Tower Private Advisors
Capital Markets Recap
March 20, 2009
- The long-awaited multimedia festival
- Subdued domestic markets; exuberant foreign bourses
- Irritated hypocrites
- No legalese
This week, the Dow 30 rose by 54.40 points, or 0.75%, to 7,278.38. The S & P 500 (SPX) rose by 11.99 points, or 1.58%, to close at 768.54. The NASDAQ Composite rose by 25.77 points, or 1.80%, to 1,457.27. The S & P Mid-cap index rose by 7.67 points, or 1.68%, to close at 464.38. The Russell 2000 small-cap index rose by 7.02 points, or 1.79%, to close at 400.11. Finally, the Morgan Stanley EAFE (Europe Australasia & Far East) index made up for last week’s lagging and rose by 86.92 points, or 8.86%, to close at 1,067.56.
The Federal Open Mouth Committee formally threw inflation caution to the wind this week and said it will spend $1.2 trillion to buy mortgage backed securities (MBS) and $300 billion of Treasury securites. The first is intended to push mortgage rates lower, perhaps to 4.50% or below (30-year fixed). The second is intended to combat the re-widening of some corporate bond spreads. A side benefit–yes, benefit; at least temporarily–is increased inflation. In this case, it’s called reflation. That caused a huge spike in commodity prices, while the news of Treasury and MBS buying pushed bond yields–especially of the government variety–sharply lower.
Yields on the 10-year and 30-year Treasuries retreated a bit this week, with the former falling sharply. The 10-year note fell by 0.29% to a yield 0f 2.60%, a decline of 9.96%. The 30-year bond fell by 0.04% to 3.63%. Treasury investors will deal with inflation implications later, it seems.
West Texas Intermediate Crude Oil (aka light, sweet crude) futures leapt this week. The front month contract for the black gold rose by $4.81, or 10.40%, to $51.06. Even Natural Gas rallied this week, as it rose by $0.31/mmbtu, or 7.88%, to $4.24.
Gold futures reversed this week, rising by $25.70, or 2.76%, to $955.70/ounce. The action in gold was quite spectacular on Wednesday. In the morning it had opened just below moving average support of $880 and drifted lower until early afternoon. When Helicopter Ben waxed sentimental about his amazing printing press, gold launched itself $62.60 higher. In turn, the U.S. Dollar Index took a drubbing, falling by 3.59, or 4.10%, to $83.84.
Congress continued to unleash its ire on the good folks at American International Group, bailed-out banks, and even Fannie and Freddie. This week, Barney Frank was in full dander as he asked the Federal Housing Finance Agency to cancel bonuses intended to keep employees of Fan/Fred from jumping ship. Easy for him to do, as he was only #26 on the list of top recipients of funds from the two companies. The outcry from such folks as Christopher Dodd, President Barack Obama, John Kerry, Bob Bennett, and Spencer Bachus–who comprise those in Congress who recieved more than $100,000 from the companies–is a bit more subdued. You can see the entire list of recipients by clicking here. AIG made the top stories on the Bloomberg terminal several times this week. It, naturally, is also on the receiving end of wrath from those pure-as-the-driven-snow solons in Congress. Four congressmen–including the former President George W. Bush–received more than $100,000 from that company, with only the now-President among them raising his voice to demand something be done about the bonuses. Click here for the entire list of AIG recipients. With apologies to William Congreve, hell hath no fury like a Congress-person made to look stupid, so Congress was quick to pass a bill that imposed a 90% tax on recipients of bailout money. Speaker of the House Nancy Pelosi (#18 on the Fan/Fred recipient list; way down the AIG list) stood up for the common taxpayer in saying, “we want our money back now for the taxpayers,” according to a quote in an AP story. The bailout dujour on Thursday went to the autopart suppliers, who are said to be on the receiving end of $5 billion in aid.
Oracle announced a profit the beat analyst estimates and did announced something virtually unheard of this week: it’s instituting a dividend for the first time in its history. Those shares jumped nicely. One of the perks of being a Goldman Sachs employee is being able to invest in its excluse, private investment funds. They come with some strings attached, including one that’s coming in to play: one has to make annual commitments to the fund(s). That’s no problem when the bonus money is flowing. When it stops, though, the Ferrari-driving minions there come up a bit short, so the company is offering loans to employees so they can fulfill their commitments. At our house, whining children are treated to a pity party. Let’s hear one for the poor folks at Goldie. Alcoa, in response to its own liquidity crunch cut its dividend by 82% to keep the wolves at bay. The wolves who had shorted the stock rushed to cover their shorts and pushed the stock up by a generous 29%. That’s been the case with a number of companies recently, where it paid to buy the rumor. GE’s stock jumped sharply when its debt was finally downgraded; JPMorgan shares moved up by 15%+ when it cut its dividend. The list could go one. We engage the services of the fine folks of the Williams Inference Center, a group of inferential readers, who divine demand pressures that may take some time to manifest themselves. Several quarters ago they began to highlight the increasing frequency of anger. We found it intriguing, but didn’t take it much further . . . until now. We find ourselves watching the shares of Smith & Wesson (SWHC). It’s up, ostensibly, because gun applications are at an all-time high, ammunition is tough to find, amid other firearm statistics. We think, though, that that could be masking a darkening societal mood, an increase in anger. Like maybe it’s time for the 53% of Americans who do pay taxes to lay some lumps on the 47% of those who don’t (see the vast array of carefully-researched statistics at the end of today’s dispatch.
Oh, and not to make you want to panic or anything, but Sheila Bair, head of the FDIC says without some immediate action to impose one-time or other FDIC insurance premium hikes on banks, the FDIC’s depost reserves could fall to zero. The increase has, to date, been staggering, and the FDIC intended to impose a one-time hike later this year that would further hurt banks. The FDIC has a line of credit at the Treasury Department, and there had been some chatter about an increase in the line being sufficient to be able to postpone the one-time assessment.
The Empire State Manufacturing index turned in a dismal performance relative to what economists had expected. Whereas economists had expected a modest improvement (to a reading of -30.80), the index fell from -34.65 to -38.23. I commented on the year-to-year point change we could expect to see short of an absolute implosion in the index. Well, we didn’t get an implosion reading, and the year-to-year change did improve. It’s still a long way from positive, but the news is getting less bad. The other regional index released this week, the Philly Fed index, did just the opposite. It improved nicely (less worse) from the February reading, which flummoxed economists, but its year-over-year change worsened.
Each month the Treasury Department releases its Treasury International Capital (TIC) data, which shows the net flows of capital in and out of the U.S. It breaks out the flows into net Private and Official purchases. Those data are further broken down by asset class: Treasury securities, government agency debt, corporate debt, and equities. This data will need to be watched carefully given the amount of money the Federal government has committed to spend on everything from neighborhood association bailouts to expensive potties for Citigroup execs monetary and fiscal policy projects. The January data showed a record net outflow of $148.9 billion. On Wednesday, the markets rallied, in part on news of the Fed’s intended purchase of $300 billion of Treasury securities. That will, however, only replace two months of capital outflows, based on January data. Further complicating capital flows is the shrinking trade deficit. That’s right, we’re not buying as much Chinese stuff, so the Chinese don’t need to recycle as many dollars back into U.S. Treasuries. Add to that concerns being voiced with increasing frequency by senior Chinese officials, about the safety of that country’s investments here, and one begins to wonder how the spending will be financed. On the other hand, the Chinese Yuan would increase in value were they to aggressively sell their Treasury investments, and that clashes with a recent report from China’s State Information Center, a Chinese think tank, which said China should allow its current to depreciate to “stem a slide in exports and help sustain economic growth” (Bloomberg). To some degree, the Chinese may have no choice but to buy the Treasury issuance.
At face value, the housing news this week didn’t seem too bad. For starters, the National Association of Home Builders didn’t put on a longer face in its monthly Housing Market Index, which would, admittedly be hard not to do. The index and each of its components remained at February levels. Tuesday’s release of Housing Starts and Building Permits data kicked the markets in the seat of the pants, with the former riseing 25% over the January figures (583,000 v. 466,000); building permits also rose, albeit by a much smaller 5.0% (547,000 v. 521,000). Economists had expected both to decline from the January figures. As we’ve pointed out here in previous writings, economic readings in the winter months are easily distorted by weather, so we shouldn’t be surprised to see more softness next month. Housing starts have been making record lows for several months now, and 583,000 starts shouldn’t be considered good news. A sustained increase should, along with improvements in next week’s housing data, and lower mortgage rates, which the government is hell-bent on ensuring. The Mortgage Bankers Association’s Mortgage Applications index rose by 21.2% last week, but as with most recent increases, the majority of the application growth came from refinances, not purchases. Still, that puts more disposable income in the hands of consumers, and that goes a long way toward either rebuilding savings or buying stuff. With the government intent on driving mortgage rates lower, we can expect to eventually see home purchases increase. One index hitting all time highs in the right direction is Housing Affordability. Data from Ned Davis Research show affordability rising almost vertically, and that’s before Helicopter Ben announced plans to buy more mortgage backed securities.
Producer Price Index data came in about as expected. Both the headline and core rates moved closer to 0% (0.1% and 0.2%, respectively), and the year-over-year rate of change in the headline rate fell to -1.3%. If deflation fears were fanned at the wholesale level, they were dampened at the consumer level, as the Consumer Price Index rose by 0.4% in February (0.2% at the core level), while the headline rate grew by 0.2% on a year-over-year basis (1.8% at the core level.)
After two months of improved readings, the Leading Economic Indicators resumed their decline. About the best that can be said about this series is that it’s nowhere near past recession lows. Other than that, there’s not much good news here. We had experienced two straight months of improvement, although most of the improvement came from the Fed pulling levers. The December increase, however, was revised in this month’s release to a small decline, and January’s increase was revised lower, according to the Conference Board.
Industrial Production fell further in February, but at a slower pace than in January. Industrial production is reported by industry: manufacturing, utilities, and mining. Manufacturing output has been gradually improving (getting less worse) since October 2008. Utility output can be a factor of weather, with heat and air conditioning demand fluctuating wildly. February’s reading, for example, was the second largest (negative) since 1990. Finally, Mining output can be a leading indicator of sorts, dealing as it does with the base minerals of economic foundations. Most recently, this segment seems to be sniffing out some growth in China. Capacity Utilization fell again in February and has now tied the post-1961 record low of 70.9% of capacity being utilized. To be fair–and we’re all about that–capacity utilization has never exceeded its 1978 level, nor gotten close. Virtually every peak since then has been at lower levels, reflecting capacity that will never be used again–think of the grasshopper oil rigs rusting in fields around little Indiana towns like Gas City and Petroleum–and perhaps a shift in our economy from manufacturing to knowledge base, although I hasten to point out for all the Cassandras that the industrial output of the U.S. of A. has never been higher than now, notwithstanding the recent pullback.
Monday - Housing news comes early in the week. Existing Home Sales for the month of February are released. This is reported for single-family homes and condo and co-op sales. The latter has been in free-fall, while the former has held at or above November 2008 levels. Economists expect a further decline.
Tuesday – the Federal Housing Finance Agency releases its House Price Index. The agency claims that there is no home price index that gives a broader look at house prices in the U.S. As you’d expect, the series is in freefall, but there are a couple of interesting observations to be made. First, there was a fair bit of strength in home prices in December. This report looks at nine regions of the country, and in the five months ending November 2008, there were only three incidents of price increases in what amounts to 45 readings (9 x 5). The strength was most pronounced in the West North Central reading, which amounts to the Dakotas and Minnesota, but there was strength throughout this sort of middle north-south band of the country. According to the economist at the agency, they’re seeing increased home sale volumes in areas where prices have been the strongest. Second, and you can see this here, six states in the union have actually experienced rising prices over the last four quarters. See if you can name them before clicking. It’s not very closely watched, but another Federal Reserve District releases its regional index in the form of the Richmond Fed Manufacturing index. Economists don’t got no time for no steenking Richmond Fed, and so no consensus estimate is available.
Wednesday – We get the week’s second look at housing with the release of New Home Sales. The year-over-year (y-o-y) decline in this series is staggering, January’s figure being 48.2% lower than the year-earlier figure, and it has been reflected in falling housing starts. Unlike a couple of other series, we could see a similar y-o-y decline this time round, and it could be a while before we see the percentage declines begin to improve. The government’s dedicated effort to lower mortgage rates, however, makes this series ripe for a surprise. Durable Goods Orders are reported. These are adjusted to remove aircraft orders and defense orders. Doesn’t matter. None of them look good, and none show signs of bottoming. The silver lining in this apparent thundercloud is that, historically, this series has bottomed after the recession has ended.
Thursday – Final Q4 GDP, the third iteration of it, is released. Economists expect yet another downward revision, this time to -6.6% from -6.2%. I’ll let someone else do the worst-ever-since thing. Initial Jobless Claims are released. They’ll be ugly again. On the employment front, Ned Davis Research did provide a glimmer of hope today by suggesting that, given the correlation of the ISM Non-Manufacturing survey’s Employment Index with a measure of Service Payrolls, a bottom in employment–at least in the service sector–might not be far off.
Friday – Personal Income, Personal Spending, and–via some fancy math–Personal Savings are announced. We’ve seen statistics suggesting that the average consumer retrenchment, measured by the increase in saving, has resulted in an 8% savings rate (please don’t ask where we saw that statistic; we’re pretty sure it had to do with recessions and tough times, though). January data showed a savings rate of 5%, which hasn’t been seen since May 1995. The prodigal consumer is coming home . . . and finding it underwater. As if that’s not enough, the University of Michigan releases its Consumer Confidence data for the second half of March. Consumer spirits are expected to have remained in the cellar. What’s not to be confident about? Trillion is the new billion. Your grandchildren will get the bill. 47% of Americans don’t pay income taxes, and 57% of statistics are made up on the spot.
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
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