photo by Shahram Sharif'
I will be traveling for the holidays. I will be back online at the beginning of 2008. Happy Holidays...
Sphere: Related ContentFriday, December 21, 2007
Thursday, December 20, 2007
Wednesday, December 19, 2007
Beware the TED Spread
The Financial market is scared. Paul Krugman, who The Economist said is "the most celebrated economist of his generation", writes in the New York Times:
Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.
...
Some credit markets have effectively closed up shop. Interest rates in other markets — like the London market, in which banks lend to each other — have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged.
The TED spread is a measure of the confidence of the credit market. It is the difference between the 3 month LIBOR (London Interbank Offered Rate-- the interest rate that banks lend to other banks in the money markets in London) and the 3 month Treasuries (considered a risk free interest rate).
The TED Spread historically is under .75% and has been under .25% in the past few years. When the spread jumps, there is a perceived risk in the immediate future (next 3 months) that wasn’t there the previous month. Interestingly when looking at the S&P 500 since 1985, when the spread first goes over 1%, in the ensuing 3 months the S&P 500 has performed better than average. However, over the next 3 months (months 4-6), the market has underperformed.
The TED Spread did warn of the crash of 1987 and of the internet bubble of 2000. In May of 1987 the spread was at 1.7008. The S&P 500 hit an intraday high on August 25th of 337.89 before crashing in October when it reached an intraday low of 216.46 (35.9% down from peak). In May of 2000, the spread reached 1.2577. The market climbed to close at 1517.68 in August, 2000 and crashed to a low of 944.75 in September of 2001 (37.7% decline).
Click on the chart for a larger view.
The TED Spread is a good warning signal; bankers sometimes have reason to worry. And yet like Nobel Prize-winning economist, Paul Samuelson, once said, “Economists have correctly predicted nine of the last five recessions.”
Wednesday, 12/19/07
photo by stfbfc
"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to dance. We're still dancing." -- Chuck Prince, former Citigroup CEO, a few months before being forced to resign.
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Tuesday, December 18, 2007
Central Banks Are Getting Desperate
Professor Nouriel Roubini at RGE Monitor has some good information on recent action by the Central banks.
Central banks are obviously getting frustrated and effectively desperate in
dealing with a most severe liquidity crunch that has gotten significantly worse
since August. Even last week’s coordinated announcement of central banks
monetary injections has done little so far in reducing the Libor spreads (at
maturities from two weeks to 3 months) relative to overnite policy rates,
relative to government bonds of matching maturity and relative to the Overnite
Index Swap (OIS) rate. The three month Libor versus policy rate differential is
still 69bps in the US, 95bps in the Eurozone (its highest level in years); and
93bps in the UK....
The ECB just announced a special liquidity operation that will allow financial institutions to borrow for two weeks unlimited amounts at a rate of 4.21% (close to its policy rate of 4%); the two-week euro Libor had been 4.9% before the announcement. So the ECB is providing a temporary monetary policy easing of 70bps for a two week period.
...
At the same time the Fed appears to have started again the stealth Fed Funds easing that it did perform in August and until the September 18th Fed Funds 50bps cut. Indeed, right after the 25bps cut in the Fed Funds rate on December 11th the Fed has started to do open market operations at rates below the new Fed Funds target rate of 4.25%. On Wednesday December 12th the Fed did a $12 billion 8 day repo at an effective rate of 4.066, i.e. 19bps below the Fed Funds rate (with accepted collateral being Treasuries). ... yesterday Monday December 17th the Fed did another overnite repo where the rate on the $7.5 billion backed by Treasuries collateral was 3.95%, i.e 30bps below the overnite Fed Funds rate of 4.25%.
What does this means? Simply that, like in August and September the Fed is now doing stealth reductions in the effective Fed Funds rate as it is lending every day significant amounts of liquidity at rates well below the target Fed Funds rate of 4.25%.
Bank of England Governor, Mervyn King was questioned by the Parliament’s Treasury Select Committee:
“The reason for the rise in spreads is not due to a shortage of cash, as it was in September,” responds King. “The large banks are now awash with cash. The issue is whether they’re willing to lend. What has become evident is that banks are concerned about the capital positions of other banks.”
In the past few weeks, says King, there has been a “more disturbing development” in the reluctance to lend will lead to a downturn in the US and lead to a further downturn in non-financial areas, says King.
Tuesday, December 18, 2007
photo by brentbat
Time is the coin of your life. It is the only coin you have, and only you can determine how it will be spent. Be careful lest you let other people spend it for you. - Carl Sandburg
Moving the markets:
The European Central Bank lends over $500 billion to ease tensions. This was the second time in its nine-year history that the ECB had pre-announced it would guarantee all bids at a fixed rate (the other time was August 9, 2007).
Housing starts fell in November after rebounding for the first time in four months in October, while building permits slid to the lowest level in 14 1/2 years. Sphere: Related Content
U.S. consumers plod along; Foreign investors pull back their money
The U.S. Department of Commerce released the 3rd Quarter 2007 U.S. International Transactions report Monday. Per the report the current account deficit narrowed by $10.463 billion to $178.5 billion in the third quarter of 2007 from $188.9 billion (revised figures) in the second quarter.
$5.279 billion of the reduction in the current account deficit came from an improvement in the goods and services trade deficit. The goods and services trade deficit for October 2007 was announced earlier this month and deteriorated slightly ($0.705 billion higher than September 2007). $7.787 billion of the reduction in the current account deficit came from income receipts from U.S.-owned assets in foreign countries versus income payments on foreign-owned assets in the U.S. Net unilateral current transfers (transfers without anything received in return) increased the deficit by $2.603 billion largely due to an increase in U.S. government grants.
While the weakened dollar has naturally strengthened exports, the U.S. consumer is not flinching at the weak dollar. Recession also appears to be held at bay as they have not decreased their imports as was the case during the 2001 recession.
Per the report “Net capital account payments (outflows) were virtually unchanged at $0.6 billion in the third quarter.”
For the Financial Account: “Net financial inflows--net acquisitions by foreign residents of assets in the United States less net acquisitions by U.S. residents of assets abroad--were $93.4 billion in the third quarter, down from $152.8 billion in the second.”
Foreign investors flocked to safety of U.S. Treasuries, which were up $46.7 billion in the third quarter, up from $1.8 billion in the second. At the same time they shunned Agency securities (Fannie Mae, Freddie Mac, etc.) and U.S. corporate stocks and bonds with “net foreign sales of $44.2 billion in the third quarter from net foreign purchases of $243.0 billion in the second. Transactions in U.S. stocks shifted to net foreign sales of $19.7 billion from net foreign purchases of $104.1 billion. Transactions in U.S. corporate bonds shifted to net foreign sales of $8.2 billion from net foreign purchases of $109.7 billion. Transactions in federally sponsored agency bonds shifted to net foreign sales of $16.2 billion from net foreign purchases of $29.1 billion.”
This is only the third time in over 30 years that there were net foreign sales in U.S. securities other than treasuries. During the recession of 1990 in the 3rd quarter, there was a net sale of $2.874 billion. During the stock market crash of 1987 in the 4th quarter there was a net sale of $4.888 billion. You have to go back to the recession in 1974 for the next previous net sale. Net foreign sales to the degree of $44.2 billion is without precedence. After reaching a low in net sales in August, transactions have reverted back to net purchases in September and October per the U.S. Department of the Treasury’s Treasury International Capital (TIC) report. 
One quarter does not necessarily set a trend, but we are at an unique point in history.
Monday, December 17, 2007
Friday, December 14, 2007
CPI jump stokes inflation fears
Consumer inflation increased at the fastest pace in more than two years in November, and analysts said the report wouldn't sit well with the Federal
Reserve.
Consumer prices rose 0.8% in November, led by higher prices for gasoline, the Labor Department reported Friday.
But energy wasn't the entire story. Prices of apparel, drugs, housing, and airline fares also spiked. As a result, core inflation, which excludes food and energy prices, rose 0.3%, its biggest advance since January.
The figures raise concern that inflationary pressures are increasing and could limit the room for the Fed to cut interest rates to counter the expected economic slowing over the next few quarters.
…
The numbers were worse than expected. Economists were forecasting the CPI would climb 0.7% and the core rate would rise 0.2%, according to a survey conducted by MarketWatch.
Barry Ritholtz at The Big Picture puts yesterday’s retail sales in perspective:
Oh, and those Retail sales yesterday? Let's do some quick math: The monthly nominal sales data of plus 1.2%, when adjusted for inflation, was a much more modest 0.4% real. The huge 6.3% year-over-year surge I mentioned? Try a real number of 2%, after the 4.3% annual inflation.
Here are the CPI-U charts, with and without food and energy. Click on the graphs for a larger image.
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The mighty U.S. consumer puts the economy on their back
U.S. retail sales surged in November, making a surprisingly strong, broad-based climb that suggests the economy might not be as weak as feared.
…
Retail sales increased by 1.2%, the Commerce Department said Thursday, compared with an unrevised 0.2% in October.The median estimate of 10 economists surveyed by Dow Jones Newswires was a 0.6% advance in November. Analysts have been expecting consumer spending -- and the economy as a whole -- to slow sharply in the final months of 2007 compared with the third quarter amid falling home prices and rising energy costs.
Sudeep Reddy blogs at the WSJ:
Here are 2 Retail Sales charts with and without auto sales. Taking out auto sales removes some of the volatility especially month over month (red bars). Click on the chart to make it bigger.· Retail sales figures pushed Morgan Stanley’s fourth-quarter GDP estimate to 1% from 0.2%, and then the increase in business inventories pushed the tracking figure to 1.2%.
· Lehman Brothers raised its growth estimate to “close to” 1% vs. the previous 0.1%. “This dramatically reduces the odds of a negative print during the quarter and suggests that second half growth could average as high as 3%,” its economists said.
· J.P. Morgan economists boosted their growth estimate to 1.5% from 0.5% previously due to surprises in retail sales, government military spending and inventory growth figures. At the same time, however, they lowered their forecast for the first quarter of 2008 to 1% from 1.5% as the stronger demand in the current quarter “is viewed as borrowing from the start of next year.”
Background on Retail Sales
The advance report is published by the U.S. Census Bureau around the 11th to 15th of each month for the previous month's numbers. The December advance numbers are scheduled to be announced on January 15, 2008. At that time they will announce the “preliminary” November numbers and the “revised” October figures. There is also a revision released annually every spring.
The sales report measures sales at retail stores. The report is often viewed excluding motor vehicles. Attention is also paid to the gas and food components where changes can be more of product of changes in prices than changes in demand.
Sales makes up about half of personal spending which in turn makes up about two thirds of US GDP . Total personal spending (including services) will be announced in the the personal income and spending reports on December 21, 2007.
Sphere: Related ContentThursday, December 13, 2007
Wednesday, December 12, 2007
Central Banks to Inject Liquidity
The Wall Street Journal’s Greg Ip has a good breakdown of what the central banks announced:
The Federal Reserve has joined with four other major central banks to announce a series of measures designed to inject added cash into global money markets in hopes of thawing a credit freeze that threatens their economies.
The Fed said today it would create a new "term auction facility" under which it would lend at least $40 billion and potentially far more, in four separate auctions starting this week. The loans would be at rates far below the rate charged on direct loans from the Fed to banks from its so-called "discount window."
…
"This is not about particular financial institutions with particular problems. It is about market functioning," said a senior Federal Reserve official who briefed reporters on condition of anonymity because of the sensitive nature of the actions.
The Financial Times’ Martin Wolf adds some colour:
The central bank helicopters are planning a co-ordinated drop of liquidity on troubled market waters. The money to be dropped now is not that large. But if this does not work, more will surely follow. The helicopters will fly again and again and again.Sphere: Related Content
One point is clear: central banks must be pretty worried to take such a joint action.
…
It is easy to understand why central banks should have decided to take heroic action. Confidence has fled the markets in a four-month long episode of “revulsion”. As a result, monetary policy is not being transmitted to the ultimate borrowers as central banks wish. Particularly worrying has been the widening of gaps between three-month inter-bank lending rates and policy rates in the dollar, euro and sterling markets. Spreads in the last of these have recently become enormous (at more than 100 basis points).
Yet this is not the only indication of distress: in the US, for example, the spread between the rate of interest on 3-month treasury bills and AA-rated asset-backed commercial paper has widened to 270 basis points from a mere 30 basis points earlier in the year. This is revulsion, indeed.
Wednesday, 12/12/07
picture by Nick Russill
Scientists discover the cause of the Northern Lights: magnetic ropes connecting Earth's upper atmosphere directly to the sun.
The stock markets were up for most of the day as the Federal Reserve announced that it is participating in a global effort to combat the credit crunch.
Sphere: Related ContentFriday, December 7, 2007
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