A decision by the FHFA requiring the GSEs to finally release detailed information on loans they acquired and guaranteed uncovers an ugly truth about the GSEs that many should be aware of (as we noted the exuberance here). The release was only required on 35 million fully-amortizing, full documentation, 30-year fixed rate mortgages, which means as JPMorgan's Michael Cembalest notes the underwriting histories on another 20-30 million loans (e.g., the riskier ones) remain a mystery (and likely will forever). As Cembalest concludes, some people made up their minds on all the factors causing the housing crisis in 2009, and others in 2011. As long as new information keeps coming out, it seems premature to close the book on it, he adds, first, the private sector descent into underwriting hell took place well after the multi-trillion dollar GSE balance sheets had gone there first; and second, there are many reasons to wonder how bad the former would have been had the latter not preceded it.
The most important question we should be asking is not the one that Stewart repeated several times while grilling Sebelius: “Businesses were given a delay of a year, but individuals were not given that option, why is that?” The bigger question is: “If the administration messed up so badly on the seemingly mundane task of building a website, how much will Obamacare damage the broader economy and the nation’s long-term fiscal health?” The Stewart-Sebelius interview drew attention to the second question only briefly, when Stewart mentioned that employers were converting full-time workers to part-time due to the ACA. But he failed to challenge Sebelius’ weak response that “economists – not the anecdotal folks – but economists say there’s absolutely no evidence that part-time work is going up.” This is exactly where an informed and unbiased interviewer would have dug further to expose the truth.
The chart shows dollars spent on entitlements for every dollar spent on non-defense discretionary spending (NDDS). This latter category includes education, infrastructure, energy R&D, law enforcement and a wide range of other things that affect the productivity and the general well-being of the US economy (see table), not just today but into the future. The entitlements-to-NDDS ratio is already at an all-time high, and is headed for the stratosphere during the next few years according to CBO projections.
The situation in Italy appears to be going from bad to worse. With a confidence vote pending for Tuesday as the government dissolves into chaos for the umpteenth time, and following the resignation of the CEO of one of Italy's largest non-financial corporations (Telecom Italia), the largest bank (by assets) in Italy - Intesa SanPaolo has announced - effective immediately - the resignation of its CEO and replacement with Carlo Messina. According to sources, the now former CEO had lost the confidence of shareholders (which is odd given the bank's stock is near 2-year highs). We can't help but wonder Ayn Rand-like at the devolution of the ruling class in Italy and what happens next (in light of the crumbling manufacturing and production data).
Italy’s Stability Program targets a 5%-6% primary budget surplus, and 3% nominal GDP growth. Both strike JPMorgan's Michael Cembalest as unrealistic in the context of post-crisis Italy. Italy ran a 6% surplus for a brief moment in the 1990’s but it didn’t last, as it was the result of a prior devaluation helping growth, some asset sales and some tax increases. Only asset sales seem feasible in Italy right now, if anything. If Cembalest's concerns are correct, Italy will remain a country with almost twice the debt/GDP ratio as the US; unbreakable interdependency of the government, the banks, and the ECB; and low GDP and employment growth. If history is any guide, he will be right as the last few years have seen the biggest collapse in Italian GDP since The Unification in 1861...
While everyone knows that there is a profound ideological schism when it comes to those for and against the Affordable Care Act, aka Obamacare, what may not be appreciated is that Obamacare was, and still is, the most contentious and polarizing legislation in the history of Congress. At least, it is according to JPMorgan. In the chart below, JPM's Michael Cembalest shows that the "disagreement gap" between Republicans and Democrats in the House and Senate, over 100 years of impactful legislation, has never been greater than with Obamacare.
1:1 In the beginning, Ben Bernanke hath said, let there be liquidity.
1:6 And so each among them sayeth the following benediction: “May the Fed bless you and keep you; may the Fed extend its balance sheet to shine upon you; and may the Fed lift up asset prices and protect you from harm”
On a purely humanitarian basis, Syria’s tragedy is exceeded by many conflicts that the US abstained from participating in. So when thinking about civil wars and how the US defines its national interest, one has to ask why Syria would qualify for direct intervention while others conflicts did not.
When people get divorced, a major determinant of the division of marital property depends upon the state they live/file in. Nine states (AZ, CA, ID, LO, NV, NM, TX, WA, WI) use a community property approach, which usually results in an equal distribution of property acquired and income earned during the marriage (but excluding gifts, inheritances, and property owned before the marriage). The other 41 states use equitable distribution, although, in many, there is a legal presumption of 50-50 unless the facts and circumstances suggest something else. In any case, as JPMorgan's CIO Michael Cembalest notes, “equitable” is not always interpreted to mean “equal”, given judicial discretion based on each state’s statutory factors considered when dividing marital property.
Parents old and rich? Eying that new Veyron as the stock market lifts your family wealth to all-time heights? Don't get carried away quite yet! As estates rise in size, most families give a greater percentage to charity rather than their heirs. As JPMorgan's CIO, Michael Cembalest notes, taxes as a % of the estate disposition remain roughly constant for estates greater than $5 million. What this suggests: wealthy families have in mind a baseline level of support for their heirs, and once it is met, they channel more assets to charities. On the bright side, bequests (parental transfers to children through their estates) are generally divided equally by child, irrespective of the child’s income, proximity to parents or behavioral differences vs. siblings (i.e. a suck up or drug-taking outcast). Various studies estimate that the “equal treatment of siblings” approach applies to 88%-92% of all estates.
Tech stocks seem cheap on paper - based on valuations relative to the market using both P/E multiples and free cash flow yields they are the cheapest they have been in decades - but as JPMorgan's Michael Cembalest notes there are some obvious reasons for this (and some not-so-obvious). The challenge with technology companies: there are a lot of haves and have-nots; as sector-level valuations may be less useful when looking at technology companies than when looking at sectors with more homogenous revenue performance.
Some among the cognoscenti of European elite still crow that the crisis is behind us and point to the closing of current account deficits in Spain, Italy Portugal, and Greece as some evidence of this. However, as JPMorgan's CIO David Cembalest notes, while, in prior cases, this development usually meant a broadening recovery was on the way; the collapse in imports has driven this move and dramatically flatters any overall improvement. Typically balance of payments crises are solved by rising exports and as Cembalest warns, Europe's ability to endure the current collapse remains a major question mark.
What happened in Japan last week (a 14% decline after a 85% rally since last fall) is an example of markets getting ahead of the facts on the ground. How much optimism was priced into the success of Japan’s monetary policy bazooka? As JPMorgan's Michael Cemblaest notes, P/E multiples rose from 11x to 17x since last Labor Day, and breakeven inflation implied by (admittedly thin) Japanese JGB-i bond markets rose to 2%, a level Japan has not seen consistently since 1990. On top of that, net long positions on the Tokyo Stock exchange were close to the highest levels in 20 years, and foreign participation in Japanese equity markets was also elevated. It did not take much detailed market research to see that Japan had become a crowded and popular trade. But what happens next? After a 70% run-up over 6 months, how have stocks performed? The answer may surprise many...
Tesla has been outselling specific Mercedes, BMW and Audi models at similar price/quality points, and Consumer Reports has given the car glowing reviews. Is there a broader meaning in this, other than the introduction of a very well-designed luxury automobile? JPMorgan's Michael Cembalest's suggests that the Tesla’s price and its fossil fuel footprint suggest that it’s a distraction regarding the issue of transportation and related environmental efficiencies.
Spanish economic data does not always pass the sniff test. A simple example that JPMorgan's Michael Cembalest explains is that as unemployment rose from 10% to 25% from 2008 to Q2 2012, Spanish banks reported stable non-performing loans of 3%. The latest Mad-riddle, as he calls it, has to do with corporate profits but recent headlines from PM Rajoy, explaining his approach to solving the country's devastating youth unemployment problem just beggars belief. Simply put, as Bloomberg reports, he proposes to create a mechanism to temporarily exclude tax rebates granted to companies for hiring young people from the calculation of the government budget deficit - which, his twisted logic prompts, "would enable immediate action because we’d lower contributions to the Social Security system and this would facilitate and encourage hiring. So in summary, his suggestion to boost youth employment is... to further misreport the deficit and to underfund social security even more. With Spanish data already questionable (as we discuss below), this simply exaggerates an already farcical situation.