All Things in Moderation

Vital Statistics:

S&P 500 down 35 points
Eurostoxx down 125 points
Oil down 2.50 to 90.67
10 year bond yield down to 2%
US dollar up 1%

Last week’s rally faded as investors began to have doubts over whether the rescue package would be enough to solve the crisis. In addition, Greek Prime Minister George Papandreou has decided to put the bailout to a vote. If voters fail to approve the austerity measures that are a condition to loan packages, it puts a disorderly default back on the table. The French banks are getting hit hard, with BNP down 4 1/2 euros to 28.33 and SocGen down 3.6 euros to 17.50. European LIBOR/OIS is at 86 basis points, approaching the peak of 90 in late September. I had mentioned previously that the fact that LIBOR/OIS wasn’t tightening was a warning sign.

MF Global (ex NJ governor Jon Corzine’s firm) has filed for bankruptcy after a large proprietary bet on Euro sovereign debt went wrong. This will certainly provide ammunition to the argument that the Volcker rule is a necessary safeguard to protect investors. While the death of MF Global is a hit to investor confidence, it does not appear to pose any systemic risk issues.

Edit:

Watch Jeffries (JEF). The stock is down 10% today on rumors of exposure to MF Global.

Filed under: Uncategorized | 3 Comments »

Filed under: Uncategorized | 1 Comment »

Vital Statistics:

Markets are giving back a little after yesterday’s furious rally. By all accounts, this euro deal does not solve the problem, it just is a downpayment. Sovereign credit default swap levels declined yesterday, but not dramatically. EURIBOR / OIS (an esoteric calculation that measures fear in the banking system) did not tighten yesterday as one would expect. That is a caution flag.

Volatility is a characteristic of bear markets, which is why trading them is so hard. Yesterday’s rally certainly had the feeling of bears throwing in the towel, and maybe some of it was end of the month window dressing. I am still of the view that we are in a secular bear market in equities that started in 2000 and probably has a few years left to run. That said, earnings have been increasing as the equity markets have marked time, and the dividend yield on the S&P 500 is nearly that of the 10-year bond. Yet people continue to sit in the 10-year. Ben Bernake must be tearing his hair out.

In economic data this morning, personal incomes were up .1% in September, while the employment cost index was up .3% for 3Q. Spending was up .6% in Sep while inflation remains subdued. The WSJ has an article this morning discussing the dynamic between incomes and the employment cost index. Wages aren’t rising, but employees are getting more expensive. It has all sorts of effects not only on employment and productivity levels, but also income inequality.

Filed under: Uncategorized | 66 Comments »

Vital Statistics:

Markets are selling off on reports talks are deadlocked in Europe over the haircuts bondholders will have to take. Stocks initially rose on reports that Germany’s lower house approved plans to boost the European bailout fund.

In earnings, Amazon reported disappointing results and is down roughly 10%. Also reporting today: Ford, Nabors, Exelon, Hess, Wellpoint, FMC, Boeing, Sprint, Corning. We are in the heart of earnings season. So far, on average, corporate profits are holding up and CEOs are in general constructive on the near future.

In economic data, durable goods orders were better than expected, with a 1.7% increase ex transportation. New Home Sales came in at 313k, a slight bump from August’s reading of 296k, but still in depressed territory.

Chart: New Home Sales:

Filed under: Uncategorized | 2 Comments »

The last real estate bubble couldn’t have been bigger than the Great Depression, could it?

Actually, it was – about twice the size

The following chart compares an index of real estate prices for the 10 years leading up to the peak and then the behavior 5 years after. The Great Depression bubble ran from 1915 – 1925. The US bubble ran from 1995 – 2006.

For those wondering, the Great Depression bear market bottomed out 3 years later down 21% from the end of this chart.

Food for thought…..

Filed under: Uncategorized | 22 Comments »

August Case-Schiller came in at 142.84, down 3.8% from a year ago. Home prices are back to Summer 2003 levels. Certainly the chart gives no indication of gathering strength, if anything it looks like we have had a meager (at best) dead cat bounce off the bottom, and are now in a decling channel with lower highs and lower lows. Detroit and Washington DC were the only MSAs that were up while the worst performers were Portland, Phoenix, and Minneapolis. June and July numbers were revised down as well.

Certainly there is nothing to indicate strength in the housing market. We are going into a seasonally weak period and the consumer is in a foul mood as evidenced by the Conference Board Consumer Confidence reading of 39.8, which takes us back to late 08 / early 09 levels.

Obama’s new housing plan will probably be as successful as his earlier ones at stanching the decline in the housing market. It may help a few marginal homeowners stay in their home, but it isn’t going to do anything for troubled homeowners as they have to be current in their payments to refinance. As I discussed before, we have a demographic issue here, with the older first time buyer prematurely entering the market and the younger first time homebuyer not in a position to buy. That leaves the professionals, and they aren’t going to get interested in housing until prices are dirt cheap and we are not there yet. Against that, we have an army of baby boomers who need to downsize empty nests, or simply bought too much home and need to get out. The government is probably powerless to change this dynamic – all they can do is try and redistribute the losses.

Chart: Case-Schiller:

Filed under: Uncategorized | 23 Comments »

Vital Statistics:

Futures are flat this morning as the market waits to see what comes out of Europe. The WSJ has a story this morning about the brightening outlook for Corporate America. It raises an interesting point regarding consumers – what they actually do can be different from what they say. Consumers can feel tapped out and miserable, but when the 10-year old car has had it, they buy a new one. Consumption can only be deferred for so long, and we have had a retrenching consumer for 3 years now.

The Obama administration is working on a new housing plan – one which eases the requirements for refinancing. Credit is so tight right now that borrowers who are current but have little or no equity are unable to refinance. This move is intended to break that dynamic. Will it prevent home prices from dropping? Probably not, as the first-time homebuyer is not really in a position to buy a house, and prices aren’t cheap enough to entice professional investors to take the liquidity risk and step into the market.

Merger Monday is back upon us with a bear hug in the pipeline space and a deal in the cloud computing space. CAT reported better than expected earnings.

No major economic data today – Case-Schiller comes out tomorrow.

Filed under: Uncategorized | 18 Comments »

Vital Statistics:

European leaders begin a 6-day summit on Greece and the banks today. Merkel and Sarkozy are having differences over the mechanics of the European Financial Stability Facility. The WSJ has an article this morning about the exposure French banks have to Greece. While a Greek default will not make them insolvent, they will have to raise capital and de-risk. Societe Generale’s stock has been cut in half over the last 3 months. EURIBOR / OIS spreads have retreated from their peak a month ago, but are still elevated.

In earnings, Mister Softee posted better than expected sales on strong corporate demand. It is now a value stock, sporting a single digit P/E. I remember when MSFT was a growth stock in the late 90s, trading at 56x 2000 EPS of .86. Earnings have increased 10% a year to a current estimate of $2.83. Meanwhile, the stock has been cut in half over the same time period. The gulf between the perceptions of growth investors and value investors is huge. And once growth investors decide the fizz is gone, it is a long long way down until value investors get interested. AAPL investors beware.

Filed under: Uncategorized | 25 Comments »

Vital Statistics:

Initial Jobless Claims came in at 403k, slightly higher than the 400k estimate. Later this morning, we will get Leading Economic Indicators, Philly Fed, and Existing Home Sales. It will be interesting to see if the Existing Home Sales confirms some of the increase in activity we are seeing from the homebuilders. Yesterday we saw some big prints in the call options for Toll Brothers and D.R. Horton. (14,000 contracts). It looks like others are positioning themselves ahead of earnings announcements. NVR’s earnings were a mixed bag this morning. Something to keep an eye on.

Other companies reporting today / last night: PM, LLY, EBAY, NUE

Steve Wynn went on another epic rant on his earnings conference call yesterday. Here is the audio and transcript: Wynn Resorts 3Q conference call

—————————————————————————————

Thought I’d add a link to Huntsman’s WSJ op-ed on TBTF. Not being a financial guy, I was surprised by the following numbers:

More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.

The major banks’ too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop. This funding subsidy amounts to roughly 50 basis points, or one-half of a percentage point in today’s market.

Huntsman on TBTF

— Mike

Filed under: Uncategorized | 9 Comments »