Saturday, May 30, 2009
US Equity Markets
The major stock indices continued their impressive rally which began on March 9th, albeit at a more constrained rate of increase than in March or April. The S&P500 began the month at 872.81, and ended at 919.14- an increase of 46.33 points or 5.3%. This corresponds to to an annualized rate of increase of 86%, which is likely unsustainable.
US Treasury Market
The most profound development in the market for US Government debt occurred at the 10-Year portion of the curve. The yield on the 10-Year note began the month at 3.1%. By the midpoint of the month, the yield was little changed. However, from May 20th to May 27th, the yield on the 10-Year increased by nearly 50 basis points to a month-high of ~3.7%. A variety of justifications have been offered by the investment community concerning the underlying causes of the downward price pressure. We reside firmly in the camp that sees the movements as the Market's skepticism towards the ability of the United States to service vast amounts of newly acquired debt. We expect this trend to continue until the Fed decides to step in and defend the 10-Year. We do not know the exact point that this will occur, but we suspect that the Fed will be loathe to allow the 10-Year to push average mortgage rates into the 6% territory. There are several planned Treasury auctions in early June- the outcome of which will likely dictate future Fed actions in the arena of quantitative easing.
North Korea: The isolated dictatorship has continued to test the Obama Administration's willingness to forcibly curtail its nuclear ambitions. At some point, China is likely to exert its influence over North Korea and compel the "Great Leader" to cease and desist. It is in China's interest to allow this chirade to continue at the moment, because it highlights Washington's relative inability to exert power over the region. However, North Korean actions that could potentially stymie a global recovery and induce world panic are certainly not in China's interest. That being said, further escalations of rhetoric between Washington and Pyongyang could have the effect of provoking short term volatility spikes in US and other equity markets.
Pakistan: The Pakistani army's advancement into the Swat Valley has continued to displace residents, creating a humanitarian nightmare. Recent pronouncements from the US military indicate that the Obama Administration is laying the necessary groundwork to justify a military intervention in Pakistan. We expect that this will not occur, as the Pakistani military is fully capable of extinguishing the Taliban resistance. However, a drawn out conflict in that country could have the effect of inducing further upward pressure on oil prices. This would obviously not bode well for the sprouting of further "green shoots".
We note that public sentiment concerning the liklihood of a recovery was slightly diminished during the month of May. The optimism spurred by the appearance of the "green shoots" and concomitant equity market rally has been partially displaced by the realization that there is no true catalyst for a sustained recovery. Disaster appears to have been averted, however job losses, foreclosure/delinquency rates, rising fuel costs, and continued bank failures have served as a sobering reminder to the public that we are not "out of the woods" yet. The emergence of frugality as a popular concept should continue to affect consumer spending, which, as we recall, represents some ~70% of the US economy. Our venue of choice for gleaning insight into this trend are the earnings, statements, and behavior of Procter and Gamble(the company that owns every brand of household necessity that you see on the store shelf). At an investor conference last week, the CEO of P&G, A.G. Lafley, made the following statement:
"In every recession there are hosts of compensating consumer behaviors as they manage a more modest budget. We have to expand our portfolios to serve the needs of those consumers. I think a lot of that is going to last"
P&G is one of the fortunate ones-their products are actually Needed by consumers, and they have a broad enough product mix to emphasize "trade down" products in a recessionary environment. Even they are not immune however, as the Company's most recent 10-Q indicates that Q1 earnings were bolstered largely through cost cutting and lower interest expense-a direct result of subdued Treasury yields. While cost cutting is necessary and helpful, it is doubtful whether this strategy can be successful indefinitely.
We expect that Q2 earnings season will bring with it a host of dissapointments, especially if Treasury yields continue to march upwards, and the consumer continues to embrace frugality as a way of life. Sphere: Related Content
Most egregious of all, in our opinion, were the actions of former Rep.William Jefferson (D-LA). According to official documents, the taxpayer has purchased Mr. Jefferson a $2793 Toshiba Toughbook laptop. Now, we are all for technological literacy within Congress( we don't think much exists currently), but seriously, this is the same man who was caught with $90,000 of cash in his freezer. How in the world can a member of Congress be caught with that kind of money in his freezer(of all places), and still retain the audacity to charge the taxpayer for an overpriced "Toughbook" that isn't even designed for old men in Congress?
The consensus of historians as to the reason for the fall of the Roman Empire, is that Rome was not overwhelmed by external enemies, but rather that it crumbled from within. Sphere: Related Content
Friday, May 29, 2009
The prevailing conventional wisdom, for the past 6-8 months or so, has been that commercial real estate would suffer a residential-like implosion. While we did acknowledge that the key economic ingredients were in place for a decline in the sector, we remained a bit wary of the overwhelming consensus that had developed. In terms of financial markets and the economy, the stronger the consensus, the more likely that the herd is dead wrong. Our approach has been one of cautious assessor, avoiding a conclusion until more material evidence of a deterioration, or possibility thereof, arose with respect to commercial real estate. We believe now to have that evidence in hand.
Thursday, May 28, 2009
- The percentage of first mortgages to have foreclosure proceedings initiated
- Quarter to quarter increase, in basis points, of percentage of first mortgages to have foreclosure proceedings initiated.
- The non-seasonally adjusted delinquency rate for mortgage loans on one to four unit residential properties.
- The combined percentage of loans in foreclosure and at least one payment past due.
- The percentage of loans in the foreclosure process.
Wednesday, May 27, 2009
Monday, May 25, 2009
As far as this current equity market is concerned, we have been told repeatedly that stocks are "in the bargain bin". We will now look to the available data for the S&P500 index and attempt, in an impartial and straighforward manner, to either verify or refute that claim.
Index-wide earnings for the S&P500 are reported in the two separate ways below:
Operating Earnings- Income from the sale of goods and services
As-Reported Earnings- Income from continuing operations as defined by Generally Accepted Accounting Principles (GAAP)
Our earnings figure of choice will be "As-Reported Earnings". This decision stems from a couple of grievances we have with the "Operating Earnings" figure. First of all, we are wary of the fact that these numbers are not standardized according to GAAP. While standardized accounting principles are not perfect, we ardently prefer a slightly flawed yet standardized measure over the inconsistency that is inherent to earnings designations made outside of the GAAP framework. Most suspect, we believe, is the fact that Operating Earnings exclude what is known as "unusual items". Essentially, a company has characterized a particular charge to earnings as "unusual" and thus can pretend that it did not really happen. Unfortunately, the world is defined by events and occurrences that would be largely considered unusual. Unusual things happen, and they matter. That being said, we will still provide the data for both earnings figures if for no other reason than to appease those who suffer from chronic delusions. Below are the quarterly, aggregate earnings per share for the S&P500, as reported by Standard and Poors:
Friday, May 22, 2009
Monday, May 18, 2009
Friday, May 15, 2009
Friday, May 8, 2009
Thursday, May 7, 2009
Wednesday, May 6, 2009
Treasury Announces TARP Capital Purchase Program Description
Washington- Treasury today announced a voluntary Capital Purchase Program to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy.
Throughout this announcement, in three separate instances, "U.S" is used as an adjective to emphasize the fact that these activities are being conducted for the benefit of the United States. However, the Treasury, on its own website(http://www.financialstability.gov/impact/index.html ), posts information that would seem to contradict the stated purpose of the Capital Purchase Program as advertised to the public. According to the impressive interactive map, Treasury has funded $1,335,000,000 worth of transactions in Puerto Rico. A closer look at the reports reveal that the lions share of this amount, $935,000,000, went to Banco Popular (Popular, Inc.) , a San Juan based conglomerate with assets in excess of $45Billion. The most compelling piece of information that we can identify concerning Popular is that, in early 2008, it sold its US consumer finance division to AIG. This transaction was apparently quite beneficial, if not necessary for Popular- both Moody's and Fitch had placed the Company on "negative" outlook and were reviewing it for a possible credit downgrade. After the sale however, Moody's immediately assigned a "stable" rating to Popular.
To put Banco Popular's amount of US Government support in perspective, consider that it received more Federal support than the did the financial institutions of 34 individual US states.
We did not choose to bring this information to light out of xenophobia(or any other phobia), but rather to point out that the public's attention has been skillfully manipulated throughout this entire economic episode. Case in point: there has been considerable rage leveled at Banks who received TARP money, and then planned to hire recent MBA's who happened to be from another country. However, there has been zero mention in the traditional media of the billion or so that has flowed directly to Puerto Rico.