U.S. stocks showed no desire to pullback just yet as Wednesday’s rally extended the latest winning streak to four days. This move has now erased last week’s decline plus a couple of points.
Stocks got off to a strong start after Goldman Sachs advised buying industrial shares but the broad market pared some of those gains after the Fed’s latest report on economic activity reinforced concerns regarding consumer activity; a final late-session push then got us almost back to the day’s highs.
(That’s really sweet of Goldman to recommend industrial shares, the S&P 500 index that tracks these shares has only bounced 70% since March. While the group remains 40% off its October 2007 high, I’m going to guess the bulk of this current move has been realized – waiting for a pullback at this point seems the appropriate course.)
And speaking of the March lows, yesterday marked six-months since hitting that wicked March 9 nadir of 666 on the S&P 500, we’ve now surged 56% since that (let’s hope) generational bottom.
Industrials (and those who increased exposure to the group early this year thank Goldman for this latest rally), financial and consumer discretionary shares led the rally. The laggards were two of the traditional safe-havens, consumer staples and utilities – the only sectors to post a loss on the day.
Volume was weak again, maybe the vacationers failed to get the memo that the summer holiday season is over, as less than 1.2 billion shares traded on the NYSE Composite.
Market Activity for September 9, 2009
Returning to Risk
I want to preface the following comment by saying that risk taking is generally good and the economy needs a confidence level that allows for this activity. However, there are points in time in which a certain level of risk aversion is appropriate and I’m not convinced that time has passed.
Now that that is out of the way. Investors are definitely returning to risk, and I’m not just talking about the equity markets. Via derivatives such as total return swaps, hedge funds and other investors are going for it again – and banks, the counterparty to this activity, put themselves in a vulnerable position as well.
Total return swaps are a low-cost financing tool that hedge funds use to accomplish leveraged exposure to a particular asset, thereby generating relatively high returns without tying up capital. The hedge fund can use the “purchased” (actually leased) assets as collateral for the loan, which when things go bad means both sides can get burned.
(To keep it simply, a total return swap goes like this: Bank (A) has an asset – a loan. A hedge fund, or other bank for that matter, can sell bank (A) a swap that guarantees against the downside and pays bank (A) LIBOR plus a spread. The swap seller (say the hedge fund) will receive the interest payments that run off of that loan plus any capital appreciation. However, if the asset declines in value the swap seller is on the hook and if that seller goes down as a result of bets gone bad [remember this is a leveraged position], who is there to guarantee the downside protection for the bank?)
Banks have also begun to repackage home and commercial mortgage loans in what some describe as mini CDOs. The strategy of course is to offer securities with a higher yield but also viewed as highly rated. Some of the most explosive land mines of the financial crisis are making a comeback
There’s nothing inherently bad with these instruments, but with the commercial mortgage land mine that has yet to hit (and don’t forget about the $500 billion in interest-only home loans that will reset 2010-2011, according to First American CoreLogic), I’m not sure this story is going to end well.
This is all one consequence of very easy Fed policy, just as we should have learned from the recent debacle. When the Fed pours money into the system and keeps rates very low, that money is going to search for return and the hunt for yield in this low interest rate environment can cause the multitudes to improperly assess the risk that accompanies these securities vehicles. There is a certain déjà vu concern here for those without short-term memory problems.
Mortgage Applications
The Mortgage Bankers Association reported that their mortgage apps index jumped 17% in the week ended September 4, the largest increase since March when the 30-year fixed rate moved below 5.00%. In this latest week, that 30-year rate settled in at 5.02%.
Applications to purchase a home rallied 9.5% as homebuyers rush to get in before that first-time tax credit of $8,000 expires. Applications to refinance an existing mortgage surged 22.5%.
Fed’s Beige Book
The Federal Reserve released their Beige Book – reports on the economic conditions within each of the Fed’s 12 districts, the survey is released about every six weeks.
The Fed stated that economic activity continued to stabilize in July and August. In terms of district, Dallas indicated activity has firmed, while Boston, Cleveland, Philly, Richmond and San Fran mentioned signs of improvement. Atlanta, Chicago, KC, Minneapolis and NY generally described activity as stable or showing signs of stabilization. St. Louis described the pace of decline appeared to be moderating.
A majority of districts reported flat retail sales – helped by clunker-cash. (Note: Odds are retail activity would have been lower without clunker-cash, which begs the question: What will this segment of the Beige Book look like for the current six-week period now that the subsidy has expired and consumers have increased debt levels at the margin – remember, auto loans ran at an LTV of 92% in July).
Downward pressure on home prices continued in most districts – Dallas and NY noted local prices were firming. On the commercial side, all districts suggested demand for space remained weak and rent concessions and the postponement of property improvements were prevalent.
Manufacturing activity improved in most districts. Contacts remain cautiously optimistic but cost control measures would remain in place, according to the report.
Labor market conditions remained weak across all districts. However, several districts did note an increase in temporary hiring – this is what you want to see as it is an early indication of more permanent hiring. That said, contacts in Boston questioned whether these gains will persist. (Note: There was no evidence in last week’s August employment report of temp. hiring as it fell for the 20th straight month.)
Most districts reported loan demand was weak, and one gets the sense that this would have been even weaker if not for the increase in auto loans.
Have a great day!
Brent Vondera, Senior Analyst
Stocks got off to a strong start after Goldman Sachs advised buying industrial shares but the broad market pared some of those gains after the Fed’s latest report on economic activity reinforced concerns regarding consumer activity; a final late-session push then got us almost back to the day’s highs.
(That’s really sweet of Goldman to recommend industrial shares, the S&P 500 index that tracks these shares has only bounced 70% since March. While the group remains 40% off its October 2007 high, I’m going to guess the bulk of this current move has been realized – waiting for a pullback at this point seems the appropriate course.)
And speaking of the March lows, yesterday marked six-months since hitting that wicked March 9 nadir of 666 on the S&P 500, we’ve now surged 56% since that (let’s hope) generational bottom.
Industrials (and those who increased exposure to the group early this year thank Goldman for this latest rally), financial and consumer discretionary shares led the rally. The laggards were two of the traditional safe-havens, consumer staples and utilities – the only sectors to post a loss on the day.
Volume was weak again, maybe the vacationers failed to get the memo that the summer holiday season is over, as less than 1.2 billion shares traded on the NYSE Composite.
Market Activity for September 9, 2009
Returning to RiskI want to preface the following comment by saying that risk taking is generally good and the economy needs a confidence level that allows for this activity. However, there are points in time in which a certain level of risk aversion is appropriate and I’m not convinced that time has passed.
Now that that is out of the way. Investors are definitely returning to risk, and I’m not just talking about the equity markets. Via derivatives such as total return swaps, hedge funds and other investors are going for it again – and banks, the counterparty to this activity, put themselves in a vulnerable position as well.
Total return swaps are a low-cost financing tool that hedge funds use to accomplish leveraged exposure to a particular asset, thereby generating relatively high returns without tying up capital. The hedge fund can use the “purchased” (actually leased) assets as collateral for the loan, which when things go bad means both sides can get burned.
(To keep it simply, a total return swap goes like this: Bank (A) has an asset – a loan. A hedge fund, or other bank for that matter, can sell bank (A) a swap that guarantees against the downside and pays bank (A) LIBOR plus a spread. The swap seller (say the hedge fund) will receive the interest payments that run off of that loan plus any capital appreciation. However, if the asset declines in value the swap seller is on the hook and if that seller goes down as a result of bets gone bad [remember this is a leveraged position], who is there to guarantee the downside protection for the bank?)
Banks have also begun to repackage home and commercial mortgage loans in what some describe as mini CDOs. The strategy of course is to offer securities with a higher yield but also viewed as highly rated. Some of the most explosive land mines of the financial crisis are making a comeback
There’s nothing inherently bad with these instruments, but with the commercial mortgage land mine that has yet to hit (and don’t forget about the $500 billion in interest-only home loans that will reset 2010-2011, according to First American CoreLogic), I’m not sure this story is going to end well.
This is all one consequence of very easy Fed policy, just as we should have learned from the recent debacle. When the Fed pours money into the system and keeps rates very low, that money is going to search for return and the hunt for yield in this low interest rate environment can cause the multitudes to improperly assess the risk that accompanies these securities vehicles. There is a certain déjà vu concern here for those without short-term memory problems.
Mortgage Applications
The Mortgage Bankers Association reported that their mortgage apps index jumped 17% in the week ended September 4, the largest increase since March when the 30-year fixed rate moved below 5.00%. In this latest week, that 30-year rate settled in at 5.02%.
Applications to purchase a home rallied 9.5% as homebuyers rush to get in before that first-time tax credit of $8,000 expires. Applications to refinance an existing mortgage surged 22.5%.
Fed’s Beige BookThe Federal Reserve released their Beige Book – reports on the economic conditions within each of the Fed’s 12 districts, the survey is released about every six weeks.
The Fed stated that economic activity continued to stabilize in July and August. In terms of district, Dallas indicated activity has firmed, while Boston, Cleveland, Philly, Richmond and San Fran mentioned signs of improvement. Atlanta, Chicago, KC, Minneapolis and NY generally described activity as stable or showing signs of stabilization. St. Louis described the pace of decline appeared to be moderating.
A majority of districts reported flat retail sales – helped by clunker-cash. (Note: Odds are retail activity would have been lower without clunker-cash, which begs the question: What will this segment of the Beige Book look like for the current six-week period now that the subsidy has expired and consumers have increased debt levels at the margin – remember, auto loans ran at an LTV of 92% in July).
Downward pressure on home prices continued in most districts – Dallas and NY noted local prices were firming. On the commercial side, all districts suggested demand for space remained weak and rent concessions and the postponement of property improvements were prevalent.
Manufacturing activity improved in most districts. Contacts remain cautiously optimistic but cost control measures would remain in place, according to the report.
Labor market conditions remained weak across all districts. However, several districts did note an increase in temporary hiring – this is what you want to see as it is an early indication of more permanent hiring. That said, contacts in Boston questioned whether these gains will persist. (Note: There was no evidence in last week’s August employment report of temp. hiring as it fell for the 20th straight month.)
Most districts reported loan demand was weak, and one gets the sense that this would have been even weaker if not for the increase in auto loans.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment