Posts filed under “Think Tank”

Financials: Is the Tailwind Becoming a Headwind?


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 levitation in bank shares, since the banks themselves have decided to respond to the rising demand for their equity with a fresh dose of supply. Negative comments about the banks by Meredith Whitney only reinforced this directional wind shift, as did some proposed tax hikes by the Obama administration. Because it is too soon to tell if today’s reversal will last more than a session or two, perhaps it will be instructive to look at some economic data that lies outside the spin zones found in New York and Washington, D.C.

Friday’s upside surprise in terms of the April jobs figures (-539K vs. expectations for -630K) looked less flattering the more analysts pulled apart the data. Not only were there downward revisions to prior months, but also the weakness in manufacturing, construction and other, higher-paying pursuits was met with strength in either temporary jobs (by the U.S. government for the upcoming census) or fictional jobs (the infamous “birth-death model” somehow estimated new job creation by small businesses of more than 200K). Maybe I should be more open-minded, but I don’t think a new business has been created when former investment bankers hang out the “consultant” shingle while in outplacement, nor would I count all the out of work traders goosing their P.A.s from home. And even if one is moved to take Friday’s unemployment report at face value, losing more than half a million jobs in a month falls a wee bit shy of the 100-150K job additions normally associated with a minimally growing economy.

As the market participants who are actually employed filed back to work this morning, they had little in the way of either economic data or earnings results to guide them. It made the headlines you see below all the harder to miss. A group of stalwart banks, especially those receiving a “good housekeeping” seal of approval from Treasury stress regulators late last week, decided today was the day to cash in the recent rally in their shares by offering a good deal more of them. The new share issuance by Key, USB, Capital One, BB&T, and PNC was marketed as the sort that would enable these fine institutions to repay their TARP loans. To me it looked more like an attempt by this group to avoid having to some day take TARP II funds rather than funding a way to pay back those received in TARP I. Time will tell, but Meredith Whitney’s comments late in the day on CNBC imply my interpretation might not be far off the mark (see below). Saying she wouldn’t touch bank stocks here, Ms. Whitney also pointed out that the business models for financial firms have changed because the government is now involved. “For investors, you invest on what you know to be the rules of the game,” said Whitney. “But with the government involved, no rules apply.” (source:

If investors needed a further reminder that Uncle Sam is making profits more difficult to come by for corporate America, the Obama administration announced some targeted tax hikes in its proposed budget today (see below). Broker dealers, traders, certain types of insurance, large estates, and “carried interest” all had bull’s-eyes placed on them for prospective tax increases. Rather than comment on the politics of this move, I will stay in the policy realm instead by simply noting that Uncle Sam has some rather large bills to pay. That wealthy individuals, partnerships, and corporations will all be targeted to pony up is exactly the type of change our new President promised while on the campaign trail, and it should come as no surprise to investors. What may start to bother them as they re-price forward earnings at higher effective tax rates is that less of what companies earn will be falling to the bottom line. This announcement is just one of many recently that suggest that even when GDP some day returns to 2007 levels, corporate profits are likely to make a much slower journey back to their highs.

Since all of the above news items hit at various times during the day, the overall reaction in the capital markets came in waves rather than all at once. With bank shares cowering in the face of new issuance prior to this morning’s open, U.S. index futures pointed to a lower open. 1% losses at the bell soon became 2% losses across the board before prices dug in a bit. NASDAQ was definitely the firmest of the major averages, and while most of them could only repair approximately half the early damage, the NASDAQ actually managed to turn green for a spell. The averages settled into a somewhat quiet and narrow range for most of the rest of the day. Ms. Whitney’s late day appearance on CNBC only added to the woes facing the banks, and the KBW bank index closed almost 7% lower. The rest of the averages followed the financials and went out near their lows, with the aforementioned NASDAQ (-0.45%) holding in best and the Dow Transports (-3.85%) bringing up the rear. Treasury prices were firm in part due to the weakness in equities, but also because the Fed took advantage of a hole in the Treasury’s issuance calendar to create demand out of thin air. Our central bank’s monetized purchase of more than $3 billion of government debt helped cause yields to fall between 8 and 12 bps. The dollar stabilized after last week’s drubbing, but commodity prices snoozed for most of today’s session. The CRB index fell a modest 0.25%.

If you took the time to read Jeremy Grantham’s latest Quarterly letter, you might get the sense that what lies around the corner in the stock market is pretty tough to handicap with any conviction. A large hole in private credit formation opened after Lehman failed last fall, only to be met with a vast governmental attempt to fill it. The U.S. economy responded to the initial loss of many traditional borrowing arrangements as would any machinery suddenly deprived of fuel; it seized up. Washington has responded by pouring freight car loads of its own brand of financial fuel into the tank, enough so that investors and economists have been straining their eyes looking for the proverbial green shoots that indicate forward motion will soon resume. Not so fast, say the railroad analysts at Credit Suisse, however (see above). Rather than review the entire 24 pages about rail car loadings, these opening paragraphs amount to a real time glimpse of U.S. economic activity:

“Bottom Line: Last week proved no different than the last 4: railroad carloads were down more than 20%. Week 17 saw a year-over-year volume shortfall of 21.6% – which is slightly worse than the 20.4% drop in Week 16.

• The weakness is broad based – whether it be industrial, bulk or consumer related – every segment has shown precipitous declines in each passing week. Worse, we are one-third of the way through the second quarter and volumes are well below even the substantial declines seen in the first quarter (recall that 1Q09 industry carloads were down more than 16% year-over-year).

• The railroad carload data are telling a very different story about the economy than one might surmise by looking at the S&P 500. Our concern is that the carload data are ahead of the curve; the light at the end of the tunnel that seems to be boosting stock prices may just be an oncoming freight train.

• Volumes: All commodity types posted steep declines during Week 17. Specifically, we saw sharp drops in metallic ores and minerals (-52.6%), motor vehicles and equipment (-37.6%), non-metallic minerals (-26.4%) chemicals (-21.6%), coal (-18.0%) and intermodal (-17.0%).” (source: Credit Suisse)

As you can see, the type of rail activity that should be accompanying any improvement in economic activity is nowhere to be found. In fact, Credit Suisse indicates economic growth is stuck in reverse. Back before the Great Crash and Great Depression, legend has it that Jesse Livermore and his forward–looking peers used rail car loadings to detect shifts in agricultural and industrial activity. Long before the Commerce and Labor Departments put out seasonally adjusted economic statistics, it was rail car loadings and even the Dow Transportation Average itself that were thought to be leading economic indicators. It’s easy to see why, since lower shipments to intermediate and end users would eventually lead to lower orders for the manufacturers. The Credit Suisse team says the data they track shows shipment trends are weakening, not strengthening.

I doubt Mr. Market had rail shipments on his mind when he experienced a small case of vertigo today, but these numbers bear watching. And if the banks continue to pull back, whether due to dilution or more analysts like Ms. Whitney telling folks to stay away, then last week’s abundant confidence will itself start to pull back. Besides, the banks have tried more than once during this bear market to tell everyone that everything was hunky dory. Then, as now, they hit the resulting bids to raise fresh capital from trusting souls. If we pay no attention to what the banks are saying and instead focus on what they are doing, the decision on bank stocks becomes a simple one. They know their businesses and they are selling shares. Shouldn’t a prudent investor do the same?

– Jack McHugh

U.S. Stocks Slide From Four-Month High on Earnings Valuations

Capital One, U.S. Bancorp, BB&T to Repay U.S. Aid

I Would Not Own Bank Stocks: Meredith Whitney

Obama Proposes New Taxes on Dealers, Life Insurance

Keeping Score

Category: Markets, Think Tank

Bernanke: The Supervisory Capital Assessment Program

Chairman Ben S. Bernanke

At the Federal Reserve Bank of Atlanta 2009 Financial Markets Conference, Jekyll Island, Georgia

May 11, 2009

The Supervisory Capital Assessment Program

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.

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Category: Think Tank

A Fully Fledged Garden of Economic Recovery?

Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc and a Fellow with the Economists for Peace and Security ( He is a frequent contributor to the blog, Credit Writedowns, and the Japan Policy Research Institute ( 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.

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Category: Economy, Think Tank

Bernanke speaking on Jekyll Island, ironic?

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

Category: MacroNotes

Commodity Inflation

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

Category: MacroNotes

Words from the (Investment) Wise: 5.10.09

Words from the (investment) wise for the week that was (May 4 – 10, 2009)

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

The diagram below, courtesy of the Financial Times, summarizes the stress test results in a nutshell. Click here or on the image below for a larger graphic.


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.


Source: 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.


Source: Fullermoney

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Category: Economy, Markets, Think Tank

Interesting Amendment on the Federal Reserve Audits

This is really interesting. A few days ago, Senator Chuck Grassley got an amendment passed by the Senate that lets the GAO audit the Fed’s lending to individual companies (such as Citigroup and Bank of America) and the Maiden Lane entities. The actual amendment in PDF form has a bunch of handwriting on it, because…Read More

Category: Bailouts, Taxes and Policy, Think Tank

Green Shoots or Dandelion Weeds?

Go to Google. Type in “green shoots.” In about a 10th of a second you will find 28,900,000 references. Scrolling through a few pages, you find a lot of references to the beginning of the end of the recession. Today we look at some data to see if we can indeed see the end. Most readers will be surprised to know that the number of people employed in the US went up (!) in April. Yet so did the unemployment rate. Is that green shoot just another dandelion weed in our economic garden?

Are the Green Shoots Really Dandelion Weeds?

When the employment numbers come out, my usual routine is to go the Bureau of Labor Statistics website and peruse the actual tables ( I was rather surprised to see that the actual number of people employed in the US rose by 120,000. That has certainly not been the trend for a rather long time.

So, are things back on track? Is the recession just about over? Is that a green shoot? I don’t think so.

First, there are actually two surveys done by the BLS. One is the household survey, where they call up a fixed number of homes each month and ask about the employment situation in the household and then take that data and extrapolate it for the economy as a whole. So, while the number of employed rose, the number of unemployed rose a lot faster, by 563,000 to 13.7 million. In

addition, there are 2.1 million who are “marginally attached” to the workforce. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

According to the survey, headline unemployment rose 0.4% to 8.9%, the highest level since 1983. But if you count those who are working part-time but want full-time work, as well as the “marginally attached,” the unemployment rate (called the U-6 rate) is an ugly 15.8%.

For whatever reason, the markets were happy that the headline number of the other BLS survey, the establishment survey of lost jobs, was “only” 539,000, down from a negatively revised 699,000
in March. At least, the thinking was, the numbers were not getting worse, though it is hard for me to be encouraged by half a million lost jobs. That may not be the worst of it, however, since 66,000 jobs were temporary workers hired for the 2010 census, and the BLS estimated that the birth-death ratio added 226,000 jobs as a result of new business creation. Really? This will mean that there will likely be a major revision downward at some future point. The number will likely be well over 600,000 in the final analysis.

Further, it is likely that we will see at least another 1.0-1.5 million lost jobs over the rest of the year,
taking unemployment very close to 10%. As an aside, the Treasury used an unemployment rate of 9.5% in their stress test of the banks, which suggests the test was not all that stressful. And, showing further weakness, there were 66,000 fewer temporary jobs. If there was really a nascent recovery, you would see a rise in temporary workers.

Average wages rose by a mere 3.2% on an annual basis, and by just 0.1% for the month, and the average work week was at an all-time record low of 33.2 hours. In nearly any inflation scenario, rising wages play an important part. This suggests that inflation is not in our near future.

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Category: Economy, Think Tank

Mortgage Duration Risk: The Banks Are No Longer the Problem

Mortgage Duration Risk: The Banks Are No Longer the Problem

“You think that’s air you’re breathing?”
Morpheus to Neo

-The Matrix

We are gratified to see that Treasury Secretary Geithner and Fed Chairman Ben Bernanke take our suggestion of several weeks ago on CNBC not to allow the TARP banks to repay the government debt until they prove the ability to function in the debt markets without reliance upon a government guarantee.

Washington has indeed fixed the solvency problems of the large zombie banks — not with additional capital or stress tests, as many of us seem to think. Rather, the banks have been stabilized by turning them into GSEs via FDIC guarantees on their debt. Those banks which can end their dependence on federal guarantees will be the visible winners in the post stress test market, and valuations and spreads will reflect this divergence between zombies and viable private banks.

Seen from this perspective, Chrysler, General Motors (NYSE:GM) and the large banks are GSEs rather than private companies, parestatales as they know them in Mexico. To talk about a rally in the equity of large US financials seems truly ridiculous, at least to us, especially true when you look at how the public sector subsidies being applied to the banks have distorted their financial statements.

Maybe by the end of next year, when we know which banks can or cannot shed the need for government subsidies, then we can talk about investible equity in these GSEs. To that point, turning Bank of America (NYES:BAC), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) into GSEs was just the first battle, Vol. II of the Lord of the Rings, to use another cinematic metaphor. Next comes dealing with the dysfunction in the non-bank market for securitization and financing, the real battle to save the US economy from a truly dreadful year-end 2009 and beyond.

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Category: Bailouts, Credit, Think Tank

Talking Their Book

> The markets are now screaming at the Fed to do something to arrest inflation concern.  Fed governors must now internally debate hiking the fed funds rate…And if the economy and stock market have bottomed, a 50bp fed funds rate should be insignificant.  But many people don’t really believe; they’re just “talking their book.” Two…Read More

Category: Federal Reserve, Inflation, Think Tank