Archive for January, 2010

  • Once Again, Economists Are Split
    , January 13th, 2010 at 12:21 pm

    I sometimes think that a group of academic economists couldn’t agree on the color of the sky. The WSJ surveyed economists over Ben Bernanke’s view that low rates didn’t contribute to the housing bubble (to be fair, Bernanke merely said it wasn’t the primary cause of the bubble).
    Here’s what the WSJ found:
    NA-BD420_Bernan_NS_20100112225240.gif

  • This Just In
    , January 13th, 2010 at 12:16 pm

    “Whatever we did, it didn’t work out well.” Lloyd Blankfein CEO of Goldman Sachs

  • The Buy List So Far
    , January 13th, 2010 at 11:20 am

    I probably shouldn’t mention this so early and jinx myself, but the Buy List has gotten off to a very nice start this year. Through 11am this morning, the Buy List is up 3.77% for the year which is almost exactly double the S&P 500, which is up 1.88%. So far, so good.
    The Buy List will get a big test tomorrow when Intel (INTC) reports its earnings. The Street is looking for 30 cents a share which is definitely too low. I expect earnings around, 35 cents a share, but the mystery is how Wall Street will react.

  • The Credit Market Slowly Wakes Up
    , January 13th, 2010 at 10:57 am

    The credit markets recently passed an important milestone when the spread between the BAA corporate bond index and the 10-year Treasury bond fell below 250 basis points. This spread is a good measure of the willingness of lenders to take on default risk.
    image891.png
    In the best of times, the spread is around 160 basis points, and that’s where it was during the summer of 2007. By early 2008, the spread doubled and then nearly doubled again during the frantic days of September 2008. The spread reaches its peak of 616 basis points on December 4, 2008.
    Since then, the spread has plunged. It dropped below 300 over the summer, and it just recently fell below 250 for the first time in over two years.
    image892.png
    So what does that means for equities? It’s hard to put an exact effect on each instance, but historically stocks have shown a clear preference for a tighter BAA-10YTB spread.
    I ran the numbers and found that since 1986, when the spread is 250 basis points or more, the stock market has lost an average of -4.50% annually. When the spread is 249 basis points or less, the market has gained an average of 12.13% annually.
    There’s probably a feedback loop at work. Because the yield spread narrows, it’s good for companies because it lowers their borrowing costs. The lower borrowing costs make them more profitably and in turn, less likely to default.

  • Chinese Revaluation Needs to Come Soon
    , January 13th, 2010 at 9:56 am

    The WSJ writes on the most important economic issue right now, the absurd peg of the Chinese yuan:

    Surging Chinese exports and an expansion in the U.S. trade deficit have shown this week that a revaluation in the Chinese yuan is the most urgent item of unfinished business for the global economy.
    Most economists believe a modest appreciation in the yuan is inevitable sometime this year. The latest move by the People’s Bank of China — an incremental increase in its T-bill rate last week and a hike in reserve ratios and one-year T-bills on Tuesday — could even pave the way for this.
    But time is running out. Anger is growing around the world over what many see as a grossly unfair advantage for China’s exporters. “The monetary disorder has became unacceptable,” said French President Nicolas Sarkozy last week.
    China’s leaders have said nothing of plans to raise the value of their currency — even though this would help diffuse inflationary pressures — and have at times sounded hostile to the suggestion.

    This could get ugly. China currently holds $2 trillion in reserves.

  • One Bank Had a Very Good Year
    , January 12th, 2010 at 10:26 am

    The Federal Reserve earned $45 billion last year:

    Much of the higher earnings came about because of the Fed’s aggressive program of buying bonds, aiming to push interest rates down across the economy and thus stimulate growth. By the end of 2009, the Fed owned $1.8 trillion in U.S. government debt and mortgage-related securities, up from $497 billion a year earlier. The interest income on those investments was a major source of Fed profits — though that income comes with risks, as the central bank could lose money if it later sells those securities to reduce the money supply.
    The Fed also made money on its emergency loans to banks and other firms and on special programs to prop up lending, such as one that supports credit cards, auto loans, and other consumer and business lending. Those programs impose interest and fees on participants, with the aim of ensuring that the Fed does not lose money.
    And while the central bank in its most recent financial report had recorded a $3.8 billion decline in the value of loans it made in bailing out the investment bank Bear Stearns and the insurer American International Group, the Fed also logged $4.7 billion in interest payments from those loans. Further losses — or gains — on the two bailouts are possible as time goes by. The Fed also charges fees for operating the plumbing of the financial system, such as clearing checks and electronic payments between banks.

    Despite what conspiracy theorists think, any profit over the Fed’s 6% dividend goes right to the U.S. Treasury.

  • Well Played Sir
    , January 11th, 2010 at 12:37 pm

    I’m not sure if this is real, but I like it anyway.
    (HT: Footnoted)

  • Animated Reconstruction of Hudson River Landing
    , January 9th, 2010 at 11:20 am

    Here’s an amazing animated reconstruction of Captain Sullenberger bringing Flight 1549 into the Hudson nearly one year ago.

    (HT: Ritholtz)

  • Trills Just Don’t Make Sense
    , January 8th, 2010 at 1:28 pm

    David Merkel has written a few on Robert Shiller’s idea of GDP-linked US Treasury bonds, or trills (see here, here and here). In his first post, David wrote:

    My interest rate models indicate that if the US were to issue a consol, a perpetual bond, it would have a yield near 4.4%. Here’s the question: what do you think nominal GDP growth will be on average forever? If it is above 4.4%, one should be willing to pay an infinite amount to buy it. At lower rates of nominal GDP growth, the security will have a finite value that declines rapidly with lower nominal GDP growth.

    I think he’s exactly right. The rational price for a trill would be an infinite amount which is another way of saying that trills don’t make sense. The Treasury can get the same thing for a lower price. Trills would be a waste of taxpayer money.
    Here’s a comment I left on David’s most recent post:

    A few quick points.
    There’s no way to pay off a trill except by running a budget surplus or by issuing conventional debt, thus negating the need for trills.
    There might also be a slight risk premium due to the uncertainty of each coupon payment. It might be small but even a small amount comes of out taxpayers’ wallets.
    The Q3 GDP for 1983 has been revised 10 times since it first came out. The last time was in 2009. Imagine the headache for trills.
    I keep coming back to your point that trills would be worth an infinite amount. I think that’s exactly right. For the borrower, trills are irrational. The US Treasury can get the exact same thing for less.

  • The Plunging VIX
    , January 8th, 2010 at 11:06 am

    The Volatility Index (^VIX) hit 18.70 today which matches yesterday’s low. That’s a level we haven’t seen in 19 months.