Nov 30, 2011

The Fed to the Rescue, Again

November 30, 2011

Good news or bad news? In economics, the dismal science, news is definitely in the eye of the beholder. Stocks, commodities, and the Euro are soaring this morning after six central banks (the Fed, ECB, Bank of Canada, Bank of Japan, Bank of England, and the Swiss National Bank) lowered the cost of emergency dollar funding for European banks. The banks also agreed to extend bilateral swap programs through Feb 2013, from Aug 2012. Additionally and unrelated, China cut bank reserve requirements to 21% from 21.5% to stem a slowdown in exports to Europe.

Is this coordinated central bank action good news? It definitely helps the liquidity problem faced by the major banks in Europe. I have shown the big rise in overnight funding costs for European banks a number of times over the past six months, but recently pricing has spiked to 2008 levels as solvency concerns in Europe have risen dramatically. The central bank action definitely helps the liquidity problem for the banks, but it doesn’t address the sovereign solvency issues which continue to plague these banks’ balance sheets. But is it good news that liquidity is so bad that the central banks must act in a coordinated effort we have only seen rarely, most recently in the fall of 2008 after Lehman collapsed? I’m not so sure.

Not surprisingly financial stocks and inflation beneficiaries (materials and energy) are up strong this morning. Partially due to bans on short selling financial stocks in some European markets and primarily due to the liquidity problems faced by our banks, US financials have been hammered to levels close to those in 2008. Bank of America (BAC) traded below $5 yesterday for the first time since early 2009, but is finding a bid today in spite of S&P lowering their credit rating for dozens of banks yesterday.

A number of people have asked me about the EFSF and how it is funded. I ran into this chart below from The Big Picture that attempts to clarify how the facility is funded. Have fun with this one.

Microsoft (MSFT) announced this morning that they have sold more X-box 360 game consoles this week than ever before. I have to admit that I am a member of that crowd, picking one up for my kids for Christmas (please keep that quiet J) . On Black Friday I was online looking to purchase one, and I found it for $425 fully loaded. Because I was buying it through the American Express (AXP) points portal and using Amazon (AMZN) and CNET for price comparisons, there was a dearth of information on what was included in the unit that I was buying. I navigated over to the MSFT website to find out why I should spend an extra $100 on the additional memory, and found they were offering the same package for $199, no tax, no shipping! I bought one, surprised that the manufacturer was offering the unit for much less than any of their resellers. They have sold almost 1 million units in the past week.

FaceBook may file for a reported $100 billion IPO to come in the first third of 2012. If accurate, this is an enormous deal that dwarfs Google’s (GOOG) 2004 IPO. The company will reportedly be selling $10 billion worth of stock in the deal.

American Airlines (AMR) filed for bankruptcy yesterday citing debt, rising fuel costs, and high labor costs. The company plans to operate on a normal schedule during the reorganization. AMR is one of the few airlines that hasn’t participated in the recent industry consolidation.

Bloomberg’s ongoing investigation of federal records has discovered that Hank Paulson met with investors on July 21, 2008 to give them a head’s up about looming problems at Freddie Mac (FRE) and Fannie Mae (FNM), just hours after telling the NY Times all was well with the two GSE’s. All four people in the meeting were Goldman alumni who worked with Paulson while he was still at the firm. Seven weeks later both firms (FRE and FNM) went into conservatorship. Both stocks had fallen 99% since the meeting, with preferred shares losing 85%. Now it appears that not only is the Fed giving out inside information to select investors, but also the Treasury Department. Is it any wonder why individual investors are fleeing the markets, feeling they are rigged?

Hundreds of protestors attacked the British embassy in Tehran yesterday in response to new economic sanctions over their nuclear program, forcing the UK government to close the embassy.

Some data out of Germany shows why the Germans are so intent on maintaining the Euro in spite of the costs faced by the German people for bailing out the weaker members. The Federation of German Wholesale, Foreign Trade and Services said it expects exports to exceed 1 trillion euro by year end and continue increasing in 2012. Year to date exports are up 12%. As I’ve mentioned before, the Euro heavily benefits German exports, effectively acting as a weaker than justified currency for them.

UCLA has decided to go back to the drawing board on the football field as they begin their search for a new coach, days before they attempt to win the Pac 12 against Oregon. My opinion is that the only way they’ll ever get out of their own way in football is to 1) start with a new athletic director and 2) invest in their facilities so at a minimum they have a full 100 yard field to practice on. The new helmets were a good idea, they might help recruiting, and certainly can’t hurt.

Have a great day


Nov 28, 2011

Black Friday Booms!

November 28, 2011

Today is Cyber-Monday, the day created by the marketing wonks on Madison Avenue when shoppers theoretically begin ordering online for the holiday season. The very real Black Friday, the traditional heavy retail discounting day that occurs the day after Thanksgiving, was robust this year. Although tough to measure, according to Channel Advisor online sales were up 20% on Friday and retail sales for the weekend were up 6.6% from a weak 2010. Black Friday was helped by heavy promotional pricing as well as an early opening as many retailers opened for the big weekend sales on Thursday evening. The National Retail Federation said consumers spent $52.4 billion over the four day weekend, up 16%. The overall effect on retailers is often muted as the heavy discounting takes a toll on margins.

Equity markets, fresh off their worst Thanksgiving week since 1932, are up strong this morning. The Dow is up over 250 points, the S&P 500 is up 33, and the Russell 2000 26 points. Crude and commodities are getting a bounce, and treasuries are trading down. The yield on the US 10-year has inched back above 2% to 2.05%.

It wouldn’t be a Monday without some discussion of Europe. Leaders in the Eurozone are reportedly discussing adopting spending and borrowing rules to ensure compliance and fiscal discipline. This would truly be a major step towards a centralized budget and virtual single monetary and governmental authority. My guess is that while great in concept, there will be significant resistance from many countries who fear German style monetary policy.

In spite of constant protestations that they aren’t giving away free money to banks, the data keeps contradicting the Fed’s statements. Bloomberg has obtained documents via the Freedom of Information Act that show global banks received over $13 billion in income during the crisis due to secret, below market loans from the Fed.

Speaking of commodities, the S&P GSCI Index is up 2.1% this year, while the MSCI All-Country World Index of equities is down 15% year to date. In spite of this strength, prices have softened since August as demand for aluminum, copper and iron ore (among others) has fallen by 20% and inventories keep rising. Much of the weakness in demand has been due to a pull-back in Chinese purchases. There are two schools of thought regarding the decline in demand from China. The first is that the economy there is slowing much faster than governmental reports suggest. The second and less accepted theory is that the government is forcing down inventories in the country in an effort to temporarily stem inflationary pressures.

The election is in full swing, a year before voting day. The Wall Street Journal is reporting that President Obama has made 56 trips this year to swing states so far this year, a Presidential record. The President, who dominated Wall Street during the 2008 election, has seemingly been abandoned by the Street during this cycle as he badly lags Mitt Romney in Street related fund-raising. I guess all that "fat-cat banker" and "soak-the-rich" rhetoric is finally catching up with him.

Normally I try not to be concerned with market speculation regarding upcoming Fed actions, other than to try and understand the expectations of the market. After last Wednesday’s revelation that the Fed routinely leaks information to select investors, I’m suddenly more apt to listen to well-placed rumors. Today bond dealers are anticipating another round of stimulus coming out of the Fed, this time focused in the mortgage-backed securities market instead of treasuries. Sixteen of the 21 primary US dealers say the Fed will begin buying MBS in the first quarter.

The NBA players and owners have finally agreed to settle their differences and start playing basketball. As I said a few weeks ago, now that paychecks are being missed, the impetus to settle should increase dramatically.

Thanksgiving weekend was great, punctuated by USC retaining its crown as the Kings of LA, beating UCLA 50-0. UCLA did try a bit of trickery by showing up in new uniforms. My guess is that they were hoping no one would recognize them.

Have a great day


Nov 23, 2011

Happy Thanksgiving!

November 23, 2011

Trying to keep track of what’s going on in Europe is like playing whack-a-mole. Every time one country’s issues seem to be addressed, problems in another country pop up. This morning a German Bund issuance wasn’t well received, and yields jumped as over 1/3 of the issue wasn’t sold. This has to make the rest of Europe nervous because above all else, the Germans are concerned about the Germans, and won’t tolerate unwieldy yields or inflation. France appears to be in the firing line of the investment community as the yield on their 10 year bonds spiked 18 basis points to 3.71% as a downgrade from Moody’s appears imminent.

The price of a traditional turkey dinner has jumped 12% from last year while travel costs are up 16%. In some states, such as New Jersey, things are even worse. In New Jersey, shelters that provide meals to the homeless have been reclassified as restaurants. Volunteers who used to bring in pre-cooked food (think chocolate chip cookies, etc), are no longer allowed to do so. All meals must be prepared on-site. Servers are no longer allowed to enter the kitchen area, and volunteers can no longer where their own aprons. One shelter estimated that their cost of operations jumped by $125K because of the new regulations.

A slew of economic reports came out today because of the holiday tomorrow and Friday. I have placed some of the more significant releases in the table below. Notice the unusual number of downward revisions.




Durable Goods Orders



-1.5% (revised from -0.8%

Durables ex-transports



0.6% (was 1.7%)

Cap Goods non def



0.9% (was 2.4%)

Personal Income




Personal spending



0.7% (was 0.6%)

Initial jobless claims



391K (was 388k)

Despite our treatment of the mighty dollar, it has been a beneficiary of the turmoil in Europe. The chart below, courtesy of Kimble Charting Solutions, shows the dollar beginning to break out. If it continues its trajectory, the risk off trade could become extremely profitable.

Federal Reserve Bank of NY President William Dudley admitted that the Federal Reserve routinely gives select analysts and investors access to advance indications of policy changes. While admitting that these nonpublic discussions might give the impression that the Fed gives well-connected investors an advantage over others, he defended the practice. Wow! Am I gullible. I thought only Congressman and Senators could trade on inside information without being prosecuted.

APAC markets were down hard last night after the HSBC Chinese manufacturing index fell to 48. This measure is a diffusion index, similar to our ISM, and a reading below 50 indicates contraction.

The FDIC reported that bank earnings in the US hit a four year high in the third quarter. Revenue growth is still a struggle for the banks as lending remains sluggish.

EU market commissioner Michael Barnier said that the EU is looking at separating retail banking and investment banking to reduce risk. Finally! Now if our regulators and elected officials would consider a similar approach to banking regulation, we could truly reduce the overall risk in the system.

While enjoying support from President Obama, despite being the one who has cozyed up to bankers and the 1% while verbally bashing them, Occupy Wall Street has been relatively quiet since being thrown out of the parks last week. Now it appears workers are fighting back. The picture below shows the response of two employed men responding to the OWS crowd.

I’m planning to watch football tomorrow, but anticipate I’ll be switching to CNBC Europe during the commercials. Should be fun.

Have a fabulous Thanksgiving.


Nov 21, 2011

Super Committee not so Super

November 21, 2011

If it’s Monday, then there must be a new government in Southern Europe. Over the weekend Spain became the third ailing country in the euro-zone to experience a change in government. The Popular Party captured 44.6% of the vote over the weekend, giving it a clear majority in the 350 seat Parliament. The troubles in Spain mirror those of Greece and Italy, with unemployment running at 21% and borrowing costs exploding. I’m not sure which way this all plays out, but hopefully our leaders in DC will take note, and at least for the sake of their job security actually stop campaigning and start governing.

Of course, as I finished that last sentence I realized the irony of my next comments, that markets are down hard this morning on reports that the Super Committee (BTW-where did that name come from? How about Super Incompetent Committee, Ship of Fools, or some other more descript designation?) efforts at achieving a bi-partisan deal are collapsing. Not that this should be a surprise to anyone given the way it was structured (uber-partisan) and how the default cuts (defense and discretionary cuts) were a better alternative for the Democrats than any negotiated settlement would have been. John Kerry, still pissed about losing to George Bush in 2004, said that the Bush tax cuts were the only reason a deal couldn't be reached. Unfortunately, the message being sent to the markets is that the only difference between the US and Greece is time. Sounds like we could use an adult in the room instead of hanging out in Hawaii planning his campaign.

Christmas is only 34 days away, and retailers are aggressively positioning themselves for the early shopping rush. Warm weather in the east is pressuring early holiday shopping, but this year there is an extra week between Thanksgiving and Christmas, which should help retailers and the overall Christmas spend. Surveys are showing consumer spending intentions are running flat to down for the season.

Chinese Premier Wen Jiabao cited recent changes to their policy on the yuan that have resulted in a 30% increase over the past year. He also said the country will try to improve the currency’s flexibility, “China will continue to closely monitor the yuan’s trading movements and will strengthen yuan’s trading flexibility in either direction.”

APAC markets were weak last night on concerns the about US sovereign debt issues. The Hang Seng fell 1.4%, Kospi 1%, Sensex 1.1%, and Nikkei 225 0.3%.

Bloomberg is reporting that US fund managers made their biggest cuts in bullish bets on commodities in two months. CFTC data showed a reduction in net-long positions across 18 futures/options by 10%.

What an amazing weekend of college football! Four top ten teams were upset, throwing the whole BCS upside down. Congratulations to the Galaxy, but don’t hold that trophy too tight because its moving to Chicago next year!

Have a great Monday