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  • Mon, Jun 22 2009
  • 9:09 AM » Roubini: Oil, Rates May Stifle Recovery
    Published Mon, Jun 22 2009 9:09 AM by The Big Picture
    The price of oil, which is rising too fast, and long-term interest rates that are beginning to creep up are likely to suppress a budding recovery, Nouriel Roubini, president of RGE Monitor, told CNBC Monday. Airtime: Mon. Jun. 22 2009 | :40:0 09 ET See also: | 22 Jun 2009 | 06:21 AM
    Click Here to Read the Full Article

    Source: The Big Picture
  • 9:09 AM » FEDS 2009-24: Demand-driven Job Separation: Reconciling Search Models with the Ins and Outs of Unemployment
    Published Mon, Jun 22 2009 9:09 AM by Federal Reserve
    A theory of cyclical unemployment fluctuations should model both the outflows and the inflows of unemployment, but the benchmark framework, the Mortensen-Pissarides search and matching model with endogenous separation, has difficulties generating key facts about unemployment and its transition probabilities. To overcome these empirical issues, I propose a new mechanism of job separation based on firms' demand constraints. The model is remarkably successful at explaining the behavior of labor market variables and can rationalize a number of puzzling findings: why hires tend to increase in recessions, why unemployment inflows were less important in the last two decades, and why the asymmetric behavior of unemployment weakened after 1985.
    Click Here to Read the Full Article

    Source: Federal Reserve
  • 8:38 AM » World Bank Cuts Forecast for Developed Economies
    Published Mon, Jun 22 2009 8:38 AM by NY Times
    Detailed forecasts released Monday show that the U.S., the euro zone and Japan will be among the hardest hit by the global recession this year.
  • 8:38 AM » More Option ARM Falsehoods: Interest Rates Are Not the Issue
    Published Mon, Jun 22 2009 8:38 AM by Seeking Alpha
    submits: Dig load of garbage: The Mortgage Bankers Assn. is also estimating that the lower interest rates will delay the resets. But the group also expects that lenders will help borrowers move out of the option ARM products before they reset. Many of the investors who can't easily qualify for modifications and the borrowers beyond help have already lost their homes, says Michael Fratantoni, vice-president of single family research and policy development for the Mortgage Bankers Assn.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 8:38 AM » PIMCO Doesn't Believe in Relative Value
    Published Mon, Jun 22 2009 8:38 AM by Seeking Alpha
    submits: In the accompanying presentation, it is easy to see why Bill Gross' PIMCO is highly bullish on credit of any variety. As the table below demonstrates, taken straight out of the biggest bond fund's May 2009 presentation "Investing for the Journey and the Destination: What it means across the Capital Structure" PIMCO doesn't see any overvalued instruments in the credit realm: MBS, IG, EM and HY / Loans all have wonderfully green and positive metrics in the valuation column. As for products, while PIMCO believes that fundamentals, technicals, valuations and policy support are all "positive" exclusively for Mortgage Backed Securities, in essence this is merely window dressing for justifying to investors (and the SEC) that after every 7 am conversation with Tim Geithner, in which the latter tells Bill that he will buy yet another $20-30 billion in MBS that week, that PIMCO will be frontrunning the taxpayers in purchasing a boatload of Fannie 30 Years.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 8:23 AM » The Fed's Collateral Squeeze
    Published Mon, Jun 22 2009 8:23 AM by Seeking Alpha
    submits: Collateral squeeze, the Fed DID it. Total collateral pledged by borrowing depository institutions exceeded $1 trillion as of May 27, more than twice the amount of credit outstanding.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 8:23 AM » The Liquidity Trap: Up to $1 Trillion in Excess Working Capital
    Published Mon, Jun 22 2009 8:23 AM by Seeking Alpha
    submits: Ernst & Young released a research report which examines working capital for the 2,000 largest companies in the US and Europe. The interesting find is that part of the liquidity crunch involved a deterioration in major companies' ability to manage their working capital, particularly inventory, in line with falling demand, volatile commodity prices, and volatile currencies. While working capital as a percentage of sales fell from 2007-2008 (i.e. improved), in 4Q08, when the global crisis really hit hard, this reversed dramatically.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 8:23 AM » Big Banks in Trouble: Huge Mortgage Write-Downs Seem Inevitable
    Published Mon, Jun 22 2009 8:23 AM by Seeking Alpha
    submits: Are The Banks Paying Back TARP Money Too Soon? Since the beginning of the year, major banks have raised over $200 billion in capital, far in excess of the $75 billion of new capital that the government stress tests had called for. The market prices of major bank stocks have recovered dramatically since March, indicating that Wall Street investors see a recovery in the banking industry.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • Sun, Jun 21 2009
  • 6:56 PM » Stimulus Package Rebuilding Same Myth of Debt Fueled Economic Growth
    Published Sun, Jun 21 2009 6:56 PM by Seeking Alpha
    submits: Imagine for just a few moments an economy with no debt. You have no ability to borrow or lend, nor does any other participant in the economy. There is also no mechanism to print money and therefore to create additional nominal paper wealth. The only assets you own were purchased with the fruits of your labour and enterprise. The only money you have is from the proceeds of assets you previously sold or income from labour and enterprise, yet unspent. Also in this fictional land, the nominal supply of money, coins and bank notes, exactly equals the true nominal and economic value of society’s wealth, This wealth consists of ready to use commodities (grown coffee, mined coal, etc.) and real, not paper, assets. If the rate of saving increases, or the holding period between transactions lengthens, the velocity of money and real economic activity decreases. If through natural disaster or war, assets are destroyed, the nominal value of paper money would be greater than the economic value of real assets. In this environment of fixed money supply with no ability to lend, borrow or print money, society can only theoretically accumulate more assets in future periods, than it did in the past, by improving the efficiency of commodity growth and extraction or by inventing new products of economic value.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 6:55 PM » New Roubini Project Syndicate Op-Ed Pondering on the Financial Markets Rally
    Published Sun, Jun 21 2009 6:55 PM by Google News
    From the : The risks of a double-dip, W-shaped recession may be growing By Nouriel Roubini In the past three months, global asset prices have rebounded sharply: Stock prices have increased by more than 30 percent in advanced economies and by much more in most emerging markets. Prices of commodities — oil, energy, and minerals — have soared; corporate credit spreads (the difference between the yield of corporate and government bonds) have narrowed dramatically, as government-bond yields have increased sharply; volatility (the “fear gauge”) has fallen; and the dollar has weakened as demand for safe dollar assets has abated. But is the recovery of asset prices driven by economic fundamentals? Is it sustainable? Is the recovery in stock prices another bear-market rally or the beginning of a bullish trend? While economic data suggests that improvement in fundamentals has occurred — the risk of a near depression has been reduced; the prospects of the global recession bottoming out by year end are increasing; and risk sentiment is improving — it is equally clear that other, less sustainable factors are also playing a role. Moreover, the sharp rise in some asset prices threatens the recovery of a global economy that has not yet hit bottom. Indeed, many risks of a downward market correction remain. First, confidence and risk aversion are fickle, and bouts of renewed volatility may occur if macroeconomic and financial data were to surprise on the downside — as they may if a near-term and robust global recovery (which many people expect) does not materialize. Second, extremely loose monetary policies (zero interest rates, quantitative easing, new credit facilities, emissions of government bonds and purchases of illiquid and risky private assets), together with the huge sums spent to stabilize the financial system, may be causing a new liquidity-driven asset bubble in financial and commodity markets. For example, Chinese state-owned enterprises that gained access to huge amounts...
  • 6:54 PM » Dallas Fed on Curbing Irresponsible Lending
    Published Sun, Jun 21 2009 6:54 PM by Seeking Alpha
    submits: In yet another splinter approach from the route espoused by Bernanke, the shares its thoughts on limiting irresponsible lending. The Fed's solution is the imposition of loan-to-value caps which would make a lot of sense, but would substantially curb loan demand - a course of action that the Federal Reserve would fight tooth and nail against in its attempt to deflate debt by a new wave of excess (and even more irresponsible as it would be taxpayer backstopped) lending. The Dallas Fed's justification: A maximum loan-to-value ratio would create a cushion of borrower equity—the excess of collateral value above loan amount—available to lenders in the event of default. In addition, borrowers would face the prospect of losing their equity, making them more likely to apply only for loans they were reasonably sure to repay. By promoting such conservatism, loan-to-value regulation would guard against the speculative borrowing that leads to credit booms.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 6:54 PM » Fed Meeting, Treasury Auction Will Dominate Market
    Published Sun, Jun 21 2009 6:54 PM by CNBC
    The Fed meeting and a record $104 billion of Treasury auctions are the big hurdles for the market this week. Plus, weekend news that Apple chief Steve Jobs had a liver transplant will put techs in focus.
  • 6:54 PM » Economic Preview: Economy still overly dependent on government
    Published Sun, Jun 21 2009 6:54 PM by Market Watch
    If the U.S. economy does begin to grow again in the second half of the year as many analysts expect, it sure won’t feel like much of a recovery to most people.
  • 6:39 PM » Treasury’s Got Bill Gross on Speed Dial
    Published Sun, Jun 21 2009 6:39 PM by
    Every day, Bill Gross, the world’s most successful bond fund manager, withdraws into a conference room at lunchtime with his lieutenants to discuss his firm’s investments.
    Click Here to Read the Full Article

  • Fri, Jun 19 2009
  • 5:48 PM » Rate Hike?
    Published Fri, Jun 19 2009 5:48 PM by Google News
    Seriously, a rate hike in this environment? Or anytime before the end of 2009? At the moment, I just can't see it happening. That said, long rate are higher, and inflation expectations in some corners of the market are rising. What is going on? My explanation for recent market action revolves around three themes: 1.)Financial Armageddon appears to have been avoided - at least for the moment. The "all but explicit" implicit guarantee that no significant US financial institution will be allowed to fail established a return to financial stability. And with that stability comes an end to the flight to safety that buoyed Treasury prices. Something off a conundrum for Treasury Secretary Timothy Geithner - cheap financing of the staggering US deficit appears to be dependent on financial instability. 2.)Recent inflation numbers are not exactly what I would call benign. The trend in core PCE is not deflationary: I think deflation fears were always overblown - the current batch of monetary policymakers are simply dead set against such an outcome. The deflation trade, like the flight to safety, needed to be priced out of Treasury's and TIPS. The outcome: Breakeven spreads are up sharply. 3.) The US, in aggregate, is borrowing less from the world than a year ago. But make no mistake, we still rely on capital inflows to maintain a substantial US current account deficit. Lacking a flight to safety, it is not clear that private investors are willing to support that deficit at 2.75%. Or even 4%, for that matter. That fact that foreign central banks are accumulating Dollars is proof positive that private investors don't want to do the job - and the transition in central bank purchases from the long end to the short end suggest that even they grow weary of this game. Remember, the argument that "Japan ran a massive budget deficit so we can too" falls apart when you recognize that for decades Japan has been able to rely entirely on internal savings to finance...
  • 5:47 PM » New Regulator Role May Threaten Fed Independence
    Published Fri, Jun 19 2009 5:47 PM by WSJ
    Anxiety is mounting that the Federal Reserve’s core mission, controlling prices, may be jeopardized by government plans to enhance its power as a financial regulator. Plans announced by the Obama administration this week would grant the Fed new powers to regulate financial stability. Many see the authority, if granted, as a recognition of the role the central bank has played on a de facto basis throughout the financial crisis. But controversy abounds. The Fed’s bolstered power as regulator would be added onto its existing mission as the nation’s guardian of price stability. Achieving this can mean making politically unpopular decisions. That’s why the central bank was set up as an independent body. But that sort of independence appears unlikely to be extended to an enhanced regulatory portfolio. That means the Fed will have to balance its independence on one front with the need to cooperate on another. At issue is accountability: Legislators understandably want it for a major financial regulator, and that desire could lead them to alter the Fed’s monetary policy role. The administration believes the balance can be found, not far from where it already exists. Treasury Secretary Timothy Geithner said Thursday that under the proposal “the chairman of the board would be accountable, as he is now.” Geithner has a point: The Fed already has considerable interaction with the political class. Top officials are selected by the president and approved by the Senate. The Fed regularly reports to Congress its views on the economy, and it increasingly makes available information about its activities and holdings, although many remain huge critics of this process and think the institution needs to do more. Still, some remain uncomfortable with the Fed’s basic constitution and question how well the central bank has used its existing power over banks. They oppose the Fed getting new authority. Others see the reforms as grounds to change core aspects of the central bank, even when it...
  • 5:46 PM » California Survey of Loan Servicers Q1
    Published Fri, Jun 19 2009 5:46 PM by Calculated Risk Blog
    The 2009 First Quarter from the Department of Corporations Survey of Loan Servicers has been released. Historical data is . There is a lot of information in this survey: the unpaid balances by loan type, the number of loans by loan type, and modification data. From Jim Wasserman at the Sacramento Bee: (ht Paul) I was going through the state Department of Corporation's newest quarterly report (Q1-2009) for lenders' loan modification activities and this jumped out at me: The number of workouts initiated for prime loans is rising fast, mirroring rising unemployment in California. The data come from lenders that report to the state as part of Gov. Arnold Schwarzenegger's Nov. 2007 Subprime agreement. These lenders service about 3.3 million loans in California, about half the state's total. Click on graph for larger image in new window. The first graph shows the number of loan modifications initiated by type (Prime, Alt-A, Subprime). This totals almost 1.5 million loan modifications initiated in California since January 2007 (there are 3.3 million loans including HELOCs) - so there is probably some double counting as modification negotiations are started and stopped. Modifications for prime loans are surging (and Alt-A is increasing rapidly too). It is possible that subprime peaked during the moratorium period. The second graph shows loan mods completed by category. The data was only broken out by category starting in Jan 2008. I expect a surge in prime loan mods completed based on the mods initiated. Note that completion can mean: account paid current (about 5%), paid-in-full (6%), modified terms (about 60% of completions), short sale (about 11%), deed-in-lieu of foreclosure (few), reductions in principal (few), and other workouts (about 15%). As an aside, the California website is titled "Subprime". With the surge in prime modifications, I guess we're all subprime now!
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 5:46 PM » FHFA Director: May Expand Loan Refinance to 125 Percent LTV
    Published Fri, Jun 19 2009 5:46 PM by Calculated Risk Blog
    From Bloomberg: President Barack Obama’s program to help more homeowners refinance may be expanded to include borrowers who owe more than 105 percent of their homes’ values, Federal Housing Finance Agency Director James Lockhart said. The Obama administration is considering allowing Fannie Mae and Freddie Mac to refinance loans with current loan-to-value ratios of 125 percent or higher, Lockhart said at a National Association of Real Estate Editors Association conference in Washington yesterday. This is part of the Home Affordable program, and only applies to homeowners with loans that Fannie and Freddie holds or guarantees. As long as this is no cash out, increasing the LTV limit from 105% to 125% just allows Fannie and Freddie to lower the risk on loans they already own or guarantee.
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 5:46 PM » Coldwell Banker CEO: "Move-up buyers absent"
    Published Fri, Jun 19 2009 5:46 PM by Calculated Risk Blog
    From Reuters: (ht Annie) Jim Gillespie, president and chief executive of Coldwell Banker Real Estate, in an interview with Reuters, said sales were only modest during the spring, with demand overwhelmingly dominated by first-time home buyers and investors. "The more important 'move-up' buyers were absent and that is not encouraging," said Gillespie ..."They are key to a U.S. housing market recovery," With lenders as sellers in a large percentage of sales, it is no surprise there are few move-up buyers. This will impact the mid-to-high end for some time. The article also mentions a proposal for a new $15,000 tax credit.
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 4:13 PM » Real Estate Weekly: Homeownership goal may have lost its luster
    Published Fri, Jun 19 2009 4:13 PM by Market Watch
    The drop in home prices has people questioning whether the goal of owning a home will ever be as desirable as it once was, and that topic was addressed at a panel discussion held this week at the National Association of Real Estate Editors conference in Washington.
  • 4:13 PM » Awaiting Bernanke, House Panel Subpoenas Fed
    Published Fri, Jun 19 2009 4:13 PM by
    Anticipating an appearance by the Federal Reserve chairman, a House committee said Friday that it had served the Federal Reserve with a second subpoena for documents related to Bank of America's acquisition of Merrill Lynch.
    Click Here to Read the Full Article

  • 4:13 PM » Regulating Big Firm Bad Behavior
    Published Fri, Jun 19 2009 4:13 PM by Google News
    In today’s , we learn of the proposed shift in standards for retail stock brokers — from “Suitability” to “Fiduciary:” “Buried in President Obama’s proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher “fiduciary” standard that would compel them to place their client’s interests ahead of their own. Currently, brokers are only required to offer investments that are “suitable,” which means they can’t put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.” While this is important, the entire structure of the brokerage industry — incentivized to be long only and fully invested at all times — is what destroyed so many investors in 2008. As we have noted in the past, this manifests itself in many ways — but most egregiously, in the . It is a very misaligned incentive system, one that penalizes brokers who did the right thing. Back in March ‘09, I noted two Merrill Brokers who had put 75% of their asset base is in money market funds early in 2008. This pays essentially nothing to the broker — but preserves the clients capital. When 2009 rolls around, their manager calls them into his office, and says: “Bad news, boys. Your revenues dropped so much last year you are in the Penalty Box . As per your contract, your payout for this year is down to 25-30%.” That is a horrific misalignment of incentives. And while a fiduciary obligation on retail brokers is an okay idea, if it is going to be remotely effective, IT MUST ALSO BE APPLIED TO THE BROKERAGE FIRMS ALSO. The Penalty Box is “Exhibit A” as to why. > Originally published at and reproduced here with the author's permission.
  • 12:23 PM » What is "Quadruple Witching"?
    Published Fri, Jun 19 2009 12:23 PM by
    The third Friday of March, June, September and December when Index Futures, Options on Index Futures, Single Stock Futures and Stock Options expire together.
    Click Here to Read the Full Article

  • 12:21 PM » I am pretty sure China didn’t sell Treasuries in April (or May, for that matter)
    Published Fri, Jun 19 2009 12:21 PM by Google News
    The fall in China’s recorded Treasury holdings in April has attracted a fair amount of . Too much, in my view. Best that I can tell, China shifted from bills to short-dated notes in April rather than actually reducing its overall Treasury portfolio. It just so happens that China buys all its short-term bills in ways that show up in the US TIC data, but only a fraction of its longer-term notes in ways that show up in the US TIC data. A shift from bills to notes then could register in the US data as a fall in China’s total Treasury holdings and a rise in the UK’s holdings. This is actually a well established pattern. The past five surveys of foreign portfolio investment in the US have all revised China’s long-term Treasury holdings up (in some cases quite significantly) even as they revised the UK’s holdings down. The following graph shows the gap between Chinese long-term Treasury purchases in the TIC data and China’s actual purchases of long-term Treasuries– as revealed in the survey. With the help of Arpana Pandey, I have smoothed out the impact of the survey revisions. But when there is a hard data point — say June 2006 — the y/y increase in China’s Treasury holdings in the adjusted series should match the increase in the survey. The last survey data point though comes from June 2008, so the subsequently data includes some estimates — specifically estimates of the share of the UK’s Treasury purchases that should be attributed to China. I am pretty confident though that it is no more inaccurate than the published US TIC data, which systematically under counted Chinese purchases of long-term bonds over the last five years Here are three signs to watch to know when China really is reducing its US holdings. First, the TIC data should show a fall in China’s holdings, i.e. net sales of Treasuries. Second, the TIC data should also show limited purchases of Treasuries through the UK. The fall in China’s holdings should not be offset by a rise in the UK’s holdings.* Third,...
  • 12:20 PM » Does unconventional monetary policy and unusual fiscal policy presage an upsurge in inflation?
    Published Fri, Jun 19 2009 12:20 PM by Google News
    Unconventional monetary policy Central banks worldwide have gone into `unconventional monetary policy' owing to policy rates having hit the zero interest rate bound, and owing to the difficulties in finance which have impeded the monetary policy transmission. This has involved dramatic increases in money supply, purchases by central banks of government bonds and corporate bonds, and other unconventional things. Unusual expansion of debt A critical part of the global fiscal response to the downturn has been massive fiscal stimuli, particularly in the OECD. Governments worldwide have seen a sharp escalation of debt/GDP ratios in recent years, through a combination of automatic stabilisers (reduced tax revenues, and more spending on welfare programs, in a downturn) and discretionary expenditures (fiscal stimuli and financial sector problems). The UK DMO, which issued roughly 8 billion pounds of bonds in the year it was created, moved up to issuing 225 billion pounds this year. An suggests that by 2014, G-20 advanced countries will have added 36 percentage points of GDP to their debt compared with end-2007 levels. The questions This new mountain of debt, and the dramatic enlargement of money supply, is making some people nervous. A host of questions are now back to prominence: Will there be an upsurge of inflation? Do these recent actions amount to an abandonment of inflation targeting? How safe is it to buy a US or a UK long bond? The graph superposes the three-month and ten-year interest rates in the US. While the short rate has gone to zero and roughly stayed there, the long rate has risen substantially through calendar 2009, going up from 2% to 4%. Can this be interpreted as a resurgence of fears about inflation? Direct observation of inflationary expectations by comparing the prices of inflation-indexed and nominal bonds would have given a direct reading of how the bond market feels. Unfortunately, market efficiency on the market for inflation indexed bonds in the...
  • 12:20 PM » Does the Obama Plan for Reforming Wall Street Measure Up?
    Published Fri, Jun 19 2009 12:20 PM by Google News
    In a word: No. The plan doesn't stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn't require bankers to take their pay in long-term stock options or warrants, and it doesn't even hint that banks should go back to being partnerships instead of publicly-held corporations. All this means traders still have very incentive to place big and often wildly risky bets as long as the potential winnings are big enough, and top executives have very little incentive to monitor what traders are up to as long as the traders are collecting large commissions on the bets. Nor does the plan do anything to prevent banks from becoming too big to fail. It doesn't hint at a return to the days before the late 1990s when commercial banks were separate entities from investment banks -- before mammoth bank supermarkets like Citigroup came to be so tied up with so many other commercial and investment vehicles that they couldn't be allowed to go under. And there's not the slightest mention of antitrust, to break up the largest banks. The plan does focus on a few conflicts of interest, such as how credit rating agencies are paid. And it does establish a new agency to oversee all forms of consumer loans -- thereby helping make sure borrowers know what they're getting into, and can comparison shop. But these are small potatoes relative to the size of the overall problem. The Fed is given new oversight powers, but there's no suggestion that regional Fed bank presidents, who already have a substantial oversight role, should be recruited from the ranks of people who are not bankers and don't have a big financial stake in keeping oversight to a minimum. In short: It's a mere filigree of reform, a sheer gossamer of government. Wall Street must be toasting its good fortune. Unless Congress shows some spine, the great Wall Street meltdown of 2007 and 2008 -- which lead to the biggest...
    Published Fri, Jun 19 2009 12:20 PM by Google News
    Nirvana for investing is getting tomorrow's news today. Impossible, of course, which leaves strategic-minded investors to search for the next best thing. That boils down to hard work. Estimating expected return and risk is at the heart of intelligent investing. We still can't peer into the future with a high degree of certainty, but thanks to decades of inquiry in the realm of financial economics there's a modestly clearer picture of how the markets behave and what that means for asset pricing. Explaining the details would take more than a few posts here, to put it mildly. Indeed, fleshing out the finer points is one of the reasons for launching which discusses new and existing research and updates the implications for multi-asset class investing on a monthly basis. Meantime, consider a few examples of how the markets drop clues for estimating risk premia. Take the Treasury yield curve, which has gone negative ahead of every recession for the last 40 years, including the current downturn that began in December 2007, For obvious, and not-so-obvious reasons, that's a crucial measure for estimating the equity performance over the medium- and long-term horizons. Granted, it's not a timely indicator in the sense that recession may not arrive for a year or more after the fact. Nor can the indicator be blindly trusted to be a timeless, unerring metric of what's coming. There's always the chance that it could be wrong the next time. But there's quite a bit of economic research that suggests we should pay close attention to yield curves. Nonetheless, the yield curve can't be used in isolation. We need to monitor and analyze other metrics too, with an emphasis on considering a range of data series that aren't closely related. For instance, the dividend yield on the overall stock market fits the bill. It too has a powerful economic basis for dropping clues about the future, economists advise, in this case offering a more direct estimate of...
  • 11:35 AM » This week's top stories [19 June 2009]
    Published Fri, Jun 19 2009 11:35 AM by Google News
    Our top articles ranked by reader popularity.
  • 11:34 AM » Thoughts on the Fed’s Balance Sheet
    Published Fri, Jun 19 2009 11:34 AM by
    Here is an excerpt from a piece by analysts and economists at Brown Brothers. I think it nicely summarizes why inflation fears are overblown. It begins following the colon: Various credit spreads , like LIBOR-OIS and TED would suggest there has been a dramatic improvement in capital markets. The rally in the stock market points in the same direction and a handful of banks have returned TARP money. But the sad truth of the matter is that the deus ex machina of credit creation is still terribly impaired. And to appreciate this is partly to understand another reason why inflation fears are overstated. The Federal Reserve’s balance sheet has expanded to $2.055 trillion from $871 billion last May. The expansion has been financed primarily in two ways: Extra Treasury bill issuance by the Treasury Department which is in essence given to the Fed, and by creating reserves, “printing money” in the vernacular. Therein is where many see the inflation risk. The reserves in excess of what is required, hence they are called “ excess reserves , are the fuel for inflation, the monetarists amongst us argue. The key though seems to be what the banks are doing with these reserves. The short answer: nothing. That is to say, that the banks are sitting on a virtual mountain of excess reserves which are kept with their creator, the Federal Reserve itself. In the most recent two-week bank statement period, these excess reserves stood at almost $800 billion—yes, a little more than the entire TARP allocation. Prior to the crisis, excess reserves were minimal—a couple of billion dollars. What this means is that nearly two-thirds of the dramatic expansion of the Fed’s balance sheet that so worries many investors is still with the Fed itself. It is not chasing assets or goods. It has not truly entered the circuit of capital. In essence, the inflation risk is being exaggerated because the “real effective” expansion of the Fed’s balance sheet is being exaggerated.
    Click Here to Read the Full Article

  • 11:34 AM » Housing Recovery Moving 'Distressingly Slow'
    Published Fri, Jun 19 2009 11:34 AM by CNBC
  • 11:34 AM » Bond Report: Treasurys volatile with yields near week highs
    Published Fri, Jun 19 2009 11:34 AM by Market Watch
    Treasury prices are volatile , caught between higher yields and skittishness ahead of next week’s debt sales.
  • 9:14 AM » Paul McCulley’s Complete Fed Forecast Track Record
    Published Fri, Jun 19 2009 9:14 AM by The Big Picture
    This analysis of the long term track record of PIMCO’s managing director was performed by a long time Fed watcher, Analyst X, who apparently is unimpressed with Mr. McCulley’s forecasting acumen. Below you will find his review of a full decade’s worth of Fed calls by . Analyst X interprets this as PIMCO talking their book, consistently forecasting rate cuts, or the end of the tightening cycle, being wrong most of the time — they were wrong much more than right. ~~~ A few days ago, Paul McCulley of Pimco said: June 17, 2009, Target 0.00% to 0.25% range (Bloomberg) — Pacific Investment Management Co.’s Paul McCulley said the Federal Reserve’s exit strategy from the unprecedented initiatives put in place during the economic crisis won’t include interest-rate increases until 2011 and will likely involve paying interest on reserves. The Fed will raise its benchmark lending rate “no sooner than 2011,” and any speculation officials will raise interest rates this year is “simply silly,” McCulley wrote in a commentary on Pimco’s Web site. Let’s review Paul McCulley’s public forecasts since 2001. Amazingly in 2001 he was begging the Fed to create a housing bubble …. Pimco’s Fed Focus by Paul McCulley for July 2001 Paul McCulley: Show A Little Passion, Baby The average American also owns a home. In fact, the home ownership rate in America is at a record high 68%. And while most of those homes are levered, there is room to lever them even more, from both a balance sheet and an income statement perspective , as shown in Figure 4. Most important, perhaps, valuation of homes - the price of a home divided by the shelter services that it provides - is secularly cheap, as shown in Figure 1 on the cover. There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing (just like he denied belatedly attacking the NASDAQ...
    Click Here to Read the Full Article

    Source: The Big Picture
  • 8:47 AM » Secondary Sources: Romer, Deflation?, Estate Tax
    Published Fri, Jun 19 2009 8:47 AM by WSJ
    A roundup of economic news from around the Web. White House Council of Economic Advisers Chairman Christina Romer writes for the Economist with an important take on the recession. “As someone who has written somewhat critically of the short-sightedness of policymakers in the late 1930s, I feel new humility. I can see that the pressures they were under were probably enormous. Policymakers today need to learn from their experiences and respond to the same pressures constructively, without derailing the recovery before it has even begun.” Also, check out the roundtable of economists discussing the piece on the magazines blog. On the Atlanta Fed’s macroblog, Laurel Graefe responds to a post by . “While the median is certainly a valuable way to look at inflation, there is also some interesting information that can be gleaned from breaking down the whole distribution of prices. [There is] another interesting feature of yesterday’s CPI release. Notice the clear downward shift in the distribution of CPI component price changes. Over half of the prices within the CPI market basket posted declines at or below 1 percent last month, up from an average of 29 percent in 2008, with a whopping one-third of the price index posting declines in May.” Writing for the Tax Policy Center’s TaxVox blog, Ben Harris looks at the estate tax, which is set to be repealed for a year in 2010. He challenges the idea that the estate tax reduces economic growth. “With no tax on estates, the lost revenue will have to be made up elsewhere. Not only would Treasury lose nearly half-trillion dollars over ten years that would have been collected directly by the levy, but also billions more that would be lost due to the new gaping hole in the tax code if the estate tax no longer serves as a backstop. JCT estimates that the reduction in income tax receipts accounts for about 20 percent of the cost of repeal. Depending on how this other revenue is generated — or if it’s collected at all — the estate tax repeal...
  • 8:46 AM » Is There a Government Gameplan for the Long Haul?
    Published Fri, Jun 19 2009 8:46 AM by Seeking Alpha
    submits: Back in the early days of the Obama administration, as the new president and his staff kept adding legislative priorities to their to-do list, critics would ask how they would manage to handle such a large load. “We can’t afford not to,” was the typical reply. Health care reform can’t wait. Energy policy reform can’t wait. Financial regulatory reform can’t wait. These things must be addressed, and they must be address this year. But increasingly, reform is waiting. An overhaul of the financial regulatory apparatus might not pass through Congress until next year. And even as Representative James Oberstar is preparing to roll out his proposal for a new transportation bill, Transportation secretary Ray LaHood is Congress to delay a major overhaul for 18 months.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 8:45 AM » A Very Strange Divergence in Title Insurance
    Published Fri, Jun 19 2009 8:45 AM by Seeking Alpha
    submits: This is one of the few times I'd like to have ready access to analyst reports. I am completely boggled by the massive divergence among the two title insurance companies we own. While both faltered badly once interest rates started to rise (hurting mortgage applications and by transitive theory, titles), First American ( FAF ) has fought back to its 200 day moving average while Fidelity National Financial ( FNF ) has continued down at a nearly 45 degree angle, even as Treasuries have rallied here the past 5 sessions buffering the rise in mortgage rates. Granted, the latter is more a pure play on title insurance, but this is one serious variance. There must be something going on specific to FNF and "someone" obviously knows "something" - but I definitely do not know what it is. On valuation I'd like to add here, even if its a very busted chart, but it just continued to falter almost on a daily basis and make new lows. In fact, it is lower than it was at any point in the Jan-early March 2009 selloff . I don't think almost any other stocks can make that claim.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 8:44 AM » Re-REMIC Redux for Banks
    Published Fri, Jun 19 2009 8:44 AM by Seeking Alpha
    BoneYard submits: From the "we haven't learned our lesson" file: Banks are turning to so-called re-REMICs for commercial mortgage debt to create securities that offer protection from rating cuts and losses. Investors are buying commercial mortgage bonds that may be repackaged into securities similar to re-REMIC deals being sold by Bank of America (BAC) and Morgan Stanley (MS), assuming they will be able to sell them at a higher price, according to Chris Sullivan, chief investment officer at Federal Credit Union in New York.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 8:43 AM » Raise the Minimum Capital Ratio to Prevent 'Too Big to Fail'
    Published Fri, Jun 19 2009 8:43 AM by Seeking Alpha
    submits: The financial crisis has proven yet again (as if anyone should need further convincing) that U.S. financial institutions implicitly deemed “too big to fail” tend also to be too big to manage. That creates an unacceptable systemic risk. Citigroup (C), [[AIG]], Wachovia, Washington Mutual, and Bank of America (BAC) all provide good examples of the bad things that can happen when an institution becomes so large that managements can no longer keep track of all the mischief going on. The solution? I believe these institutions should be broken up, so that they can once more be effectively and prudently managed. That would reduce systemic risk, increase competition, and, in general provide better services to customers at a lower cost.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 8:43 AM » Politicizing the Fed Would be a Mistake
    Published Fri, Jun 19 2009 8:43 AM by The Big Picture
    Good Evening: U.S. stocks managed to finish with modest gains Thursday, though the performance by the major averages could have been better considering today’s positive economic news. Then again, it was this same set of data that helped push Treasury yields quite a bit higher, and therein lies the rub facing investors. With all the paper slated to be issued by the Treasury in the coming months, any improvement by the economy may lead to the type of higher interest rates that could choke off any recovery. And if the economy instead steps on the green shoots by continuing to stagnate, then equities will at best go sideways (and could roll over to the downside). Perhaps this boxed-in feeling among investors is why volume has trailed off in recent weeks and why prices have much such little headway in either direction. Adding to this sense of unease is an aspect of President Obama’s regulatory reform proposal that could politicize (and thus compromise the independence of) the Federal Reserve. Overseas markets were once again weak last night, but our stock index futures were only a bit lower as jobless claims hit the tape this morning. Initial claims remained above 600K, but continuing claims declined for the first time in what seems like forever. Of course, what we don’t know is how much of this reduction in ongoing claims is due to the stoppage of benefits once the long term unemployed have “timed out” of the program, but the news is welcome nonetheless. Stocks were hovering only slightly above unchanged when both the Philly Fed and LEI figures came in well above expectations. Manufacturing in the Philadelphia Federal Reserve district still fell in May, but this stat came close enough to the zero (neutral) mark that some eager investors thought they spied “growth”. This notion was only reinforced when the Leading Economic Indicators figures for May rose a full 1.2%. The BAC-MER economic team was impressed enough to opine that the U.S. economy is now “closer to the trough...
    Click Here to Read the Full Article

    Source: The Big Picture
  • 8:43 AM » Foreclosure-prevention plan gains steam: HUD chief
    Published Fri, Jun 19 2009 8:43 AM by Market Watch
    About 200,000 mortgage modifications have been worked out under the government’s Making Home Affordable program, with 40,000 modification offers completed last week, Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development said on Thursday.
  • 8:27 AM » Geithner on Fannie and Freddie: 'Not Essential'
    Published Fri, Jun 19 2009 8:27 AM by Seeking Alpha
    BoneYard submits: Tim G in front of the Senate Banking Committee: “We did not believe that we could at this time -- in this time frame -- lay out a sensible set of reforms to guide, to determine what their future role should be,” Treasury Secretary Timothy Geithner told the Senate Banking Committee in Washington today. “We’re going to begin a process of looking at broader options for what their future should be.”
    Click Here to Read the Full Article

    Source: Seeking Alpha
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