Tuesday, February 23, 2010

Mortgage Bubble: 20bps spread from Treasuries!!!!


A fascinating article from Dave Rosenberg in Monday's Breakfast with Dave.
Once again, this Houdini recovery has involved a situation where mortgage rates have plunged and yet Treasury bond yields have been rising — 30-year fixed rate mortgages have fallen to 4.93% and are sitting are record-tight spreads over long Treasury bonds (see Chart 7). Historically, the average spread is 150bps and this differential is now 20bps. This is remarkable and our concern is that investors who may be exposed to mortgages are at serious risk because there is a considerable chance that these rates will be moving higher over the intermediate term — notwithstanding continued support from Uncle Sam’s pocketbook.

Investors must be reminded time and again that mortgages are callable, Treasuries are not; and we are now in a situation where net of fees, which average 70bps, anyone buying mortgage paper today is receiving a rate that is less than what the borrower is paying, How nutty is that?

Remember — despite all the ridiculous comparisons to the Weimar Republic, the long bond is THE risk-free benchmark interest rate in the U.S. and with State taxes going up, Treasuries are an even further bargain because of their tax status.

Even without the caution about callable securities, why anyone would be rushing into mortgages with the Fed about to pull the plug on buying is certainly a mystery. Are pension funds chasing yield to ridiculous extremes again? Can the Fed's purchasing account for 100% of that silliness?

Assuming the answer to the second question is no, this is yet another one of those reflation risk trades that just will not die, until it does, more than likely all of a sudden, and more than likely sooner rather than later.

Monday, February 22, 2010

Volume Drops when Tiger Talks


From Bloomberg:

Feb. 19 (Bloomberg) -- For a few minutes, Tiger Woods was bigger than Ben S. Bernanke.

The CHART OF THE DAY shows that a day after the Federal Reserve chairman and his colleagues raised the rate charged to banks for direct loans, investors took time out from trading to watch Woods apologize for his marital infidelity and “repeated irresponsible behavior.”

New York Stock Exchange volume fell to about 1 million shares, the lowest level of the day at the time, in the minute Woods began a televised speech from Ponte Vedra Beach, Florida, headquarters of the U.S. PGA Tour. Trading shot to about 6 million when the speech ended, the highest for any period except just after exchanges opened, data compiled by Bloomberg show. Trading on all U.S. bourses declined during the press conference, falling to 456 million shares from an average of 576.8 million during the five previous 15-minute segments, Bloomberg data show.

“You couldn’t escape it,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages about $2.5 billion in San Antonio. “It was everywhere. You have one of the best athletes of our time involved in something like this. Every channel you were on had the press conference.”

The top player in the World Golf Rankings, the 34-year-old Woods said he would return to the sport that has made him a billionaire but had no timetable.

Woods had been on an indefinite break from golf since saying in December that he had been unfaithful to his wife. He hadn’t spoken publicly since a single-vehicle traffic accident outside his home on Nov. 27, which was followed by often lurid media reports detailing extramarital affairs.

I mean Really Citi?

Seen on a recent Citibank statement: "Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change."

Whoa. Is this an April Fool's joke? A contingency plan to defend against the idea of what "would happen if thousands of [bank] customers pledge to withdraw their money from the bank on a certain day, unless the bonuses are capped?" A strategem cooked up by Citi's new shareholders from the hedge fund industry, an industry in which such withdrawal gates are common? An idea backed by Citi's big shareholder, Uncle Sam, or one of its regulators?

Calls to Citi have resulted in them saying that the warning applies only to customers in Texas and that the notification had been mistakenly included on statements nationwide. Whatever the explanation, it doesn't exactly inspire confidence in Citi. But it's hard to believe a bank would be sending out a notice like that on its statements.

Citibank has released the following statement by way of explanation: "When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Reg D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal. We recently communicated this technical requirement to our customers. However, we have never exercised this right and have no plans to do so in the future."

Friday, February 19, 2010

Surprise! Fed raises discount rate by .25%



Now I would like to think that this is the beginning but knowing Bernanke I know it is not. This (IMO) is a direct reaction to the Chinese actually selling Treasuries and Japan being the largest buyer of Treasuries from this last issuance. We need the Chinese and they have already stopped buying our longer term notes and shifted towards shorter term and are already jawing about not buying them in the future. Bernanke is caving and trying to entice the Chinese to continue buying with the hope this move strengthens the dollar and whets China's appetite for our bonds.

Thursday, February 18, 2010

Trillion Dollar State Pension Gap.... Not Surprising at All

The Pew Center came out with their report on State pensions and found that the entire nation has approximately a TRILLION DOLLAR gap.

Why is this happening? Oh I'll just skip straight to the point so you don't have to waste your time reading this lengthy report: UNREALISTIC ASSUMPTIONS!

Most of the states with the biggest shortfalls are the ones with 8% or greater investment return assumptions. I don't know who is managing their money but the market's long term average sits right around 7% so their underlying assumption is that they are going to consistently beat the market by a FULL PERCENTAGE POINT every year. That kind of positive alpha would be legendary (ala George Soros). It is just amazing how inept our governments are. I blame the academics. They are the ones who are using these unrealistic principals and assumptions and because they went to some fancy school the states take their word for gospel. This just adds to how profoundly annoying and hopeless our government system is.

Shame on you states and your 8% or greater return assumptions.

The Onion Hits the Nail on the head

The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct.

What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately disavowing the entire concept of currency, and negating in an instant the very foundation of the world’s largest economy.

“Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…” said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief. “You know what? It doesn’t matter. None of this—this so-called ‘money’—really matters at all.”

“It’s just an illusion,” a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. “Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless.”

According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, “Oh my God, he’s right. It’s all a mirage. All of it—the money, our whole economy—it’s all a lie!


The Onion

Here come the Municipal Bankrupcies

“People believe that municipal debt is safe based on assumptions that are no longer true.”
-Kenneth Buckfire


The above quote comes from the CEO of Miller Buckfire & Co., an investment bank that is currently advising cities on municipal restructurings. Technically, these are called Chapter 9 reorganizations.

The WSJ notes:

“The seldom-used part of U.S. bankruptcy law gives municipalities protection from creditors while developing a plan to pay off debts. Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders.

The economic slump, however, is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk.”


There have been but 600 cases since this chapter of the bankruptcy code became law in 1934. The largest Chapter 9 filing was back in 1994, when Merrill Lynch bankrupted Orange County, California via a form of unsuitable investments that lost a billion plus dollars on a form of Interest Rate Swaps.

Given the various pressures states and cities are under, a surge in municipal bankruptcy filings is all but unavoidable . . .

Friday, February 12, 2010

Slobs and the American Civilization

From Rasmussen Reports:

Had George Washington joined me outside a Chili's at Chicago's O'Hare Airport recently, he would have shuddered at the sight. There, a nation of slobs paraded through the crossroads of America. Frayed denim hems swept the filthy floor. Cleavage poured out of T-shirts bearing vulgar messages. Big bellies flowed over the waists of jeans. Mature women waddled in stained sweat suits. Some passersby stuffed their mouths with pizza as they walked.
Washington was a stickler for good manners, and that included dignified dress. As a youth, he hand-copied a text called "Rules of Civility&Decent Behavior in Company and Conversation." They included: "Wear not your Cloths, foul ... or Dusty but See they be Brush'd once every day at least and take heed that you approach not to any Uncleaness."
Some observers suspect that a collapse in grooming and attention to dress has contributed to the decline in civility on our streets and in our politics. People don't care what they look like in public because they don't care about the public. They have little notion of, or interest in, playing a supportive role in their civilization.
Digital technology has no doubt made many feel divorced from a larger community. Movies that were seen in crowded theaters are privately consumed at home. Socializing happens online. Some may view self-presentation as a pointless concern.
Many dress carefully for important events, such as weddings and funerals. But they regard a planeload of strangers as nobodies for whom they don't have to change out of a sweatshirt. People wear shorts and flip-flops to church.
Some don't even dress up for the most solemn of occasions. Funeral home directors note an increase in visitors perfectly outfitted for a barbecue. The day after Jackie Onassis died, actress Daryl Hannah famously came to her apartment in jeans and T-shirt.
Dress codes have collapsed at all but a handful of upscale restaurants. The proprietors create an atmosphere of elegance and romance only to see it populated by people dressed for mowing a lawn.
As the Chicago chef Charlie Trotter told the San Francisco Chronicle a few years ago, "I call it the casualization of America, and it's a grim scene."
New York remains the most formal city, say proprietors of fancy dining establishments, and the degree of dressing-down rises the farther one moves west. This trend hits bottom in some of California's richest enclaves. Hollywood moguls and Silicon Valley tycoons seem to revel in visiting the most expensive locales wearing baseball caps on backward.
Whereas the old Hollywood would pour on the jewels and fine silks to impress, the new Hollywood dresses sloppily to say, "I'm so important, I don't have to make the smallest effort on your behalf."
But do not confuse the jogging pants and dirty sneakers with any interest in making common cause with the masses. The movie stars in the undershirts are nonetheless driving Porsches and living in 20-room mansions. Their wealth is not left in doubt.
A friend in Omaha has noted the phenomenon where young women doll up for a date while the young men with them look like total slobs. It's a sad commentary on modern relationships.
We must concede that this is a big country with different expectations for proper attire. One person's ostentation may be another's good manners. But a modicum of care in dress and grooming would seem a basic minimum just about everywhere -- or it used to be. Cowboys might get muddy on the job, but they were clean and pressed for the Saturday night dance.
It seems that the richer this country gets, the more slovenly people have become. It's a grim scene all right.

Nice FT Piece on Proposed Banking Reforms




Hopefully some of what Volcker wants done gets pushed through, but I'm not holding my breath

Wednesday, February 3, 2010

Government Lies

So I would like to answer my own question;

How can U.S. GDP be up by a robust 5% when oil imports and rail traffic are down and unemployment is still rising?
The answer, in a nutshell, is that once again we’re being conned. Get this: Washington defines interest on credit card debt as “consumer spending” and adds it to GDP. So as debt soars, the gap between what we spend and what we actually receive grows, but the economy appears to improve. Eliminate that accounting trick and the numbers look like most people feel, very bad and getting worse.