There is no table for today because I am doing a major overhaul of the way I present the info. It will be worth the wait.
Freddie Mac announced earnings this morning as it continues to move in lockstep with its counterpart Fannie Mae. Freddie Mac reported a $25.3 billion loss for the 3rd quarter, or $19.44 a share, on increased writedowns of assets and increased reserves for bad loans. Taking Fannie’s remarks a step further, Freddie is now asking for an injection of $13.8 billion from the Treasury and is also hinting that the previous number of $100 billion may not be enough.
With the increased writedowns plaguing Fannie and Freddie and talk of even larger injections being needed in the future, we continue to see agency MBS spreads tighten. This tells us that although the future of Fannie and Freddie as standalone entities appears dismal, the street isn’t reflecting any concerns about the credit in prices. In fact they are reflecting the opposite. Agency MBS has tightened in to Ginnie Mae, full faith and credit, MBS in past week. A widening of the spread between the two would show concern.
The yield curve steepened to 262 basis points Thursday before settling down 10 basis points to 252 basis points today.
The theory that steeper yield curves foster business expansion is supported by the historical data. We currently have the 3rd steepest yield curve since 1977. The second highest peak in July 1992 of 268 basis points preceded the great bull market of the 90’s. And the highest peak in August 2003 of 274 basis points appeared right at the beginning of the longest streak of double digit corporate earnings growth for S&P 500 companies in the post WWII era (20 Quarters). I thank Brent for that last bit of info.
The yield curve’s shape is not pure technical charting hullabaloo. The shape tells us something about what investors expect interest rates to be in the future. Economic growth is traditionally followed by higher interest rates to curb inflation. Hence, the longer end of the curve is bid to higher yields in order for investors to be compensated not only for the risk of holding a longer term asset, but the fear that rising inflation will eat away at their principle.
This is one piece of good data. One must consider the countless other things that will weigh on future growth including government policy.
Cliff J. Reynolds Jr.
Junior Analyst
Friday, November 14, 2008
Daily Insight
U.S. stocks rallied the most in nearly three weeks (going back to the 10.8% jump on October 28) as the market rocketed higher in the afternoon session; much of this jump occurred in the final hour. Six percent of the 11% rally from the day’s nadir occurred in the 50 minutes that brought us to the bell.
The S&P 500 appeared to be headed for another 4% decline, but after moving through the October 27 multi-year low of 818 just after lunch, a powerful rally ensued, soaring 11% to the close from that intraday low. We’re trying to cement a bottom here, it’s going to take some time before we no whether we’ve found it or not. For the Dow, we held about 100 points above the October 10 intraday low of 7890, for what it’s worth.
Still, investors are going to have to get past a series of really weak economic data over the next couple of months. One can make the argument we’ve priced in this weakness and moves like the one witnessed yesterday offer some confidence to this belief. We shall see, sentiment will certainly be tested through year end.
Energy and basic material stocks, led the advance, jumping 11.10% and 8.28%, respectively. Industrial shares were among the relative laggards, gaining just 5.74%, on a day the broad market rose nearly 7%.
These areas may over the most promise as we come out of this mess. The massive amounts of liquidity the Fed has pumped into the system should cause commodity prices to jump again – the Fed will be very reluctant to take this liquidity back until the economy is well into expansion mode. For industrials, the group is feeling the pain of current realities, but global infrastructure projects will fuel profits for this sector over the next few years. Besides, it’s reasonable for one to expect the traditional areas of growth to return – like industrials --, as the financial sector is moving back to a more sustained degree of leverage
The Economy
The Mortgage Banker’s Association reported mortgage applications climbed last week from a nearly eight-year low. Applications plunged 20.3% in the week ended October 31.
The index of applications to either purchase a home or refinance a loan rose 11.9% for the week ended November 7. The group’s purchase index increased 9% and the refinancing gauge jumped 16%.
The decline in mortgage rates likely brought some buyers back into the marketplace as the average rate for a 30-year fixed loan fell to 6.24% from 6.47%. As a result, demand for fixed-rate financing increased 12%.
In a separate report, the Commerce Department reported the U.S. trade deficit narrowed more than forecast as a record decline in the cost of crude-oil caused imports to tumble.
The trade gap shrank 4.4% to $56.5 billion for September from $59.1 billion in August. This was completely due to the plunge in the price of oil; excluding petroleum, the deficit widened as exports of U.S. goods dropped by the most since 2001 – that’s on a month-over-month basis.
The chart below shows the year-over-year changes.
The focus from here will be on imports, which will post significant declines for a few months due to economic contraction here at home.
The trade gap will certainly narrow again for October – the decline in oil was most pronounced last month. However, in the months that follow this narrowing will ease, and may in fact reverse course as our export activity is cooling very quickly after a couple of years of robust growth – up 16.3% at an annual rate for the two years that ran July 2005 – July 2007. Overseas economies are enduring weakness too and thus will continue to curtail their purchases.
Viewing the pattern of the export data, weakness was specifically evident in Europe. Asia slowed significantly but not yet to the same extent as did Europe. The only regions/countries in which export growth picked up were Mexico, Canada and Asia NICs (Newly Industrialized Countries).
Lastly, the Labor Department reported initial jobless claims for the week ended November 8 finally breached the 500k level, rising 32,000 to 516,000 – a jump that was greater than expected. We’ve been watching for this event and here it is. The payroll declines of the past two months (now that the September reading was revised significantly lower) show the labor-market conditions are looking more like the typical job-market contraction.
For the first eight months of the year the monthly job losses has been mild as firms were holding onto jobs – indeed, they had no reason to lay many workers off as the troubles, for the business side at least, did not occur until September. But everything changed when Lehman went down and the credit chaos took hold. Now both claims and the payroll data are showing significant weakness.
The four-week average – the chart you are all familiar with as we post it each week – has eclipsed the 2001 level and appears to have its sights set on the peak hit during our last real recession – 1990-1991. By this measure, claims increased 13,250 to 491,000, the highest reading since March 1991.
Continuing claims – those that have been on the dole for longer than a week – has really shot up, surpassing the levels of both the 1990-1991 recession and the 2001 downturn. We have to go all the back to 1983, coming out of the nasty 1982 contraction, to see a reading this elevated.
We’ll note, however, when adjusting for labor-force growth, continuing claims would need to shoot all the way up to 5.2 million (the numbers on the chart are in thousands so 3897 means 3.897 million). The labor force was 112 million back in 1983, today it stands at 155 million. I highly doubt we’ll hit levels that near the five-million mark, which would be in line with an unemployment rate of 9-10% -- our feel is unemployment will top out at 7.5% based on what is currently known.
What all this tells us, which is pretty obvious, is that this real-time indicator (jobless claims) is signaling the November jobs report (released December 5) will be worse than the last two readings and may surpass a decline of 300,000. We’ll have a better sense of this with next week’s jobless claims number as it will align with the November payroll survey week.
This morning we get import prices for October, retail sales (also for October) and business inventories for September.
The import data will show improvement as the price of oil has plunged and the US dollar has soared – both obviously push import prices lower.
However, the retail sales data will be abysmal, although this is expected; so long as we hold to the expectation the market should take the news relatively well.
For business inventories the data will be weak. What we look to here is the underlying sales data, which is going to look really soft for the next couple of readings – this too should already be baked in.
Have a great weekend!
Brent Vondera, Senior Analyst
The S&P 500 appeared to be headed for another 4% decline, but after moving through the October 27 multi-year low of 818 just after lunch, a powerful rally ensued, soaring 11% to the close from that intraday low. We’re trying to cement a bottom here, it’s going to take some time before we no whether we’ve found it or not. For the Dow, we held about 100 points above the October 10 intraday low of 7890, for what it’s worth.
Still, investors are going to have to get past a series of really weak economic data over the next couple of months. One can make the argument we’ve priced in this weakness and moves like the one witnessed yesterday offer some confidence to this belief. We shall see, sentiment will certainly be tested through year end.
Energy and basic material stocks, led the advance, jumping 11.10% and 8.28%, respectively. Industrial shares were among the relative laggards, gaining just 5.74%, on a day the broad market rose nearly 7%.
These areas may over the most promise as we come out of this mess. The massive amounts of liquidity the Fed has pumped into the system should cause commodity prices to jump again – the Fed will be very reluctant to take this liquidity back until the economy is well into expansion mode. For industrials, the group is feeling the pain of current realities, but global infrastructure projects will fuel profits for this sector over the next few years. Besides, it’s reasonable for one to expect the traditional areas of growth to return – like industrials --, as the financial sector is moving back to a more sustained degree of leverage
The Economy
The Mortgage Banker’s Association reported mortgage applications climbed last week from a nearly eight-year low. Applications plunged 20.3% in the week ended October 31.
The index of applications to either purchase a home or refinance a loan rose 11.9% for the week ended November 7. The group’s purchase index increased 9% and the refinancing gauge jumped 16%.
The decline in mortgage rates likely brought some buyers back into the marketplace as the average rate for a 30-year fixed loan fell to 6.24% from 6.47%. As a result, demand for fixed-rate financing increased 12%.
In a separate report, the Commerce Department reported the U.S. trade deficit narrowed more than forecast as a record decline in the cost of crude-oil caused imports to tumble.
The trade gap shrank 4.4% to $56.5 billion for September from $59.1 billion in August. This was completely due to the plunge in the price of oil; excluding petroleum, the deficit widened as exports of U.S. goods dropped by the most since 2001 – that’s on a month-over-month basis.
The chart below shows the year-over-year changes.
The focus from here will be on imports, which will post significant declines for a few months due to economic contraction here at home.
The trade gap will certainly narrow again for October – the decline in oil was most pronounced last month. However, in the months that follow this narrowing will ease, and may in fact reverse course as our export activity is cooling very quickly after a couple of years of robust growth – up 16.3% at an annual rate for the two years that ran July 2005 – July 2007. Overseas economies are enduring weakness too and thus will continue to curtail their purchases.
Viewing the pattern of the export data, weakness was specifically evident in Europe. Asia slowed significantly but not yet to the same extent as did Europe. The only regions/countries in which export growth picked up were Mexico, Canada and Asia NICs (Newly Industrialized Countries).
Lastly, the Labor Department reported initial jobless claims for the week ended November 8 finally breached the 500k level, rising 32,000 to 516,000 – a jump that was greater than expected. We’ve been watching for this event and here it is. The payroll declines of the past two months (now that the September reading was revised significantly lower) show the labor-market conditions are looking more like the typical job-market contraction.
For the first eight months of the year the monthly job losses has been mild as firms were holding onto jobs – indeed, they had no reason to lay many workers off as the troubles, for the business side at least, did not occur until September. But everything changed when Lehman went down and the credit chaos took hold. Now both claims and the payroll data are showing significant weakness.
The four-week average – the chart you are all familiar with as we post it each week – has eclipsed the 2001 level and appears to have its sights set on the peak hit during our last real recession – 1990-1991. By this measure, claims increased 13,250 to 491,000, the highest reading since March 1991.
Continuing claims – those that have been on the dole for longer than a week – has really shot up, surpassing the levels of both the 1990-1991 recession and the 2001 downturn. We have to go all the back to 1983, coming out of the nasty 1982 contraction, to see a reading this elevated.
We’ll note, however, when adjusting for labor-force growth, continuing claims would need to shoot all the way up to 5.2 million (the numbers on the chart are in thousands so 3897 means 3.897 million). The labor force was 112 million back in 1983, today it stands at 155 million. I highly doubt we’ll hit levels that near the five-million mark, which would be in line with an unemployment rate of 9-10% -- our feel is unemployment will top out at 7.5% based on what is currently known.
What all this tells us, which is pretty obvious, is that this real-time indicator (jobless claims) is signaling the November jobs report (released December 5) will be worse than the last two readings and may surpass a decline of 300,000. We’ll have a better sense of this with next week’s jobless claims number as it will align with the November payroll survey week.
This morning we get import prices for October, retail sales (also for October) and business inventories for September.
The import data will show improvement as the price of oil has plunged and the US dollar has soared – both obviously push import prices lower.
However, the retail sales data will be abysmal, although this is expected; so long as we hold to the expectation the market should take the news relatively well.
For business inventories the data will be weak. What we look to here is the underlying sales data, which is going to look really soft for the next couple of readings – this too should already be baked in.
Have a great weekend!
Brent Vondera, Senior Analyst
Thursday, November 13, 2008
Daily Insight
U.S. stocks failed to even tease the plus side yesterday after Best Buy warned of a “seismic” slowdown in consumer spending and a Treasury Department press conference reminded anyone that may have forgotten we still have a housing downturn and delinquency problems on our hands. It’s tough to get past a bevy of negatives and as a result the market is in the process of testing the October 27 low.
Basic material, energy, consumer discretionary and financial stocks received the heaviest beat-down yesterday. Utilities and health-care were the relative winners yet still down 2.75% and 3.52%, respectively.
Looking on the bright side, bear market’s generally test lows after a quick bounce off a multi-year low (you may recall the 18.5% rebound that occurred over six sessions from that October 27 multi-year nadir). Assuming another bomb doesn’t hit, it is likely we’ll rally hard off of this level – sorry I can’t tell you when – but we may have to wait to see how the Senate race finishes. (Minnesota is quickly slipping away from the Republicans so this brings us to the Alaska recount and the Georgia run-off. One can bet that the Georgia race will be one of the ugliest we have yet seen with all that is at stake – whether there is some form of check and balance or the majority has free-reign to govern may very well come down to this contest.)
Another bit of good news is that while retailers are stating this is the most difficult climate in a very long time, it means desperate discounting is on the way. Further, while there are many headwinds for the consumer, the 65% decline in gasoline prices from the July peak won’t hurt either.
Risk Aversion
Yesterday we touched the current bout of risk aversion, again. We’ve been watching the TED Spread for evidence of some willingness from investors to step back into areas of risk, and indeed the spread has narrowed, which is good. However, this narrowing has largely been due to the significant decline in LIBOR rates, no help has come from a rise in T-bill rates – the other component of this spread. And that trend looked even worse yesterday as the yield on the three-month T-bill plunged 27 basis points to 0.15% -- illustrating inundation into the safety of the short-end of the Treasury curve.
We need to see that three-month T-bill rate rise before it shows investors are willing to take some risk again.
Trade Pacts
We talk a lot about the uncertainty over tax rates and trade pacts, but we focus more on the former than the latter. If we go down the road of increased tariffs and destroying trade pacts, it will come back to harm us to a much larger degree than we are currently witnessing. The stock-market is forward looking and participants within the marketplace are concerned over these issues.
Study of the Great Depression shows that that economic period began as a rough recession, but was made into a depression by the three T’s: Federal Reserve tightening, a massive increase in tariffs (via Smoot-Hawley) and an increase in tax rates. The first, (Fed tightening) we have no worry of right now; the Fed has injected massive amounts of liquidity into the system and pushed their target for fed funds down to 1.00% (the effective FF rate is below 0.50%). But trade policy and tax rates are a big one right now.
The WSJ ran a piece yesterday calling on President-elect Obama to encourage Congress to pass a series of trade pacts – initiatives that have been held up by the Congress in this election year – that could easily pass if the leadership would acquiesce before Republicans lose even more numbers by January. This would remove one major uncertainty currently in the marketplace.
Take the Columbia Free Trade Act (CFTA) for instance. Failure to approve this pact illustrates the nonsensical nature of what Congress is doing right now. Columbian goods currently flow into the U.S. duty-free, yet U.S. companies (such as Caterpillar and Ingersoll Rand) have to deal with 5%-15% tariffs when they sell machinery to Columbia – a country that has a robust mining industry. The protectionists have been blocking this trade pact as they remain beholden to union leadership, but the irony is that the current environment is making union shops less competitive.
By passing the CFTA, U.S. business will see activity rise as their goods will flow into Columbia free of tariffs just as Columbian-made goods flow into the U.S. free of charge right now – this is what we call free trade. It’s a no brainer and Congress needs to pass it. By doing so, and getting on with passing the various other trade pacts that are currently held up by Speaker Pelosi, we can very quickly remove one major uncertainty from the market.
It is then we can get to tax policy (even though we won’t see improvement here with the 111th Congress and a President Obama, we can at least fight to keep rates unchanged) and we’ll see this market soar. Until the, the protectionists and those that engage in class warfare get a clue, the economy and stocks will have a very difficult time here in the short term.
Focusing on the same topic over and over (housing and mortgage securities) – even if housing and certain mortgage securities are at the heart of the problem – is not doing any good, as witnessed by another stock-market decline.
Congress needs to focus on the other concerns that are affecting investor sentiment – like these trade pacts. We’re under no illusion that pro-growth advocates will have the votes to push tax rates lower – I mention it simply because this sort of policy would boost optimism and the uncertainty of which lowers after-tax return expectations – but we can get this trade issue accomplished and one-by-one knock down these impediments to progress.
The TARP
Treasury Secretary Paulson held a press conference yesterday explaining that the program would primarily focus on injecting capital into financial institutions rather than buying up troubled assets. This was a segment of the original plan, but the decision to abandon the erstwhile centerpiece of the program did come as a surprise – which we touched on yesterday as the WSJ broke the story prior to Paulson’s official address.
The shift isn’t a bad thing, and it is quite possibly better to inject capital to give institutions the time to hold these assets until the housing market stabilizes rather than the government holding auctions, or flat-out determining the price – besides this direction would have taken much longer to implement, which was another issue.
What was new from Paulson’s comments is a plan – along with the Federal Reserve – to develop a lending facility that would encourage investors to buy securities backed by credit cards, auto loans and student loans. This is where the overkill really begins.
Why is the world would investors want to buy these types of asset-backed paper in this environment? The Fed has put in place some really strong facilities, the most successful being the money market and commercial paper programs. The money-market plan will help confidence, which is extremely important right now, and the commercial paper facility is essential because this is a very important element of business financing. However, credit card and auto activity is not essential.
Some things must be allowed to run their course. We’ve entered an economic downturn and we’ve got to let the market do its things in this regard.
And on student loans, you can thank Congressional leadership for much of this problem when they decided to cap the interest rate on subsidized student loans in early 2007 -- this was part of the 110th Congress’ 100-hour agenda. The idea was well-intentioned but lacked understanding, which is quite dangerous. The result was many banks simply decided to pull-out of the student-loan market, as it was no longer worth the risk. So the current issues in the student-loan arena are not just a function of credit-market chaos and increased delinquencies, but an unintended consequence of well-meaning, yet benighted people. Remove the cap on rates and you’ll find much of the problem disappears in time. Unfortunately, there is about zero chance of this occurring.
Have a great day!
Brent Vondera, Senior Analyst
Basic material, energy, consumer discretionary and financial stocks received the heaviest beat-down yesterday. Utilities and health-care were the relative winners yet still down 2.75% and 3.52%, respectively.
Looking on the bright side, bear market’s generally test lows after a quick bounce off a multi-year low (you may recall the 18.5% rebound that occurred over six sessions from that October 27 multi-year nadir). Assuming another bomb doesn’t hit, it is likely we’ll rally hard off of this level – sorry I can’t tell you when – but we may have to wait to see how the Senate race finishes. (Minnesota is quickly slipping away from the Republicans so this brings us to the Alaska recount and the Georgia run-off. One can bet that the Georgia race will be one of the ugliest we have yet seen with all that is at stake – whether there is some form of check and balance or the majority has free-reign to govern may very well come down to this contest.)
Another bit of good news is that while retailers are stating this is the most difficult climate in a very long time, it means desperate discounting is on the way. Further, while there are many headwinds for the consumer, the 65% decline in gasoline prices from the July peak won’t hurt either.
Risk Aversion
Yesterday we touched the current bout of risk aversion, again. We’ve been watching the TED Spread for evidence of some willingness from investors to step back into areas of risk, and indeed the spread has narrowed, which is good. However, this narrowing has largely been due to the significant decline in LIBOR rates, no help has come from a rise in T-bill rates – the other component of this spread. And that trend looked even worse yesterday as the yield on the three-month T-bill plunged 27 basis points to 0.15% -- illustrating inundation into the safety of the short-end of the Treasury curve.
We need to see that three-month T-bill rate rise before it shows investors are willing to take some risk again.
Trade Pacts
We talk a lot about the uncertainty over tax rates and trade pacts, but we focus more on the former than the latter. If we go down the road of increased tariffs and destroying trade pacts, it will come back to harm us to a much larger degree than we are currently witnessing. The stock-market is forward looking and participants within the marketplace are concerned over these issues.
Study of the Great Depression shows that that economic period began as a rough recession, but was made into a depression by the three T’s: Federal Reserve tightening, a massive increase in tariffs (via Smoot-Hawley) and an increase in tax rates. The first, (Fed tightening) we have no worry of right now; the Fed has injected massive amounts of liquidity into the system and pushed their target for fed funds down to 1.00% (the effective FF rate is below 0.50%). But trade policy and tax rates are a big one right now.
The WSJ ran a piece yesterday calling on President-elect Obama to encourage Congress to pass a series of trade pacts – initiatives that have been held up by the Congress in this election year – that could easily pass if the leadership would acquiesce before Republicans lose even more numbers by January. This would remove one major uncertainty currently in the marketplace.
Take the Columbia Free Trade Act (CFTA) for instance. Failure to approve this pact illustrates the nonsensical nature of what Congress is doing right now. Columbian goods currently flow into the U.S. duty-free, yet U.S. companies (such as Caterpillar and Ingersoll Rand) have to deal with 5%-15% tariffs when they sell machinery to Columbia – a country that has a robust mining industry. The protectionists have been blocking this trade pact as they remain beholden to union leadership, but the irony is that the current environment is making union shops less competitive.
By passing the CFTA, U.S. business will see activity rise as their goods will flow into Columbia free of tariffs just as Columbian-made goods flow into the U.S. free of charge right now – this is what we call free trade. It’s a no brainer and Congress needs to pass it. By doing so, and getting on with passing the various other trade pacts that are currently held up by Speaker Pelosi, we can very quickly remove one major uncertainty from the market.
It is then we can get to tax policy (even though we won’t see improvement here with the 111th Congress and a President Obama, we can at least fight to keep rates unchanged) and we’ll see this market soar. Until the, the protectionists and those that engage in class warfare get a clue, the economy and stocks will have a very difficult time here in the short term.
Focusing on the same topic over and over (housing and mortgage securities) – even if housing and certain mortgage securities are at the heart of the problem – is not doing any good, as witnessed by another stock-market decline.
Congress needs to focus on the other concerns that are affecting investor sentiment – like these trade pacts. We’re under no illusion that pro-growth advocates will have the votes to push tax rates lower – I mention it simply because this sort of policy would boost optimism and the uncertainty of which lowers after-tax return expectations – but we can get this trade issue accomplished and one-by-one knock down these impediments to progress.
The TARP
Treasury Secretary Paulson held a press conference yesterday explaining that the program would primarily focus on injecting capital into financial institutions rather than buying up troubled assets. This was a segment of the original plan, but the decision to abandon the erstwhile centerpiece of the program did come as a surprise – which we touched on yesterday as the WSJ broke the story prior to Paulson’s official address.
The shift isn’t a bad thing, and it is quite possibly better to inject capital to give institutions the time to hold these assets until the housing market stabilizes rather than the government holding auctions, or flat-out determining the price – besides this direction would have taken much longer to implement, which was another issue.
What was new from Paulson’s comments is a plan – along with the Federal Reserve – to develop a lending facility that would encourage investors to buy securities backed by credit cards, auto loans and student loans. This is where the overkill really begins.
Why is the world would investors want to buy these types of asset-backed paper in this environment? The Fed has put in place some really strong facilities, the most successful being the money market and commercial paper programs. The money-market plan will help confidence, which is extremely important right now, and the commercial paper facility is essential because this is a very important element of business financing. However, credit card and auto activity is not essential.
Some things must be allowed to run their course. We’ve entered an economic downturn and we’ve got to let the market do its things in this regard.
And on student loans, you can thank Congressional leadership for much of this problem when they decided to cap the interest rate on subsidized student loans in early 2007 -- this was part of the 110th Congress’ 100-hour agenda. The idea was well-intentioned but lacked understanding, which is quite dangerous. The result was many banks simply decided to pull-out of the student-loan market, as it was no longer worth the risk. So the current issues in the student-loan arena are not just a function of credit-market chaos and increased delinquencies, but an unintended consequence of well-meaning, yet benighted people. Remove the cap on rates and you’ll find much of the problem disappears in time. Unfortunately, there is about zero chance of this occurring.
Have a great day!
Brent Vondera, Senior Analyst
Wednesday, November 12, 2008
Fixed Income Recap
Treasuries rallied slightly as the flight to quality trade still thrives with the short end of the curve leading the way. Yield on the 2 year reached 1.15% intraday, the lowest seen since June 2003. The yield curve remains steep as the 2-10 year spread closed today at 249 basis points.
As retailers continue to report terrible earnings forecasts the bonds backed by loans for strip malls and other retail locations continue to suffer. Dealers dealing with such product reported “Worse day ever” type movement for today. These are AAA rated Super Senior traunches dropping 3-4 points on the day. Proof that ratings mean nothing in the current environment as the fixed income world is being turned upside down before our very eyes.
It seems that the Treasury comes out with a new way to tackle our woes daily, and today was no exception. The Treasury announced a revision to the original TARP plan of buying bad assets from financial institutions and will spring forward with a plan to use the entire $700 billion to directly inject capital.
As it stands now the Treasury has only $60 billion left from its first slug of funding and will have to turn to the next administration to implement its new plan.
Regardless of how you look at it this is the government setting prices artificially. Whether it’s setting prices for assets that no one else will buy or setting rates of return on preferred stock investments in companies that can’t raise capital in the open market. As bad as it sounds it may be our best option.
In my opinion, the use of the new capital is the main obstacle ahead. If the health of these companies can be improved enough to attract private sources of funding, improving their situations even more, it may help the nasty case of deleveraging plaguing the market.
Cliff J. Reynolds Jr.
Junior Analyst
As retailers continue to report terrible earnings forecasts the bonds backed by loans for strip malls and other retail locations continue to suffer. Dealers dealing with such product reported “Worse day ever” type movement for today. These are AAA rated Super Senior traunches dropping 3-4 points on the day. Proof that ratings mean nothing in the current environment as the fixed income world is being turned upside down before our very eyes.
It seems that the Treasury comes out with a new way to tackle our woes daily, and today was no exception. The Treasury announced a revision to the original TARP plan of buying bad assets from financial institutions and will spring forward with a plan to use the entire $700 billion to directly inject capital.
As it stands now the Treasury has only $60 billion left from its first slug of funding and will have to turn to the next administration to implement its new plan.
Regardless of how you look at it this is the government setting prices artificially. Whether it’s setting prices for assets that no one else will buy or setting rates of return on preferred stock investments in companies that can’t raise capital in the open market. As bad as it sounds it may be our best option.
In my opinion, the use of the new capital is the main obstacle ahead. If the health of these companies can be improved enough to attract private sources of funding, improving their situations even more, it may help the nasty case of deleveraging plaguing the market.
Cliff J. Reynolds Jr.
Junior Analyst
Daily Insight
U.S. stocks engaged in another wild ride yesterday as the broad market moved nearly 4% intra-day peak to trough – the word “peak” is a relative term as the index was never in positive territory, although it came close to moving to the black with about an hour left in the session.
Increased concerns over the outlook for global growth increased investor pessimism. Surely continued talk of the auto market’s struggles and crude-oil’s steep decline help to reinforce that activity has deteriorated in a meaningful way – both from the consumer and business. Weakness on the business side is a fairly new event and occurred very quickly as the credit-market chaos that began in September evoked a high level of caution and halt to business spending plans.
Not helping things is that the filibuster power of the Senate appears to be slipping away. The Minnesota race has tightened in the past few days and the recount hasn’t even begun yet – go figure that one out. The thought of Al Franken actually making it to the U.S. Senate cannot offer investors optimism, and whether the Senate has filibuster ability or not may very well determine the direction of the market.
Basic material, consumer discretionary and energy shares led the market lower as these are the areas that logically get hit the hardest on concerns over global growth. The traditional safe-havens – utility and health-care shares – performed well on a relative basis.
Everyone’s a Bank Now
American Express won approval from the Federal Reserve to become a commercial bank yesterday and is now seeking $3.5 billion in TARP funds. The Fed waived the usual 30-day waiting period on the application because of “the unusual and exigent circumstances affecting the financial markets.” according to a Fed new release yesterday.
Who knows, you could find yourself driving down the road one day, minding your own business, and blow by a billboard advertising CD rates at the First Commercial Bank of U.S. Steel.
The TARP
And speaking of the TARP (you know, the $700 billion Troubled Asset Relief Program), a top Treasury Department official stated yesterday that the program is shifting from buying troubled assets to focus primarily on capital injections into the financial system. Ok.
Sure, it was very much important for the TARP to have flexibility – and it is certainly proving to be flexible – I just hope we don’t wake up one day to find 250,000 new TARP bike paths have been created, 30 TARP “bridges to nowhere” have been built and 50 additional monuments to Senator Robert Byrd have been erected – certainly some of the more favorite earmarks of the past decade.
Crude and the Dollar
Crude-oil prices fell below $60 per barrel on speculation the International Energy Agency will lower its 2009 demand forecast for the third-straight month in its report today – probably not much of a stretch right now, as least regarding the first-half of the year. The IEA has cut its 2008 forecast by 1.3 million barrels a day via seven revisions this year. The world uses roughly 85 million barrels of oil per day in case you were wondering.
Alas, the plunge in energy prices may prove short-lived. We talked about the affect Fed liquidity injections will have on commodity prices in yesterday’s letter. We also see members of Congress have been talking about reinstating the ban on offshore drilling.
My how things have changed; this is quite unfortunate. It appears, well that’s putting it lightly – it’s an overt objective – that the Democrats had planned on doing this all along after what they figured were to be big gains this election – that ban was just lifted a couple of months ago. It seems some people never learn. We could incrementally replace imported oil needs by gathering the low-hanging fruit now that this ban has been lifted. There is enough in the Prudhoe Bay and ANWAR areas, along with spots on the east and west coasts directly offshore to fully replace the energy we import from Chavez’s Venezuela. But no, that would make too much sense. It seems some forms of “change” are not all that new.
The Economy
We have been without any major economic releases for a couple of days and that’s the case again today. However, we did receive a sentiment survey yesterday, one that has gained attention of late.
The Investor’s Business Daily/Technometrica Market Intelligence (IBD/TIPP) index that tracks consumer sentiment showed economic optimism rose this month.
The IBD/TIPP Economic Optimism Index jumped 9.7 points to reach 50.8 in November, the largest one-month increase in the survey’s eight-year history. A reading above 50 indicates optimism, below 50 indicates pessimism among most respondents.
The survey has three components:
Ø The Six-Month Outlook jumped 13.5 points to 55.4.
Ø The Personal Finance Outlook gained 10 points to 60.6
Ø The Confidence in Federal Economic Policies rose 5.5 points to 36.4
Bottom line, this confidence survey made big gains as the price of gasoline plunged and the government’s economic rescue plan may be getting a better reception from the public – although, as the table (via Bloomberg) below illustrates, any increased optimism on this front is purely relative. It remains the low point of the survey’s components.
Credit Markets
As we’ve been touching on, the credit market freeze of the past couple of months continues to thaw. We see this in three-month LIBOR rates, which illustrate an increased willingness from banks to lend to one another, and in the TED Spread – which has narrowed as this shows risk aversion may be on the wane, albeit mildly – we really need TED to get closer to 1.00 for a clear sign investors have embraced risk again.. Commercial paper issuance has also rebounded thanks to the Fed latest attempt to facilitate this vital aspect of business financing.
However, even though the TED Spread has narrowed, it has not come down as the decline in LIBOR rates would suggest because the other component of that spread (three-month T-bills) continues to garner massive demand, which means T-bill rates remain very low – the price and yield are inversely related. We want to see this component of the spread rise (thus causing the spread to narrow further) as it will show investors’ desire for safety has waned. We’re still waiting for this event to take place.
Further illustrating this point, was the huge demand that the Treasury Department’s three-year note auction received on Monday. The bid-to-cover ratio came in at 3.07, which indicates very strong demand. This indicates a massive flood of money to the shorter-end of the curve.
It is good and all to see demand for US Treasuries, but demand of this nature simply shows the degree of risk aversion out there. These three-year notes yield 1.76%. Since inflation is running at 4%, investors are clearly looking for places where they can first and foremost get their money back, forget the return right now. This trend must reverse course in order for the stock market to engage in a meaningful rally, which we’ll see via the three-month T-bill yield.
Today we’ll go another day without an economic release, but will get back to it tomorrow with initial jobless claims and the September trade balance.
Have a great day!
Brent Vondera, Senior Analyst
Increased concerns over the outlook for global growth increased investor pessimism. Surely continued talk of the auto market’s struggles and crude-oil’s steep decline help to reinforce that activity has deteriorated in a meaningful way – both from the consumer and business. Weakness on the business side is a fairly new event and occurred very quickly as the credit-market chaos that began in September evoked a high level of caution and halt to business spending plans.
Not helping things is that the filibuster power of the Senate appears to be slipping away. The Minnesota race has tightened in the past few days and the recount hasn’t even begun yet – go figure that one out. The thought of Al Franken actually making it to the U.S. Senate cannot offer investors optimism, and whether the Senate has filibuster ability or not may very well determine the direction of the market.
Basic material, consumer discretionary and energy shares led the market lower as these are the areas that logically get hit the hardest on concerns over global growth. The traditional safe-havens – utility and health-care shares – performed well on a relative basis.
Everyone’s a Bank Now
American Express won approval from the Federal Reserve to become a commercial bank yesterday and is now seeking $3.5 billion in TARP funds. The Fed waived the usual 30-day waiting period on the application because of “the unusual and exigent circumstances affecting the financial markets.” according to a Fed new release yesterday.
Who knows, you could find yourself driving down the road one day, minding your own business, and blow by a billboard advertising CD rates at the First Commercial Bank of U.S. Steel.
The TARP
And speaking of the TARP (you know, the $700 billion Troubled Asset Relief Program), a top Treasury Department official stated yesterday that the program is shifting from buying troubled assets to focus primarily on capital injections into the financial system. Ok.
Sure, it was very much important for the TARP to have flexibility – and it is certainly proving to be flexible – I just hope we don’t wake up one day to find 250,000 new TARP bike paths have been created, 30 TARP “bridges to nowhere” have been built and 50 additional monuments to Senator Robert Byrd have been erected – certainly some of the more favorite earmarks of the past decade.
Crude and the Dollar
Crude-oil prices fell below $60 per barrel on speculation the International Energy Agency will lower its 2009 demand forecast for the third-straight month in its report today – probably not much of a stretch right now, as least regarding the first-half of the year. The IEA has cut its 2008 forecast by 1.3 million barrels a day via seven revisions this year. The world uses roughly 85 million barrels of oil per day in case you were wondering.
Alas, the plunge in energy prices may prove short-lived. We talked about the affect Fed liquidity injections will have on commodity prices in yesterday’s letter. We also see members of Congress have been talking about reinstating the ban on offshore drilling.
My how things have changed; this is quite unfortunate. It appears, well that’s putting it lightly – it’s an overt objective – that the Democrats had planned on doing this all along after what they figured were to be big gains this election – that ban was just lifted a couple of months ago. It seems some people never learn. We could incrementally replace imported oil needs by gathering the low-hanging fruit now that this ban has been lifted. There is enough in the Prudhoe Bay and ANWAR areas, along with spots on the east and west coasts directly offshore to fully replace the energy we import from Chavez’s Venezuela. But no, that would make too much sense. It seems some forms of “change” are not all that new.
The Economy
We have been without any major economic releases for a couple of days and that’s the case again today. However, we did receive a sentiment survey yesterday, one that has gained attention of late.
The Investor’s Business Daily/Technometrica Market Intelligence (IBD/TIPP) index that tracks consumer sentiment showed economic optimism rose this month.
The IBD/TIPP Economic Optimism Index jumped 9.7 points to reach 50.8 in November, the largest one-month increase in the survey’s eight-year history. A reading above 50 indicates optimism, below 50 indicates pessimism among most respondents.
The survey has three components:
Ø The Six-Month Outlook jumped 13.5 points to 55.4.
Ø The Personal Finance Outlook gained 10 points to 60.6
Ø The Confidence in Federal Economic Policies rose 5.5 points to 36.4
Bottom line, this confidence survey made big gains as the price of gasoline plunged and the government’s economic rescue plan may be getting a better reception from the public – although, as the table (via Bloomberg) below illustrates, any increased optimism on this front is purely relative. It remains the low point of the survey’s components.
Credit Markets
As we’ve been touching on, the credit market freeze of the past couple of months continues to thaw. We see this in three-month LIBOR rates, which illustrate an increased willingness from banks to lend to one another, and in the TED Spread – which has narrowed as this shows risk aversion may be on the wane, albeit mildly – we really need TED to get closer to 1.00 for a clear sign investors have embraced risk again.. Commercial paper issuance has also rebounded thanks to the Fed latest attempt to facilitate this vital aspect of business financing.
However, even though the TED Spread has narrowed, it has not come down as the decline in LIBOR rates would suggest because the other component of that spread (three-month T-bills) continues to garner massive demand, which means T-bill rates remain very low – the price and yield are inversely related. We want to see this component of the spread rise (thus causing the spread to narrow further) as it will show investors’ desire for safety has waned. We’re still waiting for this event to take place.
Further illustrating this point, was the huge demand that the Treasury Department’s three-year note auction received on Monday. The bid-to-cover ratio came in at 3.07, which indicates very strong demand. This indicates a massive flood of money to the shorter-end of the curve.
It is good and all to see demand for US Treasuries, but demand of this nature simply shows the degree of risk aversion out there. These three-year notes yield 1.76%. Since inflation is running at 4%, investors are clearly looking for places where they can first and foremost get their money back, forget the return right now. This trend must reverse course in order for the stock market to engage in a meaningful rally, which we’ll see via the three-month T-bill yield.
Today we’ll go another day without an economic release, but will get back to it tomorrow with initial jobless claims and the September trade balance.
Have a great day!
Brent Vondera, Senior Analyst
Tuesday, November 11, 2008
Fixed Income Recap
Today Fannie and Freddie announced a new streamlined plan to modify mortgage loans they hold and guarantee in hopes of curtailing the rising trend in home foreclosures. In addition to the GSE’s, private label mortgage originators Citigroup Inc., Bank of America, J.P. Morgan and Wells Fargo have recently announced plans to renegotiate the terms of loans that they originated. However, the vast majority of mortgage debt is packaged in mortgage backed securities and sold to investors, which presents a major bump in the road for private label originators when is comes to restructuring a troubled loan.
The streamlined effort announced today but not expected to start until December 15th will target Fannie and Freddie loans that are 90 days or more past due. They will modify interest rates, extend the terms of the loans and in some cases forgive portions of the principle in order to bring monthly payments close to a target of 38% of gross household income. The problem of the homeowner selling the house at a later date for a gain was not addressed specifically in today’s announcement but earlier discussion leans towards the agencies being entitled to at least part of the appreciation in the value of the home. To initiate the process the homeowner must provide a written statement to the servicer of the mortgage showing they have encountered some hardship. The servicer, along with the FHFA, will then evaluate their specific situation and make the judgment of eligibility.
An investor who owns a Fannie or Freddie pool consisting of loans that are restructured will likely never notice. A restructured loan, regardless of the form of restructuring, will appear to the bondholder as a simple refinance. The bond holder will then be made whole and the loan will either be repackaged in another security and sold or held on Fannie or Freddie’s books. If there is a loss on the principle due to the restructuring then Fannie and Freddie, who guarantee payment, will absorb the shortfall.
It is much more difficult to restructure the loans securitized by J.P. Morgan, Wells Fargo and the like because they do not stand behind the credit as Fannie and Freddie do. The banks, which act as only a servicer of many mortgage backed securities, are currently in talks with investors who hold large amounts of these bonds. Renegotiating loans that have been packaged and sold upstream would modify the bonds held by banks, hedge funds and other holders of this type of debt. Because of this I would expect the banks to concentrate first on restructuring debt they hold on their books first, and then move on to the more complicated securitized debt.
Cliff J. Reynolds Jr.
Junior Analyst
The streamlined effort announced today but not expected to start until December 15th will target Fannie and Freddie loans that are 90 days or more past due. They will modify interest rates, extend the terms of the loans and in some cases forgive portions of the principle in order to bring monthly payments close to a target of 38% of gross household income. The problem of the homeowner selling the house at a later date for a gain was not addressed specifically in today’s announcement but earlier discussion leans towards the agencies being entitled to at least part of the appreciation in the value of the home. To initiate the process the homeowner must provide a written statement to the servicer of the mortgage showing they have encountered some hardship. The servicer, along with the FHFA, will then evaluate their specific situation and make the judgment of eligibility.
An investor who owns a Fannie or Freddie pool consisting of loans that are restructured will likely never notice. A restructured loan, regardless of the form of restructuring, will appear to the bondholder as a simple refinance. The bond holder will then be made whole and the loan will either be repackaged in another security and sold or held on Fannie or Freddie’s books. If there is a loss on the principle due to the restructuring then Fannie and Freddie, who guarantee payment, will absorb the shortfall.
It is much more difficult to restructure the loans securitized by J.P. Morgan, Wells Fargo and the like because they do not stand behind the credit as Fannie and Freddie do. The banks, which act as only a servicer of many mortgage backed securities, are currently in talks with investors who hold large amounts of these bonds. Renegotiating loans that have been packaged and sold upstream would modify the bonds held by banks, hedge funds and other holders of this type of debt. Because of this I would expect the banks to concentrate first on restructuring debt they hold on their books first, and then move on to the more complicated securitized debt.
Cliff J. Reynolds Jr.
Junior Analyst
Daily Insight
U.S. stocks began the session higher, led by industrial shares, on news the Chinese government would inject nearly $600 billion into their economy through 2010. But the benchmark indices quickly reversed course as focus turned to the reality that the current quarter’s earnings figures will be less than auspicious, to put it mildly.
As you can see, industrial shares led the early session rally, up 3% from the get go, but also gave it back even though much of this group will benefit from China’s spending.
It is also impossible to currently gauge the duration and depth of the economic contraction that surely began in September, and this is also making it tough to hold rallies. However, we are down 42% from the peak, so it appears the market has priced this event in, even if we get something that compares to the significant 1982 downturn.
I don’t believe there as been such a rapid decline in confidence and economic data since at least 1973-1974, so we could be headed for a similar contraction – certainly the stock market activity of the past few months compares well to that period. That 1973-1974 economic downturn lasted roughly 18 months.
While the current earnings season (last quarter’s results) is shaping up quite well, sans the financial and consumer discretionary sectors, there is little doubt the current quarter will post some real weakness – earnings will be significantly affected by the shutdown in spending among consumers and an extreme level of caution among businesses that the stock-market decline and credit-market chaos wrought.
Senate Numbers
Another drag on confidence is the uncertainty regarding the filibuster power of the Senate. There are still three Senate seats that have yet to be decided – Minnesota and Alaska are in a recount and Georgia, which is still counting, appears headed for a runoff. (GA is like LA in that if there are three candidates in the race one fails to receive over 50%, then the top two head into a runoff election, which is roughly 20 days out)
This is a huge event. A Senate with filibuster ability – meaning Democrats hold less than 60 seats, currently it’s at 57 – is the only check and balance on an Obama/Pelosi/Reid legislative and executive branch agenda. We know the voting records of this three-some along with their statements of the past several months and the agenda is not exactly market friendly. So the fact that the Senate race remains undetermined seems to be a big market issue right now. (President-elect Obama will be out president and must be embraced. But one finds it hard to get past his voting record and associations. We should all hope those concerned over the direction he desires to take the country – myself included -- are dead wrong.)
China’s Stimulus
The Chinese government pledged to inject $586 billion into their economy, largely for infrastructure projects. The funds will be delivered by 2010, but the first tranche -- $100 billion – is scheduled for this quarter and to be spent on low-rent housing, roads, railways and airports. The government will also allow tax deductions for purchases of fixed assets like machinery, plants and electrical equipment – which is big news for U.S. firms that provide the Chinese economy with a good degree of these equipment and construction orders.
The degree of this stimulus is huge, amounting to nearly 20% of their GDP. For perspective, this would be equivalent to the U.S. spending $2.8 trillion – our own government is in the process of spending a lot, but we haven’t yet approached this percentage, thankfully.
Economic Data
We will be without a data release for a couple of days, but get back to it by the second-half of the week.
Thursday, we get the weekly jobless claims data and look for claims to remain elevated. The market will be watching to see if we hold below the 500k level. Most readers are familiar with the jobless claims chart, but I’ll post it again to illustrate.
We also get the trade balance for September, which will show meaningful declines for both export and import activity. Imports will decline to a larger extent than exports and thus the trade gap should narrow. On an inflation-adjusted basis, the trade gap will have narrowed to the lowest level since 2002.
Those who have yearned for a narrower trade gap are getting their wish, but it comes on the heels of slow growth, or economic contraction, which we have mentioned for several years now.
On Friday, we’ll get import prices (October) and business inventories (September).
On import prices, the market expects the figure to continue to ease from extreme readings of the first half of the year. The US dollar rallied 18% from July through October and this will naturally bring import prices lower. Further, the plunge in energy prices will also move the index lower.
That said, we expect the easing we’ve seen within the inflation gauges to reverse and turn up again as we look out over the next year -- the combination of fiscal stimulus (of which we haven’t yet seen the extent) and the massive liquidity the Fed has pumped into the system will cause the inflation gauges to shoot higher again. Currently, the financial press is focused on deflation, and most economists I’ll add. This is quite unlikely though with what the Fed has done. We’d watch for inflation to kick up after a multi-month respite. As you can see on the chart below, import price inflation has come off of extreme highs, but even excluding energy they remain dangerously high.
On the business inventories data, we expect the figure to fall as the manufacturing and wholesale figures have already offered evidence of this. Business sales have remained very upbeat over the past several months, but everything changed in late September and into October. There is no way sales will have advanced based on what’s occurred. The hope is that this decline will prove to be a two-month event. We shall see.
Veteran’s Day
Today is Veteran’s Day and the 90th anniversary of the symbolic end of WWI, signed on the 11th hour of the 11th day of the 11th month of the year 1918. The bond market will be closed, but stocks and currencies are open for business. Thank you veterans; thank you for all you endured and accomplished for the rest of us.
Corrections:
Yesterday I stated that $3.8 billion sits in money market funds as of the Fed’s latest report. It is actually $3.8 trillion. I’ve cited this figure before, so most of you likely assumed what I meant to type. A reader pointed the error out to me yesterday morning. Thank you.
Also, in terms of the mini nuclear reactor story, I noted that the $25 million initial cost for each reactor (able to power 10,000 homes) would come to only $250 per house – that number would actually be $2500. .
Starting today, we will not be including the tables or charts in the blog version of Daily Insights. If you would like the complete version, please send us your email information at info@acrinv.com.
Have a great day!
Brent Vondera, Senior Analyst
As you can see, industrial shares led the early session rally, up 3% from the get go, but also gave it back even though much of this group will benefit from China’s spending.
It is also impossible to currently gauge the duration and depth of the economic contraction that surely began in September, and this is also making it tough to hold rallies. However, we are down 42% from the peak, so it appears the market has priced this event in, even if we get something that compares to the significant 1982 downturn.
I don’t believe there as been such a rapid decline in confidence and economic data since at least 1973-1974, so we could be headed for a similar contraction – certainly the stock market activity of the past few months compares well to that period. That 1973-1974 economic downturn lasted roughly 18 months.
While the current earnings season (last quarter’s results) is shaping up quite well, sans the financial and consumer discretionary sectors, there is little doubt the current quarter will post some real weakness – earnings will be significantly affected by the shutdown in spending among consumers and an extreme level of caution among businesses that the stock-market decline and credit-market chaos wrought.
Senate Numbers
Another drag on confidence is the uncertainty regarding the filibuster power of the Senate. There are still three Senate seats that have yet to be decided – Minnesota and Alaska are in a recount and Georgia, which is still counting, appears headed for a runoff. (GA is like LA in that if there are three candidates in the race one fails to receive over 50%, then the top two head into a runoff election, which is roughly 20 days out)
This is a huge event. A Senate with filibuster ability – meaning Democrats hold less than 60 seats, currently it’s at 57 – is the only check and balance on an Obama/Pelosi/Reid legislative and executive branch agenda. We know the voting records of this three-some along with their statements of the past several months and the agenda is not exactly market friendly. So the fact that the Senate race remains undetermined seems to be a big market issue right now. (President-elect Obama will be out president and must be embraced. But one finds it hard to get past his voting record and associations. We should all hope those concerned over the direction he desires to take the country – myself included -- are dead wrong.)
China’s Stimulus
The Chinese government pledged to inject $586 billion into their economy, largely for infrastructure projects. The funds will be delivered by 2010, but the first tranche -- $100 billion – is scheduled for this quarter and to be spent on low-rent housing, roads, railways and airports. The government will also allow tax deductions for purchases of fixed assets like machinery, plants and electrical equipment – which is big news for U.S. firms that provide the Chinese economy with a good degree of these equipment and construction orders.
The degree of this stimulus is huge, amounting to nearly 20% of their GDP. For perspective, this would be equivalent to the U.S. spending $2.8 trillion – our own government is in the process of spending a lot, but we haven’t yet approached this percentage, thankfully.
Economic Data
We will be without a data release for a couple of days, but get back to it by the second-half of the week.
Thursday, we get the weekly jobless claims data and look for claims to remain elevated. The market will be watching to see if we hold below the 500k level. Most readers are familiar with the jobless claims chart, but I’ll post it again to illustrate.
We also get the trade balance for September, which will show meaningful declines for both export and import activity. Imports will decline to a larger extent than exports and thus the trade gap should narrow. On an inflation-adjusted basis, the trade gap will have narrowed to the lowest level since 2002.
Those who have yearned for a narrower trade gap are getting their wish, but it comes on the heels of slow growth, or economic contraction, which we have mentioned for several years now.
On Friday, we’ll get import prices (October) and business inventories (September).
On import prices, the market expects the figure to continue to ease from extreme readings of the first half of the year. The US dollar rallied 18% from July through October and this will naturally bring import prices lower. Further, the plunge in energy prices will also move the index lower.
That said, we expect the easing we’ve seen within the inflation gauges to reverse and turn up again as we look out over the next year -- the combination of fiscal stimulus (of which we haven’t yet seen the extent) and the massive liquidity the Fed has pumped into the system will cause the inflation gauges to shoot higher again. Currently, the financial press is focused on deflation, and most economists I’ll add. This is quite unlikely though with what the Fed has done. We’d watch for inflation to kick up after a multi-month respite. As you can see on the chart below, import price inflation has come off of extreme highs, but even excluding energy they remain dangerously high.
On the business inventories data, we expect the figure to fall as the manufacturing and wholesale figures have already offered evidence of this. Business sales have remained very upbeat over the past several months, but everything changed in late September and into October. There is no way sales will have advanced based on what’s occurred. The hope is that this decline will prove to be a two-month event. We shall see.
Veteran’s Day
Today is Veteran’s Day and the 90th anniversary of the symbolic end of WWI, signed on the 11th hour of the 11th day of the 11th month of the year 1918. The bond market will be closed, but stocks and currencies are open for business. Thank you veterans; thank you for all you endured and accomplished for the rest of us.
Corrections:
Yesterday I stated that $3.8 billion sits in money market funds as of the Fed’s latest report. It is actually $3.8 trillion. I’ve cited this figure before, so most of you likely assumed what I meant to type. A reader pointed the error out to me yesterday morning. Thank you.
Also, in terms of the mini nuclear reactor story, I noted that the $25 million initial cost for each reactor (able to power 10,000 homes) would come to only $250 per house – that number would actually be $2500. .
Starting today, we will not be including the tables or charts in the blog version of Daily Insights. If you would like the complete version, please send us your email information at info@acrinv.com.
Have a great day!
Brent Vondera, Senior Analyst
Monday, November 10, 2008
Fixed Income Recap
The benchmark curve steepness, usually measured by the difference in yield of the 2 year and 10 year Treasuries, reached 250 basis points for the first time since January 2004. Steeper yield curves have historically forecasted improving economic conditions in the past, but the validity of that correlation could be questioned this time around. Especially given the current state of the bond market overall and the current funding needs of the Treasury. These are things we will have to monitor closely.
Fannie Mae, who still has yet to receive a cent of help from the Treasury, reported a loss of $29 billion, or $13 a share today. The company said today that it may fall to negative net worth before the end of the year and the $100 billion facility established by the Treasury may not be enough. Delinquencies on their book of business did increase this month over last, but most of the losses resulted from a decreasing of a very large deferred tax asset that they have had on their books for years. Tax assets are only held at a significant value if they are expected to be realized in the foreseeable future through taxable profits, which doesn’t look likely to happen.
The treasury auction this morning was met with great demand driving treasury prices down and yields up. But yet again we saw them rally back as stocks lost their steam going into the afternoon, causing the curve to shift down about 8 basis points. We will wait to see if the thin balance sheets of dealers have the appetite for the 10 and 30 year auctions later this week.
The bond market is closed tomorrow in observance of Veterans Day.
Cliff J. Reynolds Jr.
Junior Analyst
Fannie Mae, who still has yet to receive a cent of help from the Treasury, reported a loss of $29 billion, or $13 a share today. The company said today that it may fall to negative net worth before the end of the year and the $100 billion facility established by the Treasury may not be enough. Delinquencies on their book of business did increase this month over last, but most of the losses resulted from a decreasing of a very large deferred tax asset that they have had on their books for years. Tax assets are only held at a significant value if they are expected to be realized in the foreseeable future through taxable profits, which doesn’t look likely to happen.
The treasury auction this morning was met with great demand driving treasury prices down and yields up. But yet again we saw them rally back as stocks lost their steam going into the afternoon, causing the curve to shift down about 8 basis points. We will wait to see if the thin balance sheets of dealers have the appetite for the 10 and 30 year auctions later this week.
The bond market is closed tomorrow in observance of Veterans Day.
Cliff J. Reynolds Jr.
Junior Analyst
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