All Things in Moderation

Vital Statistics:

Greek Prime Minister George Papandreou stepped aside to allow the formation of a new Unity government which will implement the required measures to receive 130 billion euros in financing. Holders of Greek debt will receive 50 cents on the dollar. Surprisingly ISDA (who oversees derivative contracts) will not consider this to be a “credit event,” so if you had hedged your Greek sovereign debt holdings with credit default swaps, you are out of luck. This adds a brand new risk element to debt / CDS investing – interpretation risk – or the risk you can get crammed down and have it not be considered a credit event. It will be interesting to watch the dynamic here – CDS levels might start giving misleading indications. Since credit default swaps are basically puts, their put value will decline as investors factor in the possibility that they won’t get paid if, say, Italy or Portugal does a similar cramdown plan. Watch the bonds, not the swaps.

Earnings season is more or less over. While companies generally reported strong results, analysts are taking down 2012 estimates. FWIW, there has been a “V” shaped recovery in corporate profits, but that has not extended to employment. From my perch overlooking the mortgage market, I am seeing companies miss out on business because they don’t have the staff to handle it. They are pulled in different directions from increased activity, and paralysis from having no clue how the regulatory environment is going to look. Strange times indeed.

We have a few minor economic data releases this week, but nothing really market moving, except for Initial Jobless claims on Thurs morning. Europe will continue to dominate the market until the January fiscal retailers report Q3 numbers in a few weeks.

-ashotinthedark

I thought Triumph the Insult Comic Dog’s visit to OWS was too funny not to share.

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Vital Statistics:

Stock Index futures dropped dramatically after the IMF and G20 failed to come to a deal over IMF resources. EURIBOR / OIS (a measure of stress in the European banking system) hit a post-crisis high yesterday, although some of that may have been due to MF Global. LIBOR / OIS (a measure of stress in the US banking system) has been steadily rising since August.

Lots of economic numbers released this morning. The unemployment rate came in at 9.0% vs expectations of 9.1%. October payroll numbers were a touch light, but September numbers were revised higher. Average Hourly earnings and hours in line with expectations. Markets are rallying slightly on the news, as investors focus on the revisions and bet that the disappointing Oct payroll numbers will end up being revised upward in the future.

The MF Global saga is interesting on a number of fronts. At the moment, it appears that $633 million of customer money is missing. Co-mingling customer and firm accounts is a big, basic no-no. In addition, it looks like they moved customer funds around in order to fool the auditors. CEO Jon Corzine has resigned this morning and chosen to forego his severance package. If the Occupy Wall Street really wants a perp walk, here is a golden opportunity. It will be interesting to see if the Obama Administration decides to go after Corzine, a well-respected Democrat. So far, they have exhibited zero interest in going after ex-Clinton Budget Director Franklin Raines who paid himself tens of millions or dollars in salary and bonus based on fraudulent accounting, so I am not optimistic. But hey, you never know.

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Link to the Federal Reserve FOMC statement

The Fed has noted the increase in consumer spending that has become apparent in the economic data. This is new. They anticipate moderate economic growth with subdued inflation and slowly declining unemployment levels. The Fed reaffirmed its commitment to maintain low rates through 2013.

Operation Twist will continue, and the Fed intends to continue to maintain its overall exposure to the mortgage market by re-investing cash received from maturing paper. There was no mention of QEIII.

Interestingly, we had a dovish dissent. Charles Evans supported additional monetary policy accomodation at this time. I am sure Barney Frank is preparing a statement condemning dissent at the Fed. /sarcasm.

Overall, markets aren’t reacting to the statement at all. FWIW, I take the official statement that the consumer is returning as bullish for the equity markets.

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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.

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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.

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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:

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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…..

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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:

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