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Archive for November, 2008

Economic/Market Highlights 11/22-11/29/08: “Whack a Mole”

Posted by Larry Doyle on November 30th, 2008 3:15 PM |

The domestic equity markets rebounded by 15% over the last week which is the single strongest week since the 1930s. With that rebound the markets still ended down app 5% for the month. Despite the enormous rebound, albeit on moderate volume and in a shortened week, the overall sentiment and fundamentals to the market remain decidedly negative.

The Dow has been in a range of 9600-7500 over the last 6 months so the rebound off the lows of 11/20 bring the market back slightly above the midpoint of this short-term range. I would counsel those who trade the market to trade it against those levels with an overall negative bias.

The rebound started with the announcement of Geithner as Treasury Secretary but then received another 1.1trillion reasons to move higher in the form of the rescue package thrown to Citigroup (300bln) and 800bln in the form of more rescue money for Freddie/Fannie, more purchases of debt issues by Freddie/Fannie and Federal Home Loan Banks, and funding for a facility to facilitate increased liquidity for consumer finance markets.

With those announcements, the equity markets continued to rally as did the U.S. government bond market, and the U.S. mortgage market (each of those debt markets rallied by app 40 to 50 basis points). The corporate credit markets, the high yield markets, and the municipal markets did not rally, however. Those markets remain largely frozen for entities looking to issue debt.


Economic/Market Highlights 11/21/08: V-O-L-A-T-I-L-I-T-Y !!

Posted by Larry Doyle on November 22nd, 2008 4:10 PM |

The fact that the equity markets totally reversed yesterday’s 5-6% selloff is not the biggest story of the day. In short, 400-500 point swings either way have become so normal as to not be a big deal. But they are a big deal and I will explain why shortly.

At 2:30pm the equity markets were basically unchanged. By 3:45pm the equity markets had rallied by 5-6% primarily on the announcement of Tim Geithner, NY Fed chair, as the nominee to be Treasury Secretary, while the other candidate for that role, Harvard professor and former Tsy Secretary for Bill Clinton, Larry Summers will be a senior White House economic advisor. Well done by Barack to get both on the team.

The markets respect Geithner and he will be easily approved. Summers would have faced some grilling for sexist comments he made while President of Harvard as well as the fact that he has already been Tsy Secy and it would have been viewed as “the more things change the more they stay the same”. Geithner obviously knows where all the bones are buried on Wall St. having worked very closely with Paulson over the entirety of this financial fiasco. The transition should be seamless. Geithner and Paulson have different styles but both are respected by Wall St. even if Paulson is not fully liked by Main St. The markets respect Geithner and this is obviously very important.

Read more here as to “Obama Likely to Pick Fed’s Geithner for Treasury.”

While Geithner and Summers are obviously highly respected they are not Houdini and they will not be able to singlehandedly turn our economy or markets around based on their name alone. (more…)

Economic/Market Highlights 11/20/08: D-E-L-E-V-E-R-I-N-G !!

Posted by Larry Doyle on November 21st, 2008 7:55 AM |

There were major forced liquidations on the parts of hedge funds, asset managers, and insurance companies that went through the markets Thursday. Laszlo Birinyi, a noted market tactician whom I follow quite closely, indicated today that given the market price action that making investment decisions now is “strictly guesswork”.

Equity markets traded down another 5.5% to 6.5% Thursday with much of that selloff occurring in the last hour which is an indication that orders from asset managers and mutual funds built into the close. The delevering process (the selling of assets purchased with borrowed money) continues!! Volume on the NYSE was 8.8bln shares, 44% above average. Clearly a strong indication of massive liquidations. Oil and copper were down 6% and 4% respectively given continued expectations of economic weakness. When does OPEC come out and announce aggressive cuts in production?

Government bonds rallied by 30basis points in the 10yr (a huge move) in a “flight to safety” trade.

While the safest bonds rallied, bonds with a risk component (high grade corporates, mortgage-backed bonds, high yield) either did not move or in the case of high yield traded down in sync with equities. (more…)

Economic/Market Highlights 11/19/08 . . . The Pain Increases!!

Posted by Larry Doyle on November 20th, 2008 7:10 AM |

***Citigroup is down another 25% in this morning’s trading as investors are concerned that embedded losses are deeper than previously thought….as the attached article highlights, “it makes us think the mark to market writeoffs are not over yet”.***

Read more as to how and why “Citi’s Slide Deepens….”

As my Dad used to say when the report cards came home, “Just give me the grades and save the sob story for your Mother!”

Dow on the day -5.1%
  month to date -14.2%
  year to date – 40%
S&P 500 on the day -6.1%
  month to date -16.7%
  year to date -45.3%
Nasdaq on the day -6.5%
  month to date -19.5%
  year to date -49%
10yr U.S. Tsy on the day 3.33% down 20bps
  month to date down 64bps
  year to date down 70bps

With grades like these, my Dad would have clenched his teeth, furrowed his brow, and bit his tongue. My Mom would proceed to rip my head off. Truth be told, that tough love was just what I needed to increase my discipline.

While tough love needs to be more love than tough, the fact is that covering my own shortcomings in work and discipline solved NOTHING. Our “socialized housing finance system” and our effectively “socialized banking system” are finding the same outcomes. Ultimately the price must be paid much like the losses must be recognized.

Neither Paulson nor Congress nor anybody in Washington or Wall St will tell you that the system has trillions in embedded losses but they do and our markets know it and are showing it by their prices.

Economic/Market Highlights 11/17/08

Posted by Larry Doyle on November 17th, 2008 10:20 PM |

I am going to save all the readers here extensive verbiage so as not to be overly morose about the ongoing challenging economic environment. I will offer my thoughts and comments on a few of the higher profile stories as indicators of what is going on, broadly speaking.

1. G-20 Summit….I had high hopes that commitments to global coordinated tax cuts would emanate from this summit. Talk about a major “whiff” on behalf of the global leaders. All I see is that leaders expressed a “promise” to work together on the critical issues. Wow, how gracious of them. Over and above this promise, I sensed that global leaders want to wait until the Obama administration takes charge and work with them. Believe me, with all due respect to Barack and team, if anybody thinks they have a magic bullet and will “inspire” a heightened level of confidence in the markets and economy, well….don’t hold your breath.

Read more on how “G-20 leaders Tighten Grips on Banks” (more…)

“The Greatest Generation”

Posted by Larry Doyle on November 14th, 2008 7:45 AM |

I commend HRC for providing some real leadership at this point in time. There is no doubt that our country is screaming for real leadership. From Washington to Wall St. to Main St. our citizens are looking for people and programs that will look forward and take the vital and necessary steps to change our national mindset. Do you get the sense that perhaps some supporters of BO are getting a little nervous and now realize that he is a very high risk President-elect?

HRC’s stimulus proposal addresses a number of fronts (expanding unemployment insurance, addressing Medicaid, funding infrastructure projects and clean energy, modify mortgages) which will need focus from Congress to create a demonstrative impact on our economy. Some of the programs will clearly be impactful while others may have unintended negative consequences. We will have to take some prudent but necessary risks to achieve positive results.

The TARP bailout/rescue plan proposed to date has not inspired confidence nor generated any real impact for three reasons:

1. the banks have such sizable embedded losses that the funds already injected are being and will be used to recapitalize the balance sheets …

2. investors have little to no appetite to purchase loans currently on the banks’ books which were not properly underwritten and will likely continue to suffer an ever increasing level of delinquencies and defaults …

3. little to no demand for funds due to the fact that most individuals and institutions are looking to decrease their debt service not increase it …

As a result our economy spirals downward. HRC’s plan addresses some of our most serious needs. I commend her. (more…)

Economic/Market Highlights 11/12/08

Posted by Larry Doyle on November 13th, 2008 1:31 PM |

Markets trade down another 5% and close within spitting distance of October’s closing lows seen on Oct 10. I remain decidedly negative on the market and the economy despite every effort made by global governments. In fact, the pace of the economic slowdown is quickening. It’s all about delevering and liquidity.

We have much to address, so let’s get after it.

1. Best Buy comments that they see a “seismic slowdown” in 4th quarter projected sales. Expect to see significant sales and price cuts on electronics going into the holiday season.

2. Survey of credit card holders indicates the following: 53% have more debt than they are comfortable handling. Of that group 73% indicate that they will likely spend less this holiday season….lots of regifting….

1. Julian Robertson, one of the most highly regarded money managers of the last 40 yrs, indicates that “we have not seen the capitulation in our economy and that the foreseeable future will be a long, tough period for the American people. He also offered that Nancy Pelosi wants to throw money down the toilet to save the automotive industry. (more on this later)

2. Moody’s ratings expects defaults on distressed debt situations to almost quadruple in the next year to north of 10%. This expected level of defaults is why high yield debt is trading near a 20% yield level. Lots of RISK! Companies will be severely challenged to refinance their debt.

3. Jamie Dimon, CEO of JP Morgan, indicates that the economic recession will be worse than the credit crisis.

Auto Situation
1. Pelosi, Frank, Obama and team clearly want to see a bailout for the automotive industry with GWB’s signature. The package being discussed is $25bln but with no specifics highlighted as of yet. Expect hearings next week in Washington on this issue. From the standpoint that Uncle Sam has already committed north of a trillion dollars to the financial system, a 25bln capital injection is a drop in the bucket but it goes a lot deeper than that. First off, the cash burn rate for the Big 3 at the anemic pace of auto sales is currently 5+bln per month, so 25bln gets us to next March. Big deal.

IMO, I would not give this industry $20 without an agreement to restructure. (more…)

The Wall St. Model is Broken . . . and Won’t Soon be Fixed!!

Posted by Larry Doyle on November 12th, 2008 12:15 PM |

Despite billions and now trillions of dollars in capital injections and equity investments made by our government, private equity, and sovereign wealth funds, our economic turmoil is a long way from being over. I do find it interesting that despite numerous Wall Street titans having indicated to us at different points over the last year that we were in the 7th inning of this fiasco, now a recurring theme is that we should not expect any real economic recovery until 2010. Actually, maybe we were in the 7th inning but it was the 7th inning of the first game of a 4 game series.

Well, if we want to figure out where and when we are moving forward, I think it would be beneficial to know from where and when we came.

For those over 50 years of age, perhaps you remember when mortgage money dried up. Perhaps you also recall the days of putting down 20% before you even thought of buying a home. In any event, the growth of the secondary mortgage market in the mid 1980s was a result of some very sharp financial minds on Wall St. who engineered a product called a Collateralized Mortgage Obligation (CMO). (more…)

Economic/Market Highlights 11/10/08

Posted by Larry Doyle on November 11th, 2008 2:30 PM |

I will admit that, given the current dynamics at work in the economy and the markets, I have become somewhat numbed as to the magnitude of some of the developments. Many of the highlights that I will offer from yesterday’s news would be enormous stories in and of themselves. Taken collectively, they do become overwhelming if we let them.

The markets are down 5-6% on the month. Given the stream of negative news, one might think that the market could be even lower. The fact that markets aren’t even lower is testament to the trillions of dollars that have been put to work by governments around the world.

Let’s review the major stories of November 10, 2008:

1. China implemented a $563bln economic stimulus plan primarily to further develop infrastructure in the country. That figure represents 1/5th of their total GDP. I was surprised to hear that, but it also indicates to me how much growth potential that country possesses. This package had an immediate impact on our equity markets this morning when our markets were up 3%. This package also supported commodities, especially copper which bounced about 5% on the day. Aside from infrastructure, China directed this stimulus package to an area that was badly damaged in a recent earthquake. Last but not least, China offered “tax deductions” on the purchase of certain hard assets. (Are you listening, Barack??)

This stimulus package though indicates to me that it is not likely that many of our domestic companies will likely be receiving capital injections from sovereign wealth funds. With oil at $60, oil producing countries (such as Dubai) may need to support the real estate developers and exporters in their own countries.

2. Fannie Mae reported a loss of $29bln (I’m not going to say earnings when companies lose money) which equates to $12.96 a share vs an expected loss of $1.40 a share. (How can Wall St. analysts maintain credibility when they miss a call by almost 1000%?).

It is amazing how Fannie can rack up losses like this when their own incentive bonuses are not on the line and when collectively Uncle Sam owns them. Aside from this loss, Fannie did announce that they expect losses to continue and to increase into 2009. This to me means they see foreclosures increasing over the next 6 months. More than likely Fannie will have a negative net worth by the end of 2008 requiring an increased capital injection by the U.S. taxpayer. Where does it end!!

Again, this model is broken. The American consumer who is able to get a mortgage is being subsidized at the expense of the taxpayers. Let the private market set the mortgage rates and if the housing market re-prices, so be it. Enough socialized housing finance. (more…)

Review of Employment Report and Markets 11/7/08

Posted by Larry Doyle on November 7th, 2008 4:50 PM |

The highly anticipated October employment report came in as follows:

unemployment rate 6.5% up from 6.1%
non-farm payrolls -240k jobs vs consensus estimate of -200k
September revision a loss of 284k jobs from initial estimate of 159k!
Labor costs +3.5% year over year

Jobs were lost in virtually every sector: manufacturing, construction, and especially the service sector, which had been the sector that provided job strength over the last few years.

In summary, there is nothing to like about this report and it is likely to get worse. Estimates on unemployment rate range from 7% to 9% by the middle of 2009.

Read more here on how the “Economy Sheds Jobs.”

Goldman Sachs, which had the most accurate call on the employment report, is now calling for a -3.5% GDP for 4th qtr 2008 and a -2% for 1st qtr 2009. (more…)

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