Monday, January 18, 2010

Leftovers - Radio Show 1/9/2010

Paul Krugman had two articles during this week.  His "That 1937 Feeling" warns us of blips, which are statistical illusions, that appear to convey good news and are often caused by inventory bumps, which is when inventory levels have been reduced to the point that they must be at least minimally replenished in order to continue to do business.  He indicates the housing and employment problems are not coming back yet in this recovery, which is something I have been saying for some time.  He indicates a boom in business investment would be very helpful right now, but I have been observing that business lending is down and the Fed appears to be discouraging bank lending by accepting excess reserve deposits without penalty to the depositors.  Krugaman indicates that the current stimulus will have played itself out economically by the middle of 2010 and any attempts by the Fed to exit by ceasing to purchase long-term debt and mortgaged backed securities will amount to monetary tightening without raising interest rates.

Krugman.s "Bubble and the Banks" asserts that the bursting of the housing bubble brought the financial system to a grinding halt with the significant reduction of liquidity in the financial system.  However, the banks got themselves in this plight by raising their leverage ratios in order to maximize short-term profits which directly affected the size of their bonuses.  While their is every need for transparency and regulatory reform, there is every incentive for bankers to engage in a repeat performance as they are now doing.  There needs to be a limit on bank leverage and a tax on excessive risk taking activities.

Karl Denninger of The Market Ticker had a post entitled, "Here It Comes (You Were Just warned Folks)" in which he argues that the only direction for interest rates to go is up, that P/E ratios are at record highs, and investors are piling in to the financial sector which needs regulation from the tech sector which has been on a tear.  He references the BIS warnings on Central Banks low interest rate policies and the China real estate bubble.  He indicates that we are presently worse off than in early 2007.  He ends with regulators warning of liquidity and interest rate risk at the same time it is preparing an exit from the liquidity programs put in place to seal the dam.

Marshall Auerbach published an article entitled, "Spain and the EU: Deficit Terrorism in Action" in which he criticizes the EU arbitrary fiscal rules with respect to the 3% of GDP limitation of deficit spending, because it is significantly deterring the ability of some EU member nations to adequately respond to their economic conditions during this period of global financial crisis.  The need for targeted government spending to increase employment and spur GDP growth is in direct conflict with the EU fiscal rules.  This is posing a a particular problem for Spain which adheres to the EU rules and is also a looming problem for Portugal and Ireland.  This conflict can also be seen in the friction between Greece and the EU over Greece's attempts to reduce its budget deficit.  There have been polite but harsh words on both sides as we have seen in several stories this week.

The Chicago Board Options Exchange intends to wait until the second half of this year to start a new platform for high-speed, high  frequency traders.  The SEC has not yet announced any decision yet on its proposals on regulating flash orders.  The CBOE is just going to keep muddling on as usual until it gets firm directions.  The process of regulatory reform is very slow when there is no one making it happen.

China raised the rate on its 3 month bills at the most recent auction and this is seen a a tightening of monetary policy.

FDIC is considering a plan to tie banks payment for deposit insurance  to risks involved in their pay structures.  Also, after a receiver of failed bank distressed CRE loans, the FDIC set up a LLC to hold these distressed loans with unpaid principal of $1.02 billion and sold 40% of the LLC to Colony Capital for $90.5 million net of working capital.

Bill Gross of PIMCO said that when the Fed stops buying MBA's the Fed will be unable to sell them and it will put pressure on interest rates.  PIMCO is also cutting it exposure  to US and UK debt.

Meredith Whitney, the banking analyst, lowered Goldman Sachs earnings estimates for 2010 through 2012 for the second time in less than a month.

The Illinois pension fund, Central laborer's Pension Fund, is suing  Goldman Sachs over bonuses citing the compensation system as a complete breakdown of corporate oversight.  $17 billion has been set aside for bonuses through Q3 and may approach $22 billion for year on what the Pension Fund calls government  bailout inflated revenues.

The ISM Manufacturing Index is up to 55.9 in December from 53.6; new orders up to 656.5 from 60.3; production  up to 61.8 from 59.9; employment up to 52.0 from 50.8; supplies deliveries up to 56.6 from 55.7; inventories up to 43.4 from 41.3; prices up to 61.5 from 55.0; exports down and imports up; customer inventory still contracting.

Construction spending down .6% in November.

ISM Service Sector up to 50.1 in December from 48.7 with 12 of 18 industries reporting a decrease and 2 reporting no change.

US durable goods factory orders up 1.1% in December; shipment up 1.0%; unfilled orders down .7%; inventory up .2%.

Mortgage demand at a 6 month low.

Pending home sales down 16% November but up year on year.

HAMP 2nd lien modification program is on hold with no listed servicers.

US apartment vacancy rate hits 3 year high; office vacancy rates hit  15 year high; and strip mall vacancy rate at 10.6%.

Small and medium size business loans, leases, and lines of credit more than 180 days behind are up to .91 from .87 for a 22nd monthly increase.

2009 personal bankruptcy at 1.41 million which is up 32% from 2008.

The Euro 16 nation unemployment at 11 year high of 10% and it is estimated it will continue to rise into Q3 2010.  Eurozone factory activity rose to 51.6 from 51.2 at the fastest rate in 21 months of 4/10ths of a percent.

German exports are up 1.6% in November.

Canadian unemployment is 8%.

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