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HomeSense on Cents Navigates the Markets
Posted by Larry Doyle on June 5th, 2009 12:41 PM |
Navigating the markets on the day in which the employment report is released is always fascinating. Why? Typically the release of new and meaningful information generates very heavy volume; as such, the market moves can be measured with greater weight. Let’s take our equipment and head out along the trail . . .
Equities: major market equity averages opened very firm after the positive tone embedded in the non-farm payroll component of this morning’s report.
As the day has moved along, though, these indices have all faded. The DJIA is up approximately .4% as of this writing. The S&P 500 and tech heavy Nasdaq are unchanged relative to Thursday’s closing levels.
Particular industry groups that have had outsized moves are mortgage finance (-2.2%) and industrials (+.93%). What’s going on here? The mortgage finance companies are negatively impacted by higher interest rates (more on that in a moment). The industrials are likely benefitting from the perception that the economy may be slowly turning the corner.
Bonds: this is where the real action is occuring!! Various sectors of the bond market are down anywhere from .25% to 1%. It appears the only bond sector improving on the day is the high yield space (+1-1.5%) as it is benefitting from the perception of lessened credit risk.
The biggest loser on the day is the front end of the U.S. Treasury market which has backed up an EYE-POPPING 25 basis points. The intermediate to long end of the Treasury yield curve has backed off by 5 to 15 basis points.
Bonds are faced with 3 major hurdles:
1. massive supply: as global governments, corporations, municipalities, and individuals all look for credit.
2. inflation : as much as analysts will point to the lack of any wage pressures, the fact is that the U.S. has so much liquidity in the system that any hint of an economic spark will be akin to dropping a match on dry hay. The Fed can only dampen the “hay field” by withdrawing liquidity from the economy. How? Increase the Fed Funds rate or sell Treasury or mortgage assets currently on its books. What would that mean? Push interest rates even higher, especially on the front end of the yield curve. What would that do? Slow the economy.
3. the Fed: Big Ben, (Turbo-Tim as well) and team may find themselves between the proverbial rock (a fragile economy) and a hard place (fears of increasing inflation) sooner than they think.
Currencies: the greenback is doing better on the day. This seems counterintuitive to an economy regaining its footing with investors taking on a greater risk appetite. What’s happening? In my opinion, the greenback is anticipating that Bernanke and the Fed may have to “think” about increasing the Fed Funds rate.
Commodities: slightly weaker on the day.
Other news of note . . . Bloomberg releases a story highlighting the charade being played by banks in “generating” earnings. The fact is banks have benefitted tremendously by “accounting” maneuvers and as such are “masking” sizable losses. Regular readers of Sense on Cents have witnessed my addressing these issues. That said, I recommend: Bank Profits From Accounting Rules Mask Looming Loan Losses.
In summary, we are clearly entering the next stage of the Brave New World of the Uncle Sam Economy. The key attribute of this phase will be higher interest rates.
LD
Freddie Mac, Fannie Mae Deja Vu?
Posted by Larry Doyle on May 28th, 2009 4:21 PM |
Can our economy absorb another financial hit of the magnitude of Freddie Mac and Fannie Mae?
In the process of digging for some data on Uncle Sam’s TARP commitments, I came across a compelling story at Subsidyscope, a Financial Primer (right sidebar) link here at Sense on Cents. The lead story at Subsidyscope, dated May 26, 2009: Concerns Grow Over Federal Home Loan Bank Investments. They write:
The Federal Home Loan Banks, or FHLBs, may be the biggest financial players you’ve never heard of. Collectively, they hold $1.3 trillion in assets and are the largest U.S. borrower after the federal government.
For readers here at Sense on Cents, I have raised warnings about the FHLB system both on April 3rd (Putting Perfume on a Pig!!) and just this past Monday, May 25th (FHLBs: Red Sea, Dead Sea, or Both?). In my opinion, there is little doubt that the FHLB system was the greatest beneficiary of the FASB’s relaxation of the mark-to-market. Subsidyscope says as much:
A Subsidyscope review of the FHLBs’ financial statements has found that several of the banks are carrying substantial “unrealized losses” on their investments in mortgage-backed securities. Because the banks believe these losses are temporary, they don’t have to be recognized on the banks’ accounting statements.
What’s potentially worrisome is the sheer size of the losses. For the Federal Home Loan Bank of Seattle, they are substantially larger than the capital the bank holds to protect itself against such declines. If its mortgage-backed securities don’t regain their value, the bank will have to write them down, which could wipe out its capital buffer and raise risks for taxpayers.
Remind you of Freddie Mac and Fannie Mae? I thought so. Let’s continue to dig even deeper. Subsidyscope asserts: (more…)
Sense on Cents Economic Review: Red Light, Green Light
Posted by Larry Doyle on May 28th, 2009 11:09 AM |
We had some very interesting economic reports released this morning. The data and its interpretation provide serious “grist for the mill.” On that note, let’s sharpen the stone and get to work.
1. Durable Goods: rose 1.9% versus a consensus expectation of a rise of .5%. Much of the increase was due to strong orders in the automotive and defense industries. Green light, green shoot, call it what you want. This report is much stronger than expected, so get back in there and BUY, BUY, BUY. Actually, hold on . . .
Do we expect to see growth in the automotive industry going forward? This industry is and will continue to be downsized. Do we think Barack is looking to grow our defense budget? Most assuredly not.
As much as market analysts, media mavens, and government officials are spinning this report in a very positive fashion, let’s dig deeper.
Last month’s Durable Goods Orders were revised lower from an initial reading of -.8% to -2.1%. Red light!! Additionally, given the volatile nature of orders in the transportation sector, economists look at Durable Goods excluding transportation. How did that do?
Wow!! Another green light. Durable Goods excluding transportation orders rose .8% versus an expectation of -.3%. Much stronger than expected. How about revisions to last month’s numbers? Uh-oh!! Last month this report reflected a decline of -.6% and this was revised to a -2.7%!!! Red light!!
So for those who think we’re making progress on this front, put it in the context of “take three steps back and two steps forward!!” (more…)
The Stakes Are Raised
Posted by Larry Doyle on May 28th, 2009 7:46 AM |
The move higher in rates and lower in the U.S. dollar is nothing more than the market response to Ben Bernanke, Tim Geithner, and ultimately Barack Obama for the cards that they have already shown.
Managing one’s personal business and finances is anything but a game, but the manner in which Wall Street and Washington address economic and financial issues incorporates many aspects of “game theory.” As such, we need to adapt our own thought process and financial management accordingly.
Our leaders in Washington have shown many cards, including:
1. $780 billion Stimulus
2. proposed $3.5 trillion budget
3. multiple trillions in backstops to the financial industry (Sense on Cents’ link to Subsidyscope provides a wealth of info)
4. a trillion dollar plus commitment to quantitative easing targeted over a 6 month time horizon.
Be mindful that the “Washington wizards” are at the “table” and “playing the game” with borrowed funds. Each of us is also in the “game” whether we know it or not. We, along with foreign participants, are funding the window from which the wizards have to get the cash to stay in the game. The move higher in interest rates on the long end of our yield curve is nothing more than market participants (investors) “raising” the stakes on the “wizards.” (more…)
Mortgage Refi Activity Is Driving Rates Higher
Posted by Larry Doyle on May 26th, 2009 7:17 PM |
In Wall Street terms, the wheels are coming off the Treasury bus. What does that mean in layman’s terms? Interest rates on U.S. Treasury securities are ratcheting higher. Why? I have addressed the massive supply of global government bonds that will be issued in order to finance the exploding deficits. For newer readers, you can find my thoughts on this topic in Is The Government Bond Bubble Getting Ready To Burst? UPDATE #2.
The dynamics of the massive supply of bond issuance to fund global deficits will not change. To wit, our market needs to absorb $60 billion in 5yr and 7yr notes tomorrow and Thursday. Long term interest rates in our U.S. Treasury market moved higher by another 10 basis points again today to a level of 3.55%.
Over and above that, though, there is another significant reason that is driving our bond market lower and interest rates higher. This reason is receiving little to no attention by the media or market analysts. In fact, the color allocated to this factor is strictly viewed as a positive. I am talking about the waves of mortgage refinancing precipitated by the Federal Reserve’s quantitative easing program.
How could refinancing activity further pressure the government bond market driving interest rates higher? Well, let’s accept the premise that any government program is never risk free or cost free. The quantitative easing employed by the Federal Reserve to purchase government and mortgage-backed securities has very real costs. The extraordinary volume of purchases of newly issued mortgage-backed securities by the Federal Reserve has allowed millions of homeowners to lower their mortgage payments. This is great for those benefitting. What are the costs? (more…)
Change, Change, Change
Posted by Larry Doyle on May 26th, 2009 7:46 AM |
How are we as a nation handling the changes going on in our country?
Change is stressful, especially when the change is involuntary. The ability to adapt to change is critically important in order to minimize the stress, maximize the opportunities, and move forward in life. The ability to adapt to change and prosper from it is the premise for one of my recommended books in the Sense on Cents Reading Room, Who Moved My Cheese?: An Amazing Way to Deal with Change in Your Work and in Your Life by Spencer Johnson, M.D.
I first read this book in early 2001 prompted by the merger of Chase Manhattan and JP Morgan. Dare I say the changes ongoing in our economy and world render the merger of two large banks rather pedestrian. That said, the lessons in Johnson’s book apply to professional and personal situations. I have recommended this book often.
I was reminded of Johnson’s Who Moved My Cheese? this morning when reading an article in the Financial Times, When Austerity Does Not Come Easily:
When the global economic crisis first hit, it was natural to assume that the poorer and more recent democracies would be most vulnerable to a political backlash.
But perhaps we are looking for trouble in the wrong places. It could be that it will be the richer democracies, such as Britain and the US, that find it most difficult to adapt to the politics of austerity.
While this message is neither pleasant nor easily broached, I truly appreciate it and commend Gideon Rachman for writing about it. In regard to change, our country needs to initially understand, willingly accept, hopefully embrace, and then boldly move forward. I think we are still in the very early stages of the “initially understand” phase.
While the Obama administration has put forth large measures and grand programs under the guise of change, I view many of these measures as “more of the same.” That is, inflated government spending and bureaucracy to facilitate living beyond our means. The simple fact is, a country, corporation, municipality, or individual that perpetually lives with an excessive and growing debt burden is postponing and potentially eliminating the chance for real prosperity.
Market analysts, media mavens, and government officials regularly call for an end to our recession in 2009 and a return to “normal.” I view this time in dramatically different fashion. I believe we are experiencing not only an economic test, but also a test of national character. (more…)
NoQuarter Radio’s Sense on Cents with Larry Doyle Will Be Back Next Week
Posted by Larry Doyle on May 24th, 2009 2:00 PM |
In observance of Memorial Day weekend, NQR’s Sense on Cents with Larry Doyle will not be broadcast this evening.
I hope you are able to enjoy the holiday with family and friends while reflecting on the people and values Memorial Day celebrates. We are currently living through historic times, but we can never afford to forget the sacrifices of the special men and women who fought for our freedoms. God bless them.
Even though I will not be broadcasting this evening, if there are any questions or topics you’d like me to address, please do not hesitate to ask.
Thanks for your support!!
LD
Financial Advisers: “A Crisis of Confidence”
Posted by Larry Doyle on May 23rd, 2009 7:38 PM |
Are you confident in the financial advice you are receiving?
A recent report in InvestmentNews, Financial Advisers Face a Crisis of Confidence, indicates that an overwhelming number of investors are not happy with their financial advisers. In fact:
About 80% of affluent investors — that is, those with more than $500,000 in investible assets — are “disgusted with their adviser because their adviser is spooked,” he said.
Wow!! How is it that such an overwhelming percentage of investors can develop disgust with their adviser? Very simply, as with any service, if you are not getting professional coverage for the fees charged, a level of disgust can easily develop.
Based on my experience, I have dealt with a wide range of professionals in this field. A small percentage are outstanding, a few more are more than satisfactory, a large percentage are decidedly mediocre, and plenty are borderline, if not totally incompetent. I would venture to say the same assessment could be made of many professions. How does this happen?
Financial advisers are primarily trained to do two thngs: sell products to generate commissions and gather assets to generate fees. I have been involved in training programs as participant and adviser. Additionally, I have been solicited more than I care to remember. All too often, I have experienced people and programs geared toward products and services.
Very infrequently have I experienced programs and people that fully understand the dynamics at work in the economy and markets. Additionally, I have very infrequently experienced people who truly care to learn and understand the customer’s needs and how they can help solve the customer’s issues. Why?
The salesperson or adviser is too focused on writing immediate business and moving on to the next sale. What is the result? (more…)
Wall Street Pit Welcomes Sense on Cents
Posted by Larry Doyle on May 18th, 2009 8:12 AM |
I am humbled by the request of the editors of Wall Street Pit to be a contributing author. Wall Street Pit is a leading financial website covering the economy, markets, and global finance. There are currently 51 contributing authors, including leading economists, research analysts, professors, central bankers, and corporate titans from around the world affiliated with:
Education: Harvard University, University of California-Berkeley, Dartmouth College, UC-San Diego, London School of Economics, Koc University, Chuo University, Trinity College Dublin, University of Michigan, University of Oregon, University of Wisconsin, Peking University’s Guanghua School of Management, Stanford University, University of Leuven (Belgium), MIT, Graduate Institute/Geneva, Northwestern University, Sloan School, Goethe University of Frankfurt.
Central Banks: International Monetary Fund, Federal Reserve Bank of Cleveland, U.K. Cabinet Office, Central Bank of Turkey.
Corporate: Carl Icahn, McKinsey, Bloomberg Personal Finance, DailyFX.com, Mark Cuban, Ockham Research, Q1 Publishing, IA Capital.
A number of these individuals are also connected with voxEU.org, a leading European based financial website. In fact,
VoxEU.org is partnering with the UK government to collect the views of economists from around the world on what the G20 should do to fix the global economy.
I am thrilled to be a contributing author. I am also thrilled to bring the wisdom of such an esteemed coterie of individuals to Sense on Cents. I look forward to my affiliation with Wall Street Pit and the impact it will have on all who visit Sense on Cents. Please visit Wall Street Pit as we collectively navigate the economic landscape.
LD
NoQuarter Radio’s Sense on Cents with Larry Doyle Tonight at 8PM
Posted by Larry Doyle on May 3rd, 2009 7:38 AM |
UPDATE: The show has concluded, but you can listen to a recording of it in its entirety by clicking the Play button on the audio player below. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar. Topics this evening included: the Chrysler bankruptcy situation, Bank Stress Tests, and Auction Rate Securities.
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Please join me Sunday evening from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. The developments in the markets, economy, global finance, Wall Street, and Washington are occurring at breakneck speed. 
I will try to slow things down a bit and provide a sense of perspective. What did we learn in the markets over the last week and what does that mean for the weeks and months ahead? We will address a wide range of issues, including: the auto industry, government bond market, and economic statistics.
These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere! What is on your mind? What would you like to address? Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins.
Many thanks to Larry Johnson and the rest of the team at NoQuarterUSA blog for providing such a vibrant vehicle as NoQuarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!
LD
