Morning Report 8/31/12

Vital Statistics:

  Last Change Percent
S&P Futures  1406.8 9.7 0.69%
Eurostoxx Index 2438.5 34.7 1.44%
Oil (WTI) 95.29 0.7 0.71%
LIBOR 0.418 -0.003 -0.59%
US Dollar Index (DXY) 81.21 -0.486 -0.59%
10 Year Govt Bond Yield 1.65% 0.02%  
RPX Composite Real Estate Index 192.1 -1.0  

Markets are shrugging off a lousy NAPM Milwaukee report ahead of The Bernank’s speech, which is scheduled for 10:00am EST.  Given this is the last day of the month before a long weekend, there will probably be a flurry of activity during the speech and then the Street will be on the LIE by noon. Bonds and MBS are down slightly

While the general feeling is that Bernake will not say anything earth-shattering (he prefers to announce policy during FOMC statements) people are looking for clues regarding further QE.  Numerous sources have indicated that trading desks are long bonds going into the speech, so there is room for disappointment, or a “buy the rumor, sell the fact” reaction. The next FOMC meeting is in 3 weeks, and that should be the end of anything major out of the Fed until after the election.

Jim Grant has an op-ed in today’s Washington Post discussing the gold standard. FWIW I think the latest political re-consideration of the gold standard is more of a political attempt to keep Libertarians in the tent. He does make a good point that the dual mandate is probably asking the Fed to do too much.  As he puts it: “Positively out of bounds for the chariman of the Federal Reserve is the admission that he is in the wrong line of work.  The institution he leads was created to conduct a central banking business. But Congress and he have steered it into the central planning business. In so doing, the Fed has exchanged a job it could do for one it can’t.” And let’s be honest – the Fed sets prices (interest rates) the same way the Communist Bureaus of the USSR used to set the price of gasoline.

As I was driving into work this morning, Meredith Whitney and James Bullard (St Louis Fed Head) were debating ZIRP. Bullard made a comment (and I am paraphrasing) “Some people think the Fed kept interest rates too low for too long in the early 00s – that’s been sort of an ongoing debate.  The people who disagree would point to the fact that inflation didn’t shoot up. The problem with the policy came in other ways with the financial crisis which no one could see coming. I do worry about people reaching for yield and taking too much risk”  No mention of the housing bubble.  No mention of the stock market bubble.  And Bullard is a supposed inflation hawk.  The Fed thinks it has nothing to do with creating asset bubbles. 

Stephen Roach (ex-Morgan Stanley, now at Yale) makes this exact point when he says that Bernake should not be re-appointed. Meredith Whitney (same link as above) made the point that ZIRP has made it extremely difficult for banks to make money in their traditional business (lending) so they are taking more proprietary bets (either directly or indirectly through over / underweighting different asset classes).  Not to mention that it is annihilating pension funds (the next crisis on the horizon) and retirees are cutting back consumption because of meager earnings on their assets. Contrary to the belief in Washington, there are unintended consequences that are working against what they want to achieve (more lending, more spending, less risk). ZIRP is not “free.” 

If Romney wins, it is possible we could get a break from the Greenspan / Bernake Fed, which may well be the final nail in the 30 year Treasury Bull Market’s coffin. If that happens, in a couple of years, the financial press will learn another buzzword they don’t understand – convexity risk. Which some mortgage REITs aren’t hedging.

Republican Convention Open Thread

You’re welcome, Don Juan!  🙂


Are you quite sure you don’t want to become an author with full rights and privileges for starting arguments?

MiA adds: Every time someone double posts, if I catch it, I trash one. All of us but one are following on a comments thread and the double posting is annoying. The “one” should learn to use this site.

Every time someone posts without a category (uncategorized), I jam it into one, if I catch it. KW used to do it for us, and sometimes Lulu did. Brent, look at the categories list, click the Most Used tab, and you will be surprised to find Morning Report as the second most used.

Now we wait for WMR to make his speech. If any of you watch it, please report in the comments.

Morning Report 8/30/12

Vital Statistics:

  Last Change Percent
S&P Futures  1402.6 -4.6 -0.33%
Eurostoxx Index 2422.6 -11.7 -0.48%
Oil (WTI) 95.45 0.0 -0.04%
LIBOR 0.421 -0.001 -0.24%
US Dollar Index (DXY) 81.45 -0.104 -0.13%
10 Year Govt Bond Yield 1.63% -0.02%  
RPX Composite Real Estate Index 192.1 -0.8  

Markets are lower after ho-hum economic data in the US and disappointing data overseas. Bonds and MBS are up slightly. Tonight we will get Mitt Romney’s speech at the Republican Convention and then all eyes turn to Bernake’s speech in Jackson Hole.

Personal Income and Spending both rose in July, with income coming in at .3% and spending coming in at .4%. The spending number was the strongest number since last winter, but was little below street expectations. The retailers will report BTS comps a week from today, and that will give us a more granular look at spending patterns. Initial Jobless Claims were 374k last week, more or less in line with the latest readings. 

Tomorrow, Ben Bernake will give a speech in Jackson Hole. The Street will be looking for clues to further stimulus, and they will probably be disappointed as politics are now center stage and the Fed wants to appear independent. Mitt Romney has been skeptical of the Fed’s reflation efforts and has already said he would replace Ben Bernake if he wins. Which means you should watch the polling numbers as a Romney win should be bond bearish at the margin. Especially if the Europeans find a way to muddle through.

The national settlement over foreclosure abuses is 6 months old, and the settlement monitor has released his first report. Total consumer relief has been $10.6 billion, of which the lion’s share has been short sales. At first glance, it appears the banks are over halfway there on delivering the $20 billion in relief, but that $10.6 billion will be haircut as there are different weights for different outcomes. 

Morning Report 8/29/12

Vital Statistics:

  Last Change Percent
S&P Futures  1410.4 2.6 0.18%
Eurostoxx Index 2432.9 -9.2 -0.38%
Oil (WTI) 95.95 -0.4 -0.39%
LIBOR 0.422 -0.001 -0.24%
US Dollar Index (DXY) 81.45 0.082 0.10%
10 Year Govt Bond Yield 1.65% 0.02%  
RPX Composite Real Estate Index 192.1 -0.4  

Markets are flattish after 2Q GDP was revised upwards and Mario Draghi defended the ECB’s bond buying program. Pending Home Sales increased 15% YOY in July, another sign of life in the residential real esate market. Bonds and MBS are down slightly.

Second Quarter US GDP was revised upwards to 1.7% from the initial 1.5% estimate as consumer spending was a bit higher than initially thought. The  upward revision was expected so there was no reaction in the index futures. Growth 2% or lower will probably not be enough to lower the unemployment rate 

One of the reasons for the increase in house prices has been the lack of distressed sales. CoreLogic’s latest foreclosure report bears this out, as foreclosures dropped 24% in June from a year ago, which is the lowest level since 2007. That said, the pipeline remains at 1.4 million homes and REO sales have declined while foreclosures have continued.  

Fed-Bashing was one of the themes at the Republican National Convention. Certainly a part of that is driven by the desire to keep Libertarians in the tent in the fear that Gary Johnson could pull a Ralph Nader and peel off enough Republican votes to deliver the election to Obama. Bob Corker wrote an op-ed in the FT criticizing the dual mandate. He does make a good point that bond prices should be important signals to the economy, but that signalling process is broken because of Fed manipulation.  

My gripe with the dual mandate has always been that it encourages bubbles – as long as inflation (as measured by the CPI) is behaving, the Fed must keep the pedal to the metal. Economists have accepted the fact that too much money chasing too few goods is a bad thing, but somehow think too much money chasing too few assets is okay.  Since the dual mandate was enacted in 1978, we have had the following bubbles (or mini-bubbles):


  • Gold and oil in the early 80s
  • Junk bonds in the mid / late 80s
  • Emerging Market Debt in the early 90s
  • Stock Market bubble in the late 90s
  • Residential Real Estate bubble mid 00s


Given that the consequences of getting it wrong are assymetric, maybe it is time to reconsider the dual mandate.  Of course a change in the dual mandate has zero chance of being enacted, but I would like to see the discussion move from theory (market signalling) to practice (the housing bubble).  Of course we can always show people this awesome video.  While it isn’t necessarily all about monetary policy, it does show the perils of a hyperactive Fed.

Republican Convention Rundown

I spent last evening channel flipping between CNN and MSNBC in an attempt to catch a smattering of speeches amidst the punditry. The theme of the night was We Built This, a topic honored more in the breach, at least among the televised marquee speakers. Here in semi-random order are my day-old impressions of some of the speakers.

Bob McDonnell/Rick Scott/ John Kasich served up a round robin of feel-good pep talks on how great their economy was doing despite the best efforts of the Democrats to torpedo them. Every single one had hair that was perfect. The future of Romneytron Enterprises is assured with new models rolling off the assembly line with industrial precision.

Nikki Haley at least gave some visual relief for not being a lily-white male but her schtick was the same. Her one distinguishing remark was a passage where she union bashed Northerners and bragged of the low-cost right-to-work airplane factory she sniped from Washington State.

Artur Davis, DINO turned Republican, provided a little color, both literally and figuratively. Last time around the Republicans were able to snag Joe Lieberman as their token turncoat. Davis’s lackluster soundbites showed just how far the GOP has fallen in its outreach programs. He also wins lame musical call-out (barely beating out Christie’s Springsteen allusion) with his “Somebody that I used to know” reference.

Rick Santorum provided the red meat portion of the evening puffing on a dog whistle until his cheeks turned red by cramming as many instances of “work” and “welfare” as possible into a single sentence. He also went on a long extended handsy metaphor which ended is some sort of uplifting tale of his special needs daughter. By Santorum standards it was a well-thought out speech but it just seemed out of place given the other speakers.

Ann Romney was one of two featured speakers who made it to prime time coverage. Stepping onto the stage directly from the set of “Father Knows Best” she started off with a tribute to the recently departed Phyllis Diller with five minutes of man bashing. In it she outsapped Hallmark with her tribute to the mothers and wives who really make this country run. By the end of it I was ready to vote her PTA president. She must run a heckuva bake sale. Less convincing were her tales of deprivation as the spouse of a starving college student. She was aiming for touching but it just came off as phony. Having to eat tuna fish instead of caviar. How demeaning. She sure loves that affable lug Mitt and it showed even through all the scripted folksy gushing.

Chris Christie was the most anticipated speaker of the night and like a Chris Farley SNL sketch the dramatic tension was to see just how outrageous he would get. After his seeming de riguer tribute to his immigrant parents (a theme far more prevalent than the official one), he laid into to his trademarked schtick about how he stood up to the bullies in the teacher union and their cushy low-to-mid five figure incomes.  The Twitter game (which I indulged in) was to see how long he could speak with out actually saying the name Mitt Romney. Quite a while as it turns out, fifteen to twenty minutes depending on who was holding the stopwatch.

His speech was far less the keynote of the 2012 Republican National Convention than the kick-off of the 2016 Christie Presidential Campaign. Even by the standards of New Jersey blowhards, this was a monumentally self-aggrandizing performance.

Mitt Romney managed to say not a word the entire evening. After being introduced by his adoring wife, he rushed her off the stage so quick that if you blinked you missed it. My hopes for an Al “Get A Room” Gore display of public affection were completely dashed. The rest of the evening he sat as stiffly and uncomfortably as the victim of a Friar’s Club roast.

The conventions are carefully scripted spectacles but I had no idea who the target audience was. Romney was rarely mentioned by any of the speakers. The inspirational tales of constitutionally mandated state budget balancing were tepid at best. Even the conventioneer hats seemed oddly subdued. The entire evening was completely skippable and if it weren’t for bourbon and internet snark it would have been unendurable.

Morning Report 8/28/12

Vital Statistics:

Last Change Percent
S&P Futures 1405.6 -2.7 -0.19%
Eurostoxx Index 2436.4 -25.4 -1.03%
Oil (WTI) 96.04 0.6 0.60%
LIBOR 0.423 -0.002 -0.49%
US Dollar Index (DXY) 81.46 -0.196 -0.24%
10 Year Govt Bond Yield 1.64% -0.02%
RPX Composite Real Estate Index 192.3 0.2

Markets are flattish-to-down as a positive Case-Schiller reading offsets disappointing economic data out of Japan and Spain. Bonds and MBS are up slightly.

The S&P / Case-Schiller index came in at 142.2 vs expectations of 141.3. The national composite was up 1.2% YOY and up 6.9% vs Q1.

The real estate market is recovering, but where are home prices still getting hit?  Fairfield County, CT, where prices have declined 13% YOY, especially in Greenwich and New Canaan. This of course is due to Wall Street compensation dropping like a stone over the past 5 years and the realization that it may be a while before it comes back. As the article points out, while the events in Europe are an abstraction to most people, they do affect jobs in the financial services industry. Given the fact that entitlement spending is going to crowd out a lot of discretionary spending (especially on defense), it makes me wonder if one of the last high-flying real estate markets – Washington DC – is next.

The WSJ has a fluff piece on Paul Singer, who has been raising a lot of money for Mitt Romney. It repeats the rumor that he might be given a place in a potential Romney administration. However, he originally backed Chris Christie and has been very vocal in pushing for gay marriage so that could be an issue.

Chart:  S&P / Case-Schiller House Price Index:

Morning Report 8/27/12

Vital Statistics

Last Change Percent
S&P Futures 1413.8 4.0 0.28%
Eurostoxx Index 2442.3 8.0 0.33%
Oil (WTI) 97.07 0.9 0.96%
LIBOR 0.425 -0.002 -0.47%
US Dollar Index (DXY) 81.55 -0.044 -0.05%
10 Year Govt Bond Yield 1.67% -0.02%
RPX Composite Real Estate Index 192.1 0.0

Markets are higher this morning on no real news as we head into one of the slowest weeks of the year. The Fed Heads will meet in Jackson Hole this week, although analysts aren’t expecting much in the way of new policy announcements. That said, the article does suggest the Street is leaning heavily towards additional stimulus, so the risk is to the downside in MBS and Treasuries. There doesn’t appear to be any market-moving economic data this week. Oil is moving higher in response to Issac. Bonds and MBS are up slightly.

One of the longest merger kabuki dances ended today, as Hertz finally gets an agreed deal with Dollar. I believe Hertz’s initial bear hug letter was released in 2007 or 2008.

The first read on Back-To-School looks negative. Teen Apparel Retailers may end up missing their comp expectations next Thursday. Some of the names in this space have been flying lately – AEO, GPS, URBN, HOTT, so they may be vulnerable to a disappointment. For those that are more risk averse, you can always short Abercrumble as the stock cannot get out of its own way.

The Republican National Convention is this week and I don’t expect it to matter to the markets one bit. They had to shorten it a day due to Issac.  Greg Valierre of Potomac Research said that 98% of his Wall Street clients are voting for Romney.

Drones and an Open Thread

One of the features I love most about the internet is following links that are embedded in links……………………….you never know what you’ll find.  Generally it’s either a virus or a piece that agrees with the original you’ve just read but with either a twist or a few added details.  Occasionally you find an unexpected source of information or amusement.

I woke up way too early this morning, for someone who was out until midnight, and spent the wee hours of the morning following links and came across this guy.  It’s too early to tell if he’ll be a valuable source of information or just another quack hiding behind some interesting ideas, but the piece I read this morning might interest some of you.

It’s been suggested by more than one wit that life imitates art far more often than art imitates life. The United States military these days seems intent on becoming a poster child for that proposal. Industrial design classes at MIT used to hand out copies of “Superiority” as required reading; unfortunately that useful habit has not been copied by the Pentagon, and as a result, the US armed forces are bristling with brilliantly innovative wonder weapons that don’t do what they’re supposed to do.

You’ll notice that this has done little to stabilize the puppet governments we’ve got in the Middle East these days, and even less to decrease the rate at which American soldiers are getting shot and blown up in Afghanistan.  There’s a reason for that.  The targets for drone attacks have to be selected by ordinary intelligence methods—terrorists don’t go around with little homing beacons on them, you know—and ordinary intelligence methods have a relatively low signal-to-noise ratio.  As a result, a lot of wedding parties and ordinary households get vaporized on the suspicion that there might be a terrorist hiding in there somewhere.  Since tribal custom in large parts of the Middle East makes blood vengeance on the murderers of one’s family members an imperative duty, and there are all these American soldiers conveniently stationed in Afghanistan—well, you can do the math for yourself.

He goes on to talk about torture being another ineffective use of the military and then explains a theory based on chaos, discord and confusion.  I especially like this explanation of chaos and discord comparing a tropical storm (chaos) to antibiotic resistant bacteria (discord).

If we shift attention from Tropical Storm Isaac to the latest recall of bacteria-tainted produce, we move from chaos to discord.  Individually, bacteria are nearly as dumb as storms, but a species of bacteria taken as a whole has a curious analogue to intelligence.  All living systems are value-oriented—that is, they value some states (such as staying alive) more than other states (such as becoming dead) and take actions to bring about the states they value.  That makes them considerably more challenging to deal with than storms, because they take active steps to counter any change that threatens their survival.

If X occurs, then Y must occur………………………………………..

This bit of systems theory is relevant here because American culture has a very hard time dealing with any kind of uncertainty at all. That’s partly the legacy of Newtonian science, which saw itself—or at least liked to portray itself in public—as the quest for absolutely invariant laws of nature.  If X occurs, then Y must occur:  that sort of statement is the paradigmatic form of knowledge in industrial societies.

It also explains a good bit of why the United States has stumbled from one failed counterinsurgency after another since the Second World War.

You can’t treat a hostile country like a passive object that will respond predictably to your actions.  You can’t even treat it as a chaotic system that can more or less be known statistically. At the very least, you have to recognize that it will behave as a discordant system, and react to your actions in ways that support its values, not yours: for example, by shooting or blowing up randomly chosen American soldiers to avenge family members killed by a Predator drone.

There’s more and he gets into the confusion aspect of his theory…………I just thought it was an interesting exercise in expanding the way we think.

MiA – I am pulling a Kevin and adding a Ted Talk here. Liberals, conservatives, and the Moral Mind

Haidt is a liberal.  After the first few minutes that include bashing conservatives for the amusement of liberals, he presents what he says are the pre-wired pathways that lead to developing an adult sense of morality.  He claims five from neuroscience, and liberals will be inclined to criticize him when he says conservatives use all five while liberals rely on two.  I will shorthand the five neural presets as: nurturing-hurting, fairness-cheating, group loyalty or betrayal, authority-rebellion, and purity-disgust.  I would criticize him just as I would Kant for the categorical imperative:  we do not I think, have the tools to make this a simple matter.  But what Haidt says in this Ted talk is interesting [after the cheap shots in the beginning], and I think worth attending.  If the neurosci is accurate, then it has more weight than most offerings on “morality”.

Morning Report 8/24/12

Vital Statistics:

Last Change Percent
S&P Futures 1395.9 -4.1 -0.29%
Eurostoxx Index 2417.7 -11.4 -0.47%
Oil (WTI) 95.89 -0.4 -0.39%
LIBOR 0.425 -0.002 -0.47%
US Dollar Index (DXY) 81.56 0.205 0.25%
10 Year Govt Bond Yield 1.63% -0.04%
RPX Composite Real Estate Index 192.1 0.1

Markets are off after a disappointing durable goods report. Between the durable goods report and the cap good report, it showed companies pulled back from making capital investment in July. This put a bid under bonds and the 10 year is now pushing 1.6% after topping 1.8% earlier this week.  MBS are up 1/4 of a point as well.

Why does the economic recover not feel like a recovery? One big reason is that incomes are still falling – in fact they have fallen more since the recovery began than they did during the recession. Given the move in the median house price, the median house price to median income ratio has spiked to 3.7x, implying housing is overvalued. FWIW, I am skeptical of NAR’s median house price numbers, which supposedly rose 22% to 189.6 from 154.6 in Jan. Perhaps the lack of distressed sales has caused the median price to shoot up.

Bill Gross said this morning that QEIII is “almost a done deal.” No update on the status of the cult of equities’ demise, though.

Republicans want to study the implications of returning to the gold standard. This is undoubtedly aimed at libertarians who like Ron Paul and may vote for Gary Johnson.  Needless to say, the Nobel Krug Man does not approve.

Chart:  Median income:

Morning Report 8/23/12

Vital Statistics:

  Last Change Percent
S&P Futures  1409.8 -2.5 -0.18%
Eurostoxx Index 2436.2 -16.6 -0.68%
Oil (WTI) 97.49 0.2 0.24%
LIBOR 0.427 -0.004 -0.91%
US Dollar Index (DXY) 81.34 -0.143 -0.18%
10 Year Govt Bond Yield 1.70% 0.00%  
RPX Composite Real Estate Index 192 0.0  

Initial Jobless Claims came in at 372k, a little higher than expected and pretty much in line with the latest trend of 375k / week.  New Home Sales increased to 372k in July

The FHFA Home Price Index increased 3% YOY and .7% MOM. This report only focuses on conforming mortgages, which makes it a more stable index than Case-Schiller or RPX.

The FOMC minutes noted that economic conditions have decelerated from earlier this year and discussed the possibility of another round of quantitative easing.  This drove the 10 year yield from 1.8% to 1.7%. MBS rallied as well.  My view has been that we are getting too close to the election – the Fed wants to appear non-political and definitely does not want to influence elections.  However this morning, St Louis Fed President James Bullard characterized the minutes as “stale,” noting that some of the data lately indicates the economy is getting stronger again.

CBO is forecasting 2.25% economic growth for the rest of the year and unemployment above 8%.  If Taxmageddon is not averted, CBO projects a recession with real GDP declining .5% from Q412 to Q413 and unemployment rising to 9%. If all the tax hikes and spending cuts are held off indefinitely, their projection is pretty much where the economy is now – 1.7% GDP growth with 8% unemployment. So the goalposts are (a) very modest recession vs (b) very modest recovery. Which means interest rates aren’t going anywhere. 

Chart:  FHFA House Price Index

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