A bridge over troubled waters

'A bridge over troubled waters' - I think that would be my summation of our
economic situation at the present time...
Turbulence, unexpected data releases, market volatility, artificially pegged
short rates, debt, debt and more debt...at least it appears that the consumer
(whether forced to or not) has been steadily decreasing their personal debt
levels - now if we could only convince our 'wise and wisdom filled' legislators
(at all levels) to do the same - cut and control spending!
prb

Subject: S&Y PSG Morning Market Update for Thursday February 25th
Date: Thu, 25 Feb 2010 07:17:35 -0800
From: "Stone & Youngberg Portfolio Strategy Group"


* The Treasury market was little changed yesterday as their was no significant economic releases providing an impetus for investors to reassess their views. On the day, the 2-year note was the big mover, with its yield rising 3 basis points to 0.867%. Other yields across the curve changed less than 1 basis point. At the close, the yield on the 3, 5, and 10-year notes was 1.405%, 2.354%, and 3.693% respectively. In overnight trading, yields are lower by 2 to 4 basis points across the curve as weaker equity prices and the ongoing concerns regarding the debt situation in Greece, push investors to the relative safety of U.S. Treasuries.

* This morning the Commerce Department reported that orders for durable goods rose 3.0% in January, driven largely by orders for aircraft which rose 126% on the month. When the impact of aircraft and other transportation related goods are excluded, durable goods fell by a surprising 0.6% in January. Declines were seen across both orders and shipments for non-defense related goods as orders excluding aircraft were down 2.9% and shipments excluding aircraft were down 1.5%. The weak durable goods report underscores a theme we have been advancing that while the economy is slowly recovering from the depths of the recession, the rebound will be tepid by historical standards.

* The Commerce Department also reported this morning that initial jobless claims rose 22,000 to 496,000 last week. The snow storms across the mid-west and east coast were significant contributors to the rise in claims. With the February non-farm payroll report slated for release next week, analysts will be closely reviewing the report for the impact the storms had on the employment data.

* Yesterday, data on new home sales were released by the Commerce Department, showing sales falling to a record low of 309,000 in January. The decline in sales represents an 11.2% decline from December's revised 348,000 in sales. Accompanying the report was data showing that the median sales price for new homes declined 2.4% on a year-over-year basis. The report underscores the fragility of the recovery in housing.
While home prices in most areas are no longer in a "free-fall", support for housing has largely been drawn from government programs such as the home buyer tax credits and the Federal Reserve's MBS purchase program.

* The CEO of Freddie Mac underscored the uncertainties facing the housing market this year in a statement noting "the housing recovery remains fragile, with significant downside risk posed by high unemployment and a potential large wave of foreclosures." The considerable amount of seriously delinquent loans in GSE portfolios, and the GSE's plans to buy those loans out of its guaranteed MBS have weighed on the performance of the mortgage sector, with higher coupon Fannie Mae MBS significantly underperforming the market over the past two weeks.

February 25, 2010

February 25, 2010

These times are truly amazing...when we look at what our 'wise and wisdom filled' congressional representatives ponder it makes one wonder how long the republic has left! For the clock is surely ticking...


Federal Reserve chairman Ben Bernanke gave a lesson once again in monetary policy to a still mystified House Financial Services Committee at a hearing on the Fed's semi-annual report to Congress today.
by Elizabeth MacDonald
PROF. BERNANKE INSTRUCTS CONGRESS--AGAIN

Is Fed’s Market-Timing State of the Art?
Not yet clear, because no one on the committee asked, is whether US taxpayers will ever get to see exactly what sludge they paid for in the AIG bailouts, where Goldman Sachs, Societe Generale, Calyon Securities and Merrill Lynch were made 100% whole on their trades with the toppled insurer.
The committee also did not give ample airing to the Fed’s exit strategy, in which it will need to dismount out of its very complex, very unorthodox, and very sizable intervention into the US economy, in which it has ballooned its balance sheet to $2 trillion from $800 billion pre-crisis, where it has junked up its financials with all sorts of asset-backed securities to rescue Wall Street.
Also not discussed are the Fed’s market-timing abilities, proven to be not so state of the art.
Can the Fed time the market right and make a profit selling these securities, many of which are underwater, to avoid losses? Since it took the Fed nearly two years to raise rates after the last two recessions, which exacerbated the bubble?
Can it do so when even Wall Street can't get it right, dancing deeper into paper refuse when their computer screens flashed red on subprime securities, proving artificial intelligence is no match for natural stupidity?
Fannie and Freddie Take Over Quantitative Easing
While the Fed has already ended all sorts of credit facilities for the financial sector, it’s clear Congress intends Fannie Mae and Freddie Mac will now take over the role of lending support to the US economy, as the Congress authorized for them an open-ended line of credit, previously capped at $400 billion, in the dead of night last December.
The House hearing of course didn’t give much time to discussing the impact of this blank check given to two of the worst offenders in the government distorted housing market which is getting a government bailout.
Hot Molten Evil
Because this is the same House Committee—Frank, Waters, et al--that chastised critics as hot molten evil if they dared come before it to tell the truth about Fannie and Freddie.
The Fed chairman didn’t quite fully address Fannie and Freddie reform, meekly noting something about the two being a private but yet maybe a public utility (my head just exploded), because again the representatives didn’t really fully give this issue an airing.
“Crap-ital Standards”
Although Rep. Randy Neugebauer of Texas did ask what the Fed was doing about bank reform in the way of tightening, as he unintentionally though aptly put it, bank “crapital standards.”
Standards which Congress seems to follow, as Bernanke noted once again that it’s “very important for Congress and the Administration to have a credible plan to bring the government back to a sustainable position on deficits,” since “basic arithmetic shows that interest payments on the debt would go higher and spiral out of control,” noting the Congressional Budget Office came up “with the same results.”
"Governments Jobs Are Not Productive"
To which the Fed chairman also said that while fiscal stimulus has created jobs, “you don’t want to create government jobs that are not productive.”
Deficit Spending Hurts Markets Now
This deficit spending problem “is not 10 years away, it affects the markets today,” Bernanke replied to a question to Rep. Ed Royce (R-Calif.), the only person on the committee who appears to not be a few peas short of a casserole, upon which committee chairman Barney Frank (D-Mass.) cut off this line of questioning.

Thursday February 25, 2010

A slow and sluggish return for the housing market appears to be the forecast. Arizona has some fundamental fiscal issues that will have to be worked through before a 'bull' market can return. In the mean time empty commercial real estate and continued foreclosed residential properties will dot the landscape of our fair metro area.

Real Estate: Your local forecast
381 markets tracked
By Sept. 30, 2011, the national median home price is expected by fall by about 6%. Check the predictions for your city.

Phoenix-Mesa-Scottsdale, AZ
Forecast change: Sept. 30, 2009 – Sept. 30, 2010 -22.2%
Forecast change: Sept. 30, 2010 – Sept. 30, 2011 -2.7%

Market fundamentals
Median Family Income $64,200
(2008)
Median Home Price $140,000
(Third quarter 2009)
Change in Home Prices -21.2%
(From third quarter 2008 thru third quarter 2009)
Worst 1-Year Home Price Change -35.7%
(First quarter 2009)
(time period 1980-2009)

Wednesday February 24, 2010

interesting article attached.....with Nevada leading the way and AZ in second place but 'trying harder'.......
how much more of this is there to go???

Looks like AZ won't be leading the way to recovery nor the quickest to bounce back ! ! !

Wednesday, February 24, 2010, 10:05am EST
Fla. ranks third in underwater mortgages
South Florida Business Journal
The state of Florida has the third-highest percentage of homes under water, according to a report by Santa Ana, Calif.-based First American CoreLogic, a real estate information company,
Nationwide, more than 11.3 million, or 24 percent, of all residential properties with mortgages were in negative equity at the end of the fourth quarter, up from 10.7 million (23 percent) at the end of the third quarter, according to the report.
Negative equity, often referred to as “under water” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.
Forty-eight percent of Florida's mortgages were under water. That translates to nearly 2.2 million of the more than 4.5 million mortgages. An additional 171,710 mortgages (3.8 percent) in the Sunshine State were near negative equity.
Only Nevada, which had 70 percent of all of its mortgaged properties under water, and Arizona, at 51 percent, had more. Michigan (39 percent) and California (35 percent) rounded out the top five.
The net increase in the number of negative equity borrowers in the fourth quarter was 620,000, with the largest percentage increases occurring in Nevada, Georgia and Arizona. Among the states with the highest negative equity shares, California had the smallest increase in the negative equity share, which only rose 0.4 percent, to 35.1 percent. In numerical terms, Florida had the largest increase in the number of negative equity borrowers, rising by more than 141,000, followed by Georgia (65,000) and Illinois (55,000).
"Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners," said Mark Fleming, chief economist with First American CoreLogic, in a statement.
First American CoreLogic’s data includes 47 million properties with a mortgage, which account for more than 85 percent of all mortgages in the U.S.

its just cyclical...

As we proceed through this time in our country's financial history we are seeing the paradox of government intervention. Too big to fail yet creating an atmosphere where bigger is just getting bigger! While our wise and wonderful Congressional representatives continue to write usurping laws and regulations that are squeezing the local community banks out of business. It truly takes a 'village' to enable a community bank to steer its way through the myriad of twisted and sometimes contrary regulatory directives - and the cost continues to mount. Look for the continued decline of the community banking sector as we proceed post haste into our new world order.
Don't look now but the laws and regulations just keep on coming...


Banks at risk of going bust tops 700
By David Ellis, staff writer CNN Money
February 23, 2010: 10:28 AM ET


NEW YORK (CNNMoney.com) -- More than 700 banks, or nearly one out of every 11, are at risk of going under, according to a report published Tuesday.
The Federal Deposit Insurance Corp. said that the number of banks on its so-called "problem list" climbed to 702, its highest level since 1992. At that time, the agency red-flagged 1,066 banks.

The number of banks under scrutiny by regulators has moved steadily higher since the recession began in late 2007. Just 76 financial institutions were on the list in the fourth quarter of 2007.
Banks that end up on the problem list are considered the most likely to fail because of difficulties with their finances, operations or management. Still, few of the lenders that are on the list actually reach the point of failure.
On average, just 13% of banks on the FDIC's problem list have been seized and shuttered by regulators. So far this year, 20 banks have failed, putting the FDIC on track to shutter at least as many institutions as it did in 2009. Last year, the FDIC seized a total of 140 lenders nationwide.
"Bank failures can be cyclical and I think as we have said, the pace is probably going to pick up this year," said FDIC Chairman Sheila Bair.
The names of the banks on the list are never made available to the general public by regulators out of fear that depositors at those institutions may prompt a so-called "run on the bank."

Friday February 19, 2010

Friday February 19, 2010
Interesting move and timing by the Fed. They have their proverbial hands full in attempting to 'slowly' unwind all of the monetary assistance levers they pulled during the 'crunch time'.
Yet to be delved into is the immense ballooning of the Fed's balance sheet with asset purchases, how that will be unwound, and what that will do the financial market place when it does happen...
Additionally, the interest rate effect on the price of these held assets as well as all government debt as the rate curve begins to move upward...
The key question at this time is: does our economy have enough foundational strength to struggle through the undoing?

prb

Subject: S&Y PSG Morning Market Update for February 19th

* After the close of the equity market yesterday, the Federal
Reserve increased the Discount Rate by 25 basis points to 0.75%. The decision by the Fed to raise the discount rate apparently came as a surprise to some. But anyone who follows the comments by the Fed Chairman would have seen that this move was imminent. In keeping with his commitment to transparency, Chairman Bernanke very clearly signaled he was going to raise the discount rate in published testimony released February 10th.

From the Chairman's testimony: "Federal Reserve's Exit Strategy",
Committee on Financial Services, U.S. House of Representatives, 2/10/10:
"Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve's lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC."

- The Fed's move is less an indication of a change in monetary policy and is more in keeping with the ongoing process of reducing the financial system's dependence on measures that were put in place during the financial crisis to support the banking system. Along with yesterday's announcement regarding the hike in the discount rate, the Fed announced that effective March 18th, the typical maximum maturity for primary credit loans will be shortened to overnight. Loans under the primary credit facility had been for terms as long as 90 days. Also the final Term Auction Facility (TAF) auction will be on March 8th.

* We share the Fed's view that the hike in the discount rate does not reflect a change in monetary policy and indeed the outlook reiterated in the January FOMC minutes that "it anticipates economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period", the market nonetheless exhibited a typical knee-jerk reaction with yields increasing across the curve. With this morning's economic releases, bond yields have moved lower but equity futures are set to open lower (S&P futures down 4.6 points at 8:45 EST)

* This morning's CPI release provides further indication that while the economy is slowly recovering; a sharp spike in inflation is not on the horizon. The CPI for January increased 0.2%, below the consensus estimate of 0.3%. The December CPI was revised from an increase of 0.1% to an increase of 0.2%. The CPI ex-food and energy for January came in at a -0.1%, again below the consensus estimate. On a year-over-year basis, inflation at the consumer level is running at a 2.6% pace.

Thursday February 18, 2010

Thursday February 18, 2010
Article: ‘Nightfall in America’
NIGHTFALL IN AMERICA
It is economic evening in America as our nation's spending, government programs and deficits balloon. The federal deficit this fiscal year will be $1.6 trillion, or about 10.6 percent of gross domestic product (GDP). That is the largest deficit since World War II, and even President Obama's optimistic estimates show our deficits will not return to sustainable levels for at least the next decade, says Pete du Pont, Chairman of the National Center for Policy Analysis and a former Governor of Delaware.
• The administration's projection of total federal spending over those 10 years (2011-20) is $45.8 trillion, while expected taxes and other receipts will be $37.3 trillion.
• The $8.5 trillion deficit is about 20 percent of spending.
And all of these numbers are based on a full and lasting economic recovery, which, based on current experience, is a pretty optimistic projection, says du Pont.
Earlier this month, the Wall Street Journal's editorial page did an analysis of the federal government's debt that will be held by the public over the coming decade:
• When the Democrats took control of Congress in 2007, the debt held by the public was 36.2 percent of gross domestic product.
• It rose to 40.2 percent the next year.
• This year it will be about 63.6 percent, next year 68.6 percent, then 77 percent of GDP in 2020.
• And the Obama administration's budget estimates 218 percent in 2050.
The reason for these rising deficits is the huge increases in federal spending -- the intended growth of the federal government -- that Congress and the president are pushing, says du Pont:
• The deficit in 2007 was $160 billion.
• In the next year the Pelosi-Reid Congress took it up to $458 billion, and when President Obama came into office in 2009 it hit $1.4 trillion.
• The current 2010 projected deficit is $1.6 trillion, which will lead to a tripling of our national debt from 2008 to 2020.
To the White House and congressional Democrats, these large figures are not a surprise, a mistake or a worry. They are part of a strategy to Europeanize America, to make the government larger, broader and in charge of almost everything. And that would of course require broad and massive tax increases, says du Pont.
Source: Pete du Pont, "Nightfall in America; The Obama deficits portend a gloomy future," Online Journal, February 16, 2010.
For text:
http://online.wsj.com/article/SB10001424052748704431404575067350881049536.html
For more on Federal Spending & Budget Issues:
http://www.ncpa.org/sub/dpd/index.php?Article_Category=25

Wednesday February 10, 2010

Wednesday February 10, 2010
We have spent years and years and dollars upon dollars to defend against communistic aggression and within the last several years we have now provided the communist government of China with a potentially 'lethal weapon' that will never have to be fired but can bring us to our knees - financial leverage! Who would have thought??????

prb

Interesting article:
‘Chinese see U.S. debt as weapon in Taiwan dispute’

http://www.washingtontimes.com/news/2010/feb/10/chinese-see-us-debt-as-weapon/

Thursday January 14, 2010

Thursday, January 14, 2010
It is hard to believe that there could be more foreclosures in 2010 than there were in 2009! And that people will continue to walk away from their 'home' due to negative equity positions...

prb

Subject: S&Y PSG Morning Market Update for Thursday January 14th

* In a report released early this morning (1/14), Realty Trac Inc predicts 3 million homes will move into the foreclosure process at some point in 2010. This is up from the 2.8 million foreclosures in 2009. The Realty Trac report cited continued high unemployment and the fact that housing prices, although stabilizing, still remain well below mortgage amounts in many cases.
In 2010, the rate of “strategic defaults” is expected to skyrocket. Homeowners with negative equity in which home is worth far less than the amount owed on the mortgage have little incentive to keep paying he mortgage and will walk away in record numbers. This relatively bleak forecast will undoubted serve to inhibit a recovery in the housing sector and will constrain overall economic growth.


* Yesterday’s (1/13) 10 year auction (reopening) was relatively well received. Demand was strong with a bid to cover ratio of 3.00, up noticeably from last month’s 2.62 and above the 2.49 average over the past two years.

* The Census Bureau reported this morning (1/14) a surprising drop in retail sales for December; down -0.3%, which was well below the consensus forecast of +0.5%. It appears that holiday season spending was not as strong as some had hoped. However, the previous month’s (November) sales figure was adjusted upward to +1.8% from the original +1.3%. The Census Bureau also reported that retail sales less automobiles and gasoline were down an identical -0.3% for December.

* The Department of Labor released initial jobless claims for the first week in January and the report showed a +11,000 rise in initial claims to 444,000. This was slightly ahead of the consensus estimate of 437,000. There was a much larger change in the weekly continuing claims which dropped -211,000 to 4,596,000. Except for an occasional blip, continuing claims have been declining steadily for 18 weeks; since the beginning of September 2009. If the number of unemployed receiving extended benefits is factored in, the decline in continuing claims was approximately -135,587 from last week.

* Finally, the Bureau of Labor Statistics reported there was no change in import prices in December, after rising in each of the previous four months.

Friday January 8, 2010

Friday, January 8, 2010
Some interesting economic information....
1) jobs status continues to stumble along
2) the consumer's ability to spend money to increase aggregate demand (thus improve the economy and increase job growth) continues to be flat to shrinking - and the decrease in consumer debt will not improve this facet (the deleveraging of the average consumer is a good thing for the future of our economy but it hurts today!)
3) the China syndrome will be very interesting to watch - how will they respond as we move forward (dollar/yuan price level, debt purchases, free market processes within their country, geopolitical issues) and how will their leveraging process effect their country in the future !

prb

Subject: S&Y PSG Morning Market Update for Friday January 8th

* Today's (1/8) December unemployment report showed a decline in the all-important monthly nonfarm payrolls of -85,000. The Bureau of Labor Statistics (BLS) also reported the December unemployment rate remained at 10.0%, changed from November. The markets had been expecting (hoping for?) a positive number for nonfarm payrolls.

* From a macroeconomic perspective, the lack of growth in jobs is disappointing. A review of recent labor statistics suggests companies are not laying-off workers, but neither are they hiring. The fact that businesses are not adding workers is a symptom of weak aggregate demand. Firms, both large and small, are not seeing improvement in current demand, nor do they expect it to rise in the future. As a result businesses are reluctant to expand output and hire new workers until they can be assured of more demand.

* The Treasury market reaction to today's (2/8) nonfarm number was as expected, and prices moved higher. The 10 year UST is up roughly +¼ of a point in price and he yield (when issued) is down -4 bps from yesterday to 3.78%. The 30 year long bond is up only +2 ticks in price and the when issued yield is 4.65%. The 2 year UST yield dropped below -1.00% and is now 0.94%. The Treasury yield curve remains very steeply sloped and will continue to exhibit this pattern for some time.

* Next week the Treasury will auction $74 billion in notes and bonds;
$40 billion of 3 year notes on Tuesday (1/12), $21 billion of 10 year notes on Wednesday (1/13) and $13 billion of 30 year bonds on Thursday (1/14).

* In an interesting side note. During 2009, more cars and trucks were
sold in China than in he US. For the first time in 100 years, a country other than the US purchased more vehicles. China vehicle sales for 2009 are estimated at 13.6 million compared to 10.3 million in the US. This occurred despite the fact that US GDP is 335% greater than that of China. (In 2008, US GDP was $14.4 trillion and China's GDP was $4.3 trillion.)

* A relatively large part of China's very powerful economic engine is being driven by demand from the US and other countries for its exports. This trade flow is being maintained by China's refusal to allow their currency to float in the FX markets and instead pegging their currency (yuan) to the US dollar. Very shortly, China will have the second largest economy in the world, behind the US. At some point in the not too distant future, as China's economy expands at double digit rates, it will undoubtedly be forced to stop tying its currency to the dollar and allow it to float, similar to all other major currencies. When this happens the yuan will probably appreciate significantly, and the cost of Chinese goods across the globe will surge. Consequently, China's comparative export trade advantage with the US and other countries will come under a great degree of pressure. Chinese leaders are trying to address that issue by stimulating domestic demand, hence the big increase in vehicle sales.

* Later today, the Fed releases consumer credit for November. The consensus is projecting a -$5 billion drop for the month, which is slightly worse than the -$3.5 billion decline in October. During the past 7 months (Jan - Oct) consumer credit has declined -$54 billion. Although the consumer may be reducing the debt load, which is certainly good in the long run, the short run effects for the US economy are problematic. The US economy depends on the consumer to spend and a contraction in credit will have an adverse effect on the spending level.

November 5, 2009

November 5, 2009
I believe that there are times when one must take our medicine and deal with the terrible taste that it leaves in our mouths to enable us to break the grip of the disease.
We appear to be in a repeating cycle that creates bubbles as monies move into 'favored asset classes' initially looking to gain/improve yield and then ultimately to safety as the bubble reaches critical mass and then we start all over again - in some other new favored asset class. And each cycle becomes progressively more insidious.
It takes time to create a bubble and logically it would seem understandable that it takes time to unwind one - but in our day we no longer have the luxury of time! So, how many cycles will it take for us to realize our foolhardiness?
How much government intervention can we tolerate without devastatingly dire future economic consequences?
I guess only time will tell and as we have heard before from a well know ex-Fed chairman 'it is a new paradigm - it can continue on' or so we thought!

prb

Fed moves spark bubble fears
With no end in sight to ultra-low rates, the Federal Reserve risks inflating asset and commodity prices and sinking the dollar.
By Martin Hutchinson, breakingviews.com

The Federal Open Market Committee in its statement November 4 left unchanged the language that its ultra-low rates would be kept for "an extended period". By not even signaling an end to the current era of easy money, the central bank runs the risk of further inflating asset and commodity prices and sinking the dollar.
The Fed's mandate is to keep inflation and employment stable. It's hard to see how avoiding bubbles -- and the crashes that accompany them -- shouldn't be central to its mission.
By the Full Employment and Balanced Growth Act of 1978, the Fed must maintain
Long run growth, minimize inflation and maintain price stability. As the events of 2007-09 demonstrated, in order to achieve these goals it helps to avoid bubbles, the bursting of which makes prices unstable and causes unemployment. Fed Chairman Alan Greenspan used to claim that it was impossible to recognize a bubble in progress, but that does not preclude the Fed's responsibility to prevent them from developing.
Currently, stock prices are up 50% from their lows, oil prices are above $80 a barrel and the gold price has surged to close to $1,100 an ounce. Global monetary conditions have been exceptionally accommodative for over a year, with Chinese M2 money supply up 29.3% in the year to September, for example.
All of which suggests the substantial probability of a bubble developing, whether or not it can be detected in progress. The bursting of such a bubble, at a time of large global budget deficits, could prove highly destructive to economic growth and employment.
So the Fed's lack of action -- either in word or deed -- seems incautious. It may believe that raising interest rates would abort the incipient U.S. economic recovery and that removing quantitative easing could cause a liquidity crisis given the huge U.S. budget deficit.
However, removing the language promising to keep interest rates low for an "extended period" could have no real economic effect, but would warn the markets that the Fed is aware of the potential bubble. Sometimes two words can make all the difference.

Sunday November 1, 2009

Sunday, November 1, 2009
How long can the party last?
And how long can they continue to 'fill the punch bowl'?

As long as our federal government continues to play the role of 'usurper' we shall walk down the road of liberty absconded...

prb

BBW Capital Advisors - Market Monitor
The word on the Street is that no investor “likes” the current level of rates or spreads, but every trading desk is seeing widespread demand for risk assets. This is likely to continue until the Fed takes the punch bowl away. Last Monday we got a hint of what this might look like. When Congressional lawmakers indicated that they might not extend the tax credit for 1st time homebuyers, stocks traded off 2% within the hour. The downside of not withdrawing liquidity fast enough is a potential re-inflation of asset bubbles and further devaluing of the dollar.
Does this concern the Fed? Doubtful. Last week on CNBC, Boston Fed President Rosengren stated the dollar weakens when equity markets do well, suggesting there was no reason to worry about the dollar. We ran the numbers on these two markets every possible way and found absolutely no long-term correlation between them. To suggest otherwise is statistically spurious at best, and downright misleading at worst. As far as we can tell, the Fed is doing everything in its power to distract investors from any negative consequence of its liquidity program in order to allow them to keep the party going. Stay tuned here to see who actually wins this modern day financial tug-of-war.

Monday October 26, 2009

Monday, October 26, 2009
Continuing concern over China's role in our country's growing demand for debt to fund our government's out of control spending addiction will create further instability for the dollar and its effects will be felt throughout our economy as we move forward.
Bank credit weakness still seems to have a way to go...how far and how deep remains the rather large elephant in the room...

prb

Subject: S&Y PSG Morning Market update for Monday October 26th

- There was a report out overnight (10/26) by the Peoples Bank of China, which suggested the Chinese government should scale back its reserve holdings of dollars and increase both Euro and Yen holdings. Although the report was described as simply a researcher’s personal opinion, it pushed the dollar down to a new 14-month low versus the Euro. It appears that China, with the Yuan under pressure because of its huge trade surplus, and large dollar-denominated holdings, is on the verge of making changes in the way it manages its currency/reserves. Because the Yuan is pegged to the dollar, the Yuan is depreciating versus other Asian currencies thereby making Chinese goods cheaper, earning the enmity of other Asian exporters. However, allowing the Yuan to “float” would immediately push up its value and effectively raise the prices of Chinese goods. At the same time, China could also reduce its dollar holdings. Regardless of what the Chinese decide to do, the dollar will suffer. Although a weaker dollar would be beneficial for US exporting industries, it will undoubtedly put upward pressure on Treasury rates. Should the Chinese opt to buy fewer Treasuries as the US deficit driven borrowing needs soar, yields may ratchet up.

- Third quarter bank earnings reports continue to come in, but the recent releases by some regional and sub-regional banks have been mixed at best.
On Friday Huntington Bank ($51 billion assets) reported 3rd quarter net income was -$195 million and loan quality deteriorated with nonperforming assets increasing +17%. Synovous Bank ($35 billion in assets) reported a loss of -$438 million for the quarter and nonperforming assets increased +2%. Obviously both of these banks remain under earnings and capital pressure as asset values deteriorate. This is also reflected in the fact that outstanding loans for both institutions declined in the 3rd quarter; -3% for Huntington and -4% for Synovous. As these banks wrestle with the conflicting demands of capital adequacy, profitability and falling asset values, loan production inevitably suffers.

- From a macro-economic perspective, this lack of bank loan growth is problematic for both the Fed and policymakers. Regardless of the reasons, as long as banks generally are not making loans, it is a sign that an economic recovery will be weak at best. The majority of any economic expansion of production, i.e. GDP growth, must be funded via new loans.

Wednesday October 7, 2009

Wednesday, October 07, 2009
In our current economic climate we continue to see very diverse opinions in terms of where our economy is headed.....
Each day seems to bring a new set of economic indicators that lead 'experts' to predict either the end of the economic malaise or that there is more yet to come....
So, which is the appropriate path to consider?
I believe that there is still more stress in the economic pipeline and with the continued 'tampering' by our government in the name of 'fiscal health' it will continue to hamper our country's return to solid economic growth.
prb


Stone & Youngberg Portfolio Strategy Group
Subject: PSG Morning Market Update for Wednesday October 7th

* Although some economists/analysts are touting the end of the recession and a possible "V" shaped recovery; recent financial news continues to suggest the downturn may be protracted. The Federal Reserve revealed it is extremely concerned that declining property values and a protracted economic slowdown will require a new round of write downs in banks' commercial mortgage loans. Since commercial mortgage lending is the bread and butter for many banks both large and small; ongoing weakness in this sector will undoubtedly precipitate many more bank failures. The Fed warned that too many banks were vastly under reserved given the magnitude of the growing problems in commercial real estate.

* Underscoring the growing threat depressed commercial real estate poses for banks is a report by a property research firm Reis, Inc. which shows the US office vacancy rate rose to a five year high of 16.5% in the 3rd quarter. The report also went on to say that rental rates have declined in most areas of the country. Unlike the residential real estate market which has shown some signs it is turning around, the same cannot be said of commercial real estate. The Reis report states: "We have yet to observe clear systematic evidence that the office market is bottoming out."

* Further darkening the gloomy forecast is a report by the National Retail Federation that 2009 holiday sales are expected to be down -1% from 2008.
It should also be noted that 2008 was an extremely poor year with holiday sales posting a -3.4% decline from 2007. Obviously economic uncertainty makes the consumer apprehensive and consequently they are extremely cautious about spending

* Yesterday's (10/6) $39 billion 3 year Treasury note auction went reasonably well. Demand was apparently brisk producing a bid to cover ratio of 2.76. The coupon was set at 1.375% and the yield was 1.445%. Today (10/7) the
Treasury intends to sell $20 billion in 10 year notes and tomorrow (10/8) they will auction $12 billion in 30 year bonds.

* Later today, Wednesday October 7, the Federal Reserve releases the change in consumer credit for August. (This report includes most short and intermediate term credit extended to individuals, excluding real estate.) The consensus is projecting a -$10 billion decline in credit for the month.
Consumer credit has shrunk -$109 billion over the past year. Although many
point to an overextended consumer as the proximate cause of the current economic downturn; regardless, the US economy is dependent on a consumer who borrows in order to spend. In effect, contraction in consumer credit constrains potential economic growth.

* In the absence of any economic data, the Treasury market has rebounded from a modest selloff yesterday (10/6) and is noticeably stronger this morning. The 10 year UST yield (when issued) in advance of today's auction is -3 basis points to 3.22%. The 30 year bond is up about +½ a point in price and the yield, also when issued, is right at 4.00%. The 2 year UST yield is down slightly on the open to 0.88%.

Wednesday September 30, 2009

Wednesday September 30, 2009
- more mixed economic information....
- with government spending leading the way I am not sure what that forebodes for any meaningful recovery....taxation only goes so far!
- the FDIC news ('at the current pace of failures' - not a very feel good remark!) - surprising that it will 'sit well' with banks...while earnings pressure continue and liquidity still considered an issue....a 'carrot' accounting move to allow those monies to be expensed over 13 qtrs while getting the funds now.......what does the mean for the future ?

prb

S&Y PSG Morning Market update

* The Bureau of Economic Analysis (BEA) reported this morning, Wednesday
September 30 that the third and final revision of 2nd quarter GDP came in at -0.7%. This was less than the second revision of -1.0% and was better than the -1.2% consensus estimate.(The initial estimate of 2nd quarter GDP in early August was -1.0%.)The better than expected GDP number this morning indicates that the economy is doing better than previously thought and tends to confirm the fact that the US economy has bottomed out and is clearly in the recovery phase of the business cycle. However, it is important to note that a large part of the better than expected GDP figure came from a big jump in government consumption.

* In addition to the GDP "good" news, the BEA also reported that personal consumption fell only -0.9% in the 2nd quarter and the overall GDP price index for the quarter was unchanged, 0.0%. When the volatile food and energy component are excluded, the GDP price index was up a relatively modest +2.0% (annualized) for the quarter. These price figures suggest inflation remains in check.

* Also this morning (9/30), ADP released their employment report for September and it showed a -254,000 drop in ADP processed payrolls from August to September. Although ADP total non farm payrolls are still falling, the rate of decline has slowed markedly over the past 7 months. In March the ADP payroll drop was -736,000; each month since then the decline has been shrinking.

* Unsurprisingly, all of this better than expected economic news pushed Treasury prices lower in early (9/30) trading. The 10 year UST is down -¼ of a point and the yield is up +2 basis points from yesterday's(9/29)close to 3.33%. The 30 year long bond is off roughly -½ of a point and the yield is up to 4.05%. The 2 year UST is essentially unchanged with a yield of 1.02%.

* Yesterday (9/29) the FDIC announced their plan to recapitalize their insurance fund. At the current pace of bank failures, The FDIC expects to deplete the fund very shortly and the FDIC is under pressure to keep the fund solvent. The FDIC will require all insured banks to prepay 3¼ years of insurance assessments by the end of 2009. According to the FDIC, this prepay scheme will provide a cash infusion of $45 billion for the insurance fund. The banks will be able to expense the initial outlay to the FDIC gradually over the next 13 quarters. It appears that this proposal has the backing of the banking industry.

* Tomorrow's (10/1) economic calendar is relatively crowded starting with the release of personal income and spending for August. The market is anticipating further positive signs the economy is well on the road to recovery and consumers are beginning to reassert themselves. In addition, jobless claims for late September will be reported by the Department of Labor. We will also see construction spending and pending home sales for August. Despite having to digest the economic implications of all Thursday's economic data, the market will be looking ahead to Friday's (10/2) unemployment report for September. The consensus is predicting a -180,000 drop in non-farm payrolls and a +0.1% rise in the unemployment rate to 9.8%.

Tuesday September 22, 2009

Tuesday, September 22, 2009
Here you go....liquidity abounds....good credits - limited!

prb

Subject: Bank Loans Decline & Excess Reserves Increase Negative
Implications for Economic Growth September 22, 2009

* New loan originations at the 22 largest TARP recipient banks are down -9.5% in July.

* According the Fed, excess reserves(idle balances)remain extraordinarily high.

* Without new lending, a sustained economic recovery is problematic.

* Few loans and big reserve volume will keep both inflation and rates low.