Posts filed under “Think Tank”

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) but the other components were mixed as just 5 of 18 industries reported growth. New Orders rose to 54.2 from 49.9 and Backlogs rose a sharp 10.5 pts to 51.5. Employment though remained sluggish, highlighted also by last week’s data, rising .8 pts to 44.3. Export Orders fell back below 50 at 48.5, down 6.5 pts. Prices Paid fell to 48.8 from 63.1. The ISM said “even with the overall m/o/m growth reflected in the report, respondents’ comments vary by industry and remain mixed about business conditions and the overall economy.” Bottom line, the data over the past week is best described as Blah and while today’s # was slightly better than expected, the recovery will clearly be bumpy.

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

US$/interest rates/growth/risk

There used to be a time when currencies traded off interest rate differentials amongst countries and also expectations for growth. This changed in Sept ’08 through March ’09 when the US$ became a flight to safety during that time of tumult and massive capital markets deleveraging irrespective of the above factors. While one day doesn’t…Read More

Category: MacroNotes

September Payrolls

Sept Payrolls fell by 263k, exceeding expectations by 88k and the two prior mo’s were revised a net 13k down. The Unemployment rate rose .1% to 9.8% as expected as the household survey fell by a sharp 785k but the labor market shrunk by 571k. The U6 figure which is the most comprehensive measure of…Read More

Category: MacroNotes

King Report: Economic Data Turns South

> For the past two weeks we have been warning that economic data is turning lower. On Wednesday, US beancounters manufactured a better than expected GDP but private economic data appeared that was materially worse than expected. The ADP Employment change for September is -240k; -200k was expected. More importantly, the closely-watched Chgo PMI declined…Read More

Category: Think Tank

Pending Home Sales, get in before the door (maybe) closes

August Pending Home Sales (contract signings), rose 6.4% m/o/m, well above estimates of a gain of 1% with all 4 regions seeing gains led by the West (has seen most of the foreclosures). The chief economist of the NAR summed up the boost by saying “no doubt many first time buyers are rushing to beat…Read More

Category: MacroNotes

Welsh Investment letter – September 2009



Growing up in Chicago, I looked forward to every baseball season, and I cheered for both the White Sox and Cubs, since neither team won that much. I never saw the point in being choosey. The GO-Go White Sox went to the World Series in 1959, before winning it 46 years later in 2005, and 88 years after winning in 1917. The Cubs haven’t won a World Series since 1908, and that 100 year streak appears safe in 2009. Anyone following the San Diego Padres knows the season was effectively over by early June. But, what so often happened in Chicago as I was growing up, the home team has started playing much better near the end of the season, with a bunch of no-name young guys. For any diehard baseball fan that means there’s hope for next year! In fact, over the last 50 games the Padres have been playing .600 ball, so next year they could win 96 games and go to the play offs!! Thinking about next year is just the medicine needed to overlook the current reality. The Padres are still 15 games below .500, and 22 games out of first place.

The psychology of the diehard sports fan is very similar to the psychology that drives most institutional money managers, in relation to the economy and stock market. As the economic data points have gone from dreadful to lousy since March, institutional money managers have been looking forward to next season (the second half of 2009). As I have forecast since March, GDP was likely to be positive in the fourth quarter, and possibly in the third quarter. In the July letter, I explained why the recession probably ended in July. This week Federal Reserve Chairman Bernanke confirmed what should have already been obvious to most economists, when he said that “From a technical perspective the recession is very likely over at this point.” As noted in July, the end of the recession only marks the trough in economic activity, and tells us nothing about the strength and durability of the subsequent recovery.

The stock market bottomed in March, and it would appear the economy bottomed in July. The sequence of the stock market bottoming before the economy will perpetuate one of the great falsehoods on Wall Street, which says the stock market anticipates and discounts the future. In this case, the sages state that the rally off the March low is discounting the coming earnings rebound. Myths are maintained because there is just enough truth to convince the unsuspecting. The irony in this case is the unsuspecting are the same people spewing this nonsense. What the Wall Street sages will fail to mention is that the rallies off the lows of March 2008, July 2008, October 2008 and November 2008 were all heralded as signs the economy was about to turn for the better. They also won’t explain what wonders the NASDAQ was discounting when it traded above 5,000 in April of 2000, or when the DJIA reached 14,200 in October 2007.

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Category: Think Tank