Tower Private Advisors
Capital Markets Recap
March 27, 2009
- Bair market
- Fearless forecasts
- Housing . . . improving . . . ?
This week, the Dow 30 rose by 497.80 points, or 6.84%, to 7,776.18. The S & P 500 (SPX) rose by 47.40 points, or 6.17%, to close at 815.94. The NASDAQ Composite rose by 87.93 points, or 6.03%, to 1,545.20. The S & P Mid-cap index rose by 34.45 points, or 7.62%, to close at 498.83. The Russell 2000 small-cap index rose by 28.89 points, or 7.22%, to close at 429.00. Finally, the Morgan Stanley EAFE (Europe Australasia & Far East) index rose by 49.58 points, or 4.70%, to close at 1,067.56.
The 10-year note rose by 0.12% to a yield 0f 2.76%, a decline of 4.59%. The 30-year bond fell by 0.12% to 3.61%.
West Texas Intermediate Crude Oil (aka light, sweet crude) futures rose this week. The front month contract rose by $1.17, or 2.29%, to $52.23. Even Natural Gas saw last week’s gains wiped out this week; it fell by $0.60/mmbtu, or 14.10%, to $3.63.
Gold futures retreated this week, falling by $32.50, or 3.40%, to $923.20/ounce. Finally, the U.S. Dollar Index gained back some ground, rising by 1.27, or 1.51%, to $85.11.
The big story of the week had to be the Treasury Secretary’s Public-Private Investment Partnership (PPIP). In contrast to the other times when the Boy Wonder has spoken, the markets responded quite nicely. The program is designed to purchase so-called toxic waste assets from bank. We have a lot of questions, as do many, about how the whole thing works. So here’s the problem the program is targeted toward. Say a bank has assets that must be marked to market prices. Those assets might over time be expected to recover. Unfortunately, with specific capital requirements the bank might not be afforded enough time, but another investor–sans the capital requirement–might be able to be patient with the asset, to hold it until conditions renormalize. The PPIP plan is intended to facilitate the sale of the asset from the bank to the investor. The government, through Treasury, FDIC, and the Federal Reserve, will participate alongside the investor, such that all parties will share in the up- and downside. To us, the biggest question revolves around price. It’s said that one can make money on any investment, so long as the purchase price is right. That suggests that no investor is going to want to pay the price the asset is being carried at on the bank’s balance sheet–the supposed market price; it has to be at a discount to that price so that money can be made. And discounting the price to make the asset attractive is going to require the bank to take a larger loss. Sheila Bair, Chairman of the Federal Deposit Insurance Corporation, said as much in a Time magazine article, “The challenge is going to be to get the prices high enough for banks to sell. The problem is going to be low pricing, not high pricing.” Second, imagine that this works out smashingly for the investors, a handful of which might be some of the spawn-of-Satan rich that Congress so loves to villify. Surely, Congress wouldn’t later change the rules on these investors after they’d made filthy sums of money. To answer that, one need only harken back about a week to the AIG bonus debacle. Speaking of AIG, one of its executive vice presidents submitted his resignation letter to the New York Times, and you can read it by clicking here. If you do click, you may be required to register, but, hey, it’s free–and what are you doing without access to the Grey Lady? So you don’t like the opinion page of the paper. Sign up.
We may be seeing the debut of America’s first Rock Star regulator in the person of Ms. Bair, Chairman of the Federal Deposit Insurance Corporation. This week she was quoted in Bloomberg news as saying that “I think we are seeing some signs of thawing, some signs of improvement. Many banks are making money.” She apparently woke up on the right side of the bed, as the day earlier, March 23, she said that some banks may be “beyond help.”
Two of Bank of Amerill Lynch‘s biggest names departed the firm this week for greener pastures, and who can blame them. Richard Bernstein, Chief Market Strategist, left to start his own firm, while David Rosenberg, Merrill’s Chief Economist left to join another firm. Rosenberg has been correctly bearish on both the economy and the markets for well over a year, and Bernstein has been a reliable value investor. Good people, both. Speaking of that stellar institution, Bank of America and Wells Fargo both saw their debt ratings get cut by Moody’s Investor Service, another pillar of foresight and integrity. B of A’s went from A2 to A1, while the Stagecoach went from Aa3 to A1. After Citigroup, these two have been the biggest recipients of government largess. JPMorgan has not [yet] suffered the same fate.
Google has a cool feature called Zeitgeist (go to Google, type “google zeitgeist”, click the first entry, and choose Hot Trends, or just click here). It shows the current hottest searches on Google. For example, “plaster of paris” is presently #86.
You can get your own spirit of the times by going to Google News and typing “China.” China is flexing its economic muscles in a number of ways, including jockeying for leadership among the worlds of the nation, partly by virtue of its having avoided the financial doo-doo, and is jockeying for ownership position in the world’s commodity businesses. Here are three fearless forecasts from me. 1.) China overtakes the U.S. as the world’s economic superpower before I’m saying “Welcome to Walmart”; 2.) China will be a powerful force in turning the present world economy around; and 3.) the Chinese Renmimbi/Yuan is the top candidate for a single global reserve currency right now; that is, hold to a gun to the central bank of Norway and demand an answer for one global currency, and you get Yuan for an answer. That last one will encounter powerful opposition in the person of Michele Bachmann, clueless Republican Representative from Minnesota, who has introduced a “resolution that would bar the dollar from being replaced by any foreign currency.”) Frankly, it won’t happen for a long time, but it’s a currency that right now looks pretty solid.
Quick! What state in the Union is closest to the brink of disaster? California? Yep, and its recent municipal bond issue was oversubscribed, meaning that more investors wanted the bonds than bonds were available. Sure, the yields were as high as 6.1%, but that’s scant compensation for an investment with one of the worst payoff profiles of all: upside = coupon payment; downside = -100%. Oh, but wait, it’s rated A by Standard & Poor’s and A2 by Moody’s. Never mind. Everything’s okay. We avoid, like the plague, municipal bonds from California and New York State. Always have; always will.
By and large*, economic news of greatest import this week was better than expected. In almost all cases, the news was not just of the less-bad variety, but was both better than expected and better than the prior reading.
The week started off with a bang as February Existing Home Sales jumped by 5.1%, versus the economists’ consensus guess of a decline of -0.9%. Before you don the rose-colored glasses consider that the February data just clawed back January’s decline, and because of the perversity of percentage math, it didn’t even accomplish that (the 5.3% decline in January requires a 5.6% recovery to break even.) This report is broken down into at least two components: single-family homes and condos. The former rose by 4.4%, or 178,000 units, while the latter jumped by 11.4%, or 50,000 (units expressed as an annual rate). In contrast to some recent strong housing data, which showed the strongest sales growth in the west, in February, sales of homes in the Northeast rose most sharply (+28.6%), while the West fell by 5.6%. As we’ve observed in other series, the year-over-year (YoY) change is starting to improve. Whereas the YoY change had gotten as bad as -24%, February’s change was just -4.5%. Existing home sales haven’t shown positive YoY growth since late-2005. This strength in existing home sales probably flowed through to home prices. That’s a probably since the FHFA’s House Price Index, which rose sharply, reflected January data. That confounded economists, who expected a fall of -0.9% (prior release of 0.1% was revised downward to -0.2%), not the increase of 1.7%. The largest increase (+3.9%) was seen in the East North Central region (Minnesota, Dakotas, Nebraska, etc.), which has fared relatively well in recent months and in the South Atlantic region (+3.6%), which had fared relatively poorly in recent months. Over the last 12 months, only the Pacific and Mountain states have fared worse. This index is the broadest measure of home prices in the U.S., and it not only includes purchase prices, but refinance appraisal values. New Home Sales also rose, although January sales were revised upward (309,000 to 322,000) making the increase more subdued. Still, housing data is not one where upward revisions have been common. Before we get too excited, consider that the annual rate of sales is still the lowest since 1963. Compare February’s 337,000 units to 572,000 (2008), to 820,000 (2007), to 1,061,000 (2006), and to 1,319,000 (2005). Increases in this series have been rare since the recession started, and it’s evidence that record housing affordability and low prices are beginning to attract buyers. Mortgage Applications rose sharply. As in recent weeks, the strength was concentrated in refinance activity (+41.5%) and which comprised 78.5% of mortgage applications. Historically, refis have comprised about 45% of applications. With national average 30-year mortgage rates at all-time lows the refinance activity will leave consumers with more disposable income. Finally, for housing, the National Association of Realtors published its Housing Affordability Composite Index, and it reached an all-time record . . . in the right direction. According to the folks at Ned Davis Research, a “family earning the median income could afford to buy a home priced up to $285,500 versus the median home price of $164,600. [At present mortgage rates,] monthly principal and interest payments are now a record low 14.4% of income.”
Click the chart below for a full-size chart of the data.
Durable Goods Orders posted strong increases in February. At the headline level, orders grew by 3.4% (economists expected -2.5%), while January’s orders were revised lower to a further drop (from -5.2% to -7.3%). Excluding Transportation Goods, orders rose by 3.9% (economists expected -2.0%), and January’s orders were revised lower (from -10.2% to -13.2%). Keep in mind that these are orders for big-ticket items and orders that get delayed over month end or moved forward can have a distorting effect. In addition, a look at a chart of the data shows just a bounce, and one observation doesn’t a trend make. Still, after six months of negative or no growth, the increase is welcome. Orders excluding transportation goods rose for the first time in eight months, and only for the fourth time out of 12. Orders excluding defense goods rose for the first time in seven months, and for only the third time out of 12. The orders seem to reflect real stuff. Machinery orders rose by 13.5%; Computers and electronic products rose by 5.6%; Non-defense Capital Goods (e.g. construction machinery, material handling equipment, etc.) rose by 7.4%.
Personal Income (PI) fell by (-)0.2% in February, while Personal Spending rose by 0.2%. Disposable personal income (PI less taxes) fell by 0.1%, faring better than PI because of a slight drop in taxes paid. The Savings Rate, which is disposable personal income adjusted for outlays fell by 0.2% to a rate of 4.2%. The savings rate hits its nadir in April 2008, when it hit zero. Since then, consumers have responded by cutting back on orders for durable goods (-9%) and non-durable goods (-3%). For the sake of comparison, since 1959 (earliest data), the savings rate has averaged 6.85%; last 30 years, 5.47%; last 20 years, 3.61%; last 10 years, 1.65%.
No doubt bouyed by a couple of weeks of rising stock prices, University of Michigan Consumer Confidence rose slightly to 57.3 from the first half of the month’s 56.6 reading. Not surprisingly, consumers’ assessment of the future brightened in the second half (53.5 v. 50.5), while their assessment of the current situation dimmed (63.6 v. 65.5).
Initial Jobless Claims were about as expected, and the prior week’s data was revised slightly downward. We received the third iteration of Gross Domestic Product for the fourth quarter of 2008. Economists expected a deterioration to -6.6% (from -6.2%), while the actual revision was to -6.3%.
We’ve mentioned here before the idea of Adaptive Expectations, wherein expectations for the future are not determined by a Spock-like rational assessment of all factors. Instead, one’s forecast is colored by the most recent experiences. This factor seemed to have been at work this week with the mythical consensus economist. In almost all of the most-important datapoints of this week, economists had more negative views than the actual data that was released. That was true with every piece of housing data–and the misses were considerable. It was also true with Durable Goods Orders and the GDP revision. I suspect we’re nearer a turn in the economy than most, but I’m hardly optimistic over the near term. Still, I think we should expect to see more whiffs by the economist as the economy improves.
* If you’re like me you wonder where these phrases come from. I decided to look to that repository of truth, the internet, and find out what “by and large” means. Turns out it’s a chicken way to sail a ship. Sure, you can’t believe everything on the internet, but with a title like The Straight Dope (click here to check it out) and an even-better subtitle (Fighting ignorance since 1973; it’s taking longer than we thought) you can’t go wrong with this description of “by and large.”
The phrase “by and large” today means “generally speaking,” “mostly” or “on the whole.” The origin is nautical, and had a very precise meaning. It was an order to the man at the helm of a sailing ship, meaning to sail the ship slightly off the wind. A similar command was “full and by” which meant to “sail as close to the wind as it can go.”
The risk of sailing too close to the wind was the danger of being “taken aback” (when the sails press against the mast and progress halts.)
Thus, when a person doesn’t want to “sail” directly into a statement, “by and large” is a hedge, a phrase of circumspection, a way of saying that the statement is an imprecise generality.
Monday - one lousy regional Federal Reserve district report, Dallas Fed Manufacturing Activity . . . yawn.
Tuesday – the revered/reviled CaseShiller Home Price Index is released. With a three-month lag we’ll see prices for January, and economists expect that they fell at an 18.5% rate in January. The Chicago Purchasing Managers Index is released, and economists don’t expect much change from recent low levels, but it, along with the little-followed Milwaukee index, should give a preview of Wednesday’s national version.
Wednesday – the Mortgage Bankers Association releases its weekly Mortgage Applications index. It’ll be tough to top this week’s 32.2% increase on little changed mortgage rates, so look for a drop in applications. The national purchasing managers index, ISM Manufacturing index is released. Economists expect no change in the reading of 35.8. Our third and final look at housing for the week is courtesy of Pending Home Salesfor February. We’ll see if this index reflects some of the strength described in above. Economists expect that sales fell further, but at a slower rate. A closely watched report will be the ADP Employment Change index, which attempts to foreshadow Friday’s monthly employment report. It has lately caught up after several months of under-estimating the Nonfarm Payrolls report. If economist estimates are to be believed, job losses in March were not as bad as in February, which is to say that instead of 697,000 jobs a mere 650,000 were lost.
Thursday – As usual, Initial Jobless Claims are released. They won’t matter much in light of Friday’s big report. Factory Orders are announced. In contrast to this week’s Durable Goods Orders report, this report will also increase non-durables. To give you some perspective, orders for goods are split about evenly between durables and non-durables.
Friday – All other reports will pale in comparison to this day’s Nonfarm Payrolls Report. Economists expect that 660,000 jobs were lost in March, with 160,000 of the losses coming from manufacturing. They also expect the Unemployment Rate to have edged up to 8.5% from 8.1% in February. Naturally, it will be important to watch the revisions to prior data for signs that the trend in job losses is changing. Don’t expect it yet. The last report of the week will be the service-sector version of Wednesday’s ISM report. Economists expect the cleverly titled ISM Non-Manufacturing survey to have plodded along at near-bottom levels. In the last couple of reports there has been some strength in the employment component. Naturally, that will bear watching.
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
This e-mail, its cynical style, ignorance of punctuation convention, and a host of other aspects, assuredly do not represent the views of Tower Bank or Tower Private Advisors. In fact, there are folks here who likely cringe upon receipt of it. If anything you have read here has offended your sensibilities, well, tough. Also, if there are typographical, grammatical, or stylistic errors above, you can see why we don’t teach English Composition. The passive tense, where used, is regretted. If you have suggestions for improvement, keep them to yourself. Just kidding . . . really; send ‘em in.