Q2 and QE2 Both End Today!

June 30, 2011

“Spending is the real measure of government’s burden on the private economy” Milton Friedman

Today marks the end of Q2 and QE2. After a smart rally that pushed 10 year treasury rates below 3%, demand for treasuries has waned over recent days and the yield has risen to 3.09%. The yet to be answered question is what will happen to rates once the Fed’s purchasing program is cut back?

The S&P is up 4% YTD and down 1% for the quarter. Yields on 10 year treasuries began the year at 3.3% and the quarter at 3.5%, and are 3.1% today. The Russell 2000 small cap index is up 4% for the year and down 2.8% for the quarter.

Bank of America agreed to make an $8.5 billion settlement to MBS investors relating to securities that were originated by Countrywide, which BofA purchased in 2008. The irony to the story is that Ken Lewis, the former head of BofA, was voted the Banker of the Year in 2008 by American Banker magazine for his purchase of Countrywide. The purchase has ultimately cost the bank billions, and this recent settlement exceeds the company’s profits for the past three years.

The Federal Reserve decided to cap the debit card swipe fee banks may charge retailers at $.21, compared to the original proposal of $.12 and the prior cap of $.44. The bill is expected to cut approximately $16 billion from the annual revenues of card issuing banks. It is anticipated that most banks will either 1) issue new, debit like cards to usurp the cap and 2) raise fees on consumer checking accounts in an effort to offset the lost revenues.

The Greek parliament voted to implement sweeping austerity programs in exchange for additional financial support from the IMF and ECB. The vote was close, 155-138. Protests have erupted across the country, with an estimated 25% of workers striking today. Striking school teachers have forced parents to stay home to take care of their idle children.

German banks and insurance companies followed the Greek vote to accept austerity by voting to accept a plan to roll over their Greek debt through 2014.

The Wall Street Journal is reporting that the median pay of S&P 500 chief financial officers rose 19% last year to $2.9 million.

After the Obama Administration dragged its feet for two(+) years, the White House and Congress finally came to an agreement that should clear the way for long-stalled free trade agreements with Colombia, Panama, and South Korea.

After studying restrictions on coal fired electric utilities for decades, the EPA appears to be close to requiring power plants to reduce pollutants dramatically. Some experts are estimating that the new restrictions could idle as much as 25% of the country’s electricity generation. I'm sure that will help the economic recovery!

Bloomberg is reporting that mortgage fraud at Fannie Mae may have begun years earlier than previously expected. Documents show that Fannie Mae executives had purchased from mortgage originators loans that they didn’t own, but never reported it to authorities. The avalanche of fake, nonperforming, or defective loans to follow eventually topped $3 billion, one of the biggest fraud schemes in history.

The price of pork in China has risen over 40% from last year, driving inflation to a 34 month high. Rising grain prices and a shortage of live pigs have elevated pork prices for the past few months.

I'm not sure this is actually news, but the President is pushing for higher tax rates on those “who are doing extraordinarily well.” He hasn't defined "extraordinarily well", but given his recent attempts at taxation, I'd guess anyone making above $80K should be concerned.

A recent government study showed that families earning the median income in 1981 paid 11% of their income in federal taxes, and today pay 4%. Those earning one-half of the median in 1981 paid 6% in federal taxes, and today get a tax credit.

A recent study shows that overlapping coverage between Medicare and Medicaid accounts for 39% of Medicaid costs and 27% of Medicare costs but is attributed to about 15% of enrollees. The combined cost of these “dual enrollees” is $300 billion of the $900 billion spent annually by Medicare and Medicaid.

The chart below, from a recent Goldman Sachs report, shows the level of mortgage debt as a percentage of GDP for various countries. The higher levels of Australia, the UK, US and Spain could be a large reason why these countries’ economies are struggling right now.




Corn futures are down today in spite of a report showing that stockpiles have been falling. Evidently an additional 100K acres of previously uncounted corn was recently discovered, resulting in higher than expected stockpiles. In spite of the recent release of oil from the SPR, oil prices are up the past couple of days and are now higher than when the SPR release was announced. That lasted about a week!

Have a great day!

Ned