S&P 500: +8.12% (+0.97%)
REITs
Shopping center developer Kimco Realty Corp (KIM) joined the growing list of REITs that are slashing dividends and issuing shares to shore up their balance sheets. Although these actions are dilutive to current shareholders, investors are applauding actions taken by REITs to stabilize their balance sheets. Perhaps investors will finally return their focus to leasing fundamentals rather than balance sheet deficiencies.
One of the flaws with the REIT model is that companies pay out most of their earned cash, so they need debt or equity to continue growing. With the capital markets still tight, companies have resorted to selling new shares despite the fact that most are trading well below intrinsic value. Still, adding cash greatly improves a company’s chances of meeting debt maturities and surviving the recession.
REITs may also be benefiting from FASB’s change to the mark-to-market, which should provide lenders with regulatory capital relief. This, in turn, should free up more capital and make it easier for REITs to get financing.
Things are definitely improving for REITs.
Quick Hits
Peter Lazaroff, Junior Analyst
Friday, April 3, 2009
Fixed Income Recap
Treasuries
The two-year finished the day down 9/64, and the ten-year was lower by 49/64 on strength in the stock market (S&P +2.87%). The benchmark curve was 3 basis points steeper on the day, and remains at +187 bps. A basis point represents .01%.
FASB Releases New Mark-to-Market Guidance
The Financial Accounting Standards Board revised the rules associated with how financial institutions must value certain “difficult to price” assets. The new rules give institutions the opportunity to price some assets based more on their own judgment rather than relying on prices from fire sale transactions.
Banks have been writing this stuff down pretty extensively now and this rule change doesn’t reverse any of the losses taken to date. However, fears of more write-downs have haunted investors for the past 18 months and profitability and regulatory capital ratios stand to look much better in the future thanks to this ruling.
Treasury Purchases by the Fed
The Fed purchased $7.5 billion in 4-6 year Treasury notes today. The Fed will purchase 10-17 year notes on Monday and 1-2 year notes on Wednesday of next week.
FDIC Insured Corporate Bonds
The FDIC’s Temporary Liquidity Guarantee Program (TLGP) was extended to December of 2012, (the previous limit was June of 2012). In addition to the term extension, an increase in fees will begin in June of this year in an attempt to dissuade borrowers from using the program while recapitalizing the FDIC’s reserves. The original fee of 100 basis points annually will be increased 25 basis points for debt maturing by June of 2012 and 50 basis points for debt maturing after that. For non-bank entities like GE Capital the fee increases will be larger.
I’m not sure if the fee increase will really deter any bank from issuing debt under the program. Even considering the fee increase, issuing debt under the TLGP program is still vastly cheaper than issuing debt without the FDIC’s guarantee. About $350 billion dollars worth of debt has been issued under the program to date, while program participants have brought only 2 non-TLGP issues to market over the same period. Goldman, B of A and Citi are going to continue to take advantage of this program as long as it remains cost effective.
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
The two-year finished the day down 9/64, and the ten-year was lower by 49/64 on strength in the stock market (S&P +2.87%). The benchmark curve was 3 basis points steeper on the day, and remains at +187 bps. A basis point represents .01%.
FASB Releases New Mark-to-Market Guidance
The Financial Accounting Standards Board revised the rules associated with how financial institutions must value certain “difficult to price” assets. The new rules give institutions the opportunity to price some assets based more on their own judgment rather than relying on prices from fire sale transactions.
Banks have been writing this stuff down pretty extensively now and this rule change doesn’t reverse any of the losses taken to date. However, fears of more write-downs have haunted investors for the past 18 months and profitability and regulatory capital ratios stand to look much better in the future thanks to this ruling.
Treasury Purchases by the Fed
The Fed purchased $7.5 billion in 4-6 year Treasury notes today. The Fed will purchase 10-17 year notes on Monday and 1-2 year notes on Wednesday of next week.
FDIC Insured Corporate Bonds
The FDIC’s Temporary Liquidity Guarantee Program (TLGP) was extended to December of 2012, (the previous limit was June of 2012). In addition to the term extension, an increase in fees will begin in June of this year in an attempt to dissuade borrowers from using the program while recapitalizing the FDIC’s reserves. The original fee of 100 basis points annually will be increased 25 basis points for debt maturing by June of 2012 and 50 basis points for debt maturing after that. For non-bank entities like GE Capital the fee increases will be larger.
I’m not sure if the fee increase will really deter any bank from issuing debt under the program. Even considering the fee increase, issuing debt under the TLGP program is still vastly cheaper than issuing debt without the FDIC’s guarantee. About $350 billion dollars worth of debt has been issued under the program to date, while program participants have brought only 2 non-TLGP issues to market over the same period. Goldman, B of A and Citi are going to continue to take advantage of this program as long as it remains cost effective.
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
Daily Insight
U.S. stocks posted another very good session yesterday, as the rally from the wicked low of 666 continues. News that FASB voted to modify the accounting rule that has done undue damage to regulatory capital within the banking system offset a jobless claims figure that shows no sign of improvement within the labor market.
Yesterday the Financial Accounting Standards Board (FASB) approved changes to fair-value (mark-to-market) accounting that will allow financial firms to use “significant” judgment in valuing assets to reduce write downs on certain investments – namely those in which there is not sufficient liquidity to make a market.
The key here is that “relaxing” the rule at least partially breaks the link between these assets and regulatory capital and this will help to ease the impact the November 2007 accounting change has had on banks’ ability and willingness to lend (it has unjustifiably been vaporizing capital). This will also allow firms to mark an asset to the underlying cash flows instead of having to price to distressed levels even for securities that are performing on schedule.
This likely helped yesterday’s rally, although we should acknowledge that the bounce off of the March 9 low is at least partially a result of the market pricing this event in as it’s been telegraphed for a couple of weeks now.
It was really nice to see something other than the financial sector lead the overall rally for a second-straight day now. This could be a sign a broader-based leadership is occurring. Transportation stocks are on a tear as well, which is essential to see if we’re going to add onto this upswing – the Dow Jones Transportation Average jumped 7.9% yesterday and is up 38% from its March 9 low.
To throw a guess out there, I think we can add another 10% or so to this rally, which will put the broad index at 20 times our low-end earnings range estimate. Beyond that it’s going to be tough to keep going as there are still tough job numbers to get past, a first-quarter earnings season that will be ugly (banks will show improvement but industrial, tech and consumer sector profits will be weak), legislative risks and rogue regime activity that no one is really talking about right now.
A really good session could have been a great session yesterday, but we lost some momentum in the afternoon and failed to hold above 842 on the S&P 500, which may be a level technicians are viewing as resistance -- that was the October 10 intraday low. October 10 marked the first true low put in during this six-month stock-market debacle; then we had the penultimate low hit on November 20 and the latest devilish low of March 6.
Market Activity for April 2, 2009
G-5, G-7, G-8, G-20, G… whatever
I’m not going to waste much time on the G-20 show-- and the fact that it involves so many members should alert people to the high probability that its ideas are going no where. Heck, the G-8 (formerly the G-7, and before that the G-5) hadn’t agreed on anything since the Plaza Accord of 1985 – and a good thing too as the agenda from these groups are as anti-American as those of the UN.
The farce of this latest gathering (not to be confused with the farce of all of those rock-wielding miscreants outside the event pretending to be anti-capitalists, the majority of which cannot even define the term, but are actually nothing more than delinquents who never miss an opportunity to spur chaos) is that they are leaning on the IMF to spark an economic revival.
The IMF, as its 65-year history proves, is not capable of profound economic incitement, but unfortunately they are quite adept at transferring wealth from the American taxpayer to all kinds of indecorous regimes. But fear not, as the addition of another 12 members (and thus 12 more competing self interests) to the G means it’s highly unlikely even a fraction of their agenda will be accomplished.
(The hilarious aspect of the convocation – well hilarious if it we weren’t talking about so much money and this wasn’t the fraction of the G-20 agenda that will be accomplished – is that the group agreed to add $1 trillion to the IMF. Where do people think this money comes from? It’s sapped directly from the private sector; so someone please tell me how this boosts anything. The Keynesians in charge incessantly focus on their precious “aggregate demand” but how exactly is aggregate demand boosted when you take $1trillion from the private sector and hand it to the IMF to distribute as they wish. Reality is it doesn’t boost anything, but rather does damage as the IMF can hardly allocate these resources in the efficient manner the market is capable of.)
Jobless Claims
The Labor Department reported initial jobless claims for the week ended March 28 jumped to the highest level since September 1982 and sits just 25,000 below the all-time high. (Still, when you adjust for employment growth -- there were 88 million payroll positions in 1982 vs. 132 million today -- claims would have to be higher by 300,000 than they are currently to compare to the labor market conditions in the early 1980s).
Initial claims rose to 669,000 from 657,000 in the prior week (that prior week’s reading was revised higher by 5,000). The four-week average of claims rose 6,500 to 656,750.
Continuing claims hit the highest level since records began in 1967, rising 161,000 to 5.728 million.
The insured unemployment rate (which tracks the direction of the overall jobless rate) rose to 4.3% from 4.2% in the prior week. This insured unemployment rates has hit the highest level since May 1983, when the overall jobless rate hit 10.1%.
This data continues to signal the job market will continue to worsen. We’ll note, the unemployment rate is a lagging indicator – it will continue to rise and will peak even as the business cycle returns to expansion mode. But this claims data is what is known as a coincident indicator, meaning it’s a real-time look at economic conditions. This figure has to show some easing, along with ISM hitting at least the low 40s (currently at 36), before signaling the economy is truly rebounding.
Factory Orders
The Commerce Department reported that factory orders rose for the first time in seven months, mirroring the direction the durable goods report showed roughly a week ago – factory orders also include non-durable goods orders, or those goods that are not necessarily meant to last at least three years.
Orders rose 1.8% in February after falling 3.5% for January, which was revised down from the 1.9% decline estimate when the January report was first released.
The damage witnessed in factory orders over the past six months has been harsh, falling 33% at an annual rate since September (that’s with this latest increase). This latest reading showed nice increases in construction materials, machinery, and computer and electronics orders. The key figure we watch is nondefense capital goods ex-aircraft (a proxy for business-equipment spending). This segment of the report jumped 7.1% for February after plunging 46% at an annual rate in the previous six months.
Now let’s add to this rebound and we may be onto something.
Big news today is the release of the March jobs report. We’ll likely see a decline of 700,000 payroll positions, the consensus estimate is for a 670,000 decline. The market should be able to look past this reading though as it has already factored it in. It may take a decline that approaches 750,000 to drive a substantial sell-off in stocks.
We’ll also get the ISM services-sector reading which has moved slightly above the low put in in November – although the February reading did decline relative to the January number so the improvement hasn’t been consistent. If this reading inches higher, and the jobs loss stays within expectations, stocks may just rally again.
Have a great weekend!
Brent Vondera, Senior Analyst
Yesterday the Financial Accounting Standards Board (FASB) approved changes to fair-value (mark-to-market) accounting that will allow financial firms to use “significant” judgment in valuing assets to reduce write downs on certain investments – namely those in which there is not sufficient liquidity to make a market.
The key here is that “relaxing” the rule at least partially breaks the link between these assets and regulatory capital and this will help to ease the impact the November 2007 accounting change has had on banks’ ability and willingness to lend (it has unjustifiably been vaporizing capital). This will also allow firms to mark an asset to the underlying cash flows instead of having to price to distressed levels even for securities that are performing on schedule.
This likely helped yesterday’s rally, although we should acknowledge that the bounce off of the March 9 low is at least partially a result of the market pricing this event in as it’s been telegraphed for a couple of weeks now.
It was really nice to see something other than the financial sector lead the overall rally for a second-straight day now. This could be a sign a broader-based leadership is occurring. Transportation stocks are on a tear as well, which is essential to see if we’re going to add onto this upswing – the Dow Jones Transportation Average jumped 7.9% yesterday and is up 38% from its March 9 low.
To throw a guess out there, I think we can add another 10% or so to this rally, which will put the broad index at 20 times our low-end earnings range estimate. Beyond that it’s going to be tough to keep going as there are still tough job numbers to get past, a first-quarter earnings season that will be ugly (banks will show improvement but industrial, tech and consumer sector profits will be weak), legislative risks and rogue regime activity that no one is really talking about right now.
A really good session could have been a great session yesterday, but we lost some momentum in the afternoon and failed to hold above 842 on the S&P 500, which may be a level technicians are viewing as resistance -- that was the October 10 intraday low. October 10 marked the first true low put in during this six-month stock-market debacle; then we had the penultimate low hit on November 20 and the latest devilish low of March 6.
Market Activity for April 2, 2009
G-5, G-7, G-8, G-20, G… whatever
I’m not going to waste much time on the G-20 show-- and the fact that it involves so many members should alert people to the high probability that its ideas are going no where. Heck, the G-8 (formerly the G-7, and before that the G-5) hadn’t agreed on anything since the Plaza Accord of 1985 – and a good thing too as the agenda from these groups are as anti-American as those of the UN.
The farce of this latest gathering (not to be confused with the farce of all of those rock-wielding miscreants outside the event pretending to be anti-capitalists, the majority of which cannot even define the term, but are actually nothing more than delinquents who never miss an opportunity to spur chaos) is that they are leaning on the IMF to spark an economic revival.
The IMF, as its 65-year history proves, is not capable of profound economic incitement, but unfortunately they are quite adept at transferring wealth from the American taxpayer to all kinds of indecorous regimes. But fear not, as the addition of another 12 members (and thus 12 more competing self interests) to the G means it’s highly unlikely even a fraction of their agenda will be accomplished.
(The hilarious aspect of the convocation – well hilarious if it we weren’t talking about so much money and this wasn’t the fraction of the G-20 agenda that will be accomplished – is that the group agreed to add $1 trillion to the IMF. Where do people think this money comes from? It’s sapped directly from the private sector; so someone please tell me how this boosts anything. The Keynesians in charge incessantly focus on their precious “aggregate demand” but how exactly is aggregate demand boosted when you take $1trillion from the private sector and hand it to the IMF to distribute as they wish. Reality is it doesn’t boost anything, but rather does damage as the IMF can hardly allocate these resources in the efficient manner the market is capable of.)
Jobless Claims
The Labor Department reported initial jobless claims for the week ended March 28 jumped to the highest level since September 1982 and sits just 25,000 below the all-time high. (Still, when you adjust for employment growth -- there were 88 million payroll positions in 1982 vs. 132 million today -- claims would have to be higher by 300,000 than they are currently to compare to the labor market conditions in the early 1980s).
Initial claims rose to 669,000 from 657,000 in the prior week (that prior week’s reading was revised higher by 5,000). The four-week average of claims rose 6,500 to 656,750.
Continuing claims hit the highest level since records began in 1967, rising 161,000 to 5.728 million.
The insured unemployment rate (which tracks the direction of the overall jobless rate) rose to 4.3% from 4.2% in the prior week. This insured unemployment rates has hit the highest level since May 1983, when the overall jobless rate hit 10.1%.
This data continues to signal the job market will continue to worsen. We’ll note, the unemployment rate is a lagging indicator – it will continue to rise and will peak even as the business cycle returns to expansion mode. But this claims data is what is known as a coincident indicator, meaning it’s a real-time look at economic conditions. This figure has to show some easing, along with ISM hitting at least the low 40s (currently at 36), before signaling the economy is truly rebounding.
Factory Orders
The Commerce Department reported that factory orders rose for the first time in seven months, mirroring the direction the durable goods report showed roughly a week ago – factory orders also include non-durable goods orders, or those goods that are not necessarily meant to last at least three years.
Orders rose 1.8% in February after falling 3.5% for January, which was revised down from the 1.9% decline estimate when the January report was first released.
The damage witnessed in factory orders over the past six months has been harsh, falling 33% at an annual rate since September (that’s with this latest increase). This latest reading showed nice increases in construction materials, machinery, and computer and electronics orders. The key figure we watch is nondefense capital goods ex-aircraft (a proxy for business-equipment spending). This segment of the report jumped 7.1% for February after plunging 46% at an annual rate in the previous six months.
Now let’s add to this rebound and we may be onto something.
Big news today is the release of the March jobs report. We’ll likely see a decline of 700,000 payroll positions, the consensus estimate is for a 670,000 decline. The market should be able to look past this reading though as it has already factored it in. It may take a decline that approaches 750,000 to drive a substantial sell-off in stocks.
We’ll also get the ISM services-sector reading which has moved slightly above the low put in in November – although the February reading did decline relative to the January number so the improvement hasn’t been consistent. If this reading inches higher, and the jobs loss stays within expectations, stocks may just rally again.
Have a great weekend!
Brent Vondera, Senior Analyst
Thursday, April 2, 2009
MON, WAG, PFG, GE+INTC
Monsanto (MON) -0.40%
Monsanto reported second quarter profit that topped analysts’ estimates, but issued downside earnings guidance for the full year.
Increased prices for genetically modified seeds and Roundup weed killer helped boost revenues 8.3 percent year-over-year. Higher prices also lifted margins 5 percent in the quarter.
Sales in the seeds and genomics segment jumped 20 percent, helped by strong adoption of a higher-margin corn seed in the U.S. Sales from the agricultural productivity products dropped 16 percent on lower volumes of Roundup and other herbicides.
Despite the downside earnings guidance, CEO Hugh Grant said Monsanto is “on track for more than 20 percent growth in earnings for the full fiscal year.”
Walgreen (WAG) +3.36%
Walgreens reported impressive March sales numbers, with total sales increasing 6.8 percent and same-store sales (stores open at least 12 months) rising a modest 1.5 percent. Pharmacy sales, which accounted for two-thirds of total sales for the month, were up 10.2 percent. Same-store pharmacy sales increased 5.7 percent, but were negatively impacted by 2.8 percent due to generic drug introductions in the last 12 months.
Principal Financial Group (PFG) +7.60%
Insurers Left Hanging as Treasury Stalls
Intel (INTC) +4.46%
GE and Intel Team Up in Health Care
Quick Hits
- FASB Eases Fair-Value Rules Amid Lawmaker Pressure
- Geithner’s Non-Recourse Gift That Keeps on Giving to Bill Gross
- S&P ‘Dividend Aristocrats’ May Fall Below 40 as Payouts Are Cut
Peter Lazaroff, Junior Analyst
Daily Insight
U.S. stocks rebounded from a poor start after a key manufacturing gauge showed mild improvement, rising for the third-straight month from the 28-year low hit in December, and an unexpected increase in pending home sales for February boosted the belief that housing has bottomed.
Stocks began the session lower after two preliminary jobs reports suggested the official employment survey for March will show a decline that’s even worse than the 650,000 loss for February. The broad market fell roughly 2% in early trading, but rallied when those factory and housing reports were released at 9:00CT.
I’m still a bit skeptical manufacturing and housing has troughed. For manufacturing, we’ll still have the auto sector weighing on things and production levels for the industry will likely decline from here.
On housing, as we mentioned when the existing home sales data for February was released, we need to think about the weather-related event. Conditions were harsh for most of the country during January, which is why we saw one of the worst monthly sales declines during this contraction for that month. Conversely, weather was very mild in February, which brought people out to hunt for homes; in addition, the bounce in February was also a function of things snapping back from that 12-year low in existing sales in the prior month (the level of sales remains below where it was in December). Odds are we have seen the worst, but it’s just too early to tell right now, especially with the labor market in the condition it is in. More on this below.
Telecom, basic material (commodity-related stocks), financials and tech shares all performed very well yesterday. Utilities and health-care were the laggards.
Market Activity for April 1, 2009
Economic Releases
Mortgage Applications
The Mortgage Bankers Association reported its mortgage apps index rose for a fourth-straight week as refinancing activity increased and purchases didn’t weigh on the figure – purchases were virtually flat relative to the prior week.
Mortgage rates remain extremely attractive, the 30-year fixed rate hit 4.61% in the week ended March 27 (although the actual rate is a bit higher as it includes fees) and this should keep refis going, albeit at a lower pace coming off of the very strong bounce of the previous couple of weeks. Purchases will continue to be held back as a result of the very weak labor-market environment, although the super low rates will help to ease this drag.
Challenger Job Cuts Announcements
The Challenger Job Cuts report, a survey out of Challenger, Gray and Christmas – the country’s top outplacement consulting firm, stated job cut announcements by U.S. firms nearly tripled in March from the year-ago level.
Firing announcements jumped 181% to 150,411, compared with 53,579 in March 2008 – employers in state and local government along with nonprofit organizations led the increase. The financial and industrial goods sectors showed a nice easing in layoff announcements – that’s a really good sign that should have received more attention that it did.
ADP Employment Report
The ADP Employer Services gauge (Challenger and ADP are always released two days prior to the official monthly jobs report) came in at a larger-than-expected decline for March, suggesting 742,000 payroll positions were shed in March. We get the official reading from the Bureau of Labor Statistics on Friday and a loss of 660,000 positions is the consensus expection. The ADP figure has been an accurate indicator of the official reading over the past six months (understating the loss a bit actually, but very close).
We figured to be headed for a 650,000 loss in payrolls for March based upon jobless claims and ISM employment readings, but this ADP report may be saying a number above 700K is more likely. Expect the unemployment rate to hit 8.5%, which would be a 25-year high.
Medium-to-small sized businesses continue to cut the most jobs. Firms with 50-499 employees slashed 330,000 positions last month, according to ADP. Firms with fewer than 50 employees cut 284,000 positions. Large firms eliminated 128,000 jobs.
ISM Manufacturing
The Institute for Supply Management stated its manufacturing index rose slightly in March, coming in at 36.3 from 35.8 in February. The fact that the figure remains below 50 means that factories continue to trim output but the bounce from the 28-year low may be a signal of a bottoming process. If we can get this improvement to extend into the low 40s that will signal we’re onto something. The question really is the degree to which auto-industry woes will continue to weigh on the sector. Nevertheless, business spending on electrical and heavy machinery equipment may be enough to more than offset the auto weakness.
The new orders index was the real bright spot and hopefully this indicates a manufacturing rebound will occur over the next couple of months. The sub-index of the report jumped to 41.2 in March from 33.1 in February. This segment has been in contraction mode for 16-straight months (and remains that way since its takes a reading of 50 to mark expansion). But this is a nice improvement from the all-time low hit in January and looks to illustrate we’ve hit a bottom – cautious optimism.
The ISM employment index rose slightly from the all-time low hit in February.
In two other reports:
The National Association of Realtors stated pending sales for existing homes rose 2.1% in February, which suggests March existing home sales may show an increase. However, this pending number tracks contracts that are signed (actual existing sales count when a contract is closed) and since we’re in an environment in which borrowers have run into trouble between signing and closing the pending figure has not been as accurate as usual.
And finally, the Commerce Department stated construction spending fell 0.9% in February (the sixth-month of decline), led by a 10.9% drop in private-sector residential construction. Private-sector commercial activity rose 0.5%, the first increase since November. Public sector construction spending, which will clearly drive the overall reading over the next year at least, rose on both measures. Public residential construction rose 2.2% and public commercial was up 0.8%.
This morning all eyes will be focused on the initial jobless claims report. Stocks index futures are up big this morning and a worse-than expected jobless claims print may erase this euphoria.
No doubt we’ve got performance chasers rushing in as the S&P 500 has jumped 22% from the nefarious low of 666 of March 9. The market seems to have priced in a 700,000 payroll decline for March and is looking past last month’s data and to April and May, which is why the jobless claims figure is so important. If this morning’s jobless claims reading comes in meaningfully worse than expected stocks will sell off – a super bad jobless claims reading will suggest big job declines will continue for April. On the other side, if claims come in much lower than expected, stocks will be off to the races – kind of obvious I know.
Overall, in order to get really excited about the labor market, specifically with regard to the worst being behind us, we need to see jobless claims trend back to the 500,000 handle and I don’t see much evidence of this just yet – but that’s what you look for.
Have a great day!
Brent Vondera, Senior Analyst
Stocks began the session lower after two preliminary jobs reports suggested the official employment survey for March will show a decline that’s even worse than the 650,000 loss for February. The broad market fell roughly 2% in early trading, but rallied when those factory and housing reports were released at 9:00CT.
I’m still a bit skeptical manufacturing and housing has troughed. For manufacturing, we’ll still have the auto sector weighing on things and production levels for the industry will likely decline from here.
On housing, as we mentioned when the existing home sales data for February was released, we need to think about the weather-related event. Conditions were harsh for most of the country during January, which is why we saw one of the worst monthly sales declines during this contraction for that month. Conversely, weather was very mild in February, which brought people out to hunt for homes; in addition, the bounce in February was also a function of things snapping back from that 12-year low in existing sales in the prior month (the level of sales remains below where it was in December). Odds are we have seen the worst, but it’s just too early to tell right now, especially with the labor market in the condition it is in. More on this below.
Telecom, basic material (commodity-related stocks), financials and tech shares all performed very well yesterday. Utilities and health-care were the laggards.
Market Activity for April 1, 2009
Economic Releases
Mortgage Applications
The Mortgage Bankers Association reported its mortgage apps index rose for a fourth-straight week as refinancing activity increased and purchases didn’t weigh on the figure – purchases were virtually flat relative to the prior week.
Mortgage rates remain extremely attractive, the 30-year fixed rate hit 4.61% in the week ended March 27 (although the actual rate is a bit higher as it includes fees) and this should keep refis going, albeit at a lower pace coming off of the very strong bounce of the previous couple of weeks. Purchases will continue to be held back as a result of the very weak labor-market environment, although the super low rates will help to ease this drag.
Challenger Job Cuts Announcements
The Challenger Job Cuts report, a survey out of Challenger, Gray and Christmas – the country’s top outplacement consulting firm, stated job cut announcements by U.S. firms nearly tripled in March from the year-ago level.
Firing announcements jumped 181% to 150,411, compared with 53,579 in March 2008 – employers in state and local government along with nonprofit organizations led the increase. The financial and industrial goods sectors showed a nice easing in layoff announcements – that’s a really good sign that should have received more attention that it did.
ADP Employment Report
The ADP Employer Services gauge (Challenger and ADP are always released two days prior to the official monthly jobs report) came in at a larger-than-expected decline for March, suggesting 742,000 payroll positions were shed in March. We get the official reading from the Bureau of Labor Statistics on Friday and a loss of 660,000 positions is the consensus expection. The ADP figure has been an accurate indicator of the official reading over the past six months (understating the loss a bit actually, but very close).
We figured to be headed for a 650,000 loss in payrolls for March based upon jobless claims and ISM employment readings, but this ADP report may be saying a number above 700K is more likely. Expect the unemployment rate to hit 8.5%, which would be a 25-year high.
Medium-to-small sized businesses continue to cut the most jobs. Firms with 50-499 employees slashed 330,000 positions last month, according to ADP. Firms with fewer than 50 employees cut 284,000 positions. Large firms eliminated 128,000 jobs.
ISM Manufacturing
The Institute for Supply Management stated its manufacturing index rose slightly in March, coming in at 36.3 from 35.8 in February. The fact that the figure remains below 50 means that factories continue to trim output but the bounce from the 28-year low may be a signal of a bottoming process. If we can get this improvement to extend into the low 40s that will signal we’re onto something. The question really is the degree to which auto-industry woes will continue to weigh on the sector. Nevertheless, business spending on electrical and heavy machinery equipment may be enough to more than offset the auto weakness.
The new orders index was the real bright spot and hopefully this indicates a manufacturing rebound will occur over the next couple of months. The sub-index of the report jumped to 41.2 in March from 33.1 in February. This segment has been in contraction mode for 16-straight months (and remains that way since its takes a reading of 50 to mark expansion). But this is a nice improvement from the all-time low hit in January and looks to illustrate we’ve hit a bottom – cautious optimism.
The ISM employment index rose slightly from the all-time low hit in February.
In two other reports:
The National Association of Realtors stated pending sales for existing homes rose 2.1% in February, which suggests March existing home sales may show an increase. However, this pending number tracks contracts that are signed (actual existing sales count when a contract is closed) and since we’re in an environment in which borrowers have run into trouble between signing and closing the pending figure has not been as accurate as usual.
And finally, the Commerce Department stated construction spending fell 0.9% in February (the sixth-month of decline), led by a 10.9% drop in private-sector residential construction. Private-sector commercial activity rose 0.5%, the first increase since November. Public sector construction spending, which will clearly drive the overall reading over the next year at least, rose on both measures. Public residential construction rose 2.2% and public commercial was up 0.8%.
This morning all eyes will be focused on the initial jobless claims report. Stocks index futures are up big this morning and a worse-than expected jobless claims print may erase this euphoria.
No doubt we’ve got performance chasers rushing in as the S&P 500 has jumped 22% from the nefarious low of 666 of March 9. The market seems to have priced in a 700,000 payroll decline for March and is looking past last month’s data and to April and May, which is why the jobless claims figure is so important. If this morning’s jobless claims reading comes in meaningfully worse than expected stocks will sell off – a super bad jobless claims reading will suggest big job declines will continue for April. On the other side, if claims come in much lower than expected, stocks will be off to the races – kind of obvious I know.
Overall, in order to get really excited about the labor market, specifically with regard to the worst being behind us, we need to see jobless claims trend back to the 500,000 handle and I don’t see much evidence of this just yet – but that’s what you look for.
Have a great day!
Brent Vondera, Senior Analyst
Fixed Income Recap
Treasuries
The two-year finished the day down 1/64, and the ten-year was higher by 3/64. The benchmark curve was 2 basis points flatter on the day, and remains at +184 bps. A basis point represents .01%.
MBS
In yesterday’s recap I mentioned that “as the duration continues to creep lower on 5.5% and 6% pools, the comparison [between higher coupon and lower coupon pools] is almost becoming inappropriate.” I apologize for being so vague; let me explain what I meant a little further.
Mortgage rates currently sit at historic lows, thanks to government plan to purchase 28% of the agency MBS outstanding. LTV (Loan to Value) restrictions will be relaxed through President Obama’s “Make Home Affordable” initiative, qualifying many more “underwater” borrowers for a conventional refinance. The market considers these new variables when building consensus speeds, but opinions differ greatly and most likely err on the faster side of prepayments. These are driving valuations far from the historical norms.
Historically, prepayment speeds on higher coupon MBS are faster than lower coupon MBS. This follows the logic that when rates drop, homeowners are more likely to refinance a mortgage with a higher rate to save on interest costs, and faster prepayments on the underlying loans result in shorter average lives and durations.
The spread between the ten-year Treasury and new 30-year MBS is often quoted because historically they both have a duration of around 8 years, making it an “apples to apples” comparison. While the duration of the ten-year remains at 8.57, new issue 30-year 6% pass-throughs currently have a duration of 1.48. This is obviously no longer an “apples to apples” comparison. When the durations differ so greatly the relationship doesn’t carry the same weight, and claiming that one coupon outperforms another based simply on its change in spread over the ten-year treasury isn’t as effective.
Treasury Purchases by the Fed
The Fed purchased $6 billion in 3-4 year Treasury notes today, in line with expectations. Tomorrow the Fed will purchase notes ranging from four to six years to maturity.
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
The two-year finished the day down 1/64, and the ten-year was higher by 3/64. The benchmark curve was 2 basis points flatter on the day, and remains at +184 bps. A basis point represents .01%.
MBS
In yesterday’s recap I mentioned that “as the duration continues to creep lower on 5.5% and 6% pools, the comparison [between higher coupon and lower coupon pools] is almost becoming inappropriate.” I apologize for being so vague; let me explain what I meant a little further.
Mortgage rates currently sit at historic lows, thanks to government plan to purchase 28% of the agency MBS outstanding. LTV (Loan to Value) restrictions will be relaxed through President Obama’s “Make Home Affordable” initiative, qualifying many more “underwater” borrowers for a conventional refinance. The market considers these new variables when building consensus speeds, but opinions differ greatly and most likely err on the faster side of prepayments. These are driving valuations far from the historical norms.
Historically, prepayment speeds on higher coupon MBS are faster than lower coupon MBS. This follows the logic that when rates drop, homeowners are more likely to refinance a mortgage with a higher rate to save on interest costs, and faster prepayments on the underlying loans result in shorter average lives and durations.
The spread between the ten-year Treasury and new 30-year MBS is often quoted because historically they both have a duration of around 8 years, making it an “apples to apples” comparison. While the duration of the ten-year remains at 8.57, new issue 30-year 6% pass-throughs currently have a duration of 1.48. This is obviously no longer an “apples to apples” comparison. When the durations differ so greatly the relationship doesn’t carry the same weight, and claiming that one coupon outperforms another based simply on its change in spread over the ten-year treasury isn’t as effective.
Treasury Purchases by the Fed
The Fed purchased $6 billion in 3-4 year Treasury notes today, in line with expectations. Tomorrow the Fed will purchase notes ranging from four to six years to maturity.
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
Wednesday, April 1, 2009
March 2009 Recap
The market fared much better in March than they did in the first two months of the year. The S&P 500 hit a new low on March 9, but was lifted by optimism within the financial sector as Citigroup, Bank of America and JPMorgan said they were profitable in January and February. The Treasury’s plan to remove toxic assets from banks’ balance sheets as well as the Fed’s pledge to buy Treasuries and bonds backed by mortgages helped extend the gains.
All sectors in the S&P 500 finished the month higher. Defensive sectors such as utilities, telecom and consumer staples lagged as investors favored beaten down sectors with more upside potential. Financials, materials, consumer discretionary and technology were the best performing sectors in the S&P 500 this month.
Materials were boosted by inflation expectations as well as speculation that stimulus packages throughout the world will increase demand. Consumer discretionary benefited from bargain hunters hoping the worst of the economic decline is near. The technology sector finished the quarter in the black and continues to be viewed positively by investors for their healthy balance sheets with tons of cash and strong growth prospects.
International shares saw gains similar to those in the U.S., but the MSCI Emerging Markets index gained 14.27 percent in March and is up 0.69 percent year-to-date. Investors anticipate emerging markets will to continue growing at better rates than most developed nations, even if their growth rate is slower than in years past.
Alternative asset classes trailed stocks. REITs continue to struggle as investors shun their high debt levels. In addition, a slowing economy is keeping rents and occupancy down. Commodity posted modest gains on improved economic outlooks and orderly supply control. Nearly all commodities rose on long-term inflation expectations relative to recent fiscal policy actions.
Fed programs aimed at purchasing $300 billion in Treasuries drove yields down across the entire curve in the month of March. Yields on the two- and ten-year dropped 17.4 bps and 35 bps respectively, to leave the benchmark curve at +186.3 bps.
Peter Lazaroff, Junior Analyst
All sectors in the S&P 500 finished the month higher. Defensive sectors such as utilities, telecom and consumer staples lagged as investors favored beaten down sectors with more upside potential. Financials, materials, consumer discretionary and technology were the best performing sectors in the S&P 500 this month.
Materials were boosted by inflation expectations as well as speculation that stimulus packages throughout the world will increase demand. Consumer discretionary benefited from bargain hunters hoping the worst of the economic decline is near. The technology sector finished the quarter in the black and continues to be viewed positively by investors for their healthy balance sheets with tons of cash and strong growth prospects.
International shares saw gains similar to those in the U.S., but the MSCI Emerging Markets index gained 14.27 percent in March and is up 0.69 percent year-to-date. Investors anticipate emerging markets will to continue growing at better rates than most developed nations, even if their growth rate is slower than in years past.
Alternative asset classes trailed stocks. REITs continue to struggle as investors shun their high debt levels. In addition, a slowing economy is keeping rents and occupancy down. Commodity posted modest gains on improved economic outlooks and orderly supply control. Nearly all commodities rose on long-term inflation expectations relative to recent fiscal policy actions.
Fed programs aimed at purchasing $300 billion in Treasuries drove yields down across the entire curve in the month of March. Yields on the two- and ten-year dropped 17.4 bps and 35 bps respectively, to leave the benchmark curve at +186.3 bps.
Peter Lazaroff, Junior Analyst
Daily Insight
U.S. stocks ended the worst first-quarter (-11.67%) since 1939 on a high note yesterday. And for the month, the 8.54% jump in March (as measured by the S&P 500) marked the best monthly performance since October 2002. (Yesterday I stated that March was on track to decline 12%. In fact, it was the quarter that was on track to decline by that magnitude. When gauging this against historic quarterly moves, the past six months marks the worst back-to-back quarterly performance for the S&P 500 since the second and third quarters of 1974)
In terms of sector, the best performers for the quarter were tech (+3.96%) and basic materials (-2.82%). The worst performing sectors were financials (-29.49%) and industrials (-21.70%). The remaining six major sectors declined between -8.47% and -12.08%.
A huge level of cash remains on the sidelines and one would like to think we can continue this rally that has brought us 18.2% above the March 9 flagitious low of 666 on the S&P 500. After massive back-to-back quarterly declines of 22.56% and 11.67% on the index there is certainly room to move higher.
Unfortunately, the government is so involved, and so many of their plans are counterproductive it is really tough to have conviction we can keep this rally going. Another disturbing example is this bill sponsored by the Chairman of the House Financial Services Committee Barney Frank (named the Pay for Performance Act) that would put Secretary of Treasury Geithner in charge of determining the “appropriate” level of pay for all financial institutions that have received a government capital injection. This will involve all employees, according to the bill, and will affect even pre-existing compensation arrangements. This is exactly the kind of thing that will drive top talent from the institutions that need it most and the power grab has a meaningful affect on the market’s confidence regarding the future.
Market Activity for March 31, 2009
Economic Data
S&P Case/Shiller Home Price Index
The Case/Shiller index showed home price declines continue to accelerate. The index, which is not the broadest home-price gauge we have, but does seem to get the most attention, stated prices fell 2.76% in January on a month-over-month basis and 18.97% on a 12-month basis – both of these figures were worse than the declines for the previous month.
The three-month annualized rate of decline accelerated too, showing prices fell 26.46% -- we need to see this three-month figure improve relative to the 12-month level of decline in order to state a statistically significant bottoming in home prices has occurred and the sequential rebound has begun.
The damage in the West continues to drive the index lower – Phoenix and Las Vegas registered the largest declines, down 35% and 32.5%, respectively. Miami, Detroit, and Tampa also experienced significant erosion from the prior month’s readings.
We’ll point out that Case/Shiller is not a broad look at the housing market. The broadest look actually comes out of the Federal Housing and Finance Agency (FHFA), which measured home prices actually rose 1.7% in January, the first monthly increase in nine months. (This FHFA index misses the high-end home market, but it is very broadly based – Case/Shiller, to the contrary, is affected too much by the areas that experienced the greatest levels of speculation during the boom and thus the highest levels of foreclosure in this contraction)
When we average all four of the major home price indices – the two mentioned, along with new and existing home prices from the Commerce Department and National Association of Realtors, or NAR) – home prices were down roughly 9% in January from the year-ago period. We’ll note, data compiled by the Commerce Department and the NAR is more up-to-date and have already released their February data, which showed home prices declined again. As a result you can be sure the next Case/Shiller reading will post an even larger year-over-year decline.
Chicago Purchasing Managers Index (PMI)
The Chicago PMI came in weaker-than-expected, hitting 31.4 in March from 34.2 in February. The average for the quarter was 33.0, down from the fourth-quarter average of 35.7, suggesting the Q1 GDP will show a deeper degree of contraction than the -6.3% posted for Q4 2008.
The sub-indices of the report, indicators that give us some idea of how the next month’s reading will shape up, were flat to lower.
The new orders index rose ever-so-slightly to 30.9 from 30.6 in February – down from the fourth-quarter average..
The production index slipped to 32.7 from 34.7 – in line with the Q4 average.
The employment index, a much watched segment of these factory gauges due to the weakness in the national job market, improved to 28.1 from 25.2 – although much lower than the fourth-quarter average of 37.6.
Overall, nothing in this report suggests the economy has bottomed – although I’ve got to believe we’ll soon see evidence the business cycle has troughed, there has very significant inventory liquidation and firms will need to ramp up production in order to rebuild stockpiles, even if it’s a mild build.
Tomorrow we get the national look at factory activity for March via the ISM reading and it will likely dip to the low 30s (it posted a reading of 35.8 in February – a number below 50 illustrates contraction).
Again, we expect the inventory dynamic to boost factory activity a couple of months out, unless of course government policy scares business – and if business is scared, and remains in survival mode, you can also forget about help from the consumer side of the economy as job losses will continue for longer than they otherwise naturally would.
Have a great day!
Brent Vondera, Senior Analyst
In terms of sector, the best performers for the quarter were tech (+3.96%) and basic materials (-2.82%). The worst performing sectors were financials (-29.49%) and industrials (-21.70%). The remaining six major sectors declined between -8.47% and -12.08%.
A huge level of cash remains on the sidelines and one would like to think we can continue this rally that has brought us 18.2% above the March 9 flagitious low of 666 on the S&P 500. After massive back-to-back quarterly declines of 22.56% and 11.67% on the index there is certainly room to move higher.
Unfortunately, the government is so involved, and so many of their plans are counterproductive it is really tough to have conviction we can keep this rally going. Another disturbing example is this bill sponsored by the Chairman of the House Financial Services Committee Barney Frank (named the Pay for Performance Act) that would put Secretary of Treasury Geithner in charge of determining the “appropriate” level of pay for all financial institutions that have received a government capital injection. This will involve all employees, according to the bill, and will affect even pre-existing compensation arrangements. This is exactly the kind of thing that will drive top talent from the institutions that need it most and the power grab has a meaningful affect on the market’s confidence regarding the future.
Market Activity for March 31, 2009
Economic DataS&P Case/Shiller Home Price Index
The Case/Shiller index showed home price declines continue to accelerate. The index, which is not the broadest home-price gauge we have, but does seem to get the most attention, stated prices fell 2.76% in January on a month-over-month basis and 18.97% on a 12-month basis – both of these figures were worse than the declines for the previous month.
The three-month annualized rate of decline accelerated too, showing prices fell 26.46% -- we need to see this three-month figure improve relative to the 12-month level of decline in order to state a statistically significant bottoming in home prices has occurred and the sequential rebound has begun.
The damage in the West continues to drive the index lower – Phoenix and Las Vegas registered the largest declines, down 35% and 32.5%, respectively. Miami, Detroit, and Tampa also experienced significant erosion from the prior month’s readings.
We’ll point out that Case/Shiller is not a broad look at the housing market. The broadest look actually comes out of the Federal Housing and Finance Agency (FHFA), which measured home prices actually rose 1.7% in January, the first monthly increase in nine months. (This FHFA index misses the high-end home market, but it is very broadly based – Case/Shiller, to the contrary, is affected too much by the areas that experienced the greatest levels of speculation during the boom and thus the highest levels of foreclosure in this contraction)
When we average all four of the major home price indices – the two mentioned, along with new and existing home prices from the Commerce Department and National Association of Realtors, or NAR) – home prices were down roughly 9% in January from the year-ago period. We’ll note, data compiled by the Commerce Department and the NAR is more up-to-date and have already released their February data, which showed home prices declined again. As a result you can be sure the next Case/Shiller reading will post an even larger year-over-year decline.
Chicago Purchasing Managers Index (PMI)
The Chicago PMI came in weaker-than-expected, hitting 31.4 in March from 34.2 in February. The average for the quarter was 33.0, down from the fourth-quarter average of 35.7, suggesting the Q1 GDP will show a deeper degree of contraction than the -6.3% posted for Q4 2008.
The sub-indices of the report, indicators that give us some idea of how the next month’s reading will shape up, were flat to lower.
The new orders index rose ever-so-slightly to 30.9 from 30.6 in February – down from the fourth-quarter average..
The production index slipped to 32.7 from 34.7 – in line with the Q4 average.
The employment index, a much watched segment of these factory gauges due to the weakness in the national job market, improved to 28.1 from 25.2 – although much lower than the fourth-quarter average of 37.6.
Overall, nothing in this report suggests the economy has bottomed – although I’ve got to believe we’ll soon see evidence the business cycle has troughed, there has very significant inventory liquidation and firms will need to ramp up production in order to rebuild stockpiles, even if it’s a mild build.
Tomorrow we get the national look at factory activity for March via the ISM reading and it will likely dip to the low 30s (it posted a reading of 35.8 in February – a number below 50 illustrates contraction).
Again, we expect the inventory dynamic to boost factory activity a couple of months out, unless of course government policy scares business – and if business is scared, and remains in survival mode, you can also forget about help from the consumer side of the economy as job losses will continue for longer than they otherwise naturally would.
Have a great day!
Brent Vondera, Senior Analyst
Fixed Income Recap
Treasuries
The two-year finished the day unchanged, and the ten-year was higher by 1/32 on index buying despite the decent rally in stocks. The benchmark curve was unchanged on the day, and remains at +186 bps. A basis point represents .01%.
MBS
Agency MBS continued to lag today, widening 3 basis points to comparable Treasuries. Higher coupon pools outperformed lower coupons considerably and as the duration continues to creep lower on 5.5% and 6% pools, the comparison is almost becoming inappropriate.
Treasury Purchases by the Fed
No purchases were scheduled for today. The Fed will be bidding to buy notes in the 3-4 year space tomorrow and 4-6 year space on Thursday.
Links
AIG’s Gift
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
The two-year finished the day unchanged, and the ten-year was higher by 1/32 on index buying despite the decent rally in stocks. The benchmark curve was unchanged on the day, and remains at +186 bps. A basis point represents .01%.
MBS
Agency MBS continued to lag today, widening 3 basis points to comparable Treasuries. Higher coupon pools outperformed lower coupons considerably and as the duration continues to creep lower on 5.5% and 6% pools, the comparison is almost becoming inappropriate.
Treasury Purchases by the Fed
No purchases were scheduled for today. The Fed will be bidding to buy notes in the 3-4 year space tomorrow and 4-6 year space on Thursday.
Links
AIG’s Gift
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
Tuesday, March 31, 2009
IR
S&P 500: +10.34 (+1.31%)
Ingersoll-Rand (IR) -1.29%
After the market closed yesterday, Ingersoll-Rand lowered guidance and halved its dividend in response to “an accelerated decline in business compared with prior expectations.”
Ingersoll-Rand expects first quarter EPS to be in the low range from a loss of 15 cents to breakeven – the current consensus estimate is a loss of $0.02 per share. The company also lowered its first quarter revenue expectations to reflect a 25 percent decrease from prior levels. For the full year, Ingersoll-Rand expects EPS to be $1.40 to $1.80 per share, $0.45 below its earlier forecast.
In order to enhance liquidity and pay down debt, Ingersoll-Rand will reduce its dividend by half, effective with the September 2009 dividend payment. The company expects the dividend reduction to save $140 million a year. In addition, a subsidiary intends to offer a benchmark-sized amount of senior notes and the parent will offer $300 million senior notes due 2012, exchangeable into cash and shares of Class A common shares.
Separately, Ingersoll-Rand also reconfirmed it will move to Ireland for more favorable tax treatment, amid concerns about changes in U.S. tax laws.
Quick Hits
- Financial Rescue Approaches GDP as U.S. Pledges $12.8 Trillion
- Forget Roubini
- Big Banks’ Recent Profitability Due to AIG Scam?
Peter Lazaroff, Junior Analyst
Daily Insight
U.S. stocks got hammered after the government made clear their running the show with regard to GM and Treasury Secretary Tim Geithner stated some banks will need “large amounts” of assistance – more government involvement is not what the market wants to hear but the administration has a tin ear. At the least, one would think Tumultuous Tim to have learned this by now. His thoughtless comments of the past, comments that were followed by large slides in stock prices, would have led the rational person to do things differently.
The ancillary effects of an auto industry bankruptcy, namely the job dislocations that would result, also weighed on the market. Beyond the Geithner comments, the hit financial shares took were also a function of this issue as a large ramp up in job losses means higher credit-card delinquencies and overall loan default rates. Nevertheless, the correct path is to just get on with it for it is many times more damaging to protect jobs that are not needed and redundant -- the economic contraction will drag on if the government chooses this path
The decline in stock prices yesterday trimmed the rebound off of the devilish low of 666 (S&P 500) on March 9 to 16%. With this the last day of the first quarter, the S&P 500 is on track to slide 12% for March, which follows a 10.99% decline in February and an 8.57% decline in January. You have to go back to the fall of 1987 to match a three-month decline of this magnitude – before that, the fourth-quarter of 1937.
Market Activity for March 30, 2009
“Too Smart by Half” Proposals
There are growing signs regulators are getting closer to promulgating a modification to mark-to-market accounting rules. The Financial Accounting Standards Board (FASB) proposed changes to the rule a couple of weeks back, but an official announcement will be needed to keep this rally going. And no, this won’t cloud transparency; it may even improve it as the current environment of forcing even well-performing assets to be marked to distressed price levels engenders opacity. Besides, investors can still see the marks in quarterly statement footnotes, just as has always been the case.
Modifying mark-to-market certainly makes much more sense than the government’s convoluted Public-Private Investment Program (PPIP), and all of the unintended consequences that would follow. It’s important for us to understand that the implementation of mark-to-market in November 2007 (specifically regarding its link to regulatory capital) allowed hedge funds to game the system – they used this change to make their short positions more profitable. (All one had to do, especially since there was no margin requirement, was to bid up credit default swaps (CDSs) – as the price of CDSs were bid higher, it increased the likelihood -- or at least the perception -- that the default risk on derivatives these swaps were meant to insure would rise. This drove the value of securities banks held on their books to very low levels and mark-to-market forced the banks to mark down even assets that were performing on schedule.)
Now, the Treasury needs private investors to place bids on the “troubled” assets that are sitting on banks’ balance sheets. But as Andy Kessler pointed out last week, what do you think they’ll do? It’s likely they’ll bid CDSs higher, thus driving down the value of the “troubled” assets they’ll be buying under PPIP and increasing their profit potential -- with very very low government financing, mind you. And they’ll have plenty of time to do so as PPIP won’t get off the ground until June at the earliest. And then what do you think is going to happen after private investors make big profits off of this trade, again all with very low government (taxpayer) funding? This will further drive the populist wave in Congress and that spells trouble for the economy as the political class will enact all kinds of harmful regulation/legislation, no matter the harm done to long run growth or possibly even the rule of law as a result.
A better idea, especially since the PPIP acknowledges that these “troubled” assets have a higher intrinsic value than their current price illustrates (otherwise one couldn’t argue in favor of the program) is to allow banks to hold these assets on their books, and they’ll be able to do so with modification of mark-to-market. Modify, or ditch completely, this accounting rule and the banking industry’s regulatory capital will no longer be unjustifiably vaporized, they’ll feel more comfortable with boosting lending activity when it makes sense to do so – which is exactly the ultimate goal Geithner states as the reasoning behind PPIP. But then the government wouldn’t have the power to direct lending, which is why they’ll remain obstinate and force PPIP upon the industry anyway.
Important Week for Data
We were without a meaningful economic release yesterday, but begin an important week of data this morning with Chicago PMI (the most important regional manufacturing report).
Chicago is expected to come in basically unchanged from last month’s low reading of 34.2. Based on the readings out of the New York and Philadelphia regions we may even see the figure decline a bit from February’s low print. However, it is quite likely the factory gauges will bounce a bit some time over the next three months as the inventory dynamic will work to boost activity – businesses have significantly reduced stockpiles and this should mean a little production will ensue to restore those levels during the second quarter.
Tomorrow we’ll get ISM for March (the national factory index). Same is true for this number as for Chicago. We look for the figure to remain in the mid-30s. What you look for is ISM to bounce into the 40s (still contraction mode but a meaningful improvement); when it does it will signal the economy has bottomed and we’re headed for some degree of expansion.
On Thursday, per usual we’ll get initial jobless claims. This is another very important coincident indicator (ISM and jobless claims are the most important indicators currently), and we’ll need to see improvement before getting excited about an economic rebound. The number is expected to remain in the 650,000 range. A move back to the 500K handle should signal we’re on to something. We may be a few weeks away from this move still.
On Friday we get the all-important monthly jobs report, this time for March. We expect another 600K-plus decline in payroll postions and an increase in the unemployment rate to 8.5% from 8.1% as of February.
Have a great day!
Brent Vondera, Senior Analyst
The ancillary effects of an auto industry bankruptcy, namely the job dislocations that would result, also weighed on the market. Beyond the Geithner comments, the hit financial shares took were also a function of this issue as a large ramp up in job losses means higher credit-card delinquencies and overall loan default rates. Nevertheless, the correct path is to just get on with it for it is many times more damaging to protect jobs that are not needed and redundant -- the economic contraction will drag on if the government chooses this path
The decline in stock prices yesterday trimmed the rebound off of the devilish low of 666 (S&P 500) on March 9 to 16%. With this the last day of the first quarter, the S&P 500 is on track to slide 12% for March, which follows a 10.99% decline in February and an 8.57% decline in January. You have to go back to the fall of 1987 to match a three-month decline of this magnitude – before that, the fourth-quarter of 1937.
Market Activity for March 30, 2009
“Too Smart by Half” Proposals
There are growing signs regulators are getting closer to promulgating a modification to mark-to-market accounting rules. The Financial Accounting Standards Board (FASB) proposed changes to the rule a couple of weeks back, but an official announcement will be needed to keep this rally going. And no, this won’t cloud transparency; it may even improve it as the current environment of forcing even well-performing assets to be marked to distressed price levels engenders opacity. Besides, investors can still see the marks in quarterly statement footnotes, just as has always been the case.
Modifying mark-to-market certainly makes much more sense than the government’s convoluted Public-Private Investment Program (PPIP), and all of the unintended consequences that would follow. It’s important for us to understand that the implementation of mark-to-market in November 2007 (specifically regarding its link to regulatory capital) allowed hedge funds to game the system – they used this change to make their short positions more profitable. (All one had to do, especially since there was no margin requirement, was to bid up credit default swaps (CDSs) – as the price of CDSs were bid higher, it increased the likelihood -- or at least the perception -- that the default risk on derivatives these swaps were meant to insure would rise. This drove the value of securities banks held on their books to very low levels and mark-to-market forced the banks to mark down even assets that were performing on schedule.)
Now, the Treasury needs private investors to place bids on the “troubled” assets that are sitting on banks’ balance sheets. But as Andy Kessler pointed out last week, what do you think they’ll do? It’s likely they’ll bid CDSs higher, thus driving down the value of the “troubled” assets they’ll be buying under PPIP and increasing their profit potential -- with very very low government financing, mind you. And they’ll have plenty of time to do so as PPIP won’t get off the ground until June at the earliest. And then what do you think is going to happen after private investors make big profits off of this trade, again all with very low government (taxpayer) funding? This will further drive the populist wave in Congress and that spells trouble for the economy as the political class will enact all kinds of harmful regulation/legislation, no matter the harm done to long run growth or possibly even the rule of law as a result.
A better idea, especially since the PPIP acknowledges that these “troubled” assets have a higher intrinsic value than their current price illustrates (otherwise one couldn’t argue in favor of the program) is to allow banks to hold these assets on their books, and they’ll be able to do so with modification of mark-to-market. Modify, or ditch completely, this accounting rule and the banking industry’s regulatory capital will no longer be unjustifiably vaporized, they’ll feel more comfortable with boosting lending activity when it makes sense to do so – which is exactly the ultimate goal Geithner states as the reasoning behind PPIP. But then the government wouldn’t have the power to direct lending, which is why they’ll remain obstinate and force PPIP upon the industry anyway.
Important Week for Data
We were without a meaningful economic release yesterday, but begin an important week of data this morning with Chicago PMI (the most important regional manufacturing report).
Chicago is expected to come in basically unchanged from last month’s low reading of 34.2. Based on the readings out of the New York and Philadelphia regions we may even see the figure decline a bit from February’s low print. However, it is quite likely the factory gauges will bounce a bit some time over the next three months as the inventory dynamic will work to boost activity – businesses have significantly reduced stockpiles and this should mean a little production will ensue to restore those levels during the second quarter.
Tomorrow we’ll get ISM for March (the national factory index). Same is true for this number as for Chicago. We look for the figure to remain in the mid-30s. What you look for is ISM to bounce into the 40s (still contraction mode but a meaningful improvement); when it does it will signal the economy has bottomed and we’re headed for some degree of expansion.
On Thursday, per usual we’ll get initial jobless claims. This is another very important coincident indicator (ISM and jobless claims are the most important indicators currently), and we’ll need to see improvement before getting excited about an economic rebound. The number is expected to remain in the 650,000 range. A move back to the 500K handle should signal we’re on to something. We may be a few weeks away from this move still.
On Friday we get the all-important monthly jobs report, this time for March. We expect another 600K-plus decline in payroll postions and an increase in the unemployment rate to 8.5% from 8.1% as of February.
Have a great day!
Brent Vondera, Senior Analyst
Fixed Income Recap
Treasuries
The two-year finished up 1/8, and the ten-year was higher by 7/16 on $2.5 billion in long-dated Treasury purchases by the Fed. The benchmark curve was steeper by 1.5 bps on the day, and currently sits at +186 bps. A basis point represents .01%.
The Fed’s purchases disappointed the market who was expecting more after last week’s fast start to the program. Weakness in equities helped bonds rally (S&P down 3.46%) despite the worse than expected demand from the Fed. (more on this below)
MBS
Agency MBS lagged on quiet trading, widening one basis point to comparable Treasuries. 4.5% Thirty-year TBA (To Be Announced) Pools currently stand at 125 bps over the Treasury curve.
Treasury Purchases by the Fed
Despite Fed purchases last week, the supply of Treasury debt in the market still increased thanks to a big week of auctions. The Treasury’s auction block is inactive this week, giving the Fed its first opportunity to truly decrease the supply of Treasuries in the market. The potential for weak economic data and Fed buying this week, stand to support Treasury prices even at these yields.
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
The two-year finished up 1/8, and the ten-year was higher by 7/16 on $2.5 billion in long-dated Treasury purchases by the Fed. The benchmark curve was steeper by 1.5 bps on the day, and currently sits at +186 bps. A basis point represents .01%.
The Fed’s purchases disappointed the market who was expecting more after last week’s fast start to the program. Weakness in equities helped bonds rally (S&P down 3.46%) despite the worse than expected demand from the Fed. (more on this below)
MBS
Agency MBS lagged on quiet trading, widening one basis point to comparable Treasuries. 4.5% Thirty-year TBA (To Be Announced) Pools currently stand at 125 bps over the Treasury curve.
Treasury Purchases by the Fed
Despite Fed purchases last week, the supply of Treasury debt in the market still increased thanks to a big week of auctions. The Treasury’s auction block is inactive this week, giving the Fed its first opportunity to truly decrease the supply of Treasuries in the market. The potential for weak economic data and Fed buying this week, stand to support Treasury prices even at these yields.
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
Monday, March 30, 2009
Last week's euphoria slapped in the face
S&P 500: -28.41 (-3.48%)
Anyone expecting a continuation of last week’s euphoria got slapped in the face. Most of the market-moving news was delivered this weekend, a throw back to last fall when Sunday reports drove sentiment for the week. Notably, the Obama administration sent a harsh message to U.S. automakers and then warned that some banks will need more aid. Oil prices dropped more than 7 percent, reflecting uncertainty regarding the economy.
Quick Hits
- Who Else Is Hurt by Automaker Woes?
- Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes
- Bear Market Recoveries Since 1950 (click different dates at the top of the page)
Peter Lazaroff, Junior Analyst
Daily Insight
U.S. stocks pulled back on Friday, trimming the week’s performance, as JP Morgan and Bank of America stated March was a tough month, a meaningful decline in oil prices dragged energy and material stocks lower and the latest personal income data didn’t help expectations regarding consumer activity.
The bank news was probably the most important of the day. You may recall financial stocks caught some fire because the largest banks stated they were profitable during the first two months of the year – hard not to be as they can borrow at virtually zero and lend out at 5%-6%. But the commercial real estate market is beginning to cause havoc and we’ve got rising credit-card delinquencies that have hardly run their course as the unemployment rate continues to climb.
Still, last week managed another strong performance as the broad market added 6.17% -- thanks to that huge 7.08% bounce on Monday. The S&P 500 has rallied for three-straight weeks now, up 21% since the nefarious low of 666 was hit on March 9.
Market Activity for March 27, 2009
The Economic Data
The Commerce Department released its personal income and spending data for February, along with the inflation gauge that is tied to personal expenditures (the PCE deflator we often talked about, one of the three main inflation gauges).
The report showed personal income fell 0.2% in February, following a downwardly revised 0.2% rise in January (formerly estimated at a 0.4% increase). The income decline would have been worse if not for a 10% jump in unemployment benefits that boosted the government transfer payments segment of the report.
Total compensation fell 0.3% (hasn’t posted a monthly increase since October); wage and salary income fell 0.4%; rental income slipped 0.2%; interest income dropped 1.2% and dividend income fell 1.5%. The only segments of income that rose were, as mentioned above, government transfer payments, which rose 0.8% in February, and federal workers’ wages.
Inflation-adjusted disposable (after-tax) income remains positive on a year-over-year basis. However, as inflation begins to creep higher, and with monthly income retrenching, we may see this figure move to negative territory a few months out.
(With consumers unwilling to take on more debt (a good thing longer term but bad for the short term), we feel this will keep consumer activity subdued for some time. This is yet another reason we’ve stated broad-based tax rate reductions are needed. This will boost the disposable income number as we wait for the business cycle to turn and the labor market to rebound. Broad-based tax cuts would also boost business spending, which is activity that is vital for job creation. Unfortunately, Washington is headed in the opposite direction, tax rates will rise.)
On the spending side, expenditures rose 0.2% and followed a nice 1.0% rise for January, which was revised higher from the 0.6% increase reported last month. This back-to-back rise in spending is good to see after falling in the prior six-straight months. However, we find no evidence that consumer activity will rebound in a sustained manner as the only area of increase on the income side is coming from government transfer payments – this suggests a personal spending rebound will be transitory.
This data also reports the cash savings rate, which slipped to 4.2% from 4.4% in January. Readers may recall we have been watching for a cash savings level of 5% as a signal consumer activity will rebound (due to the plunge in stock prices and the continued decline in home prices consumers will need this cash cushion in order to feel better about spending). That savings rate figure was reported to have hit 5% in January, but was revised down to the 4.4% in this latest data. We do believe the consumer will return to adding to cash savings, but I’m no longer sure about the 5% figure triggering a sustained rebound. We will need to see the private-sector side of income rebound in order to give us conviction consumer activity will increase in a sustained way.
On the inflation front, the PCE Deflator came in at 1.0% on a year-over-year basis, a slight acceleration from the 0.8% printed for January. (The abrupt deceleration in the year-over-year PCE Deflator is more a function of the collapse in energy prices following the Fed-induced -- and $200 oil hysteria -- spike last summer.)
Core PCE, which excludes food and energy, rose 0.2% last month after rising by the same level in January. On a year-over-year basis, the core PCE inflation rate rose 1.8%, up from 1.7% for January.
While inflation is very low right now, there is no evidence to the claim that deflation is emerging (deflation is not a reduction in the growth rate of prices, but rather an outright decline in which negative figures are posted – and let’s make it clear, the traditional definition involves meaningful declines, not occasional monthly blips below 0%). In fact the data shows inflation is picking up a bit, albeit at very low levels, for now.
Washington Motors
The government has moved in to oust GM CEO Rick Wagoner and will likely force the company to enter into some sort of bankruptcy, although it surely won’t look like conventional bankruptcy. The company failed to meet the benchmarks laid out a couple of months back. GM will continue to receive an undisclosed amount of government aid at it develops a new plan over the next 60 days and will receive greater “guidance” from the Treasury Department than previously was the case.
It is that term, more government “guidance” that has stock futures down big this morning, in my opinion. Fear runs through the market every time it appears the government will become more involved in making business decisions. It also creates greater uncertainties as investors simply don’t know what the government will do. The way this process should occur is through the markets, not via government propping up a company that has made an array of bad decisions for a very long time, which is an issue that goes back to the Bush Administration.
To GM’s credit, they were on the right path roughly a year ago. They made good progress moving much of their legacy costs over to the unions (in terms of the VEBA, moving more of the health-care costs to the unions), some progress regarding employee attrition and the product line was very much improved. They had failed to implement important things such as trimming at least half of their dealership system and eliminating plants, but implementing these plans was pretty much impossible outside of bankruptcy.
We should recall that GM was doing pretty well until the oil price spike that occurred last summer. That spike was caused by the Fed when they engaged in a massive easing campaign that slashed the fed funds rates to 2.00% by June 2008 from 5.25% just a year before. That move sent the dollar reeling, plunging from 84 on the Dollar Index to the low of $71; this dollar freefall pushed commodity prices higher (specifically oil) and as that occurred you had the typical performance-chase occur (and predictions that oil would hit $200 per barrel) that caused crude to soar from $65 in June 2007 to $145 by July 2008. This crushed GM’s SUV product line, where it made virtually all of its money, and that signaled the end.
Now the government is going to rescue the firm? Good luck with that, especially as they force higher fuel efficiency upon the industry in a way that is not realistic (27.3 MPG by 2011; technology will bring increased efficiency over time, but this a mandate that carries a burden GM simply can’t handle right now). Then again, considering the degree to which monetary and fiscal policy will stoke inflation, the public may just demand smaller more fuel-efficient cars – so there may be a master plan here; however, I’m not sure the rest of the market is going to enjoy the environment very much.
Have a great day!
Brent Vondera, Senior Analyst
The bank news was probably the most important of the day. You may recall financial stocks caught some fire because the largest banks stated they were profitable during the first two months of the year – hard not to be as they can borrow at virtually zero and lend out at 5%-6%. But the commercial real estate market is beginning to cause havoc and we’ve got rising credit-card delinquencies that have hardly run their course as the unemployment rate continues to climb.
Still, last week managed another strong performance as the broad market added 6.17% -- thanks to that huge 7.08% bounce on Monday. The S&P 500 has rallied for three-straight weeks now, up 21% since the nefarious low of 666 was hit on March 9.
Market Activity for March 27, 2009
The Economic Data
The Commerce Department released its personal income and spending data for February, along with the inflation gauge that is tied to personal expenditures (the PCE deflator we often talked about, one of the three main inflation gauges).
The report showed personal income fell 0.2% in February, following a downwardly revised 0.2% rise in January (formerly estimated at a 0.4% increase). The income decline would have been worse if not for a 10% jump in unemployment benefits that boosted the government transfer payments segment of the report.
Total compensation fell 0.3% (hasn’t posted a monthly increase since October); wage and salary income fell 0.4%; rental income slipped 0.2%; interest income dropped 1.2% and dividend income fell 1.5%. The only segments of income that rose were, as mentioned above, government transfer payments, which rose 0.8% in February, and federal workers’ wages.
Inflation-adjusted disposable (after-tax) income remains positive on a year-over-year basis. However, as inflation begins to creep higher, and with monthly income retrenching, we may see this figure move to negative territory a few months out.
(With consumers unwilling to take on more debt (a good thing longer term but bad for the short term), we feel this will keep consumer activity subdued for some time. This is yet another reason we’ve stated broad-based tax rate reductions are needed. This will boost the disposable income number as we wait for the business cycle to turn and the labor market to rebound. Broad-based tax cuts would also boost business spending, which is activity that is vital for job creation. Unfortunately, Washington is headed in the opposite direction, tax rates will rise.)
On the spending side, expenditures rose 0.2% and followed a nice 1.0% rise for January, which was revised higher from the 0.6% increase reported last month. This back-to-back rise in spending is good to see after falling in the prior six-straight months. However, we find no evidence that consumer activity will rebound in a sustained manner as the only area of increase on the income side is coming from government transfer payments – this suggests a personal spending rebound will be transitory.
This data also reports the cash savings rate, which slipped to 4.2% from 4.4% in January. Readers may recall we have been watching for a cash savings level of 5% as a signal consumer activity will rebound (due to the plunge in stock prices and the continued decline in home prices consumers will need this cash cushion in order to feel better about spending). That savings rate figure was reported to have hit 5% in January, but was revised down to the 4.4% in this latest data. We do believe the consumer will return to adding to cash savings, but I’m no longer sure about the 5% figure triggering a sustained rebound. We will need to see the private-sector side of income rebound in order to give us conviction consumer activity will increase in a sustained way.
On the inflation front, the PCE Deflator came in at 1.0% on a year-over-year basis, a slight acceleration from the 0.8% printed for January. (The abrupt deceleration in the year-over-year PCE Deflator is more a function of the collapse in energy prices following the Fed-induced -- and $200 oil hysteria -- spike last summer.)
Core PCE, which excludes food and energy, rose 0.2% last month after rising by the same level in January. On a year-over-year basis, the core PCE inflation rate rose 1.8%, up from 1.7% for January.
While inflation is very low right now, there is no evidence to the claim that deflation is emerging (deflation is not a reduction in the growth rate of prices, but rather an outright decline in which negative figures are posted – and let’s make it clear, the traditional definition involves meaningful declines, not occasional monthly blips below 0%). In fact the data shows inflation is picking up a bit, albeit at very low levels, for now.
Washington Motors
The government has moved in to oust GM CEO Rick Wagoner and will likely force the company to enter into some sort of bankruptcy, although it surely won’t look like conventional bankruptcy. The company failed to meet the benchmarks laid out a couple of months back. GM will continue to receive an undisclosed amount of government aid at it develops a new plan over the next 60 days and will receive greater “guidance” from the Treasury Department than previously was the case.
It is that term, more government “guidance” that has stock futures down big this morning, in my opinion. Fear runs through the market every time it appears the government will become more involved in making business decisions. It also creates greater uncertainties as investors simply don’t know what the government will do. The way this process should occur is through the markets, not via government propping up a company that has made an array of bad decisions for a very long time, which is an issue that goes back to the Bush Administration.
To GM’s credit, they were on the right path roughly a year ago. They made good progress moving much of their legacy costs over to the unions (in terms of the VEBA, moving more of the health-care costs to the unions), some progress regarding employee attrition and the product line was very much improved. They had failed to implement important things such as trimming at least half of their dealership system and eliminating plants, but implementing these plans was pretty much impossible outside of bankruptcy.
We should recall that GM was doing pretty well until the oil price spike that occurred last summer. That spike was caused by the Fed when they engaged in a massive easing campaign that slashed the fed funds rates to 2.00% by June 2008 from 5.25% just a year before. That move sent the dollar reeling, plunging from 84 on the Dollar Index to the low of $71; this dollar freefall pushed commodity prices higher (specifically oil) and as that occurred you had the typical performance-chase occur (and predictions that oil would hit $200 per barrel) that caused crude to soar from $65 in June 2007 to $145 by July 2008. This crushed GM’s SUV product line, where it made virtually all of its money, and that signaled the end.
Now the government is going to rescue the firm? Good luck with that, especially as they force higher fuel efficiency upon the industry in a way that is not realistic (27.3 MPG by 2011; technology will bring increased efficiency over time, but this a mandate that carries a burden GM simply can’t handle right now). Then again, considering the degree to which monetary and fiscal policy will stoke inflation, the public may just demand smaller more fuel-efficient cars – so there may be a master plan here; however, I’m not sure the rest of the market is going to enjoy the environment very much.
Have a great day!
Brent Vondera, Senior Analyst
Fixed Income Recap
Treasuries
The two-year finished flat on the day, and the ten-year was lower by 5/32. The benchmark curve was steeper by two bps on the day, eight bps steeper for the week, and remains at +184 bps. A basis point represents .01%.
MBS
Agency MBS were mostly unchanged on a price basis but tightened five basis points to comparable Treasuries across the coupon stack due to the selloff in the ten-year.
Links
What if No One Came
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
The two-year finished flat on the day, and the ten-year was lower by 5/32. The benchmark curve was steeper by two bps on the day, eight bps steeper for the week, and remains at +184 bps. A basis point represents .01%.
MBS
Agency MBS were mostly unchanged on a price basis but tightened five basis points to comparable Treasuries across the coupon stack due to the selloff in the ten-year.
Links
What if No One Came
Have a great evening.
Cliff J. Reynolds Jr.
Junior Analyst
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