Sunday, May 31, 2009
Long: 33.8% (v 38.2%)
Short: 19.2% (v 9.0%)
This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.
(click to enlarge)
- The fast money is proving slow to jump on the market's bandwagon. Hedge funds, decried by many as quick traders, have played catch-up during the market rally since March. The average fund was 45% "net long" as of May 19, or had investment holdings valued at 45% more than its bearish "short" positions, according to Hedge Fund Research. That figure is up from 33% earlier this year, but still is far below its 55% level a year ago. Funds are less bullish now than they were just before the market crumbled last fall.
- Hedge-fund managers, and their investors, said many remain in a neutral position. Many funds are skeptical the economy has entered a new period of growth that justifies high equity multiples. Others fear dislocations from governments shoveling money at problems.
- Hedge funds tend to underperform stock-market averages at inflection points, in part because they aim to create a "hedged" performance, rather than ape the market. (uhh, that was DISPROVED last year - many were simply leveraged up the gills betting on 1 side of the market.. and paid the price)
- While a stock surge might force a mutual-fund manager to jump in because he is judged against the index, the pressure on hedge funds is less. (but not if "the market" puts on another 20% from here) :) If stocks keep surging, hedgies might have to jump in with two feet, giving the market another lift. (I can agree with that, you can only sit so long if "the market" continues in one direction - and just about the time every last skeptic has thrown in the towel, we'll reverse. Or at least we used to before the Invisible Hand drove the market up 1%+ in a flurry of futures buying on Friday afternoons. Or jumped futures to a positive skew almost every morning between 7 AM and 9 AM) But their continued hesitancy should be a sign of caution for investors.
- Some noted stock pickers remain wary. Steve Mandel's Lone Pine Capital bought long-dated, out-of-the-money call positions representing 2.6 million shares of a gold exchange-traded fund in the first quarter, while Och-Ziff Capital Management Group and Atticus Capital have been cautious on the market.
So S&P 1500 (i.e. prosperity) can go nicely with gold $1500. However bread $3, gas $4 are some of the ill effects. But we're all winners in nominal terms as most people will only focus on the wins not realizing the inflation adjusted returns. There are benefits of having sheeple who remain financially in the dark. Let's see if the master plan works.
Can't wait for the next Hugh Hendry update as the horde has continued to work against him... [Apr 28: The Latest Hugh Hendry] the bulls are running away with inflation in the inflation v deflation debate.
We've been speaking often about the "China will lead us" thesis, and I wrote a quite exhaustive piece this week on my updated views (really no different than my views the past year+) [May 27: How is China Spending their Stimulus... and How Many of their Loans Will Go Bad?] Much like Roach I just have to scoff at anyone believing in 6 months an economy based so heavily on exports with a nation of savers with little safety net will suddenly "turn American" and drive internal consumption (ex government handouts). This is a process that will happen over years and in fact a decade+. Until then many of these Asian economies still need Europeans and especially Americans to shop 'til they drop.
So as you read this piece from Roach keep in mind his general 'pessimistic' view (or as people off Wall Street call it: realistic) and the fact he "knows" Asia ... much more than the stock jockeys who are driving stocks up on "thesis".
- (Apr 2007) Morgan Stanley is betting that Roach’s strong connections in Asia, built through frequent travel in the last decade to regional conferences and calls on high officials, will help it win more business. He is known to enjoy regular one-on-one audiences with Singapore’s minister mentor, Lee Kuan Yew. Last month, he met in a small group with Chinese Premier Wen Jiabao to hear firsthand about China’s latest economic tightening measures. Roach, who has spent the last 25 years at Morgan Stanley, will assume his new job in June and move to Asia in September.
- In addition to predicting China’s stunning ascendance politically and economically onto the world’s stage, he was also an early bull about India.
The spin game is on as the world tries to talk itself out of the worst recession since the end of World War II. The good news is that there is a slowing in the rate of deterioration in the global economy. The tougher news is that this is hardly surprising. In the aftermath of unprecedented annualized plunges in real global GDP on the order of 6% to 7% in the fourth quarter of 2008 and the first quarter of 2009, the pace of deterioration almost had to moderate.
With history books replete with tales of V-shaped recoveries following steep downturns, financial markets have become giddy, hoping that signs of bottoming beget the long-awaited rebound. Nowhere is that more evident than in Asia, an increasingly China-centric region convinced it will lead the world out of its long nightmare.
- If it were only that easy. Contrary to the lore of the Asia century, the region continues to suffer from a lack of internal support from its 3.5 billion consumers. The private-consumption share of developing Asia's overall GDP fell to a record low of 47% in 2008 down from 55% as recently as 2001. (key point) In other words, Asia remains an export machine.
- Developing Asia's export share rose from 36% of pan-regional GDP during the financial crisis of 1997-98 to a record 47% in 2007. And recent research by the International Monetary Fund shows that Asian exports continue to be underpinned by demand from consumers in the industrial world especially from the U.S. Despite a surge of trade within Asia, the bulk of these intraregional flows have been concentrated in parts and components that go into finished goods eventually consumed by developed economies.
Now if you come back to me in 2 decades, I can give you a different story. But to believe this transformation has happened in 2 quarters? Only in snake oil salesman (or cheerleader) land. You know what TV channel to watch if you want to believe that fairy tale.
Oops, sorry - this is where I say decoupling failed in 2008 but in 2009 it's back and better than ever. Green shoots.
- Little wonder that in the aftermath of a record contraction in U.S. consumer spending in late 2008's 4% average annualized declines in the final two quarters of the year in real terms every major economy in Asia either slowed sharply or tumbled into deep recession. More than ever, the region's fate remains made in America.
- This is where hopes of an Asia-led rebound are most tenuous. After a dozen years of excess, the overextended American consumer is tapped out. The green shoots crowd, those believing global recovery is nigh' drew special encouragement from a 2.2% rebound in real U.S. consumer expenditure in the first quarter of 2009. That encouragement is about to be dashed. Outright contractions in retail sales in March and April point to a renewed decline of at least 1% in real consumption in the current quarter.
- Hit by the triple whammy of collapsing property values, equity-wealth destruction and ongoing unemployment shock, the American consumer is unlikely to spring back overnight. In fact, with asset-dependent U.S. households remaining income-short, overly indebted and savings-deficient, subdued consumption growth is likely for years. This is because the U.S. consumption share of real GDP, which hit a record 72.4% in the first quarter of 2009, needs, at a minimum, to return to its pre-bubble norm of 67%.
- That spells a sharp downshift in real consumption growth from the nearly 4% average pace of 1995 to 2007 to around 1.5% over the next three to five years. There will be years when the consumer falls short of that pace. The contraction of more than 1.5% over the past four quarters is a case in point. And there will be years when consumption appears stronger. But the die is cast for a protracted weakening of the world's s biggest spender.
Solution? The Federal Reserve is pursuing policies that will make those bubbles look like a sissy. Time for our next bubble - enjoy it kids. Just remember the to memorize the words "nominal" versus "real" in the years ahead - since most Americans only focus on nominal this is the last great parlor trick to show the us peasants we indeed are still 'prosperous'. i.e. "wow, my Etrade account is up another 28% - that is cool; now why the heck are my eggs costing 45% extra ?!"
Back to Roach
- Therein lies a critical challenge for Asia. Unless it comes up with a new source of demand to support its export-led growth model, Asia will face stiff and enduring headwinds. Nowhere is this more evident than in China, where the mood has turned particularly upbeat. While I no longer doubt that China's performance will be better than expected in 2009, there is good reason to be wary of extrapolation. China's s incipient rebound relies on a timeworn stimulus formula: upping the ante on infrastructure spending to support growth in anticipation of a return of global demand for Chinese-made goods. It's the latter presumption that remains iffy as the U.S. opts for prudence over profligacy.
- If export-led China does not get a kick from the American consumer, a relapse for China-dependent Asia is a distinct possibility next year. Don't be fooled by catchphrases such as green shoots... In the aftermath of the modern world's worst financial crisis and recession, an Asian-led global healing remains a real stretch.
Saturday, May 30, 2009
TIME columnist Justin Fox talks with Peter Schiff, who predicted the economic collapse and has other extreme views on the market's future
I am sort of laughing as my last story on Gary Shilling [May 14, 2009: Gary Shilling's Latest Thoughts] had a throw away line saying I admired Gary for seeing what few others did in 2008 (including Schiff) in that things would get so bad that indeed people would flock into US debt and currency, even as the country was the origin of the crisis. Of course a flock of Schiff defenders descended on me sending nasty-grams. The great irony is I've been a proponent of Schiff AGREEING with him as the punditry scoffed at his (and my) views. My only point was in 2nd half 2008 the "buy foreign, buy commodities" trade blew us (both) up. Now however in the past month or so that trade is again working - showing as always with the market, you can be intellectually correct but if your timing is wrong, the lemmings can run you over and cause great pain.
[Nov 24 ,2008: Peter Schiff on Yahoo Tech Ticker]
[Sep 12, 2008: Peter Schiff on Fannie/Freddie]
[Aug 3, 2008: Peter Schiff July 28 2008 on Glenn Beck]
[Jun 2, 2008: US News & World Report -Peter Schiff's Worst Case Scenario]
[Oct 2, 2007: Peter Schiff - Housing Prices to Collapse]
Also for newer readers I did an audio clip which you can listen to here (feel free to skip the first 5 minutes or so)
- Irony? Geithner Urges Chinese Leaders to Fundamentally Alter Economy
- BRIC and You'll Miss It
- PIMCO's Gross: US to Eventually Lose AAA Rating
- Government Jobs as % of All Jobs Highest Since 1992
- How to Pick up a Women in Modern America: Have a Healthcare Plan
- Long US / Short Europe? Valuation Gap Largest Since 2003
- Lawmakers Seek Geithner's Help in Saving Obama's Tailor
- US Government Unable to Post Profit in April for First Time Since 1983
Here is a quite comprehensive view from the bull camp from Minyanville.com
I've previously described the fundamental and technical rationales for an aggressive move to go 100% long in the US equity market. A complete argument for the countertrend rally was published in Op-Ed: Is a Countertrend Rally Inevitable?.
In this article, I'd like to update the case for what I believe will be stage II of the countertrend rally.
1. A series of announcements of decisive and increasingly coherent policy actions by governments and central banks around the world.
I think that there can be little doubt that this has occurred. While there are still policy measures that are yet to be announced, I believe this factor has pretty much played itself out. At this point, the risk of governments messing things up may be fairly equally balanced against any further upside from policy initiatives.
2. A dramatic turn in the economic growth dynamic.
Of all of my predictions, this has always been the most important. My proprietary statistical work has thus far proven prescient, and it's strongly indicating that we'll continue to see very strong momentum in the economic data through June and possibly July. Economists' and analysts’ numbers are still too low, and so the surprises throughout the second quarter will continue to be to the upside.
Indeed, as I've pointed out in several articles, such as in Op-Ed: Surprises Continue to Drive the Rally, many indicators aren’t just going to show turns in the second derivative, several are actually going to show positive growth! The blue-chip economists haven’t figured this out yet. This is going to be a shocker and will keep the rally going.
3. Consensus economic views are far too bearish.
This is still the case. The media is filled with pundits talking about the “certain collapse of the dollar,” “currency debasement that will inevitably lead to inflation,” and “crushing debt levels.” Most of the arguments in favor of these apocalyptic views are based on discredited ideological precepts that have become urban legends and have very little empirical evidence to support them.
I haven’t written in detail on debunking these urban legends for a reason: The market isn’t ready for it. I've virtually been lynched by readers for merely suggesting that things might not be as bad as the consensus thinks. It makes little sense to make arguments that nobody's ready to listen to.
However, in the coming weeks, as the market rises, many are going to develop doubts about the bearish consensus. Many will start to wonder whether the celebrity Cassandras really have it all figured out.
In coming weeks, I'll be writing about bearish urban legends popularized by bearish commentators and suggesting possible ways out of this crisis. Many are going to be surprised to find that behind the confident proclamations of doom, there's precious little substance to back it up.
The final stage of this rally will be characterized by a breakdown of the bearish consensus and the development of narratives throughout the financial press that would have been unthinkable just a few weeks ago.
4. Valuations are inexpensive.
In my article Your S&P Roadmap, I laid out a framework that demonstrated that equity prices had massively overshot to the downside and were extremely undervalued. Valuations had reached a point that reflected “irrational despondence,” and will only begin to enter into a “normal range when the S&P 500 crosses above 950." The midpoint of the “normal” valuation range is 1,100.
My target for the countertrend rally has been for the S&P to reach between 950 and 1,100. I now believe that the 1,100 is most likely. However, under certain circumstances, I believe it is possible for the S&P 500 to reach the upper end of its normal valuation range - which would place it at 1,350.
5. Implementation of policy actions.
I'd like to add another fundamental variable to my list of fundamental drivers at this time: Not only policy actions, but their implementation. In this regard, there are 2 key variables that are going to have huge effect on the economy and financial markets.
First, the massive fiscal stimulus in the form of rebate checks, tax breaks, and massive government spending is going to start hitting the economy in a big way starting in May, and will accelerate throughout the year; I believe the biggest impact will actually be felt between May and September, when individuals and businesses begin to alter their behavior patterns in anticipation of the stimulus. In particular, businesses will start ramping up in terms of stocking inventories, buying equipment, hiring, etc. Thus the impact of fiscal stimulus will be felt even before the government actually disburses the funds.
Second, and by far the most important, the massive “liquification” being engineered by the Fed and the US Treasury through various programs such as TALF, PPIP, and others will galvanize the economy. These programs will only really get going between June and September. These massive injections of liquidity are going to dramatically bring down spreads in the corporate debt market, which will allow companies to rollover and renew their credit facilities and access credit at very affordable prices, thereby unfreezing credit-dependent economic activity. I’m not talking about adding long-term debt here. I’m talking about credit lines for working capital, import-export finance, etc.
The liquification is also going to reduce borrowing costs for many firms and individuals. This will act as a massive “tax break.” Individuals can free up between $100-250 per month in mortgage costs; businesses will also save money due to lowered interest costs, and the funds can be deployed for investment.
The market hasn’t yet realized the dramatic impact these Fed and Treasury programs are going to have on economic activity. Again, although the major liquification will occur from June 2009 thru March 2010, financial markets will likely have discounted the impacts in the form of dramatically lower spreads and higher equity prices by June or July.
1. High cash positions.
Cash positions remain extremely high. However, I predict this will change, insofar as these are symptomatic of high levels of risk aversion. As risk aversion declines, cash positions will decline as well, and equity allocations will rise.
Please observe the graph of the VIX. As the VIX reverts from high levels above 40% toward normal levels below 20%, this is a clear indication of a dramatic decline in risk aversion. This will almost certainly be followed by a decline in another risk-aversion indicator: cash allocations.
Please note that rising long-term government bond yields, along with a declining dollar, could also indicate declining risk aversion and reduced cash allocations. The financial press may initially interpret these bearishly as signals of potential inflation and/or a loss of confidence. However, if accompanied by a contraction in private-market credit spreads, these will, as a strong confirmation of the decline in risk aversion, be a bullish sign.
The massive flow of cash into equities will be a primary driver of the market. When this sort of stampede gets started, valuations will, to some extent, cease to matter.
2. Performance anxiety.
Many have predicted that the shift in risk preferences is permanent, and that cash levels will remain high. I don’t think so.
In my view, the average American is simply not going to be able to resist getting back into the market to try to “make back” the losses they suffered in 2009. The average American won’t be able to resist feeling that the Jones’s might get ahead of him, and has been trained to commit money to stocks in a constant and steady fashion. It’s deeply ingrained into the culture, and culture doesn’t change in 6 months. Americans will tend to revert to their trained habits, and are going to feel very uncomfortable being out of the market.
Institutions similarly simply aren’t going to be able stay on the sidelines, either. Cash positions doom them to underperformance. And for institutions, losing money is far preferable to underperforming.
Hedge funds also have extremely high cash levels. Hedge funds aren’t paid 2% to 20% to hold cash. Soon they’ll be throwing in the towel and aggressively entering “at the market” buy orders.
3. Bearish consensus.
This countertrend rally has been characterized by rising put/call ratios and increasing short interest. In addition, for several weeks there has existed an almost universal consensus amongst analysts -- and technicians in particular -- that the sharp rise since March has been “unhealthy,” and that the market “needs” a correction.
First, the idea that the market “needs” a pullback is nonsense. The market doesn’t “need” anything. And it certainly doesn’t need to behave in a fashion that technicians are comfortable with. On the contrary, the market will tend to move in ways that confound the consensus.
Second, the market didn't pause much on the way down, so why should one expect it to pause on the way up? The technical principle of symmetry would suggest that the recovery will mirror the fall.
Another point: How is it that if a market overshoots to the downside in an “unhealthy” manner, it becomes “unhealthy” for the market to correct this overshoot as quickly as possible? It defies logic. Simple common sense suggests that, if a market reaches extremes to the downside, then it’s “healthy” for the market to correct these excesses as quickly as possible. (To bring the analogy back into its original context, is it “unhealthy” to a gravely ill patient to recover suddenly and quickly?)
The valuation work I present in Your S&P Roadmap suggests that this is exactly the kind of recovery that's happened. What’s happened thus far, is the market has merely corrected an oversold condition reflecting “irrational despondence” toward a level that reflects a more rational assessment. And in my view, the speed with which the market corrects excesses is a good indicator of its health and resiliency.
So, if the consensus is as bearish as I suggest, why is the market going up? The answer: Short-term traders are in cash and/or are betting against the market. Long-term institutional money is moving in -- regardless of the personal views of the managers -- for reasons related to how the industry is structured.
It's my view that eventually, the long-term institutional money that needs to get fully invested is going to overwhelm the traders. And soon, these traders will be reversing positions and going long. At that point, the melt-up kicks into full gear.
I urge readers to consult my article Op-Ed: Is a Counter-Trend Rally Inevitable for a list of indicators to monitor. To the extent that these indicators continue to move in the predicted fashion, the rally is still on.
Right now just about every one of the indicators I mentioned has moved as predicted and are signaling a continuation of the rally. Perhaps the most important indicator to monitor is private-market credit spreads. Spreads have fallen, but are currently still at crisis levels. A continuation of the trend towards the normalization of spreads will virtually assure a massive stage II of the current equity-market rally.
Add one more indicator: earnings revisions. I highlighted this factor in Op-Ed: The Earnings Revisions Circus. Historically, earnings revisions have lagged market prices. However, with earnings revisions trending strongly from a low base, this should provide a favorable wind behind the market’s sails for quite a few weeks to come. Many analysts -- in order to gain publicity and redeem themselves from having missed the rally thus far -- will be making dramatic revisions to EPS estimates and target prices. One needs to get out in front of this trend.
How Far Can the Rally Go?
In Op-Ed: Your S&P Roadmap, I showed that, based on normalized earnings, a “normal” range of valuation for the S&P 500 would be between 950 an 1,350. That means this market has a great deal of room to run before it starts looking “overvalued.”
In any event, valuation isn’t the main factor to look at now. In a strongly trending market, when valuations are within “normal parameters,” valuation becomes a secondary or tertiary consideration.
There are 2 things that matter right now: First, the flow of fundamental news is extremely positive. Second, cash allocations are at all-time highs. As cash starts to move back into equities through institutional mechanisms, there will be virtually nothing that can stop this market.
There’s one main risk that rises above all the others: A precipitous rise in long-term government-bond yields to a level significantly above 4.00%. This would signal a loss of confidence in the ability of the US government to execute its fiscal and monetary stimulus program. I don’t believe that such a development would be fundamentally warranted at the present time. However, this is more a matter of psychology than fundamentals. Thus, it's an unquantifiable risk. If this happens, all bets are off.
(See Is a Counter-Trend Rally Inevitable for other potential risks; there, I discussed IYM, JNK, CYC, CFT, GSP, GSG, DJP, JJC, and BDD.)
The other major risk to my outlook is the obvious one: I could be wrong. That's why I have a checklist. If my various hypotheses are falsified, I'll examine things again. For example, if the economic data don’t continue to show strong momentum, I'll have to reassess.
The market is recovering from an unusual and vicious financial crisis; this is a time in which market participants, after having been petrified, are starting to come to grips with the fact that Great Depression II is probably not going to happen.
This is also an extraordinary time - one in which vast numbers of market participants are wrongly over-allocated to cash. As investors adjust their asset allocations to account for new realities, the rally in financial markets will be extremely powerful.
Indeed, because of the large cash allocations, there’s the danger that at some point, things could get out of hand on the upside. Because of the effects of massive inflows by institutions that invest mechanically and are essentially insensitive to fundamentals, the market could overshoot to the upside, failing to properly account for the risk (as opposed to the certainty) that things could get materially worse in 2010.
However, we’ll worry about the risk of bullish overshoot later. As I point out in Op-Ed: The Crisis is Over - For Now, the financial crisis is over, for now. And for now, I believe this market is going higher - much higher.
Friday, May 29, 2009
The two title insurers we own have been obliterated of late - while we are "somewhat" hedged by our short of the iShares Barclays 20+ Year Bond (TLT), I continue to be amused at how vicious everything reacts in short durations now. It is as if the difference between 4.75% and 4.95% 30 year mortgages mean all housing activity will cease if you believe the stock prices. Even more so, homebuilders should be hit much harder than title insurers as there will still be foreclosed homes selling (they are about half of all sales in America at this time) at 4.75%, 5%, or 5.5% interest rates. But that's too granular for the stock market... and after all the title insurers can suffer while new home builders can go up... ? huh? Anyhow, apparently yesterday 30 year mortgage rates shot up quite significantly so for the first time in a significant manner not only did bond yields rise (as they have been doing for over a month now) but even the market the Fed is pressing its foot on, "stopped behaving" as the overlords wish. Some talk of 30 years jumping to 5.2%ish rates yesterday after sitting in the 4.7-4.8% range for a long while.
p.s. someone sent me a message that CNBC said yesterday this rise in mortgage rates was a "good thing"... i.e. higher rates will 'force' panicked buyers to buy homes 'now' before rates jump higher... oh those cheerleaders are shameless. So (a) Low rates are good because it gives homeowners cheap money but (b) so are rising rates... because it causes a buying stampede. See how it works? Either way is "good". I really need to change to a straight out bull - all news is good news. Mmmm.... Kool Aid. Can't wait to hear how $100 oil is "good" - maybe it will cause consumers to rush to the gas station to "buy now" before prices go higher. Wait a second... isn't that the definition of unanchored inflation? Wait... I digress.
We are seeing a reversal of this recent trend today as long term bonds finally rebounded a bit (bond yields move in inverse of prices - so as bonds rebound, yields fall - i.e. what the "easy money government" wants to happen is happening today). Recall I exited almost my entire short of TLT 48 hours ago below $91; I started slowly reshorting today north around $94, hoping for something closer to $96 to short more [May 27, 2009: Bookkeeping - Covering Majority of iShares Barclays 20+ Year Treasury Bond]... as I stated in that piece "Too far too quickly in my opinion" but I continue to love this trade in the year(s) to come. But for that staid market, the move of late has been parabolic.
While this is sort of wonky talk, and frankly the bond market never held my attention much in the previous 15 years - it now has mattered in a significant way the past 1.5 years. And will only continue to matter more as we can expect the market to react more and more to the battle between (a) all the interference by the powers that be throw at the bond market v (b) the "free market". It is sort of fascinating and I will assume at some point the bond market will be bigger than the "bottomless" Federal Reserve balance sheet. But as with all things in the market, knowing "when" is many times more important than "what".
I probably gloss over this topic to some degree since I've talked about it in many posts, and done it piecemeal but here is a good Bloomberg piece that describes the battle between manipulation and "free markets". Keep in mind (AGAIN) the whole consumer recovery story is based on jobs (dead), low rates (manipulation left and right), and low commodity prices especially energy ("the market" is ruining that one). And let me give you the other side of my argument to be fair and balanced. Bona fide bulls say yields rising and commodities rising are great because it signals the return of super charged growth ahead. In a normal world I'd agree, but many of our "markers" have been so meddled with who knows what anything is saying anymore. All I know is this fragile consumer cannot sustain high energy prices and higher rates. But right now the bulls have their cake, and can eat it too. Everything is good news. And there are no consequences.
Federal Reserve Chairman Ben S. Bernanke’s efforts to bring down borrowing costs to revive the housing market and help the economy are stalling. Mortgage rates are almost back to where they were in March before the 30-year rate fell to a record and sparked a refinancing boom.
- Kyle McGee went to his mortgage broker’s office yesterday hoping to refinance and save about $200 a month. He walked away empty-handed. McGee was expecting a rate of 4.7 percent; the broker offered him 5.375 percent. The average 30-year fixed-mortgage rose to 5.27 percent as of yesterday, according to Bankrate.com.
“Housing is not going to be the engine to get us out of this recession,” said Robert Eisenbeis, chief monetary economist for Vineland, New Jersey-based Cumberland Advisors Inc., and former research director at the Federal Reserve Bank in Atlanta. “They’ve squeezed a lemon and now they’re trying to squeeze some more, but you can only get so much juice out of a lemon.” (that should sound familiar to blog readers ... except I use squeeze blood out of stone - more dramatic!)
Homeowners aren’t cooperating. Refinance applications this week fell 19 percent to the lowest since early March, before the U.S. announced a loosening of Fannie Mae and Freddie Mac rules to allow more borrowers with little or no home equity to arrange new loans. (remember we used to call these people renters - now they are called homeowners in "our money is free" policies) The Fed also announced increased purchases of mortgage-backed securities and a program of buying Treasuries.
The 30-year fixed rate fell to a record 4.78 percent twice in April, according to Freddie Mac, the McLean, Virginia-based mortgage buyer. The average rate for a 30-year loan rose to 4.91 percent from 4.82 percent a week earlier, Freddie Mac said yesterday.
- Freddie Mac estimates 73 percent of the projected $2.7 trillion of mortgage originations in 2009 will be for refinancing.
Rates at historic lows have convinced prospective buyers and homeowners that even 5 percent seems high, said Greg McBride, senior financial analyst at Bankrate in North Palm Beach, Florida. Yesterday’s rate of 5.27 percent is the highest since February.
“People are looking for that magical four percent,” said McGee’s broker, Norman Calvo, chief executive officer of Universal Mortgage Inc. in Brooklyn, New York. “When you get there you have that feeling of ‘Oh my God it’s the best thing, I’ve got to buy.’”
The Fed plans to buy as much as $1.25 trillion of mortgage- backed securities and up to $300 billion in Treasuries as part of a plan to lower rates. Minutes of the central bank’s April 28-29 meeting show some officials said the Federal Open Market Committee may yet boost asset purchases to spur a more rapid economic recovery.
- The central bank’s purchases of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae had brought down the yields of those securities, allowing lenders to reduce the rates on new home loans and still sell the mortgage securities at a profit. Fannie Mae and Freddie Mac are government-chartered mortgage companies that are being supported by $400 billion of back-up taxpayer capital.
“The Fed has to step up the purchases just to keep rates from rising further,” McBride said. “As much buying as the Fed is doing this year of Treasuries and mortgage-backed debt almost exactly equates to the amount of new Treasury debt being dumped onto the market.”
Treasury yields are rising as the U.S. government sells debt and investors anticipate more supply of government securities being sold to fund federal spending. That in turn is helping push mortgage rates higher.
********** Completely unrelated, as I wrote this piece the market spiked nearly 1.5% in just over 15 minutes. Good job PPT.
.... and with that, nice markup in the last 15 minutes to finish the month off. Surely a rush of buyers who did not want to buy stock all day decided they must own stocks in the last 10 minutes. Again. Via RealMoney.com :) Hello Invisible Hand.
The volume in the five-minute bar from 3:55 to 4 p.m. on the S&P e-mini was 252,837 contracts! This is the largest volume spike I have ever seen on a Friday close. Also, the next five-minute bar from 4 to 4:05pm was 146,777 contracts! This is unbelievable. By my calculations, it would take close to $2 billion to move this market in 10 minutes. Who's got that kind of money on a summertime Friday afternoon?
I remember back in the old days I used to just talk about the coming disaster that were our state budgets (soon to be resolved with more bailouts), commercial real estate (more bailouts), the banks (they are just fine thank you! Stress tested and passed with flying colors) and our entitlement programs especially Medicare. [Aug 7: I.O.U.S.A. Movie Trailer] But it's reached a point when this spring the annual Medicare / Social Security warnings came out (only to be fussed about for a day and then forgotten) I didn't even bother to blog about it. Why bother? I did it in 2008 [Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears] - helped me to fill some space on the blog at least. It creates a 1 day fuss every year and then we go back to our normal behavior [Nov 23, 2008: David Walker in Fortune Magazine] [May 23, 2008: David Walker on CNCB this Morning] Actually I am sort of laughing now because I was hand wringing over half a trillion annual deficits [Jul 28, 2008: US Budget Deficit to Half a Trillion] That's child play now readers. We're going to be doing $2 Trillion this year just as I predicted last winter. And many more years of $1 to $2 Trillion ahead.
Once more - read this article, and then quickly forget about it... because in this magic world of paper printing prosperity [May 19: Paper Printing Prosperity Defined] we can ring up our credit card forever and never have to actually pay the bill. We get all the benefits... and none of the costs. I want you to repeat: "There's no place like the Federal Reserve. There's no place like the Federal Reserve. There's no place like the Federal Reserve." as you think about each household in America now owing over half a million dollars... and then just imagine it going up $50K a year from here to... well forever! Why not? It's only paper money - much like toilet paper we can make more of it. Worst case scenario we'll do a partial default in 20 years, promise the world that was a 1x time thing and then keep doing it. Maybe this gig can go on another century.
Via USA Today
- Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows. (you call it commitments, I call it newfound prosperity - it made the stock market go up, so it is just and good for all of us. Main Street = Wall Street... apparently USA Today does not watch enough CNBC)
- The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security.
- The latest increase raises federal obligations to a record $546,668 per household in 2008.
- That's quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined.
- "We have a huge implicit mortgage on every household in America — except, unlike a real mortgage, it's not backed up by a house," says David Walker, former U.S. comptroller general, the government's top auditor.
*richest as long as you exclude all debt
- USA TODAY used federal data to compute all government liabilities, from Treasury bonds to Medicare to military pensions. Bottom line: The government took on $6.8 trillion in new obligations in 2008, pushing the total owed to a record $63.8 trillion. The numbers measure what's needed today — set aside in a lump sum, earning interest — to pay benefits that won't be covered by future taxes.
** please note, in no way shape or form did I verify these USA Today numbers - they could be off by 10%, 20% positive or negative. All you need to know is every household in America owns 'somewhere" around half a million (and growing).
[Mar 31, 2009: Financial Rescue Pledges Now $12.8 Trillion]
Well this month's theme has been commodities; indeed the group is headed for it's best month since (wait for it...) 1974. Considering the huge surge in commodities in 2007 and through summer 2008 that is saying a lot. But in a thin market, where program traders dominate - this is the sandbox they've chosen for the time being. Oh Hugh Hendry, what say you?
Mmm... the 1970s. I do believe I've been reading somewhere we'll be having fond memories very soon of the fun times of that decade.
- Commodities headed for the biggest monthly rally in 34 years, led by energy, as the slumping dollar boosted demand for raw materials as a hedge against inflation.
In May, the Reuters/Jefferies CRB Index of 19 energy, metal and agricultural prices has gained 14 percent, the most since July 1974. The dollar was poised for the biggest monthly drop since August against a basket of six major currencies.
- Crude oil was set for the biggest monthly gain in a decade. Gasoline has soared more than 30 percent in May. Gold & copper surged, while corn and soybeans reached the highest since September. (all excellent things for the nascent "green shoot" consumer recovery)
- Investors are seeking a “safe haven from a weaker dollar,” said Stephen Platt, a commodity analyst at Archer Financial Services Inc. in Chicago.
But Australia and Canada (resource dominant countries) are seeing the exact opposite.
- Canada’s currency headed for the biggest monthly gain since the Korean War as commodities surged, global stocks rallied and the U.S. dollar tumbled. The Canadian dollar rose 8.8 percent since April 30, the most since at least October 1950.
“This does seem like a historic move,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets. “The biggest driver has been the decline in general fear, compounded by an increase in specific fear for the U.S. dollar, which might or might not be appropriate.”
- The loonie, as Canada’s dollar is known, dropped a record 18 percent last year on plummeting prices for commodities, which generate more than half the nation’s export revenue.
- The dollars of New Zealand and Australia, which like Canada’s tend to trade in tandem with stocks and commodity prices, added 13 percent and 10 percent respectively this month against the greenback, as the prospects for global growth improved.
“I don’t know where all the optimism for the economy is coming from,” said Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York. “When you look at housing and autos, all of those things are still weak. There is a disconnect between what the reality for the economy is and what people think.”
I only wish I had a before and after to show you how these have grown....
Old: JP Morgan (JPM) is now New: JPMorgan + Bear Stearns + Washington Mutual (the largest S&L in America)
Old: Wells Fargo (WFC) is now New: Wells Fargo + Wachovia (previously the 4th largest institution)
Old: Bank of America (BAC) is now New: Bank of America + Countrywide + Merrill Lynch
Old: Citigroup (C) ... well that's just a mess
Even #5 on this list (I'm only looking at commercial US based banks) is PNC Financial (PNC) which bought up National City ... but what I want you to concentrate on is how many assets are now concentrated in your Super 4. I don't know how many assets are in the total US financial sphere but let me leave you with this, the 50th ranked institution has $15 billion in assets. So you can imagine what institution #500, or #2000 or #5000 has.
Top 4 (as of 3/31/09):
- Bank of America: $2.3 Trillion
- JPMorganChase: $2.1 Trillion
- Citigroup: $1.8 Trillion
- Wells Fargo: $1.3 Trillion
So remember that as the government insists concentrating power into a few huge players is the "right thing" and "free market competition" - I am not going to bother with the math but let's be clear that something like $7.5 Trillion of assets is in the hands of 4 political donors... err financial institutions and the other 7996 commerical banks make up the other 5-8% of the commercial banking system.
So as Obama shuts down the door on egregious credit card fees let's see what's happening in bank fee land! Home of free and open competition, because surely your local credit union can compete with federally supported Bank of America. And if you are reading this blog you probably know the general financial literacy rate in this country - i.e. boom times for banks coming.
Via USA Today
- For the past year, banks have raised credit card rates to levels that sparked consumer outcry, regulatory scrutiny and congressional action. A law President
Obamasigned last week aims to stop the most egregious practices.
- But even as outrage was building over credit cards, banks seized upon another way to squeeze profits out of struggling consumers: higher checking account fees. These fees can add up to hundreds of dollars before consumers know there's a problem.
- .....banks are extending some of their most profitable — and controversial — credit card practices to checking accounts. (boo yah! p.s. thanks for the bailout money folks) For example, banks are making it easier and more punitive for consumers to spend more than they have in their checking accounts, just as they allow consumers to spend past their card limits and charge them a steep fee for doing so. Some analysts believe that new credit card restrictions will only accelerate fee increases on bank accounts.
- In June,
Bank of America(BAC) will raise its monthly fee on certain checking accounts and impose a fee on accounts that remain overdrawn. SunTrust(STI), meanwhile, is starting to charge customers a higher fee when they overdraw multiple times. Wachovia, now a part of Wells Fargo(WFC), has made it more expensive for some customers to transfer funds to cover overdrafts. And Citigroup(C) has raised foreign-transaction fees on debit cards.
- "It's a double whammy," says Michael Moebs, founder of Moebs Services, an economic research firm in Lake Bluff,
Ill. "The American consumer as a taxpayer was asked to put up $700 billion (for bank bailouts), and now they're getting another whammy from banks increasing fees." (enough of the whining Mr Moebs! Oligarchs want this, oligarchs deserve this - they are hard working folk who got us into this mess, and their political campaign contributions are what keeps this country ticking. Where would we be without their contributions to society. Do you realize how many less politicians would move on to excellent multi million jobs in the financial lobbyist sector post "graduation" from Congress?)
- Banks are raising account fees because of a "mix of market power and opportunism," says Simon Johnson, a former chief economist for the
International Monetary Fundwho teaches at MIT's Sloan School of Management. "They are supposed to act in the interest of shareholders, so they're gouging consumers." (well I can't tell Simon to be quiet because I like Simon - but try to keep your comments on your blog and not in USA Today)
[Apr 21, 2009: Simon Johnson on Yahoo Tech Ticker]
I know I've asked you to sit down a lot today, but please bear with me. You HAVE to sit down when you read this as you realize we've sacrificed all of Americans savers to push rates down to 0-0.25% so that the banks can "borrow cheap, lend expensive" and make tons of money to combat disaster on their balance sheets
- Banks may also be raising some account fees to compensate for higher borrowing costs (did he say this with a straight face? If so, that's why he gets the big bucks. Higher than almost zero I presume Mr Talbott?) and to keep prices in line with other financial institutions, says Scott Talbott of the Financial Services Roundtable, which represents the nation's largest banks. (folks I can't make this stuff up)
- "These fees are like germs. They have a tendency to spread," says Gail Hillebrand, senior attorney at Consumers Union, which publishes Consumer Reports. The fees are "all based on the same bad business model," she says, in which consumers are promised one price and then later are loaded up with back-end fees.
Let's take 1 example and trust me folks, a lot of people are their own worst enemy - this I realize.
ChelseaReyes, 25, got hit with almost $600 in fees for 17 overdrafts — five on small-dollar-amount transactions ranging from $2.67 to $7.09 — during three days in May. Reyes says she had sufficient funds in her Wells Fargo accounts. However, she mistakenly transferred money into savings, causing her to overdraw her checking account.
- But the overdraft fees cleaned out the savings she and her husband, J.C. Reyes, had been building up. Although the bank later refunded $227.50 in fees, Reyes says she was forced to borrow $500 from Wells Fargo's Direct Deposit Advance service to pay back the rest.
- "If I didn't do the advance, I don't know how I'd buy formula for our son," says Reyes of Novato,
- Reyes acknowledges making a mistake but says she doesn't understand why the bank would let her repeatedly overdraw her account without immediately notifying her.
- If consumers overspend by $20 — the median amount of a debit card overdraft — and get charged $27, their effective annual percentage rate would be 3,520%, assuming they paid the money back in two weeks, a 2008 report by the
Federal Deposit Insurance Corp. found.
Here is the kicker....
- The FDIC study found that overdraft fees represented 74% of banks' service charges on deposit accounts.
In "real terms" we can all understand now that we've become numb to billions and trillions?
- Overall, the fees are likely to cost consumers $39 billion this year.
Here comes the white horse! Our trusty regulator who missed almost everything the past decade.
The Federal Reserveis weighing whether to crack down on automatic overdraft protection. But advocates say a Fed rule — expected later this year — won't tackle the worse abuses.
- The agency's proposed rule, for instance, doesn't cap overdraft fees, require banks to disclose the overdraft interest rate or prevent them from "manipulating" the order of checks and debits to maximize overdraft fees, says Jean Ann Fox of the Consumer Federation of
Well I guess we'll have to wait for Obama.
But this raises a bigger question - and probably one we need to wrestle with as a society in ALL parts... is it really all just about shareholder profits?
- The question the government needs to answer in weighing reform, says Peter Tufano, a senior associate dean at
Harvard Business School, is "if fees help banks improve their financial health but weaken consumers' financial health, is this a net good or bad for the economy?"
- Tufano says banks should be able to come up with business models that deliver sustainable profits without hurting consumers.
Let's look at some specific cool new "competitive" fees
- In June, Bank of America will increase its monthly account-maintenance fee on its MyAccess checking to $8.95 from $5.95. The bank will also begin charging a one-time fee of $35 if consumers' accounts remain overdrawn for five business days. And it has increased the number of times customers can get hit with overdraft fees per day to 10 this year, from five last year.
- Wachovia is doubling — to $10 — the fee to transfer money to checking to cover insufficient funds on some accounts. The bank will also start charging that fee to a credit card, (now that's rich) rather than taking it from a linked bank account, meaning consumers could pay interest on that amount.
- Some new bank fees are strikingly similar to those that have already taken hold on credit cards. For instance, SunTrust began charging in May a higher fee on its basic checking if customers overdraw multiple times — similar to what banks have done with late fees on credit cards. The bank also raised its overdraft fee on other bank accounts. SunTrust says its changes are "consumer friendly."
- Overdraft fees aren't the only ones rising. ATM fees, monthly service fees and balance requirements for interest checking accounts all hit highs in 2008, before adjusting for inflation, according to Bankrate.com, a bank comparison site. Even after inflation adjustments, ATM fees are at record levels.
- In 2009, consumers should expect more of the same. Says Greg McBride, senior analyst at Bankrate.com, "A lot of these fees will continue to march higher as long as the sun rises in the East."
The irony here folks, for those of you who were not following things a decade ago is there was a major currency crisis in the late 90s which started in Thailand. Many Asian economies took very hard hits. What happened next? America swooped in (along with the IMF) and handed out advice: make hard decisions which inflict pain in near term, shore up your budgets, cut debt... then we'll help you. It's very easy to talk when you don't walk in their shoes. Now the great irony is the US was correct in their advice. But in the next irony - we will not take our own advice. Because we don't like pain.... it is not politically convenient. Plus we're America - we don't do pain. So we'll follow the Japan experience although in magnitude that makes Japan look like a sissy. Because that's what super powers do.
Just remember as long as the stock market goes up due to a flood of liquidity... it is "saying" this is the correct course of action. All is right in the world... until we look back in a few years and shake our heads. Similar to how the market was up and "saying" all was right in the world in the middle part of the decade. Until we look back now. Although this time around we can begin shaking now...
Yesterday we looked at how the conservative actions of Chile in boom times helped them weather the storm [May 28, 2009: WSJ - Prudent Chile Thrives Amid Downturn] - today we'll take a quick look at South Korea who (was forced) to make some very tough decisions a decade ago. Decisions we're going to skip.
- Nouriel Roubini, Dr. Doom himself, has found an economy even he can love: South Korea. That might sound surprising for a nation in the news for the wrong reasons. North Korea’s nuclear test, the suicide of former President Roh Moo Hyun and stock-market-bubble worries are making for some very ugly headlines this week. Getting Roubini’s seal of approval has been a rare and welcome news- cycle counterpoint.
- Recent Korean data “suggest there is the beginning of an economic recovery, and growth might be already positive in the second quarter,” Roubini said at a May 27 conference in Seoul.
- And there are ....reasons the world should be paying more attention to Asia’s No. 4 economy. One, the lessons larger economies can draw from its experiences.
- The reason Roubini says Korea may grow more than 1.5 percent next year is the economic-policy changes made over the last 10 years. The 1997-1998 Asian crisis seemed like a curse at the time. It devastated the nation of 49 million and forced the government to accept a humiliating International Monetary Fund bailout.
- Today, that experience is proving to be a blessing in disguise.
- The government assessed the magnitude of its problems and admitted how bad things were.
- It allowed weak companies and commercial and merchant banks to fail.
- It acted quickly to rid balance sheets of bad assets.
- As a result, Korea was the first Asian economy to recover from the crisis and repay the IMF.
- Economists pondering how bad things might get in the U.S. tend to look at Japan. More insights may be found in Korea.
- Even though they are spending trillions of dollars stimulating the economy, U.S. officials remain in denial. Adding liquidity isn’t enough. Steps to restore confidence and trust among corporate executives, investors, and consumers are far more important. Korea did it. The U.S. still needs to.
- Korea has its problems, not least of which is weak domestic demand. Korea still needs to wean its $970 billion economy off the U.S. consumer.
- In the meantime, Korea is standing its ground better than wealthier Japan. Officials in Tokyo reveled in Japan’s exclusion from Asia’s meltdown, yet we see today that Asia’s biggest economy is experiencing that crisis -- just in slow motion.
- Massive government spending and zero interest rates kept Japan afloat. (sounds vaguely familiar, not sure where I can place the parallel)
- They also delayed reducing overcapacity in most business sectors, raising productivity, getting a handle on public debt, opening the financial sector, attracting more foreign investment and revamping the tax system. (still trying to think where I've heard this before... which country... hmm...)
- Exports and public largess avoided disaster. Now, the lack of reform is leaving Japan uniquely vulnerable to the global recession.
[Jan 11, 2009: WSJ - America's Hard Hit Families Finally Start Saving, Aggravating Nation's Economic Woes]
[Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?]
[Nov 17, 2008: Poverty, Pension Fears Drive Japan's Elderly Citizens to Crime]
[Oct 28, 2008: Pooring of Japan Too?]
[Oct 27, 2008: Japan's Lost Quarter Century]
[Oct 7, 2008: 2000s Stock Market Worse than 1930s]
[Sep 20, 2008: US News & World Report - The End of the Shopaholic Nation?]
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