Archive for March, 2009

Lay Your Money Down, Boys.

Friday, March 20th, 2009

The Federal Reserve seems bound and determined to get folks back in the mood to buy a house.  This week they added $750 billion to the slush fund of  $500 billion already available to buy up mortgage-backed securities.  They hope this will move rates down low enough to stimulate new borrowing.  Let’s look at this as a three-legged stool.  Low rates are helpful, but in today’s world of increasingly stringent loan standards, the big down payment lenders and sellers are increasingly seeking becomes a high hurdle for many buyers.  Also, even if the payments are lower now than they have been in quite some time, you still must make them.   For that a buyer needs to feel secure that his job will be there next year and into the foreseeable future.  Lower rates will not help with those two components of a home purchase.  I could add that prices are still quite high in those areas of the country where most of the housing bubble occurred.  I suspect those need to come down more, despite statistics indicating one out of four home owners owe more than their house is worth today.  We could argue the Fed should be more interested in  keeping people in the house they have right now.  Wasn’t that why Congress passed the TARP to begin with?

The Long and Short of It.

Thursday, March 19th, 2009

“Surprise!”  So said Chopper Ben yesterday as the Open Market Committee decided to begin buying back “longer-term” treasury bonds to the tune of $300 billion over the next six months.  And they bumped up the total to be spent scarfing up mortgages by $750 billion to a total of $1.25 trillion.  The markets were caught off guard by the enormity of the commitment and 10-year bond’s yield took the largest one-day tumble we’ve seen in well over 20 years.  Why the big reaction?  We need to decide what battle the Fed is fighting.  If they want to compel people to borrow by making money rates very cheap, then this is the path to take.  If they want to salvage the banking system, they need to allow the yield curve to steepen so that banks can do what they are supposed to do: borrow short (at low Fed Funds rates) and lend long (at higher mortgage rates, etc.)  This policy shows the government wants to spur lending while hoping they can continue patching the bank problem in a piecemeal fashion.  They didn’t even wait to see if other plans in place which also result in printing gobs of money will work, or how successful the (possibly $1 trillion more) TALF program just beginning this week will take hold.  We don’t have to wait to see the effect of these decisions though.  TIPS soared after the announcement.  Gold, silver, and oil are following suit today.  Maybe borrowers needn’t be so reluctant.  After all, they may soon be able to pay off all their loans in grossly inflated dollars.

If a Dollar Falls in the Forest, Will I Hear It?

Wednesday, March 18th, 2009

Our Federal Reserve has generally needed just one big hammer to control the economy.  The emphasis in on “one” as opposed to “big.”  They control the Federal Funds interest rate and have historically used it to rev up or slow things down.  For the last year or so, every time they employed this hammer by knocking down rates to prevent a steeper recession, they have failed.  With just one tool there is little you can do other than hit it again, harder.  This they did until now we have rates in a range between one-quarter of one percent (.25%) and zero.  Can’t get lower than that.  So what to do?  Find a new tool.  They have begun a program of “quantitative easing” which means they print the heck out of money, flood the world with it, and hope that stimulates borrowing.  It hasn’t worked so far, but that little fact has not stopped the rest of the developed world from following suit.  Japan already has rates almost as low as ours.  Now the Bank of England, the Bank of Canada, and the European Central Bank have all moved their rates down to .5%.  So here we are, bumping along the bottom together, and now all starting to turn on the printing press to stimulate demand.  The world will soon be awash in quantities of most major currencies the likes of which has never before been seen.  History suggests this ignites inflation.  But if everyone inflates simultaneously, will anyone notice?  I think they will.  Who are they?  Watch the biggest emerging nations.

The Fed Pulls an All-Nighter

Tuesday, March 17th, 2009

Roughly every six weeks the Federal Reserve’s big dogs get together to review the U.S. economy’s condition, how their past actions have affected it, and what their future course should be.  They usually provide a brief synopsis of their thoughts in an  announcement delivered around 11:15 A.M. California time.  But once a quarter, they have a two-day meeting, and they are beginning one of those now.  I seriously doubt these folks will stay up into the wee hours arguing about the weighty matters confronting the domestic pursuit of happiness which seems more and more to be going awry.  Unlike many of our citizens, they might even enjoy a restful sleep unencumbered by concern.  Many of us, including most economists and market watchers, wish we could be a fly on that wall though.  What will they say tomorrow after all their ruminations?  Specifically, will they decide to print literally tons of extra money?  Will they decide to make additional purchases of mortgage-backed securities?  Will they start buying Treasury bonds, maybe even corporate bond, as well?  Such a decision, perhaps seemingly arcane to some, will affect us all in a very personal way.   It will affect the interest rates we pay or earn, it will affect the value of our dollar and the price of our imports, and it will affect the future course of inflation.  It might not keep them up all night, but it sure gives me nightmares.

Vanishing Horizons.

Monday, March 16th, 2009

Artists employ a technique when depicting landscapes that seems to create a vanishing point , an appearance of depth, as if the background stretches away forever into the distance.  Today’s economists are practicing their own art, but the results seem remarkably similar.  Not long ago we were assured the recovery was coming soon, just a few months from now, toward the end of the year.  Then prognostications began to drift into 2010, maybe early, no,  make that later.  Ah, now I’m seeing the boldest forecasts calling for a sure turn come 2011.  I certainly hope so.  Is it possible that we will find ourselves then looking eagerly forward to 2015?  Well. I reckon it is, what with increasing regulation, reckless global government spending, and an aging planet that is becoming more interested in future security than current consumption.  To have this recovery we will need to see corporate profits pick up.  Last October the forecasts estimated a 25% lift in this quarter’s S&P 500 earnings.  By January that had changed to a 12% decline.  Currently it has morphed to a stunning 34% drop.  Talk about vanishing points!  Will the recovery remain as wacky and elusive as the vanishing horizon in one of Dali’s landscapes?  We’ll see.  Keep looking.

Don’t Like the Weather? Wait 5 Minutes.

Friday, March 13th, 2009

Often said about Texas, the title of this piece offers good advice to the investor as well.  Of course it needs a little massaging first, which I will gladly apply.  Good  counsel for any weatherman before going on air regardless of his location is to first look out the window.  Despite all the best available technology, you don’t want to be seen forecasting sunny skies while your viewers are enduring hail storms.  Unlike weathermen, who probably number nationwide in the mere thousands, dispensers of market wisdom exist in numbers that might have caused Carl Sagan to stutter.  They’ll tell you what to buy; later they’ll tell you why you should have avoided it.  They’ll tell you why its up from here and down from there.  What I find most fascinating about the stock market is that it listens to none of them.  It goes its merry way, sometimes aimlessly adrift, other times driven by the majority’s relentless (but fickle) convictions.  Have we hit a turning point in this bear market at long last?  Is it all sunshine and daisies from here on out?  I doubt it, but please don’t quote me until I have a chance to look outside.

The Emperor’s New Bank.

Thursday, March 12th, 2009

On Tuesday (3-10-09) the markets delivered one whopper of a rally, attributed by many to an “internal” letter from Citibank’s CEO.  Is it odd that a copy was filed with the SEC for all of us to read as well?  Maybe not.  The substance of his missive was that the company had put together two good months in a row so far this year!  He boasted the company had over $80 billion in tangible capital equity (after the U.S. government converts their preferred into common).  Wow, why not use just 10% of that and buy back all the common outstanding?  The whole company is trading for about $8 billion right now.  And he added that the bank has some $44 billion in deferred tax assets which may (or may not according to a subsequent clarification) turn out to be worth something.  Add in another $300+ billion of “ring-fenced” assets.  Those are the toxic ones the government may have to buy with your tax dollars as they continue bailing out this superb bank.  It sounds like one of those fables we learned when young.  I’m just waiting for a child to say, “the bank has no clothes!”  The credit default market doesn’t agree with Mr. Pandit either.  Maybe we should listen to that kid.