Posts filed under “Think Tank”

Backbone Not Likely in Fed’s Exit Strategy Toolkit

Good Evening: Just when market participants had grown used to the stock market’s recent pattern of falling in the morning and rising in the afternoon, U.S. share prices pulled a George Costanza and did the opposite today (if you are unsure what this “Seinfeld” reference means, click here). Higher markets overseas, some decent earnings reports, and a positive interpretation of the jobless claims figures were all factors in pushing stocks to new highs for the year this morning. Some profit taking left the market looking a little winded in the afternoon, but it was a good day for the bulls nonetheless. Perhaps a few more sessions like today will cause the Fed to start thinking about implementing the “exit strategy” Ben Bernanke offered Congress earlier this month, but, to turn a cliché on its head, for every way there must first be a will.

Stocks in Asia and Europe were green enough this morning to propel our stock index futures higher. Positive earnings reports from MasterCard, Visa, Cigna, and Motorola only added to the anticipation prior to this morning’s open, even if Exxon and Symantec missed. Initial jobless claims scooted higher during the latest reporting week, but analysts (like those at BAC-MER, see below) pointed to the third consecutive drop in continuing claims as a reason to keep thinking the recession is over. Distortions caused by mis-timed seasonal factors this year, as well as the increasing number of those who are rolling off the continuing claims report because their benefits have expired, were brushed aside. The data point to “fewer layoffs at hand”, says Bank of America/Merrill Lynch. We’ll find out soon enough with next week’s non farm payrolls numbers, for which the early guesstimates are centering on 300K to 350K.

As if hearing Cramer’s soundboard shouting “buy, buy, buy!”, investors bid up stock prices as soon as the opening bell rang in New York. Within sixty minutes of trading, the major averages were sporting nifty gains of 2% or more. Twenty minutes and another 0.5% later, the highs of the day were in. Peaking at just over 996, the S&P 500 just missed out in its first attempt to surmount the 1000 level since just after Lehman Brothers went the way of the Dodo bird. Roaring back due to a fierce rally in commodity prices, the energy and materials names that were so weak on Tuesday and Wednesday were the leaders today. After trading sideways for the next few hours, the indexes were hit by some profit taking during the final hour. Though half the day’s best levels, the closing gains were still notable, ranging from the Dow’s 0.9% to the Dow Transport’s 1.8%. It’s far too soon to say if the pattern change away from morning weakness and afternoon strength means a trend change is at hand, but it will bear watching.

Like the 7 year note auction, Treasurys fared better today. With the 7′s receiving more numerous and higher quality bids (read: foreign central banks) than at any auction this week, the rest of the curve benefited — if unevenly. Yields on shorter dated maturities fell only a couple of basis points, while those at the long end fell as much as 10 bps. The yield curve’s penchant for flattening this week persisted today. The dollar fell with the renewed level of risk taking, and commodity market participants took full advantage. Crude oil regained most of what it lost yesterday, and the grain markets behaved as if no rain will fall between now and Labor Day. Posting a gain that approached 4%, the CRB index was the site of the real action today.

Elevated stock prices and buoyant commodities prices have been an unspoken goal of Fed policy ever since the GSEs jumped into the waiting arms of Hank Paulson a year ago. Already then operating at a feverish pace to plug the growing holes in the financial system, the Bank of Bernanke hit the panic button in September when LEH failed. Ten months later, the system is limping along well enough that exit strategies are up for discussion, if not action. No doubt Mr. Bernanke would prefer robust economic activity to the increased levels of speculation so evident this morning, but the Chairman will probably take what he can get until economic activity picks up. Come that happy day, promises Mr. Bernanke, the Fed will use numerous and considerable tools to withdraw the massive stimuli now in the financial system.

This “we put it in and we’ll take it back out” pledge is easier said than done, according to FT columnist, Wolfgang Munchau (see below). Mr. Munchau doesn’t doubt the Fed, ECB, and other central banks have “a toolkit of policies to prevent an increase in inflation once the economy starts to recover…but simply possessing such tools does not make an exit strategy.” He cites, among other obstacles, the politics that will complicate the timing of any move to remove bank reserves. When unemployment push comes to inflation shove, voters and the politicians they elect tend to emphasize the growthy half of the Fed’s dual mandate of full employment and price stability. President Obama wasn’t swept into office with a mandate for price stability.

Once growth finally does return, the real risk won’t be that the FOMC doesn’t have the tools with which to fight an incipient inflation, but whether or not they have the will to use them. Perhaps Bernanke believes that just talking about an exit strategy will forestall the need to implement one by keeping inflation expectations in check. But talk is cheap, as Hank Paulson discovered when the markets called his Bazooka bluff a year ago. Mr. Bernanke had better hope there is a backbone in the toolkit he showed Congress earlier this month. If the 4% rally we saw today in the CRB some day becomes a habit, he’ll need a Volcker-sized one.

– Jack McHugh

U.S. Stocks Rally, S&P 500 Nears Nine-Month High, on Earnings
Initial claims rise, but fewer layoffs at hand
There is no easy way out for central banks

Category: Markets, Think Tank

7 year note auction

The 7 year note auction was good as the yield was about 3 bps less than expected. The bid to cover of 2.63 was above the average seen in the previous 5 of 2.4 but below the June auction of 2.82. The level of indirect bidders totaled 62.5%, below the 67.2% seen in June which…Read More

Category: MacroNotes

RSI in the NDX, highest since Jan 2000

With another run today higher, the 14 day RSI (relative strength index) in the NDX is now at the highest level since Jan 2000. Momentum such as this that brings us overbought can keep us overbought for a continued period of time so it’s never a one stop timing measurement but it at least brings…Read More

Category: MacroNotes

Has the housing market hit bottom?

Tim Iacono is a retired software engineer and writes the financial blog “The Mess That Greenspan Made” which chronicles the many and varied after-effects of the Greenspan term at the Federal Reserve. Tim is also the founder of the investment website “Iacono Research” that provides weekly updates to subscribers on the economy, natural resources, and financial markets.

Today, he looks at the question of whether the Housing market has bottomed or not  yet . . .


Now that a number of recent housing reports are generating some incredibly positive headlines and the global economy appears to be slowly digging its way out of an enormous hole that was created last fall when the world nearly came to an end, the burning question on the minds of millions of people is … Has the housing market hit bottom?

There is no shortage of answers.

Unfortunately, most of them are far too simple and, in most cases, the individual or organization providing the answer has a bias of some sort.

I’m no exception.

We sold our house about five years ago and have been renting ever since.

We plan to buy again, but not until at least next year and we hope to get a lot more house for our money than we could today.

That’s the soonest that I think the bottom in home prices is likely to occur around here in the price range we’re looking, though a bottom in home sales may already be behind us, and this is what makes the recent discussion of a housing bottom so complicated – “hitting bottom” means different things to different people living in different parts of the country.

The discourse on this subject is full of misinformation and deception from parties with vested interests that will inevitably lead people to make horrendously bad decisions that they’ll regret in another year or two while others may postpone decisions that would be best made today.

With my biases out of the way, a few thoughts on a housing market bottom are offered here. In this article, regional differences will largely be set aside and the focus will be on three sets of national housing data – new home sales, existing home sales, and existing home prices.

New Home Sales Have Bottomed

First, let’s look at the home building industry, which, up until a couple years ago had accounted for about 10 to 15 percent of all home sales. Then, the homebuilders’ share gradually sank to about half that amount as waves of foreclosures started hitting the market at much lower prices, cutting into their business dramatically.

Ironically, many of these foreclosure sales were homes that the builders had built and sold a couple years prior. Disgruntled home buyers who, in 2006 and 2007, complained about how builders were slashing prices on Phase III after they bought in Phase II ultimately had the last laugh in 2008 and 2009 when they walked away from their almost-brand-new home and the bank sold it at a 40 percent discount to the going prices for Phase III.

Don’t feel too sorry for the homebuilders – they had a few very good years.

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Category: Real Estate, Think Tank

claims data

Initial Jobless Claims totaled 584k, 9k higher than expected and the prior week was revised up by 5k to 559k. This should be the first clean number in weeks where it’s not influenced by the seasonal distortions that was brought by the differing time schedules of auto plant shutdowns. The insured unemployment rate was unchanged…Read More

Category: MacroNotes

That was a short correction

After a 5% drubbing, the Shanghai index bounced back 1.7% as the PBOC quelled concerns that monetary policy would change much. Good earnings reports in Japan also helped to lift spirits. European stocks rallied after the July Euro Zone economic confidence # rose almost 3 points from June and was 1 point more than estimated….Read More

Category: MacroNotes

Settling For Less in the New Normal

Good Evening: Just as they have during 9 of the past 10 sessions, U.S. stocks suffered a setback in the morning, only to rally late in the day. Unlike so many recent sessions, however, all the major averages remained in the red as the closing bell rang on Wednesday. A sell off in China, some…Read More

Category: Markets, Think Tank

Being in the Sweet Spot (twice)

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 the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


Being in the Sweet Spot (twice)
July 29, 2009

At the moment we are in the “sweet spot” in markets and soon, in Maine. We must enjoy it while it lasts. Some bullets follow.

1. Fed policy is on hold at Quantitative Easing (QE), which means short-term interest rates near zero and plenty of liquidity in the financial system. The Fed has said it will continue this posture for a period of time. Markets do not expect any change until well in to 2010 at the earliest.

2. The much-feared Obama healthcare initiative seems to be stalled. Markets are relieved, because this initiative, as it was presented, amounted to a huge transfer payment that would be funded by future tax increases. The tax hikes would come on top of those already discounted by markets. Lifting the double tax whammy has given stocks a boost.

3. Foreigners are buying US Treasury securities again, and that has quieted the fearmongers who have been crying that the US will be abandoned and the dollar will face a crisis. That may still occur, but the day of reckoning for our fiscal profligacy seems to be postponed. Markets like dodging this bullet.

4. Markets have not priced in any risk premium on the Bernanke-stays or Bernanke-goes debate. Markets are also not pricing any risk premium on how and when the Fed will exit the QE strategy. Right or wrong, markets are now powered higher by bullish momentum coupled with positive economic signs. The Fed and other central banks in the world are on hold. Markets like stasis and have it for the time being.

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Category: Think Tank

China hiccups

After an amazing 100% run from the early Nov ’08 lows, the Shanghai index took its biggest one day hit since the rally began, by 5%. There is talk that the Chinese may raise bank reserve requirements and the stamp duty tax on stock executions to prevent overheating in the economy. To quantify, new Yuan…Read More

Category: MacroNotes

Wall Street’s Script: Should We Follow It?

Good Evening: Yet another afternoon rally after morning weakness allowed the major U.S. stock market averages to finish mixed today. Some earnings misses, along with some so-so economic data set the tone in the early going, but enough buyers showed up by day’s end to turn 1% losses into gains for both the NASDAQ and…Read More

Category: Markets, Think Tank