“The USSR had two newspapers, Pravda and Izvestia.  In the Russian language, “pravda” means truth and “izvestia” means news.  The saying amongst the Russian people put the situation in a nutshell:  “There’s no Pravda in Izvestia and there’s no Izvestia in Pravda”.” – The Privateer

‘You heard it here first’ and ‘Mark my words’ are the hackneyed phrases that come to mind as I begin to type this missive. I will add the oft used ‘I’m going out on a limb’ as I write the following:

The stock markets and commodity markets will not collapse when QE2 ends in June.  In fact, said markets will most likely rally.

So, why am I willing to shimmy out onto a limb that looks ravaged by disease? Because I either enjoy the danger(possible) or in all humility I see something about the entire tree others are choosing to ignore.

One can no more accuse a tree of being deaf and dumb as one can complain about the dropping of leaves on the ground because that is its nature. The same can be said of our Fed chairman, Ben Bernanke, so we can’t blame him for dropping tons of paper on the markets. He is who he is, plain and simple. He wrote dissertations on the benefits of easy money and helicopter drops of cash. So to blame him for executing his plan is futile. And to assume that the end of QE2 in June will usher in a new austere Fed chairman is to believe the proverbial leopard can change.

In fact, the Chairsatan(thank Zero Hedge for that moniker) has already begun speaking of continued accommodation, “…during the Fed Chairman’s first post FOMC meeting press conference ever on April 27, Mr Bernanke did state that the Fed was not going “cold turkey”.  He assured us that the proceeds from “maturing assets” in the Fed’s $US 2.7 TRILLION balance sheet will continue to be deployed in the Treasury debt markets.”- The Privateer.

I propose we dispense with the ridiculous ‘debate’ currently raging within the financial media about what happens at the end of QE2 and when QE3 will begin. Moreover, I would submit to you that by continuing this worthless ‘debate’ we are allowing our collective selves to become susceptible to further Fed prestidigitation.

Here is the set up for Fed Three Card Monty come June: Easy monetary policy must continue, this is a certainty(if you wish to argue this inevitability as well as other obvious laws like gravity and the color blue as relates to the sky then please navigate away from this blog, do a little research and then feel free to rejoin us at the adult table). However, Bernanke understands that a continuous trail of QE3, QE4, etc. will have diminishing returns and will be too easy for traders to follow and fade. The key for the Chairsatan is to create an environment for continued asset appreciation(US$ devaluation) without the easily recognizable QE POMO programs. So while the financial media is looking left debating quantitative easing as we currently know it, the Fed is moving right creating new QE devices to prop up markets.

Stock Market Strategy: Bernanke QE Ends June Stocks Commodities Will Rally

I don’t profess to know what the new QE devices will look like. They could be new ways of increasing the velocity of money as opposed to the amount or we could see new enormous QE programs out of Japan that somehow miraculously find their way into our markets. A mysterious large buyer with an insatiable appetite for US treasuries could emerge from the Caribbean as seen before, ” Purchases of U.S. debt remained relatively healthy from November to December, with buyers such as Japan, the United Kingdom, Brazil and Caribbean banking centers stepping up acquisitions in the final month of 2009.” - WSJ

Whatever the case may be rest assured the Fed’s goal is to have asset prices levitate when QE ‘ends’. The deception will be complete in the weeks following the termination of QE2 when the WSJ et al headlines read, “QE Ends but Markets Continue Higher Lifting Confidence Fed Plan is Working”. I beseech you, don’t play the part of the Times Square Tourist or you to will eventually be separated from your money.

Tags: ben bernanke, Bernanke, Brazil, caribbean, commodities, debt, Japan, POMO, QE, QE2, QE3, stocks, Treasury, WSJ

Comments feed (RSS 2.0), comment or trackback from your site.

Before I begin, I’d like to make clear the purpose of this post. I am not attempting to call the top of the equity market nor am I suggesting a portfolio should be aggressively short at this time.  Take a good look at the mission statement above. These posts are designed to make you think, stay aware and avoid the trap of complacency constructed by traditional financial media outlets.

That said, I think the rally is over, the equity markets have topped and a massive short position is in order (KIDDING, KIDDING!!!)  Just a little levity bringing some color to a world that is all too often monochrome.

In my first “Stalking the Bear” post I wrote about the potential negative effects of interest rate creep. Well, the creep is turning into a trickle and should that advance into a stream then things could get interesting.  Treasury rates briefly popped above 4% last week as an ever increasing amount of government debt issuance flooded the markets. This flood comes at a time when the Fed is supposedly ending the quantitative easing plan of buying MBS.  It remains to be seen whether or not the Fed can stay out of the MBS market with rates jumping higher as the story below reflects…

At 5.21%, Freddie Mac 30 Year Fixed Rate Mortgage Jumps To Highest Since August

Yesterday we reported that the MBA announced the highest average 30 year FRM rate since August: a jump from 5.04% to 5.31%. Today this deterioration in mortgage rates was confirmed by Freddie Mac, whose 30 year Fixed Rate Mortgage jumped from 5.08% to 5.21%. Whether this is a function of the recent surge in 10 Year yields (subsequently ameliorated by Chinese purchases during yesterday’s auction) or of the end of QE finally being felt is uncertain, although it is probably a combination of the two.

Read More…

Meanwhile, as Treasury rates increase and mortgage rates advance the equity markets drift higher. Throughout history, this type of divergence has been dangerous for equity investors.  Rates will need to come back down (assisted by renewed Q.E. no doubt) or at some point equity prices will adjust and if history is a guide the adjustment will be fast and furious.

Below is a graphical representation of the growing chasm between stock and bond prices courstesy of GMT…

Now, compare the above divergence to the debacle of 1987 depicted below and you will understand why we are “stalking the bear”.  Timing events is not easy and divergence can last for weeks or even months. Awareness is your only weapon; wield it wisely.

Tags: mbs, mortgage rates, Stalking the Bear, Treasury

Comments feed (RSS 2.0), comment or trackback from your site.

March 10th, 2010

Tags: budget deficit, DXY, investment strategy, OIL, rosenberg, Treasury, vix, Zero Hedge

Comments feed (RSS 2.0), comment or trackback from your site.

The equity markets dropped on average 1.5% Monday and this morning another 1.5% decline is underway.  I mentioned, in A Review of the RCM Investment Strategy, the defensive posture we at RCM have taken. I said, “We have deployed our assets in a manner we feel most appropriate for the environment we are experiencing.”

The following news items should help illustrate what was meant when I wrote, “…the environment we are experiencing.”….

Lending falls at epic pace – WSJ

WSJ reports U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry’s continued slide is making it harder for the economy to recover. While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the FDIC. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers. Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702. More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010. FDIC Chairman Sheila Bair said banks are “bumping along the bottom of the credit cycle” and that the number of bank failures in 2010 will likely eclipse the 140 recorded last year.

If “Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans” then what do you think will happen when the following development gains steam?….

SAN FRANCISCO (MarketWatch) — Just when they thought the worst of the mortgage crisis was behind them, billions of dollars in bad loans from the debacle may be rising from the dead and creeping back on the balance sheets of the largest U.S. banks.

Big lenders including Bank of America, J.P. Morgan Chase and Wells Fargo may be forced to repurchase troubled home loans from insurers and mortgage-finance giants like Freddie Mac that had agreed to take on risks associated with those assets during the real estate boom.

The banks are setting aside more reserves to cover the potential costs of such repurchases, cutting into earnings….

Read More…

Of course, we can spend all day debating the reasons for banks’ lack of desire to lend, but the real crux of the issue remains the employment picture. The American people, due in large part to the horrible jobs market, are reigning in spending hence needing less credit….

Mass Layoffs Surge In January, Highest Since July 2009

The BLS has reported Mass Layoff Statistics for January 2010 – the result is plain ugly, and kills any hope for sustained improvement in unemployment data. Not seasonally adjusted Mass Layoff Events (defined as at least 50 persons being laid off from a single employer) surged in January to 2,860, from 2,310 in January, from a 12 month low of 1,371 in September 2009. This is the biggest monthly surge since July when the Mass Layoff Events hit a 12 month high of 3,054. In terms of actual workers, January saw 278,679 initially laid off people. The deterioration was mirrored in the much less credible seasonally adjusted data. Obviously companies were waiting for the end of the year to dump as many people as they could.

ECONX Initial Claims Report Suggests a Much Weaker Labor Sector

The initial claims data weakened for the week ending Feb. 20 as the claims figure increased from 474,000 to 496,000. The consensus expected claims to decline to 460,000. Many analysts, including us, believed that inclement weather conditions across the U.S. would prevent many workers from filing new claims. If this scenario is true, then the actual initial claims figure would be much closer to 550,000… Continuing claims rose a modest 6,000 to 4.617 mln for the week ending Feb. 13. The figure for the week ending Feb. 6 was revised up from 4.570 mln, and the consensus expected claims to remain at that previous level… The job creation data looks to be minimal. The unadjusted claims data from Feb. 6 was down by 85,842 claims while the emergency benefits figure declined 317,933 claims. The decline in original claims is mostly due to workers running out of benefits and it seems the weather made it difficult to process extended benefit applications.

Meanwhile, the health of the credit markets remains the number one issue facing the equity markets today.  You may recall my Feb. 18th post ‘Credit Markets Warning Signal, Foreign Demand for US Treasury Falls ‘ in which I outlined the very real possibility that European credit constriction was migrating across the pond. Well, the following stories add credibility to that concern…

Greek Treasuries Pancake As Bond Vigilantes Chant Death Chorus

Ah, curve pancaking – better known in bond parlance as the death rattle. The Greek 4 Year GGB just traded wider of the 15 Year at a spread of -4bps (yup, negative). This, to continue the parlance lesson, means the bond vigilantes are now pretty sure how the Greek situation will play out. Oh, and Greece, all the best with that €5 billion10 year bond issuance. The 1 Year spot his exploded from just over 200 bps on January 1, to just under 5%, a rout for all short-term GGB holders. We are anxiously awaiting RBS’ rebuttal.

Read More…  

California postpones bond sale – WSJ

California One Step Closer To Insolvency After State Cancels $2 Billion General Obligation Bond Sale

Five days ago a great white hope appeared for the great bankrupt Golden State (Baa1/A-), in the form of $2 billion in GO bonds, which were supposed to be promptly syndicated via underwriters JPMorgan and Morgan Stanley. This would have been the first bond sale for California since November: a critical milestone as the state creeps ever closer to a full-on default. Unfortunately, the creeping just turned into a casual jog after Jane Wells (@janewells) just tweeted that California has cancelled its bond sale “after legislature fails to approve cash management flexibility bill [the] Treasurer said he needed to attract investors.”And seriously, did California think it would succeed where so many other high yield issuers have recently failed?

Read More…

I will rest my case today with a request to review my post titled ‘Looming Defaults and the Effect on Currencies, US$ vs. Euro’.  In this post I describe the competitive devaluation process unfolding and the similarities between Greece and California.

Tags: bad loans, California, commercial real estate, credit markets, euro, FDIC, Greece, initial jobless claims, Treasury, unemployment, US Treasury, US$

Comments feed (RSS 2.0), comment or trackback from your site.

A maelstrom of misinterpretation dominates the financial media outlets today in regards to last night’s Fed action.

Click here for my audio post on the recent decision by the Fed to increase the discount rate.

After listening to the above post, Gary Rosenthal had the following comments on the Fed move:

1) Federal Reserve banks currently have a record high of $1.14 Trillion of excess reserves on deposit with the Fed. Thus, an increase in the discount rate is meaningless because the banks have no need to borrow and will not be borrowing for a very long time.

2) Therefore, we believe raising the discount rate at this point was merely a ploy to strengthen the US$ in advance of a major Treasury auction next week.

3) Note the anomalous strong behavior of Gold during the last 72hrs in the face of overwhelmingly “bearish” news: IMF announces further Gold sales, Fed increases discount rate and Gold Feb. futures/option expiration next week.

Tags: Fed, gold, IMF, Treasury, US$

Comments feed (RSS 2.0), comment or trackback from your site.

            With a bad habit of ignoring profound systemic problems, Federal Treasury officials are now securing a system that encourages the same careless risk-taking that originally got us into this mess. With this week marking the one-year anniversary since Lehman Brothers imploded, it is only appropriate to discuss the faulty system that protects and rewards failing financial institutions.

            The talking heads in charge of the world’s financial practices are on path to deliver more of the pain and suffering we have been experiencing over the past 20 plus months. The Lehman Brothers’ collapse last year showed us how brutal a large bank failure can be. Now, because of the mess caused by Lehman’s demise, it is unlikely that our government would again allow an institution of similar size to fail. This essentially gives big banks a free pass to misbehave. If you owned a business that was referred to as “too big to fail,” and you knew the government would do all they could to keep your doors open, would you not be inclined to take risks? It is like giving a six year old the keys to a candy factory and a set of cavity-resistant teeth. All risk is stripped away, so why not have some fun?

By receiving government funds, big banks are allowed to carelessly take on high degrees of risk, knowing that there is a safety net underneath them. This recession has been gut-wrenching. It has badly battered our economy and exposed wounds that will not heal in our lifetimes. No one wants to experience a downturn of this size again. But, if officials continue to foster an environment that rewards carelessness by major financial institutions, we will inevitably get more rounds of the same. While we should be demanding big banks to practice prudent due diligence, we are instead enabling them to write off any level of accountability. This recession should have been a major wake-up call for all businesses, but those institutions deemed “too big to fail” have also been allowed to be “too big to learn.”

Top Five of the Bad, Bottom Five of the Good

            Ravaged by the bursting of the real estate bubble, Nevada is among the states with the deepest wounds. Historically, our state has been in the top or bottom five of the most-unappealing statistically-compiled lists put out by major media. Unfavorable, sure, but we all choose to live here for one good reason or another. For instance, our tax structure keeps Nevada among the most business-friendly states in the country. For this reason, we have highly-competitive local markets and capitalism thrives here. Our state officials are somewhat handcuffed because of our demand to keep government out of our businesses as much as possible. By adopting and supporting this system, Nevadans have agreed to take on more personal responsibility when it comes to providing our own financial security—and we are now being put to the test.

            Across our country, state officials are scrambling for ideas that will simultaneously better their state’s situation and put them in the position of being quality leaders. In Nevada, our elected officials have considered bringing in a pricey third-party consultant to advise them on how to progress the state. This means not only are the individuals we put in office to make vital decisions not carrying out their duty, but now we will also foot the bill for a new position. We elected these authorities to represent us; not lead us, by way of expensive consultation, in an undesirable direction. With that said, when we elect them we do not, in turn, remove ourselves from the equation. We are not reduced to waiting on our state leaders to be proactive.

            These are extremely trying times for our country. The recovery is going to be led by us via our private capital and our private enterprise. The government does not have a weapon in its repertoire that comes close to matching the power of our collective private resources. Across the U.S., and particularly in our state, there is an abundant supply of quality projects that have been postponed due to insufficient capital. Because success requires both money and knowledge, every successful idea struggles with acquiring adequate funding at least once throughout the process. Every successful venture has to be properly backed and the majority of the backing comes from private capital. At the end of the day we, the people, are the engine that runs our country.

            Nevada is riddled with quality projects that could be going forward with proper capital and qualified management. We now have to be proactive in matching the two. Being among the top five states in the country in foreclosures, troubled institutions and bank closures does not mean we cannot also be among the top five states to emerge from this recession.

Survival of the Government-Backed Banks

            Even the banks that did not become entangled in the shaky investment strategies of Wall Street during the boom still indirectly had their knees taken out from beneath them throughout this meltdown. According to CNBC.com, 92 banks have failed in the U.S. through the first nine months of 2009; including three here in Nevada. As a comparison, in all of 2008 only 25 banks closed.

            In any meltdown, the government’s focus is on the big banks that have the potential to buckle our country’s financial system if they go under. But, that focus leads to a distinct advantage for big banks over their competition. Having government support allows the bigger banks the power to go out and collect the majority of the available capital, while smaller banks are forced to scavenge. This crisis has presented terrible obstacles for banks to raise the capital lifeblood needed to remain in business. Without liquid capital, smaller banks are consumed by their debts. With losses on commercial real-estate loans rising, the smaller banks that feed credit into our communities are drowning.

            When governments support the behemoth banks and allow the smaller banks to sink, they essentially help eliminate the competition needed to improve our financial system. Without intervention, smaller banks are generally able to pose a competitive threat to the large firms because they are more apt to find ways to be faster, smarter and more strategic. It has always been a staple in American capitalism to save a place in our economy for smaller businesses because they push against the bigger corporations and keep them honest.

            Competition in the banking industry leads to a financial system that operates more efficiently. By helping to eliminate competition, our government is essentially allowing the largest banks to monopolize the industry. By supporting the large and abandoning the small, our government is positioning us to face a much weaker economic recovery than if the innovative smaller firms were allowed to compete fairly. We are essentially heading in the same direction as Europe, which has long had its bank assets heavily concentrated in massive firms. The tactic may make it easier for governments to regulate financial systems, but it also eliminates the capitalistic nature that has made our banking industry the strongest in the world.

NEXT WEEK: Banks as Intermediaries

All my best,

Thomas J Powell

Tags: Add new tag, Bernanke, economy, ELP Capital, Investment, markets, nevada, Real estate, recession, Risk, tax, Thomas J. Powell, to big to fail, tom powell, Treasury

Comments feed (RSS 2.0), comment or trackback from your site.