Posts filed under “Think Tank”

It’s Still “All Just One Trade”

Good Evening: The major U.S. stock market averages closed with smallish advances after trading in a narrow range for most of the day on Tuesday. Commodity prices joined equities by also churning and consolidating recent gains, leaving the real action to bonds and the dollar. While the former rose and the latter fell, the approach of summer might mark a good time to look back and reflect on how the capital markets have been acting (more precisely, interacting) during the two years since the collapse of two Bear Stearns mortgage-related hedge funds marked the beginning of what would become multiple crises. Interestingly, what was “all one big trade” in the run up to the crack up is essentially still one trade — right through June, 2009. Elevated correlation levels among many asset classes are still the rule, so let’s try to imagine the circumstances under which these relationships might start to break down.

Yesterday’s leap by Wall Street didn’t seem to possess its usual bullish coattails in overseas markets last night, and stock index futures were in hover mode as the opening bell in New York approached. Some modest early profit taking was erased as soon as the first piece of economic data hit the tape. Pending home sales were up 6.7% in April, well above consensus forecasts for the third time in as many months (see below). Those still looking for an imminent bottom in housing should try to recall that these sales levels are still very depressed and were flattered by both rising foreclosure sales and falling mortgage rates. The former may help the market clear some of the excess supply on the low end (high end home volumes are still very light), but the latter tailwind is disappearing as mortgage rates have spiked since April.

Still, it was a decent report, and the green shoots crowd was further encouraged when auto sales came in better than had been expected (see below). Again, a 9.9 mm annualized rate exhibits what a Doctor might call a “thready pulse”, but the level of sales is definitely an improvement when compared to April’s figures. Given the current legal status of both Chrysler and GM, it will be interesting to see which camp of analysts will be right — the ones who proclaim a turnaround in auto sales is now at hand, or the ones who claim the added sales came from the government and/or orphaned dealerships liquidating inventories ahead of their own Chapter 11 filings.

For his part, Treasury Secretary Geithner greeted this economic news warmly while in Beijing today. He’s all smiles these days, but remember last winter when he used to bark about the Chinese and their nefarious “currency manipulation”? His new role as lap dog won’t allow him to make such accusations, but I forgive him. A face to face meeting with one’s largest customer (in this case, for Treasury securities) has a way of doing that to even the most truculent salesman. And the Obama administration has little to fear from the unions about a China policy lacking either bark or bite. After all, didn’t the nice people working in the White House just hand over the lion’s share of Chrysler and GM to the UAW, leaving the hindmost for the creditors? Does it strike anyone as curious that the supposedly Communist Chinese are lecturing us about economics and the markets while we presumed capitalists extend a socialistic hand almost everywhere?

Such thoughts were lost on equity market participants today, and they kept stock prices in a steady range above unchanged for almost the entire session. It looked as if those wanting to take profits after the recent rally were almost perfectly balanced by those wanting to buy because they’ve been missing out. The employment data due out this week will likely move this situation out of equilibrium, but today every major average closed with gains between 0.2% and 1%. Only the bank stocks disappointed when the Fed pulled a fast one on them and changed the rules (again!) on TARP repayment (see below). Treasurys actually bounced after the beating they suffered yesterday, and yields on the long end of the curve fell 6 bps. The dollar retained the status reserved for it as global whipping boy by declining almost 1% during an otherwise tranquil day. And commodities snoozed right along with equities as the CRB index slipped mere 0.2%.

More than once during the 2003-2007 bull market, Bill Fleckenstein noted that the major asset classes were essentially “all one big trade”. His always excellent Rap ( pointed out back then that the overly generous Greenspan Fed was fostering a credit bubble, one that helped stocks go up, credit spreads to narrow, the dollar to fall, and commodities to rise. Anchored to the usually low fed funds rate on the short end of the curve, and recipient of large purchases by our foreign creditors on the long end, Treasurys went their own way during much of this period. Let’s just say, however, that it was hard to lose a lot of money in fixed income during this time frame.

Subprime mortgage paper was the first to run aground in early 2007, followed in June by Leveraged Loans and in July by High Yield bonds. Equities lost the plot for most of 2007, boldly and mistakenly setting all time highs in October. But they soon cracked, too, leaving only a falling dollar and rising commodities as markets that remained on their previous trends. Commodities finally buckled in July of 2008 and played an admirable brand of catch up ball as they weakened with equities last autumn. When all these markets went into panic mode after the collapse of Lehman last September, even the dollar was able to reverse by catching a surprisingly strong bid. Volatility in all markets soared. As 2008 wound down, each major asset class was running in the opposite direction of the trends they followed from 2003 to 2007. What credit had giveth, a credit crisis proceeded to taketh away.

After what can only be described as a depressing first 10 weeks, equities bottomed in mid March, followed quickly by Treasury yields. With stocks and interest rates rising, credit spreads began to narrow, the dollar resumed sinking and commodities went back to rising. The highly correlated panic reactions of last fall have now become less volatile, though no less highly correlated. These moves recall the Greenspan era, except this time it is Chairman Bernanke pushing a Quantitatively Easy monetary policy on the markets. Many investors believe the markets are signaling a return to economic health when it looks to me more like each asset class has become hostage to the credit backdrop. Whether melting down last fall or melting up this spring, it’s still “all just one trade”.

What will force these markets to stop resembling a band of junkies that are either on a high or in withdrawal? Once again, we turn to Bill Fleckenstein. He’s agnostic about stocks at the moment, but he senses some important stresses building up behind the scenes. In Bill’s opinion, the markets to watch are the dollar and long term Treasurys. To Bill, the precipitous fall in the dollar and dizzying rise in bond yields might mean the Fed has lost the control they deem so precious. If Bernanke and company let the flood of Treasury issuance take rates higher, then they lose the economy. If they scoop up all the Treasurys they can in order to prevent rates from rising, then they lose the dollar.

The risk, therefore, is a vicious circle that continually pits the Fed and its balance sheet against the global bond and currency markets. And, since even the mighty Fed can’t control world markets, U.S. stocks will likely then start to fall along with bond prices, instead of going in opposite directions as they have for most of the past year. Past an unknowable tipping point, the correlations so evident today will suddenly switch. If you think this is a tough investing climate, wait until you see what a funding crisis looks like. The only real winners in that environment will be the hardest assets of all — the precious metals. Please note that this is not my prediction of some inevitable, dark future; it is just one possible future. We can still do something to prevent such an outcome by becoming more responsible on the fiscal and monetary fronts. To paraphrase my friend, Rick Santelli: “Washington, are you listening?”

– Jack McHugh

U.S. Economy: April Pending Home Resales Surge 6.7%

GM, Ford, Chrysler Sales Fell Less Than Estimates

Fed Said to Raise Standards for Banks’ TARP Repayment

Category: Think Tank

$ index

For the Fibonacci followers out there, the DXY (US$ index) at the current level of 78.38 (down sharply again) has retraced 61.8% of its rally off the record low of April ’08. The implications the $ weakness has for inflation and interest rates and thus for the cost of financing massive deficits at the government…Read More

Category: MacroNotes

We loaded the final Q1 2009 data from the FDIC into The IRA Bank Monitor on Friday and the results are rather striking. As you will recall, our preliminary Stress Index score for the banking industry was over 5.7 or half an order of magnitude above the 1995 benchmark year. This result excluded the ratings for the lead units of the largest money center banks, data for which was not released until last week.

Category: Think Tank

Pending Home Sales

April Pending Home Sales, a measure of contract signings and thus a precursor to the existing home sales data, rose 6.7% m/o/m, much better than expectations of a gain of .5% and follows a 3.2% m/o/m rise in March and a 2% gain in Feb. The gain was led by a 32.6% gain in the…Read More

Category: MacroNotes

Jim Welsh Investment Letter – May 22, 2009


Jim Welsh of Welsh Money Management has been publishing his monthly investment letter, “The Financial Commentator”, since 1985. His analysis focuses on Federal Reserve monetary policy, and how policy affects the economy and the financial markets.


Investment letter – May 22, 2009


As noted in the March and April letters, there is a good chance that GDP will post a positive print in the fourth quarter of this year, and maybe in the third quarter. However, the most important issue in the next 12 to 15 months is whether the rebound in the second half of 2009 and first half of 2010 will gain enough traction to launch a self sustaining economic recovery. The short answer is no one knows. What we do know is that the drag to GDP from housing, inventories, and exports will be less in coming quarters. And, with the push coming from the stimulus plan, there will be a positive GDP print in the fourth quarter, if not the third quarter. Although most of the ‘growth’ will be statistical nonsense (less bad confused as actual growth), most economists will be satisfied since they assume that an increase in GDP automatically means a lasting recovery will follow. This view overlooks the many cyclical and secular hurdles that collectively threaten to transform the U.S. economy in coming years.

A dissection of the -6.1% decline in first quarter GDP will underscore why a turnaround in GDP is coming. The decline in residential construction subtracted -1.36% from GDP. However, single family housing starts have held steady for the last 4 months through April. (Apartment construction was very weak in April -42.2%, but that has more to do with commercial real estate than residential.) With housing starts already down 80% from their peak three years ago, there is a good chance starts will continue to stabilize near 350,000, a very depressed level. By the time the fourth quarter arrives, the drag to GDP from residential construction could be near zero, and possibly a slight positive. Businesses slashed inventories a record $103.7 billion in the first quarter, which shaved -2.79% from GDP. Last week, 52 million Social Security recipients began receiving their $250 economic recovery checks. Along with other measures within the $787 billion fiscal stimulus plan, consumers will have more disposable income, which will lift demand in coming months. This will help align sales with production and inventories, so the large drag from inventories will be far less in the second half of 2009.

In the first quarter, exports dived 30%, the largest drop since 1969, while imports plunged 34.1%, the steepest fall since 1975. The decline in exports knocked -4.06% off of GDP. But, in the quirky world of gross domestic product, the larger drop in imports added +6.05% to first quarter GDP, since imports represent production outside the U.S. If the impact of exports and imports were excluded, GDP would have fallen -8.1%, rather than -6.1%. Fiscal stimulus in the U.S. should revive demand for goods and services, including imports. The net result of improving exports and imports could be close to a push.
Business investment on new buildings and equipment plunged 38%, the most since 1947. This accounted for the bulk of the -4.68% non-residential investment subtracted from first quarter GDP. Although commercial real estate will remain weak in coming quarters, business investment has begun to stabilize. In the first quarter, Cisco’s revenue was down 17%, while Intel’s was off 28%. These are staggering declines, but both companies reported that the tech spending environment has stopped getting worse. Even if business investment doesn’t pick up by the fourth quarter, the negative drag on GDP will be less.

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Category: Think Tank

Baby We Were Born to Run

“In the day we sweat it out in the streets of a runaway American dream, at night we ride thru mansions of glory in suicide machines, sprung from cages out on highway 9, chrome wheeled, fuel injected and steppin out over the line.” Sorry but knowing that each and every one of us own a…Read More

Category: MacroNotes

We’re All “Dogs of the Dow” Investors Now

Good Evening: Grappling with an already confusing investment climate, investors were treated today to a GM bankruptcy filing and a scorching stock market rally. To the list of firsts previously set during the 2007-2009 bear stock market, we can now add the Chapter 11 filing of a current Dow component, the steepest 2-10 year yield…Read More

Category: Markets, Think Tank

Federal Agencies Propose Rule to Implement S.A.F.E. Act Mortgage Loan Originator Registration Requirements The Federal financial institution regulatory agencies are together issuing for public comment proposed rules requiring mortgage loan originators who are employees of agency-regulated institutions to meet the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E….Read More

Category: Credit, Federal Reserve, Think Tank

Inflation, growth and stock market performance

Continuing my point last week on REAL vs NOMINAL returns in stocks, the happy, go lucky days of the 2nd half of the 1990′s was best described with the famous buzzword ‘goldilocks,’ with the connotations of strong growth and low inflation with the Maestro running the show. The combination allowed P/E multiplies to rise at…Read More

Category: MacroNotes

C&I loans/decoupling

In the context of the debate of whether banks are lending or not to businesses and/or is the demand for loans still falling, Friday’s data from the Fed for the week ended May 20th has commercial and industrial loans falling to the lowest level since June ’08 and is down for 9 of the past…Read More

Category: MacroNotes