Thursday, September 30, 2010

BEA News: GDP (third estimate) 2nd Qtr 2010

The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.7 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.
The full text of the release on BEA's Web site can be found at
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

 


U.S. Bureau of Economic Analysis · 1441 L Street NW · Washington DC 20230 · 202-606-9900

Wednesday, September 29, 2010

Shadow Banks, Systemically Important & TBTF

Professor Mark Thoma pulls the covers off a subject that has been well camouflaged by other issues around the topic of financial stability. In his article at The Fiscal Times he reminds us of shadow banks and the danger they pose to financial stability. Just recall the speed, or velocity, of shares of everything being sold in the early weeks of the financial crisis during Q4 2008. Some of the momentum was unexpected because the lack of visibility about the amount of, and surprisingly poor quality of, the financial derivative securities shadow banks were invested in. Shadow banks enjoy the freedom from oversight and judgement from investors on their risk taking. Shadow banks can be thought of as a risk averse conventional bank that has created an unregulated alter ego. The alter ego takes on more risk in pursuit of juicing profits for the conventional bank. The alter ego is going to look like a bank sponsored broker-dealer, a non-bank mortgage lender like GMAC, and include bank sponsored hedge funds and money market mutual funds.

Tuesday, September 28, 2010

One Eye on the Fed: Permanent Open Market Operations

From Zero Hedge yesterday:
"CNBC (the infinitely more credible European edition) has run a stunning interview with Cazenove technical strategist Robin Griffiths in which the banker discusses such taboo items as the Plunge Protection Team's intervention in the market for the month of September in a last ditch effort to keep stocks from tumbling following the horrendous August performance. First Griffiths dissects POMO: "One of the reasons [for the surge] is POMO: what happens is the Fed buys Treasurys off the banks, the banks put the money into the market...That amount of money turns the algorithms up, then all the algo trading hits the market. Real life investment managers are not doing this buying. They know that equities are for losers." And the stunner: "The S&P is being effectively goosed up by the Plunge Protection Team - they can keep doing this for a little bit longer... But according to me the April high will not break...as...all of those Keynesian stimuli did not work." As for bonds: "There is an old saying, don't buy the Fed - yields will go down. Even now you should be buying bonds and not equities. The bubbles never burst when wiseheads in the media tell you it's a bubble that's gonna burst, they burst when they've given up on that and tell you this time it's different.""  Here is a link to the post on ZH including the CNBC video, which I have trouble embedding here.

Monday, September 27, 2010

Elizabeth Warren on the Financial Consumer Protection Bureau

Elizabeth Warren, recently named as interim chair of the FCPB, is an anomoly among government regulators. She is unafraid to look under the covers and frankly describe what she sees. She does not back down to the financial power structure. Unfortunately, she is basically on her own because her popular positions (described in the following video clips) make her politically toxic to poiticians working for re-election. She needs some of them to support her work. If she can deliver any part of what she is describing in this video, without adding to the cost and size of government, I say clone her. She may be the perfect regulator. Here is a link to an interview on CNBC that includes former GE CEO Jack Welch, who confronts her and allows her to demonstrate her qualities as both an interviewee and a private market advocate.

Market Data: Week Ending Sept. 24, 2010


Market Index 2009 Close 9/24 Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 10,860.26 2.38% 4.14%
S&P 500 1115.1 1,148.67 2.05% 2.92%
Fed Funds Rate 0.25% 0.22% 0% 0%
10 yr T-note Yld 3.85% 2.60% -0.14% -1.25%
5 yr T-note Yld
1.35% -0.08%
5 yr infl adj Note
0.02% -0.09%
Implied 5 yr Inflation %
1.33% 0.01%
2 yr T-note Yld 1.14% 0.44% -0.02% -0.70%
2-10 Yr Slope 2.70% 2.16% -0.12% -0.54%
90 day T-bill Yld
0.14% -0.01%
Gold ($/oz) $1,096.95 $1,298.10 1.59% 18.34%
WTI Oil ($/brl) $79.36 $76.49 3.84% -3.62%
VIX "Worry Index" 21.68 21.71 -1.36% 0.14%





Credit Spreads
9/24 Close Week Change
Inv Grade Credit Idx
4.38% -0.07%
Low Grade Credit Idx
8.32% -0.14%
Markit CDX Inv Grd Idx
114 9.62%
Markit CDX Mid Grd Idx
175 11.46%

Saturday, September 25, 2010

Sitting on a Signal

The Fed met to discuss the condition of the economy on Sept 21. The U.S. central bankers said they were “prepared to provide additional accommodation if needed to support the economic recovery.” They also left the benchmark lending rate in a range of zero to 0.25 percent while noting that inflation measures were at levels “somewhat below” the central bank’s mandate to achieve stable prices and full employment.
The Fed statement boosted speculation the central bank will buy more Treasuries sometime later this year.

Fundamentally, toxic assets(?) are still on the balance sheets of the TBTF banks in the US, UK and Europe. (See the second graph). Banks are the lynch pin in our credit based world and they hold all the political cards too. Fundamentally, the continuing high probability (99%) danger is that consumer and commercial lending does not occur with enough volume to contribute to a real economic recovery. That leaves the economy to look to the government for stimulus of some shape.

Thursday, September 23, 2010

Inflation or Deflation?

From 1979 to 1987 he was Fed Chairman. During his tenure, he raised the Fed Funds rate, from a low of 8.34% to the peak of more than 21%, in his strategy to create a recession that would stall inflation wreaking havoc on the US economy. Paul Volcker, now chairman of the president’s Economic Recovery Advisory Board, had this to say recently about the current risk of inflation. “We’re in a situation right now where we’ve got a sluggish economy, a lot of excess resources, a lot of unemployment,” he said. “This is not an atmosphere that’s inclined to produce inflation. I think we ought to be sure that we don’t take actions that down the road might lead to an inflationary situation.” He was also asked about his concern for deflation. “I do not think we should be worried about and consumed by the problem of a potential deflation that doesn’t exist,” he said. Here is a link to the article these quotes are taken from.

Monday, September 20, 2010

Market Data: Week Ending Sept. 17, 2010


Market Index 2009 Close 9/17 Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 10,607.85 1.39% 1.72%
S&P 500 1115.1 1,125.59 1.45% 0.93%
Fed Funds Rate 0.25% 0.25% 0% 0%
10 yr T-note Yld 3.85% 2.74% -0.05% -1.11%
5 yr T-note Yld
1.43% -0.15%
5 yr infl adj Note
0.11% -0.04%
Implied 5 yr Inflation %
1.32% -0.11%
2 yr T-note Yld 1.14% 0.46% -0.11% -0.68%
2-10 Yr Slope 2.70% 2.28% 0.06% -0.42%
90 day T-bill Yld
0.15% 0.02%
Gold ($/oz) $1,096.95 $1,277.50 2.43% 16.46%
WTI Oil ($/brl) $79.36 $73.66 -3.65% -7.18%
VIX "Worry Index" 21.68 22.01 0.09% 1.52%





Credit Spreads
9/17 Close Week Change
Inv Grade Credit Idx
4.45% -0.06%
Low Grade Credit Idx
8.46% -0.04%
Markit CDX Inv Grd Idx
104 -0.95%
Markit CDX Mid Grd Idx
157 0.00%

Wednesday, September 15, 2010

Seattle's Columbia Center - Debt Modification

The Columbia Center Tower is the tallest building in Seattle. It is called a trophy property. It's location is what is clearly trophy worthy. It sits up the hill from the Seattle waterfront and its height creates office views that are spectacular on a clear day. Today in the Seattle Times Newspaper, an article on the financial condition of the Columbia Center debt references an observer of the commercial mortgage-backed securities market saying this debt is the nation's largest delinquent commercial mortgage-backed securities loan. It also describes how this one potential CMBS foreclosure that is so widely anticipated may become much less formidable, until the extensions and modifications come due for the borrower. There is still a widely held view in the real estate industry that real estate prices will recover and will return to annual growth trends. The Columbia Center modification is betting on a recovery of 45% in the value of the building by 2017, just to cover the reported debt of $480 million. The commercial real estate recovery better be underway if the modification is going to work out.

The local director of leasing for Cushman Wakefield has this to say in their 2Q10 market assessment of the downtown Seattle office building market. "Although momentum is picking up, it will be some time before downtown Seattle reaches a turning point from and tenant’s to a landlord’s market. The overall vacancy is well above the previous record of 16.5% set in 2003, and the market must absorb more than 5.8 msf before it reaches a level of equilibrium. With modest gains in office-using employment forecasted over the next two years, vacancy rates will stay elevated and asking rents will remain flat for the foreseeable future." Chances are this is an optimistic statement.

Tuesday, September 14, 2010

Sitting on a Signal

Looking at the S&P 500 Index chart below, it looks like making money from May to now was easy. Buy low, sell high. There have been some good percentage moves. The axiom, "sell in May and go away" is also looking like it was good advice back at the end of April. Since mid-May the trading range has been well defined.

Fundamentally, toxic assets(?) are still on the balance sheets of the TBTF banks in the US, UK and Europe. (See the second graph). Banks are the lynch pin in our credit based world and they hold all the cards. Fundamentally, the continuing high probability (99%) danger is that consumer and commercial lending does not occur with enough volume to contribute to a real economic recovery. That leaves the economy to look to the government for stimulus of some shape.

Monday, September 13, 2010

Market Data: Week Ending Sept. 10, 2010


Market Index 2009
Close
9/10
Close
Week Change Simple YTD %
Dow Industrials Avg 10428.05 10,462.77 0.14% 0.33%
S&P 500 1115.1 1,109.55 0.46% -0.50%
Fed Funds Rate 0.25% 0.25% 0% 0%
10 yr T-bond Yld 3.85% 2.79% 0.09% -1.06%
5 yr T-note Yld
1.58% 0.10%
5 yr infl adj Note
0.15% 0.01%
Implied 5 yr Inflation %
1.43% 0.09%
2 yr T-note Yld 1.14% 0.57% 0.06% -0.57%
2-10 Yr Slope 2.70% 2.22% 0.03% -0.48%
90 day T-bill Yld
0.13% -0.01%
Gold ($/oz) $1,096.95 $1,246.50 -0.37% 13.63%
WTI Oil ($/brl) $79.36 $76.45 2.48% -3.67%
VIX "Worry Index" 21.68 21.99 3.19% 1.43%





Credit Spreads
9/10
Close
Week Change
Inv Grade Credit Idx
4.51% 0.04%
Low Grade Credit Idx
8.50% -0.13%
Markit CDX Inv Grd Idx
105 -0.94%
Markit CDX Mid Grd Idx
157 0.00%

Wednesday, September 8, 2010

10 Year Treasury is Still in Demand

Good news continues for the US Treasury, and the broader bond market, following today's ten year note auction. This information is found on Bloomberg today following the auction:

Highlights
Buyside interest in the monthly 10-year auction was strong. Direct and indirect bidders took down a combined 62 percent of the auction, nearly 10 percentage points above average. At 3.21, coverage for the $21 billion reopening of the August issue was the strongest since June. The auction stopped out at 2.670 percent, nearly two basis points below the 1:00 ET bid. Money is moving into Treasuries following the results. Tomorrow the Treasury auctions $30 billion in 30-year bonds.

Monday, September 6, 2010

Market Data: Week Ending Sept. 3, 2010


Market Index 2009 Close 9/03 Close Week Change Simple YTD %
Dow Industrials Avg 10428.05 10,447.93 2.93% 0.19%
S&P 500 1115.1 1,104.51 3.75% -0.96%
Fed Funds Rate 0.25% 0.25% 0% 0%
10 yr T-bond Yld 3.85% 2.70% 0.06% -1.15%
5 yr T-note Yld
1.48% -0.01%
5 yr infl adj Note
0.14% 0.02%
Implied 5 yr Inflation %
1.34% -0.03%
2 yr T-note Yld 1.14% 0.51% -0.04% -0.63%
2-10 Yr Slope 2.70% 2.19% 0.10% -0.51%
90 day T-bill Yld
0.14% 0.00%
Gold ($/oz) $1,096.95 $1,251.10 1.06% 14.05%
WTI Oil ($/brl) $79.36 $74.60 -0.76% -6.00%
VIX "Worry Index" 21.68 21.31 -12.84% -1.71%





Credit Spreads
9/03 Close Week Change
Inv Grade Credit Idx
4.47% 0.08%
Low Grade Credit Idx
8.63% 0.11%
Markit CDX Inv Grd Idx
106 -7.83%
Markit CDX Mid Grd Idx
157 -5.42%

Saturday, September 4, 2010

And Now, From Olympia...

This news comes from the Seattle Times and Washington State's chief economist, Arun Raha, who gave lawmakers an update on the economy Friday and laid out his perspective.

"Economic activity has slowed to an agonizing crawl. May and June saw a pause in activity, and July brought little relief. Job growth remains anemic ... housing is looking for a new bottom and despite some easing in credit conditions, small businesses continue to face a challenging credit environment. There is considerable drag in the economy and increased uncertainty," Raha said, reading from his report.
That's not all. "We have cut our 2011 employment growth forecasts roughly in half, from 2.7 percent to 1.3 percent on an annual average basis. We do not expect to reach our pre-recession peak in overall employment until the second quarter of 2013." 
Bottom line of all that: "I do not believe that we will fall back into recession, it will just continue to feel like one," he said.

Washington has an economy weighted with export in airplanes, technology, and farm commodities. As a result, the economy was slow to enter recession and will be late to the other side, whatever that will be. What Raha did not say explicitly, based only on the quote "activity has slowed to an agonizing crawl", is that the revenue available for lawmakers is still shrinking. Like other governments, the coming session is going to require painful decisions because government, here and elsewhere, has steadily become a major employer in the economy it serves. That model is getting crushed by the reality that it does not sustain itself by creating new goods and services for sale. The jobs are expensive because they provide benefits that many private employers cannot afford to provide. Will lawmakers in Olympia have the strength of knowledge to make the decisions in Washington to change the pattern during the 2011 session, or are we going to watch foolish political gridlock guided by "the party" here too. This is a fascinating time.

Friday, September 3, 2010

One Eye on China: Moving on Commodity World Stage

This piece of news comes from Reuters and the Financial Post, a Canadian online newspaper. The context is that BHP Billiton, the huge mining company based in Australia that already supplies China with iron ore, is now bidding on fertilizer giant, Potash Co. This is an interesting story to watch. It is a small window to observe how assertive China's government wants to be in world markets.

Chinese officials have ordered state-owned companies to meet with investment bankers to explore potential options to block BHP Billiton’s US$39-billion bid for Canada’s Potash Corp, according to a source with direct knowledge of the matter.
In response to the directive, Sinochem is holding meetings with multiple banks, the source said, including Citigroup, HSBC and Morgan Stanley.
The order from Beijing underscores the seriousness with which China is taking the potential BHP-Potash tie up and its implications for the pricing and supply of the important crop nutrient, despite the obstacles to launching a successful counter-bid. Read more: here at the Financial Post

Thursday, September 2, 2010

Sustainable Rally or Bear Trap?

On June 29 I made a decision to become market neutral as much as possible. In my post titled Sitting on A Signal: No More Waiting, I referenced a number of high profile blogger's and people whose fundamental and technical opinion I respect simply due to their objectivity. There was no shortage of concern for the potential loss of capital. Since then, the S&P 500 Index has tumbled and jumped through July and August. It's been a bumpy period. The bears have been formidable players making the biggest weekly moves, as shown by the red candlesticks in the chart below. The bulls have answered in their way, making a game of it. On June 29, the index closed on 1041 and on August 31 it closed on 1049.