing this letter is that I get to see a lot of really
interesting information from readers and meet with very savvy investment
professionals. I recently had the privilege of sitting with a team of analysts
from Hayman Capital here in Dallas. Hayman runs a global macro hedge fund, so
they spend a lot of time thinking about how all the different aspects of the
global markets fit together. This week we again look at some of their analysis.
There was a lot of work (as in months) done here; and Kyle Bass, the founder of
the firm, graciously allowed me to share some of it with you (and kudos to Wes
Swank, who pulled this together). The graphs are theirs, and my discussion about
them is certainly informed by our meeting; but I am using the material as a
launching point, so they are not responsible for my conclusions and

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Category: Think Tank

Responsible Versus Irresponsible Central Banking

Good Afternoon: After surging for four straight sessions this week, U.S. stocks spent most of today consolidating those gains. The quiet, sideways action we had today is fairly typical of summer Fridays, but, as always, there are longer term issues to consider. What, for example, will happen to the myriad middle market businesses that depend…Read More

Category: Markets, Think Tank

Housing Starts

June Housing Starts totaled 582k (highest since Nov ’08), 52k more than expected and May was revised up by 30k. Permits were also above the consensus coming in at 563k, 39k more than expected. The gain from May was solely in the single family home category as multi family starts fell. Single family starts rose…Read More

Category: MacroNotes