Posts filed under “Think Tank”

Australia says the emergency is over

“In late ’08 and early ’09, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy.” The move to hike rates 25 bps to 3.25% by the RBA was a surprise and in clear contrast to the Fed, whose Dudley repeated that rates will stay very low for a while. The Fed’s emergency cuts took the FF from 2% in Oct ’08 to .25% in Dec when the fear of collapse was rampant. The world is far from that scary time but the Fed wants to keep the peddle to the meddle and it’s why the US$ is near record lows and gold near record highs.

Category: MacroNotes

Goldman Sachs: The “Smart” Money?!

U.S. stocks rebounded today, aided by a rally in financials. Why was the group strong? Because a team of analysts at a well-known Wall Street firm upgraded the large banks sector. And why did they do that? Bloomberg gives us the lowdown in “Wells Fargo, Biggest U.S. Banks Raised by Goldman”:

Wells Fargo & Co., JPMorgan Chase & Co. and the biggest U.S. banks were raised to “attractive” from “neutral” by Goldman Sachs Group Inc., which said share prices don’t reflect prospects for earnings growth.

“We believe this difference in earnings power hasn’t been fully reflected in share prices,” New York-based analysts led by Richard Ramsden wrote in a note to clients today. “We estimate that normalized earnings for large banks are 39 percent higher than in 2007 despite the 36 percent decline in share prices.”

Wells Fargo, based in San Francisco, was upgraded by Goldman to “buy” from “neutral” after its tangible assets per share increased 70 percent in the second quarter. “The reason is simple: Wells bought Wachovia at a depressed price,” Ramsden said. Banks have increased earnings with acquisitions that will add to earnings over the “long term,” he said.

Wow, pretty powerful stuff, eh? Then again, maybe not. You see, if you go back and look at what Goldman said in late-January, when most bank stocks were trading at far lower levels than they are now, the firm wasn’t exactly upbeat on the group. Again, Bloomberg had the details in “U.S. Banks May Be the ‘New Utilities,’ Goldman Says”:

Large U.S. banks risk becoming the “new utilities” as governments introduce greater regulation and force lenders to increase capital ratios, Goldman Sachs Group Inc. analysts said.

Return on equity at the biggest U.S. banks will be limited by higher capital requirements and greater regulatory controls, analysts led by Richard Ramsden in New York said in a report to clients today. The measure of how effectively banks invest earnings may shrink to between 10 percent and 12 percent, from the 15 percent banks generated between 1990 and 2006, they said.

U.S. Bancorp was cut to “sell” because the Minneapolis- based company, while “a good bank,” is already highly valued, the analysts wrote. Goldman also re-instated its sell rating on Citigroup Inc., saying “investors should avoid the stock given no core earnings power clarity.”

Bank of America Corp. was cut to “neutral,” the same rating given Morgan Stanley, Wells Fargo & Co. and PNC Financial Services Group Inc. The analysts recommend buying JPMorgan Chase & Co., which they said may show earnings improvement as the economic cycle turns.

Large banks, particularly Citigroup, U.S. Bancorp and Bank of America, have “thin” capital cushions compared with Goldman’s estimates for losses in the industry, the note said.

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Category: Analysts, Contrary Indicators, Think Tank

What are banks doing?

The question of whether banks in the aggregate are lending or not gets partially answered every Friday when the Fed releases the assets and liabilities of the US commercial banks and if they are not, what they’re doing with their deposits. For the week ended Sept 23rd, commercial and industrial loans outstanding fell for a…Read More

Category: MacroNotes

Andy Xie: Why One Bubble Burst Deserves Another

Former Morgan Stanley analyst Andy Xie explains why the crisis is leading  to other problems, including bubbles . . .


The financial crisis taught crucial lessons about the dangers of bubbles, loose regulation and debt. It’s a pity we didn’t learn.

Lehman Brothers collapsed one year ago. The U.S. government refused a bailout and warned other financial institutions to be careful. The government felt other institutions had already severed their dealings with Lehman’s investment network, and that a collapse could be walled in.

Little did the government realize that the whole financial system was one giant Lehman. The securities firm borrowed short-term money to punt in risky and illiquid assets. The debt market supported the financial sector, believing the government would bail out everyone in a crisis. But when Lehman was allowed to collapse, the market’s faith was shaken.

The debt market refused to roll over financing for financial institutions. Of course, financial institutions couldn’t unload assets to pay off debts. The whole financial system started teetering. Eventually, governments and central banks were forced to bail out everyone with direct lending or guarantees.

The Lehman collapse strategy backfired. Governments were forced to make implicit guarantees explicit. Ever since, no one has dared argue about letting a major financial institution go bankrupt. The debt market is supporting financial institutions again only because they are confident in government guarantees. The government lost in the Lehman saga, and Wall Street won.

So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars — probably more than US$ 10 trillion when we get the final tally — to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.

First, let’s look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.

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Category: Think Tank

Investors clamor for inflation protection

The 10 year TIPS reopening auction was solid and bidding was aggressive. The yield was about 5 bps below expectations and the bid to cover of 3.12 was the highest since Jan 1999 and well above the average over the past two years of 2.17. Indirect bidders totaled 44%, slightly below the July auction of…Read More

Category: MacroNotes

ISM services

The Sept ISM services index hit 50.9, almost 1 pt more than expected, up from 48.4 and is the first time above 50 since Sept ’08 and implies expansion in the non manufacturing sector. Business Activity rose almost 4 pts to 55.1, the highest since Oct ’07 (measures the direction of change, not the degree)…Read More

Category: MacroNotes

Q3 earnings time is here but how will revenues be too?

With Q3 earnings reports upon us, not only is the question open of what companies will deliver on the bottom line relative to expectations but also of importance will be what they deliver on the top line as Q2 saw about 75% of companies beat EPS estimates but only 50% exceeded revenue forecasts. The market…Read More

Category: MacroNotes

Maybe The $3 Trillion In Money Market Funds Is Being Spent



James Bianco has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors.

Prior to founding Bianco Research, Jim spent time in New York as Market Strategist for UBS Securities, and Equity Technical Analyst at First Boston and Shearson Lehman Brothers. He is a Chartered Market Technician (CMT) and a member of the Market Technicians Association (MTA).


Watch CNBC for 10 minutes and you will likely hear about the $3 trillion of money sitting in money market funds (actually $3.4 as the chart below shows) and how that money has to be spent. By this they mean investors are getting antsy about earning virtually 0% in money market funds as stocks soar and make them feel stupid. Never mind the fact that cash equivalents like 3-month Treasury bills have outperformed the S&P 500 since January 1997! The conclusion still stands that this money will come flying into stocks and propel them even higher.

<Click on chart for larger image>

The recent data suggests this might be happening now. As the chart above shows, assets in money market funds have been falling over the last few months. Where is it going?

The next series of charts using data from the Investment Company Institute (ICI) may help answer this question. As the first chart below shows, money is not flowing into equity mutual funds as so many stock managers have been predicting. August flows (top panel in red) were a measly $3.86 billion. Over the last 12 months, equity mutual funds have seen a hefty $156 billion in outflows (bottom panel in blue).

<Click on chart for larger image>

However, take a look at the flows into bond funds and the picture is completely different. Flows in August (top panel in blue) set a new record as $42.91 billion came flying into these funds. Over the last 12 months (bottom panel in red) bond funds have swelled by $156 billion, nearly a record for any one year period.

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Category: Think Tank

B of A: Bond Holder’s Haircut Can Restore Solvency

Here’s our latest.  Will be on Bloomberg Radio with Tom Keene 8-9 AM ET today — Chris

The Institutional Risk Analyst
October 5, 2009

“Banking in all countries hangs together so closely that the strength of the best may easily be that of the weakest if scandal arises owning to the mistakes of the worst… Just as a man cycling down a crowded street depends for his life not only on his skill, but more on the course of the traffic there.” Hartley Withers
The Meaning of Money
Smith, Elder & Co., London (1906)

“Gran, theurer Freund, ist alle Theorie, Und grim des Lebens goldner Baum.”
(“Theory is a greybeard, and Life a fresh tree, green and golden”)
Mephistopheles speaking to the student

This past week in the IRA Advisory Service, we added M&T Bancorp (NYSE:MTB) to our coverage list. As of Q2 2009, MTB was rated “A” by the IRA Bank Monitor’s Stress Index due to its below-peer loss rate and strong operating results. We also started to describe for our clients our concerns about the outlook for Bank of America (NYSE:BAC), which was rated “C” as of Q2 2009 by the IRA Bank Monitor. Click here to register for the IRA Bank Cart and look up the rating for your bank.

If you reduce the increasingly difficult situation facing the largest banks down to its essence, the problem is politicians picking winners and losers. If we don’t have losers in our economic life, then there are no winners either. If we don’t resolve troubled banks, then all of our banks will be bad, as the century-old Whithers quote above suggests. And the fact that Washington will not let large, mediocre institutions such as BAC fail means that our entire financial system is getting sicker, not recovering as the politicians ask you to believe. The different financial and operational situations facing BAC and other members of the large bank peer group illustrate the point.

As we told CNBC’s Fast Money on Friday, the departure of Ken Lewis as CEO is probably the best news for BAC equity and bond holders in many years. Whoever is eventually selected to replace Lewis, though, is facing a tough task. In his column in the New York Times over the weekend, Joe Nocera makes that point as he talks about the culture of mediocrity that Lewis promoted at BAC, a culture where competent managers were systematically forced out by the human resources department of BAC.

For all of his insider savvy and HR muscle within the bank, Lewis really was not an operator. BAC, after all, is a combination of dozens of companies merged over the last 30 years that were never actually integrated. The mergers “worked” because the old NCNB HR department ruthlessly squeezed down personnel costs. These are “process” people, after all, who believe that you can identify tasks that can be done by one person, then train that person and pay him/her well below average. This is what they call “synergies” at BAC. This goal of short-term cost cutting pervades BAC and has led to an organization that produces narrowly focused employees and business units, with no incentive to innovate or manage risk on an enterprise basis as required by Sarbanes-Oxley, not to mention federal banking laws.

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Category: Markets, Think Tank

Another Finger of Instability

October 2, 2009
By John Mauldin

Fingers of Instability
Ubiquity, Complexity Theory, and Sandpiles
Stability Leads to Instability
A Stable Disequilibrium
3 Billion and Counting
The Texas Senate Race – A Game Changer
60 Years and Counting

“To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown – the first instinct is to eliminate these distressing states. First principle: any explanation is better than none… The cause-creating drive is thus conditioned
and excited by the feeling of fear …”

-Friedrich Nietzsche

This weekend I turn 60 and have been a little more introspective than usual. I am often told that the letter I wrote well over three years ago on ubiquity and complexity theory and the future of the economy was the best letter I have ever done. I went back to read it, and it has aged well. I basically outlined how a financial crisis would unfold, and now it has.

On reflection, I think that there are perhaps other, even larger, events in our future than the recent credit crisis and recession; yet, just as in 2006, there is a great deal of complacency. But as we will see, there are fingers of instability building up that have the potential to create large disruptions, both positive and negative, in our future. And for the political junkies in the room, I offer a brief insight into what may be one of the more intriguing behind-the-scenes developments in recent years. Now, to the letter.

“Any explanation is better than none.” – Nietzsche

And the simpler the explanation, it seems in the investment game, the better. “The markets went up because oil went down,” we are told (except that when oil went up, then there was another reason for the movement of the markets). But we all intuitively know that things are far more complicated than that. However, as Nietzsche noted, dealing with the unknown can be disturbing, so we look for the simple explanation.

“Ah,” we tell ourselves, “I know why that happened.” With an explanation firmly in  hand, we now feel we know something. And the behavioral psychologists note that this state actually releases chemicals in our brain that make us feel good. We become literally addicted to the simple explanation. The fact that what we “know” (the explanation for the unknowable) is irrelevant or even wrong is not important in achieving the chemical release. And thus we look for reasons.

The credit crisis happened because of Greenspan’s monetary policy. Or maybe it was
a collective mania. Or any number of things. Just as the proverbial butterfly flapping its wings in the Amazon triggers a storm in Europe, maybe an investor in St. Louis triggered the credit crisis. Crazy? Maybe not. Today we will look at what complexity theory tells us about the reasons for earthquakes, tornados, and the movement of markets. Then we look at how the world and that investor in St. Louis are all tied together in a critical state. Of course, what state and how critical are the issues.

Ubiquity, Complexity Theory, and Sandpiles

We are going to start our explorations with excerpts from a very important book
by Mark Buchanan, called Ubiquity: Why Catastrophes Happen. I HIGHLY recommend it to those of you who, like me, are trying to understand the complexity of the markets. Not directly about investing, although he touches on it, it is about chaos theory, complexity theory, and critical states. It is written in a manner any layman can understand. There are no equations, just easy-to-grasp, well-written stories and analogies.

As  kids, we all had the fun of going to the beach and playing in the sand.  Remember taking your plastic buckets and making sandpiles? Slowly pouring the sand into an ever bigger pile, until one side of the pile started an avalanche?

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Category: Think Tank