RANsquawk 2nd February US Morning Briefing - Stocks, Bonds, FX etc.
The Investment Team at Broyhill huddles up at 6.30AM every Monday Morning, to review market action, various measures of sentiment, and portfolio positioning, to name a few. For the two hours leading up to our Morning Macro Call, we scan dozens of charts, pour over piles of data and review all of the models critical to our investment strategy. Notes from our meetings are distributed internally and reviewed in aggregate at our Monthly Macro Meeting. We’ve noted a significant shift in the investment landscape over the course of the past few weeks, so we thought we’d share this morning’s Views from the Blue Ridge.
Today, to much fanfare, the administration released its ridiculous $3+ trillion budget (we say + because at that size the one thing certain is that the budget will certainly never hit the target and while we wish it would be lower, we are certain it will end up materially higher), which consists of a "short" 192-page summary section and a 1420 page appendix. We are confident that not one politician will read the whole thing from cover to cover. We won't either. Not because we don't care about what's in it, but because we are much more concerned with what is not included, namely $2.8 Trillion and $1.9 Trillion of MBS guaranteed portfolios at Fannie and Freddie, and an additional $782 billion and $809 billion in company debt outstanding for the two GSEs, respectively. This amounts to a total of $6.3 trillion in liabilities which should be counted toward the budget. And yet, oddly, the error-checker somehow made this rather justifiable omission: after all if we were to look at a number which written out looks as follows $6,264,000,000,000.00, we would also probably just avoid it - it is somewhat difficult to hide a number that big even in the 1,420 pages of the budget's appendix. That's ok, we are here to remind them about the omission, and also to remind Mr. Orszag, who himself, in that long ago 2008, espoused that these companies should be put on the Federal Budget. Isn't it strange what one and a half years worth of realizations just how broken beyond repair the system is, will do to one's convictions?
Everything that the government has done so far, with a few minor detours, has been almost exclusively focused on maintaining home prices high, by tweaking either the supply or the demand side of the housing equation. As the bulk of consumer net wealth is concentrated in the housing sector, and a wealthy and confident consumer, much more so than the banking system, is critical to the recovery of America's economy, the Administration will do everything in its power to achieve its goal of artificially manipulating the housing market, thereby not causing an incremental loss of wealth to those still stuck with overpriced houses, while the real intersection of actual supply and demand curves would indicate a materially lower equilibrium price. This is ironic, as proper price discovery is critical for a true recovery, since Americans realize all too well that buying a house at prevailing levels in advance of the second down-leg in housing is senseless, the continued pursuit of such flawed policies by the Fed and President Obama merely pulls the market ever further away from its equilibrium, thereby making the anticipated second dip so much more likely and not that far off in the distant future. Below are 5 simple charts the highlight just how precarious the housing situation in the U.S. is, and how likely the second, and probably much more fierce, leg down in the markets is going to be.
Spreads were tighter in the US as all the indices improved (albeit marginally). IG trades 3.9bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.4s.d. (and HY has now traded wide of its 50-day for 2 days). At 95bps, IG has closed tighter on 36 days in the last 280 trading days (JAN09). The last five days have seen IG flat to its 50d moving average.
Pulling Volcker out of the closet following the Massachusetts debacle was a useful diversion: the whole prop trading ban seemed almost credible. And now that there are no immediate public votes in the future, it is safe to put Volcker back where he belongs, but quietly, lest the morts and general peasantry think that Obama is all bluster and no actions. Alas, if the latest development in the ongoing Wall Street "regulatory" saga, as reported by the FT is any indication, the prop trading plan, as proposed by Volcker, is now dead. This time, the last chance to put the financial system on some stable footing comes courtesy of Dick Shelby, Chris Dodd and Paul Kanjorski.
A terrific chart out of the New York Times, demonstrating succinctly the endless abyss that the actual US budget is becoming (ignore the rosy expectations for a surplus - the likelihood that the US can claw its way back out of the hole at this point are slime to none). The attached article by David Leonhardt, America's Sea of Red Ink Was Years In The Making, is also a good read, and shows just how deep the sovereign debt rabbit hole goes.
Kanjorski Admits There Is A "Growing Bubble In Commercial Real Estate" As S&P Observes Recognition Of CRE Losses Could Wipe Out Banking...Submitted by Tyler Durden on 02/01/2010 - 17:49
Even as ever more Congressmen express concern about the implications of the ongoing CRE "bubble" (yes, this is a quote), S&P comes out with a report noting that should the banking system be forced to take all appropriate CRE-associated writedowns, it likely would not survive. And all this is occurring as REITs probe new 52 week highs. Welcome to the new economy.
Update: And there it goes
The technical barrier of 1,085 was a major support on the way down, and today is proving to be a major resistance as the maket tries to climb back up. So far three tests at the 1,085 level have been unsuccessful. As Greece has been dropped to the back-burner, all robotic systems are go, further demonstrated by the complete collapse in volume during the afternoon session. Should ES break above 1,085 limit cover order may kick in, taking the market higher, although it appears that the selling pressure just below that threshold will be too much for the market to digest today.
Yes, slowly but surely it is happening. In a federal notice filed earlier, the DOL and Treasury are soliciting a response on what has been on many investors' mind, namely the process of converting 401(k)s into annuity-like products. To wit:
The Department of Labor and the Department of the Treasury (the "Agencies") are currently reviewing the rules under the Employee Retirement Income Security Act (ERISA) and the plan qualification rules under the Internal Revenue Code (Code) to determine whether, and, if so, how, the Agencies could or should enhance, by regulation or otherwise, the retirement security of participants in employer-sponsored retirement plans and in individual retirement arrangements (IRAs) by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement.
Here Comes More Political Theater: Geithner To Testify Three Times This Week, Volcker To Testify On Volcker RuleSubmitted by Tyler Durden on 02/01/2010 - 15:21
Just when you thought you were going to miss the Geithner grilling we saw last week, and would need to fill the vacuum with YouTube reruns of Brady asking Geithner when he would finally quit, here comes Congress with some more just announced political soap operas. Tim Geithner is now scheduled to testify a whopping three times this week, mostly relating to the just announced budget, before the Senate Finance Committee (10am on Tuesday), before the House Ways and Means Committee (10am on Wednesday) and before the Senate Budget Committee (10am on Thursday). More importantly, Paul Volcker will testify before the Senate Banking Committee on his proposal to ban prop trading, which according to many is already dead in its tracks, courtesy of a substantial push by those most likely to be impacted by such a ban. Lastly, on the political calendar, Congress will vote on the Senate proposed bill to increase the debt ceiling by $1.9 trillion to $14.294 trillion. Nothing like ongoing political theater to mask for the complete lack of any actual reformative actions yet to be undertaken by this administration, which has so far proved good in only two things: spending and borrowing.
Zero Hedge recently highlighted the ever increasing Federal outlays on unemployment insurance, leading to questions on whether the true unemployment rate, as indicated by actual cash outlays, may be materially higher than indicated in increasingly dubious governmental reports. One proposed alternative has been that the Federal government is directly subsidizing standalone states' depleted unemployment insurance trust funds. Using data provided by ProPublica we have been able to confirm that indeed standalone states are for the most part now bankrupt and have no reserves left in their coffers when it comes to funding ever increasing insurance benefits. As ProPublica indicates, there are now 26 states which have depleted their trust funds, among these are the usual suspects including California, Michigan, New York, Pennsylvania and Ohio, which now rely exclusively on borrowings from the Federal government to prevent the cessation of insurance payments to recently unemployed workers. Currently all states collectively posses $10.7 billion in trust fund assets(with the bulk held by less impacted states such as Washington ($2.6 billion), Louisiana ($1.1 billion) and Oregon ($1.1 billion). On the other hand, 26 states currently rely exclusively on the Federal Government, and have borrowed a combined $30 billion through December to fund payments. ProPublica estimates that another 8 states will be insolvent within 6 months, as their trust funds also approach 0.
In response to several reader inquiries into the Bank Of America report behind the post highlighting the potential outcomes for the Greek nation, we present this simplified summary matrix from BofA that rates the probability of each possible scenario and the implications that would follow as a result. A useful cheat sheet for those sovereign default situations.
Rosie already shared some insights on last week's blockbuster GDP number. Today, he refuses to leave the topic alone, and warns investors to "expect big-time [downward] revisions." Additionally, and more relevantly, the entire validity of the economic reporting segment of the administration is put into ever greater question, and with good reason: "if you believe that GDP result, then you de facto are of the view that all of a sudden, with no capital deepening or major technological change in the past half decade to speak of, the potential growth rate in the United States has reached an epic scale of 7%." And this key reading into the divergence between pumped-up and real revenue growth "When one weighs in a zero Fed funds rate, $862 billion in “stimulus” (and counting) and $700 billion in bank and auto sector bailouts, sales should be running at a 10% clip by now — not 1.7%." With economic data increasingly unreliable (to keep it politically correct), and China having the ability to make or break the U.S., what is the point of continuing the charade that the U.S. is nothing more than an extension of the Chinese experiment across the Pacific.
Stripped of its fancy terminology and confusing mechanics, modern central banking boils down to a legalized counterfeiting operation. If there were suddenly a widespread public outcry to "punt the press," we can bet our hypothetical monarch would mobilize all his allies in the media to discredit the people threatening his source of revenue. In that light, we can understand the reaction today to people calling to "end the Fed." - Robert Murphy