Morning Report – S&P lawsuit 02/06/13

Vital Statistics: 

  Last Change Percent
S&P Futures  1501.6 -4.3 -0.29%
Eurostoxx Index 2615.6 -35.6 -1.34%
Oil (WTI) 95.23 -1.4 -1.46%
LIBOR 0.293 -0.003 -0.85%
US Dollar Index (DXY) 79.83 0.341 0.43%
10 Year Govt Bond Yield 1.97% -0.03%  
RPX Composite Real Estate Index 193 -0.1  

Slow news day. Stock index futures are lower after yesterday’s strong rally.  MBA mortgage applications rose 3.4% in the week ended Feb 1. The ECB meets later today.  Bonds and MBS are up.

Earnings season is starting to wind down.  Roughly 3/4 of all the companies in the S&P 500 have released earnings so far.  2/3 have beaten forecasts.

Pension funds and endowments are getting out of the commodities markets after returns have disappointed. When commodities started rallying about 6-7 years ago, big pension funds began buying commodities as a way to increase exposure to assets uncorrelated with stocks and bonds.  The problem is that these markets are relatively tiny compared to stocks and bonds (the dollar value of the entire open interest in the March WTI crude oil contract is about the same dollar value of Exxon Mobil stock traded daily). This meant that pension funds were driving up prices of commodities as they bought them.  And it wasn’t just oil – it was copper, lumber, wheat as well.  Unlike traditional speculators who buy and sell, the big institutions were making a long-term investment, which is more or less unheard-of in the commodities market, at least on a large scale.  Large OTC derivatives contracts allowed them to get around position limits, and those will be restricted in Dodd Frank. The punch line is that their exit will put pressure on commodity prices and keep inflation in check. It will also be a good thing for cash-strapped consumers. Where is the money going?  TIPS.

The Justice Department is suing S&P over ratings for subprime mortgages.  The complaint is here. The government is going to focus on conflict-of-interest issues (the issuer pays the ratings agency, not the investor) and supposedly not go after them for failing to predict the bursting of the housing bubble. Some of the damning emails are here. Sure, maybe ratings agencies may have suspected the housing bubble was bursting.  Does that mean that professional investors who relied solely on S&P’s rating get a pass?  A professional investor’s claim that “I bought this security because S&P said it was okay” ranks up there with “The dog ate my homework.” They do have a fiduciary duty, after all…

GOP Senators Bob Corker and David Vitter have introduced a bill to remove the dual mandate and direct the Fed to focus on inflation only.  Needless to say the bill is going nowhere in the Democratically-controlled Senate, but is should hopefully spark some debate.  Does the dual mandate compel the Fed to keep interest rates too low and does that fuel speculative bubbles?  

Separately, Senate Republicans have sent the President a letter suggesting that there be a bipartisan board of directors to oversee the CFPB and that its budget be subject to the annual appropriation process.  Actually, the 5 member board was part of the original proposal.  Again, this will probably end up going nowhere.

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