Posts filed under “Think Tank”

Zombie Dance Party: Q2 Update and Stress Test Preliminaries

Earlier today we announced the preliminary Q2 stress test results for all US banks.  Gretchen Morgenson gave us great ink yesterday in the NY Times:  “What the Stress Didn’t Predict.”

The preliminaries are of interest because they exclude the large banks and thus give you a regional/community bank view. In Q2 2009 the preliminary bank safety and soundness ratings calculated by the IRA Bank Monitor using the data from the FDIC indicate a dramatic climb in the stress in the US banking industry, up 23% to 6.87 in Q2 2009 (1995=1) vs. the preliminary Stress Index value of 5.57 in Q1 2009.   The rate of change in the preliminary Bank Stress Index was lower than in the previous quarter, but the absolute stress test score is at record levels.  The final industry aggregate average Bank Stress Index calculated by IRA was 1.8 at the end of Q4 2008 and 2.36 as of Q1 2009, illustrating the degree of subsidies flowing into the larger banks, as discussed below.

IRA’s unique automated system enables us to gather and process CALL reports in real time, as they become available on the FDIC CDR web facility.  This facility cuts several weeks off the wait time for the public to access FDIC data, but some of the largest banks are still not released until the FDIC releases its own analysis of the quarterly data, roughly 60 days after the quarter close.  Since the largest banks and/or the FDIC deliberately hold back the release of certain bank CALL reports until just prior to the press conference, the sample of CALL reports available via the FDIC CDR facility just prior to the FDIC press conference allows us to view the rest of the US banking industry “ex-big bank.”

Q2 2009 “Ex-Big Bank”:  Less Worse Than Previous Quarter, But Still Climbing

Prior to the FDIC press conference in Q1 2009, IRA for the first time calculated a preliminary Banking Stress Index rating for the industry using the bank CALL reports that were available on the FDIC web site about 50 days after the quarter close.   This preliminary Bank Stress Index rating included over 7,000 institutions, but excluded the largest banks and therefore provided a perspective on the rest of the industry.
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Category: Markets, Think Tank

more on the differing messages between stocks and US Treasuries

As a follow up to my morning comment, today is another of mixed messages being sent by the stock market and the US Treasury market as stocks continue to power higher while the 10 yr bond yield moves lower. Just since the Friday Aug 7th close, the S&P 500 has rallied 2.1% while the 10…Read More

Category: MacroNotes

Bank of Israel the first to raise interest rates

The Bank of Israel has become the first global central bank to raise interest rates as they moved their benchmark to .75% from .50%. They cite 3 main factors for moving. 1)Over the past few months, inflation data was above the target range of price stability, 2)the most recent economic data has shown a turnaround…Read More

Category: MacroNotes

King Report: Sympathy for Traditional Managers

> Our sympathies go out to traditional managers of public funds because they are being forced to abandon prudence and reason in order to generate short-term performance in a rigged casino. Deceit and duplicity are encouraged if not demanded. Earnings are crafted; balance sheets cannot be trusted; government economic data is illegitimate. Case in point:…Read More

Category: Think Tank

Stock market and US Treasury market sending different signals

RIP the CFC program as of tonight and we’ll now get to see what the natural supply and demand dynamic is in the auto industry. The other major program, the Cash for Shelter plan providing tax credits for home purchases, runs to Nov 31st but there is already talk of enlarging its size and making…Read More

Category: MacroNotes

Andy Xie is a former Morgan Stanley economist now living in China; The following is from the South China Morning Post: > The A-share market is collapsing again, like many times before. It takes numerous government policies and “expert” opinions to entice ignorant retail investors into the market but just a few days to send…Read More

Category: Think Tank

Oil! The price forecasts vary. Why?

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…Read More

Category: Think Tank

Words from the (investment) wise August 23, 2009

Words from the (investment) wise for the week that was (August 17 – 23, 2009)

After starting the week with a broad-based sell-off, stock markets resumed their five-month uptrend as investors’ confidence in the recovery prospects of the global economy gained traction. With risky assets back in favor, a number of bourses and crude oil closed at fresh highs for the year, showing resilience in the face of a sharp correction in China on Monday (-5.8%) and Wednesday (-4.3%). Safe-haven assets such as government bonds and the US dollar received a cold shoulder.


Source: Walt Handelsman, August 20, 2009.

Referring to the nascent economic recovery, Paul Kasriel and Asha Bangalore (Northern Trust) said: “There is concern being voiced that after the fiscal stimulus wears off, the economy will lapse back into a recession. Anything is possible, but that does not necessarily make it highly probable. In the post-WII era, once the US economy has gained forward motion, it has maintained that forward motion until the Federal Reserve has intervened to halt it.

“We believe that the earliest the Fed will begin to take action to brake the pace of nominal economic activity will be late-June of 2010. And if it begins to take action then, it will do so only tentatively. If, in fact, economic activity is flagging from a lack of additional fiscal stimulus, then the Fed is unlikely to commence tightening or would reverse course. We believe that the next recession, whenever it occurs, will be precipitated by the lagged effects of Fed tightening, not by the economy ‘running out of gas’ on its own.”

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates renewed investor appetite for risky assets.



A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+1.6%) and MSCI Emerging Markets Index (-0.8%) followed separate paths last week as China and a number of emerging markets came under pressure during the first few trading days. Emerging markets have now underperformed developed markets for three weeks running.

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Category: Think Tank

How Not to Reduce Excess Reserves

Here is something I never expected to be linking to on a Saturday afternoon, via the St. Louis Fed’s David C. Wheelock: How Not to Reduce Excess Reserves: The Federal Reserve’s actions to support financial markets and the broader economy have resulted in a large increase in bank reserves—both total reserves and reserves held in…Read More

Category: Credit, Federal Reserve, Think Tank

The Statistical Recovery, Part Three

The Statistical Recovery, Part Three
Capacity Utilization Set to Rise
A Real Estate Green Shoot?
The Deleveraging Society
Some Thoughts on Secular Bear Markets
Weddings and Ten Years of Thoughts From the Frontline

This week we further explore why this recovery will be a Statistical Recovery, or one that, as someone said, is a recovery only a statistician could love. We look at capacity utilization, more on housing, some thoughts on debt and deflation, and some intriguing charts on volatility in the last secular bear-market cycle. This letter will print a little longer, but there are lots of charts. I have written this during the week, and I finish it here in Tulsa, where Amanda gets married tomorrow. (There is no deflation in weddings costs!)

Thanks to so many of you for your enthusiastic feedback about my latest Accredited Investor Newsletter, in which I undertook to examine the impact of last year’s dramatic increase in volatility on the performance of hedge funds and to ascertain those elements that led to success in the industry, such as select Global Macro and Managed Futures strategies, as well as the challenges. If you are an accredited investor (basically anywhere in the world, as I have partners in Europe, Canada, Africa, and Latin America) and haven’t yet read my analysis, I invite you to sign up here:

For those of you who seek to take advantage of these themes and the developments I write about each week, let me again mention my good friend Jon Sundt at Altegris Investments, who is my US partner. Jon and his team have recently added some of the more successful names in the industry to their dedicated platform of alternative investments, including commodity pools, hedge funds, and managed futures accounts. Certain products that Altegris makes available on its platform access award-winning managers, and are designed to facilitate access for qualified and suitable readers at sometimes lower investment minimums than is normally required (though the net-worth requirements are still the same).

If you haven’t spoken with them in a while, it’s worth checking out their new lineup of world-class managers. Jon also tells me they just added yet more brilliant minds to their research team, making it, in my opinion, one of the foremost teams in the industry, focused solely on alternative investments. I invite you to have a conversation with one of their professional and seasoned advisors. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.) Now, let’s jump into the Statistical Recovery.

Capacity Utilization Set to Rise

Capacity utilization is a concept in economics that refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output that is produced with the installed equipment and the potential output that could be produced with it, if capacity was fully used.

The chart below shows that capacity utilization in the US is at an all-time low, around 68%. That means that with the equipment we already have in place we could produce almost 50% more goods than we are now producing. However, most analysts think that 80% capacity utilization is a very good number.

If you look very closely at the bottom right-hand detail, you can see that there is a small uptick in last month’s data. Whether or not this is the “bottom” remains to be seen. But if it is not the bottom, it is close. You can only shut down so much production before inventories fall to levels that require restocking. And we are getting close to that level in many industries.


Before we wander too far away from the graph, I want you to notice that past dips (circa the recessions of 1968, ’74, and ’80-’82) had V-shaped recoveries in capacity utilization. But in the 1990-91 recession it took longer than it did in past recessions, and in the most recent recession (2000-02) the recovery took longer and we did not actually “recover” for four years.

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Category: Think Tank