Posts Tagged ‘Wall Street’
Tuesday, June 21st, 2011
Now that QE2 (quantitative easing 2) is winding down – and with the economy sputtering – will Federal Reserve chairman Ben Bernanke call for a new round of stimulus in the form of QE3? The answer likely is “no”, although it’s doubtful that the Fed will tighten monetary policy until the economy is stronger. The central bank’s strategy has been to buy Treasury bonds to increase the money supply and foster growth. The second round of such purchases, worth $600 billion, ends June 30.
Writing in the Washington Post, Neil Irwin says that “The lousy unemployment report comes on the heels of other disappointing economic data, but Fed officials view the current situation as different from the conditions that led to last year’s bond buying. The recent round of data is neither alarming enough nor definitive enough to make them reconsider the unconventional monetary policy. For one, much of the economic slowdown in the first half of the year was likely driven by temporary factors. The Japanese earthquake and tsunami appear to have disrupted the supply chain at U.S. factories more than initial forecasts, contributing to the drop in manufacturing activity and May’s sluggish employment report. And although oil prices spiked earlier in the year, they have ebbed downward since late April.”
Mohamed A. El-Erian, CEO and Co-CIO of Pimco, agrees, noting that “Notwithstanding the historical parallel, I suspect that it is very unlikely that there will be a QE3. This view is based on an assessment of economic, political and international factors. As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference, policy measures should be judged in terms of the expected balance of benefits, costs and risks. I suspect that there is now broad agreement that, in the case of QE3, this balance has shifted: lowering the potential gains and increasing the probability of collateral damage and adverse unintended consequences. It is also clear that, in its attempt to deliver ‘good’ asset price inflation (e.g., higher equity prices), the Fed also got ‘bad’ inflation. The latter, which essentially took the form of higher commodity prices, is stagflationary in that it imposes an inflationary tax on both production and consumption — thus countering the objective of QE2.”
There’s also the point that QE2 has had mixed results. According to Bernanke, “Yields on 5- to 10-year nominal Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. Equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation…has risen to historically more normal levels.”
Philadelphia Fed President Charles Plosser warns that QE2 provides excessive stimulus: The central bank has “a trillion-plus excess reserves,” he noted, which could be “the fuel for inflation.” Anticipated inflation could explain the sudden increase in long-term yields that began last November. But the rate for 10-year Treasury Inflation Protected Securities (TIPS), rose at the same time, which contradicts that interpretation. At the same time, the five-year TIP rate didn’t rise. Had that rate increased, there would have been a sign of a stronger economy in the next five years.
UBS thinks that QE2 failed and is strongly opposed to another round of stimulus. Maury N. Harris, UBS’ Managing Director and Chief Economist for the Americas, says that “The evidence that QE2 boosted economic activity is lacking. Yields moved higher and equity markets did as well, although the latter was justified by rising corporate earnings. They importantly reflected better volumes, which probably cannot be traced to any believable instantaneous response to policy that works with a lag. Despite the recent weakness in the data, we continue to view the recent slowing as insufficient to prompt further QE from the Federal Reserve. Relative to conditions in August 2010, when QE2 was floated by Chairman Bernanke, labor market conditions are better. Additionally, the threat of disinflation last fall has given way to a somewhat more disturbing build-up in inflation pressures as core inflation continues to accelerate.”
Tags: Ben Bernanke, Disinflation, Federal Reserve, inflation, Japanese earthquake and tsunami, monetary policy, oil prices, Pimco, QE3, stagflation, Supply chain, Treasury bonds, Treasury Inflation Protected Securities, UBS, Wall Street
Posted in Economics, General | No Comments »
Monday, June 13th, 2011
Sluggish job growth in May could be a sign that the economic recovery is losing momentum.According to the ADP May Employment Report, a mere 38,000 jobs were added in the private sector on a seasonally adjusted basis. That was well below consensus estimates of 170,000 new jobs. The report also revised downwards the estimated change from March to April from 179,000 to 177,000. “A deceleration in employment, while disappointing, is not entirely surprising,” the report said. “In the 1st quarter, GDP grew at only a 1.8 percent rate and only about 2¼ percent over the last four quarters. This is below most economists’ estimate of the economy’s potential growth rate and normally would be associated with very weak growth of employment.”
Patrick O’Keefe, director of economic research at J.H. Cohn, said that although some seasonal factors may have been at work in the recent claims data and in the ADP estimates, the report still disappointed. “We can put away our balloons and party hats today,” he said. “We expected a pull back in the rate of acceleration, instead we got deceleration. It appears that the general expansion has lost a bit of momentum and employment numbers, which were already lethargic, are slowing further.”
“This only adds fuel to the argument that the slowdown story is here in the U.S.,” said Tom Porcelli, chief economist at RBC Capital Markets. “I am fairly confident that people are going to be scaling back their estimates for nonfarm payrolls. While it is a good thing that small and medium-sized companies are adding payrolls, there is no doubt that the pace has slowed. This is exactly what we do not want when other significant data shows things are slowing down as well. Having said that, I still do not believe the Fed will initiate QE3.”
Writing in the National Journal, Jim Tankersley takes a more optimistic viewpoint. According to Tankersley, “Reality is a little more positive and a lot more complicated than that. Wall Street analysts are fairly united in their view that the recovery has entered a “soft patch,” just like it did last year, and that sooner or later, growth and job-creation are on track to pick up again. Several analysts and columnists have been reminding Americans that recoveries from financial crises can often feel like stop-and-go traffic on the freeway. For now, the economic brakes seem to be pumping. The 2010 slowdown flowed from worries over Europe’s sovereign debt crisis. This one is likely a combination of several factors. The spike in oil and food prices has spooked confidence — though consumers are still spending apace, dipping into their savings to keep up — and may be driving businesses to scale back hiring.”
On the MarketWatch website, Rex Nutting says that “If you recall that government employment is declining by almost that much every month, the ADP report implies only a very small increase in total employment. This is no way to get the unemployment rate down from nine percent. The economy has been buffeted by both natural and man-made forces. Extremely bad weather earlier in the year depressed activity, as did the surge in commodity prices, especially for energy and food. Then the Japanese earthquake and tsunami knocked out vital supply chains. Global economic growth, which had given a big boost to U.S. exporters, is slowing. Europe is dead in the water, so is Japan. The fast-growing developing nations such as China, India and Brazil are downshifting to avoid overheating. The strongest sector of the U.S. economy — manufacturing — is still growing, but the momentum is fading. The Institute for Supply Management’s closely watched diffusion index (Defined by Investopedia as “A measure of the breadth of a move in any of the Conference Boards Business Cycle Indicators (BCI), showing how many of an indicators components are moving together with the overall indicator index) plunged by 6.9 points to 53.5 percent in May, the largest one-month decline since 1984.
Companies may need to start hiring again as a new report from the Department of Labor is showing that the productivity of American workers slowed in the 1st quarter and labor costs rose as companies boosted employment to meet rising demand. The measure of employee output per hour increased at a 1.8 percent annual rate after a 2.9 percent gain in the prior three months, revised figures from the Labor Department showed today in Washington, D.C. Employee expenses climbed at a 0.7 percent rate after dropping 2.8 percent the prior quarter.
Productivity measures the amount of output per hour of work. A slowdown in growth is bad for the economy if it persists. But it can be good in the short term when unemployment is high because it can mean that companies are reaching the limits on how much extra output they can get from their existing work forces. Output grew 3.9 percent in 2010, the biggest increase since 2002. But many economists believe it will slow to 50 percent of that rate this year. The expectation is that companies will hire new workers to further boost output.
Tags: ADP, ADP’s May Employment Report, Brazil, China, Department of Labor, Federal Reserve, GDP, global economic growth, Government hiring, India, J. H. Cohn, Japanese earthquake and tsunami, job growth, MarketWatch, National Journal, Productivity, QE3, unemployment rate, Wall Street
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Wednesday, March 23rd, 2011
A top Treasury official defended the federal government’s $700 billion bank bailout financial crisis-response program at a hearing where the effort was criticized by members of a watchdog panel insisting that it did more for Wall Street than Main Street. “The cost of TARP is likely to be no greater than the amount spent on the program’s housing initiatives,” said Timothy Massad, acting assistant secretary of the Treasury for the Office of Financial Stability, to the Congressional Oversight Panel that oversees the Troubled Asset Relief Program (TARP). “The remainder of the programs under TARP — the investments in banks, credit markets and the auto industry — likely will result in very little or no cost,” he said.
Panel member J. Mark McWatters, a Dallas-based CPA ad tax attorney, argued that it is difficult to call TARP a success when the unemployment rate is still approximately nine percent and millions of Americans are fighting foreclosure. Panel Chairman Ted Kaufman – who was Vice President Joe Biden’s chief of staff of 19 years and temporarily replaced him in the Senate – said that Wall Street bankers ended up in better shape than Main Street. “It’s not a tough economy on Wall Street, it’s a tough economy everywhere else,” Kaufman said.
According to Massad, TARP will end up spending no more than $475 billion; 86 percent of which has been disbursed. To date, Treasury has received $277 billion back, including $241 billion in repayments and $36 billion in additional income. The Treasury expects to receive an additional $9 billion, which will leave $150 billion outstanding through various investments. The department hopes to recover those funds over the next several years. “TARP helped bring our financial system back from the brink and paved the way for an economic recovery,” Massad said. “Banks are better capitalized, and the weakest parts of the financial system no longer exist. The credit markets on which small businesses and consumers depend — for auto loans, for credit cards and other financing — have reopened. Businesses can raise capital, and mortgage rates are at historic lows. We have helped bring stability to the financial system and the economy at a fraction of the expected costs.”
William Nelson, deputy director of the Federal Reserve’s division of monetary affairs, agrees with Massad. In testimony about the Fed’s program to restart the asset-backed securities markets with backing from the Treasury’s TARP program, Nelson said even that program is unlikely to experience any losses. “The Term Asset-Backed Securities Loan Facility (TALF) program helped restart the ABS markets at a crucial time, supporting the availability of credit to millions of American households and businesses,” Nelson said, adding that of the more than 2,000 loans worth $70 billion that were extended through the Fed’s facility, 1,400 totaling $49 billion were repaid early. Remaining loans are current, and the collateral backing the loans is retaining its value, “significantly reducing the likelihood of borrower default.”
“As a result, we see it as highly likely that the accumulated interest will be sufficient to cover any loan losses that may occur without recourse to the dedicated TARP funds,” Nelson said. Europe, by contrast, did not act as aggressively to apply stimulus with the result that financial crises occurred in countries like Ireland and Greece.
Tags: ABS markets, auto industry, banks, Congressional Oversight Panel, credit markets, Federal Reserve, foreclosures, Joe Biden, Main Street, Office of Financial Stability, Senate, Ted Kaufman, Term Asset-Backed Securities Loan Facility, Timothy Massad, Treasury Department, Troubled Asset Relief Program, Wall Street, William Nelson
Posted in Economics, Financing, General | 1 Comment »
Thursday, January 27th, 2011
At the instruction of Congress, the Federal Reserve has released the names of the approximately 21,000 recipients of $3.3 trillion in aid provided during the financial meltdown –without doubt the nation’s worst economic crisis since the Great Depression. Not surprisingly, two of the top beneficiaries were Bank of America and Wells Fargo, who received approximately $45 billion each from the Term Auction Facility. American units of the Swiss bank UBS, the French bank Societe Generale and German bank Dresdner Bank AG also received financial assistance. The Fed posted the information on its website in compliance with a provision of the Dodd-Frank bill that imposed strict new financial regulations on Wall Street.
One of the biggest surprises on the list is the fact that General Electric accessed a Fed program no fewer than 12 times for a total of $16 billion. Although the Fed originally objected, Congress demanded accountability because there was evidence that the central bank had gone beyond their usual role of supporting banks. In addition, the Fed purchased short-term IOUs from corporations, risky assets from Bear Stearns and more than $1 trillion in housing debt.
Reactions to the revelations are both positive and negative. On the positive side, Richmond Fed President Jeffrey Lacker said “We owe an accounting to the American people of who we have lent money to. It is a good step toward broader transparency.” Sarah Binder, a senior fellow with the Brookings Institution, disagrees, noting that “These disclosures come at a politically opportune time for the Fed. Just when Chairman Bernanke is trying to defend the Fed from Republican critics of its asset purchases, the Fed’s wounds from the financial crisis are reopened.”
Senator Bernard Sanders (I-VT) said “We see this (list) not as the end of a process but really a significant step forward in opening the veil of secrecy that exists in one of the most powerful agencies in government. Given the size of these commitments, it is incomprehensible that the American people have not received specific details about them.”
Tags: AIG, Bank of America, Bear Stearns, Ben Bernanke, Bloomberg News, Brookings Institution, congress, Dodd-Frank bill, Dresdner Bank AG, Federal Reserve, Federal Reserve Bank of Richmond, financial crisis, General Electric, Goldman Sachs, Great Depression, Lehman Brothers, Senator Bernard Sanders, Societe Generale, Term Asset-Backed Securities Loan Facility, Term Auction Facility, UBS, Wall Street, Wells Fargo
Posted in Economics, Financing, General | No Comments »
Wednesday, January 26th, 2011
The Federal Reserve has obser
ved that Wall Street’s big banks eased credit terms for hedge funds and private equity firms in the 4th quarter of 2010. More banks believe that credit terms have “eased somewhat” than those that think it has “tightened somewhat” in the last three months of 2010, according to the Fed’s year-end financing survey. Hedge funds and other investors worked harder to negotiate favorable terms for transactions; 55 percent of dealers responded that clients “increased somewhat” or “increased considerably” their requests for concessions.
According to the Fed, increased competition and general improvement in the market are the primary reasons that explain why the terms eased. Fully 90 percent of survey respondents cited each factor as “very important” or “somewhat important” in easing their terms. The Fed, which started the survey in response to the financial crisis, found that the results “highlighted that a significant volume of credit intermediation has moved outside of the traditional banking sector.”
“More-aggressive competition from other institutions and an improvement in the current or expected financial strength of counterparties were frequently cited reasons for the easing of terms,” the Fed report said. In addition, the banks surveyed said borrowers have increased efforts to negotiate better terms. “Dealers also noted that demand for funding of all categories of securities covered in the survey had increased over the past three months, including demand for funding of equities,” the report said.
Tags: corporate bonds, credit, Federal Reserve, financial crisis, foreclosure, hedge funds, Private derivatives, private-equity firms, securities, Wall Street
Posted in Economics, Financing, General | No Comments »
Thursday, January 20th, 2011
President Barack Obama’s crackdown on Wall Street excesses could be hampered if the incoming Republican-controlled Congress refuses to fund two crucial regulatory agencies. The Dodd-Frank financial reform law – passed with heavy Democratic support – promised a generous budget to regulate the $600 trillion over-the-counter derivatives market. Now, the law’s implementation may be derailed by the incoming 112th Congress. Randy Neugebauer (R-TX), who will chair the House Financial Services oversight subcommittee, wants to review the regulators’ expansion plans. “Once you turn the money loose, it’s a little harder to stop that train,” he said.
The two regulatory agencies in question are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC, for example, had expected to receive an 18 percent increase to its 2011 budget, which would have allowed it to hire 800 new regulators to enforce Dodd-Frank. Roadblocks are on the horizon, however, in the form of Representative Spencer Bachus (R-AL), who will chair the House Financial Services Committee, and Frank Lucas (R-OK), who will chair the agricultural committee that oversees the CFTC. The two Congressmen wrote to regulators, saying “An overarching concern…is the need to get it done right, not necessarily get it done quickly.” The Republicans’ attitude to enforcing Dodd-Frank could be a boon to Wall Street firms, whose lobbyists are advocating a go-slow approach.
Mary Schapiro, SEC Chairman, said “We will have to take some more steps to cut back. At this stage, it will impact our work.” The chronically underfunded and understaffed CFTC, which had expected a 50 percent budget increase, had planned to hire 240 new regulators this year to enforce its new oversight of the swaps market. According to CFTC Chairman Gary Gensler, “I do think without sufficient funding next summer (2011) you’d see a significant number of registrants – swap dealers, swap execution facilities and so forth – whose legitimate applications would have to be slowed down. Michael Greenberger, a University of Maryland law professor and previously the CTFC’s director of trading and markets, says.
Tags: 112th Congress, Barney Frank, Christopher Dodd, Commodity Futures Trading Commission, democrats, Dodd-Frank financial reform law, Federal Deposit Insurance Company, financial crisis, Gary Gensler, Mary Schapiro, Over-the-counter derivatives market, President Barack Obama, Randy Neugebauer, Regulators, Republicans, Securities and Trade Commission, Spencer Bachus, Swaps market, Wall Street
Posted in Economics, General, Green, Office | No Comments »
Tuesday, January 11th, 2011
With the stock market ending its best December since 1987, there is hope that 2011 will see a strong Wall Street recovery. One source of hope is the fact that the Standard & Poor’s 500 Index has returned to its pre-Lehman Brothers level. It joins the Dow Jones Industrial Average, the Nasdaq Composite Index and the Russell 2000 in seeing strong improvements in their levels. Stocks have risen 20 percent in just four months.
The recent surge was helped by performance chasing. The proportion of money managers lagging their benchmarks by five percent has increased from 12 percent at the end of October to 22 percent in the middle of December and trimming their risk exposure “on the presumption that the markets had reached the upper end of a trading range,” said JPMorgan’s Thomas Lee. BTIG’s Mike O’Rourke, chief market strategist, believes the purchase of hard assets as a hedge against depreciating currencies has helped drive the price of oil to above $90 per barrel. He also points to high silver and copper prices – with the latter at an all-time high. “There is no doubt commodities have performed well even though the dollar has not broken down, but the question is how long will it take before speculators bail on the trade,” O’Rourke said.
Wall Street market strategists are consistently bullish, generally forecasting 2011 gains of 10 to 17 percent, with Deutsche Bank forecasting gains of as much as 25 percent. Main Street investors are equally upbeat: Recent polls indicate the greatest level of optimism since 2007, with the bullish crowd surging to 63 percent of those queried, with just 16 percent claiming bearishness.
Tags: BTIG, Bullish, Copper, Deutsche Bank, Dow Jones Industrial Average, Lehman Brothers, Main Street, Nasdaq Composite Index, New York Stock Exchange, Oil, recovery, Risk exposure, Russell 2000, Silver, Standard & Poor’s 500, stock market, Stocks, Wall Street
Posted in Economics, General | No Comments »
Wednesday, November 24th, 2010
The Federal Reserve – in a highly unusual action – is defending its recent purchase of Treasury bonds in an effort to get the U.S. economy moving. Critics of the decision to purchase additional assets, led by former Fed chairman Alan Greenspan, conservative economists and writers, representatives of foreign governments – not to mention Sarah Palin — say that the Fed is deliberately weakening the dollar to make American exports more competitive. Other arguments are that the Treasury bond purchases could eventually cause inflation and that the action won’t stimulate economic growth.
William Dudley, President of the Federal Reserve Bank of New York, countered that the objective is not to weaken the dollar or cause inflation. In fact, he believes that the Fed’s moves are already having a positive impact. “You’ve seen a significant easing of financial conditions,” according to Dudley. “I have to believe that the expectation of a second large-scale asset purchase program was the primary driver of those changes.” Fed Vice Chairman, Janet Yellen, agrees, telling the Wall Street Journal that action was necessary to spur the economy. If there is no monetary stimulus, Yellen says “I’m having a hard time seeing where really robust growth can come from.”
Dudley’s and Yellen’s comments seem to confirm that the Fed is no longer staying out of public debate over its policies. Although the Fed has typically remained above the fray to maintain its appearance of political independence, that stance has proved untenable in the face of the turmoil that resulted from the financial crisis. As a result, the Fed is now open to criticism from small-government conservatives and liberals who don’t trust Wall Street. Unfortunately for the Fed, Congressman Ron Paul (R-TX) — who based his 2008 presidential bid on his opposition to monetary policy – will soon chair the committee that oversees the Fed and plans to use the post as a “mini bully pulpit,” he said.
Tags: Alan Greenspan, Ben Bernanke, Federal Reserve, financial crisis, US treasury bonds, Wall Street
Posted in Economics, Financing, General | No Comments »
Monday, November 15th, 2010
A financing vehicle that has been used in Europe since it was invented in Prussia in 1769 is finding its way to American shores as a replacement for commercial mortgage-backed securities (CMBS). The vehicle is known as covered bonds, which is a securitized debt instrument backed by a pool of top-quality assets, primarily mortgages. What is different about covered bonds is that the assets – known as a cover pool – are maintained on the issuer’s balance sheet. This acts as a safety measure because the issuer is less likely to underwrite loans that carry significant risk.
Currently, the United States has no established market for covered bonds, although they are a $3 trillion business in Europe. In July, the House Financial Services Committee approved a bill that would establish a regulatory framework for covered bonds. Although the bill just missed being included in the Dodd-Frank financial reform overhaul, the consensus is that the legislation could win House and Senate approval in 2011.
“We have seen the difficulties wrought by the complexity of securitizations,” said Bert Ely, a financial and monetary policy consultant. “Covered bonds, on the other hand, are a very clean and simple tool. A bank makes a loan, keeps the loan on its books, and issues a covered bond. There is no sale and resale of mortgages.” With a covered bond, several elements protect the bondholder. All assets in the covered pool are subject to monthly monitoring by an independent third party. If one of the loans becomes non-performing, the issuer must remove it and replace it with a loan that is performing. Thanks to the safety features, the majority of covered bonds enjoy a triple-A rating.
Despite the fact that many in the investment community support covered bonds, the Federal Deposit Insurance Company (FDIC) has some concerns about them. Primary is the fact that the pools are over-collateralized – sometimes by as much as three times the bonds’ face value. The FDIC wants access to these assets when a bankruptcy occurs. The FDIC argues that if the cover pools protect the bulk of the banks’ assets from being claimed, the depositors are being asked to take on too much risk. “We support covered bond legislation, but not at the expense of our obligation to protect the deposit insurance fund,” said the FDIC’s Michael H. Krimminger.
Tags: bonds, Canada, capital markets, commercial real estate, Europe, Fannie Mae, Federal Deposit Insurance Company, Freddie Mac, mortgage, residential market, securitized real estate market, Triple A ratings, Wall Street
Posted in Development, Economics, Financing, Residential | No Comments »
Monday, September 27th, 2010
President Barack Obama’s decision to name Wall Street’s archenemy Elizabeth Warren as his special advisor to direct the creation of the Consumer Financial Protection Bureau bypasses the often confrontational Senate confirmation process. The Harvard law professor is now tasked with building a new government agency that will crack down on abusive financial practices such as mortgages and credit cards from the ground up. President Obama – who has known Warren since his law school days – has named her “assistant to the president” — a desirable title in inner White House circles. Warren will report directly to both the president and to Treasury Secretary Timothy Geithner. Importantly, Warren will have direct access to the president, making her, in effect, the Secretary of the Treasury overseeing all consumer lending.
By naming Warren an adviser rather than as the agency head, President Obama avoided the congressional confirmation process, which Republicans likely would have used to derail the nomination. http://news.yahoo.com/s/nm/us_financial_regulation_warren “Clearly putting her in this role cements her imprint on the agency, whether she ultimately leads it or not. It also implies there’s going to be a transfer of power from the other regulators sooner rather than later. I think it would be better, though, for the agency to have a Senate-confirmed agency head, if that’s even possible,” said Ed Mills, an analyst with FBR Capital Markets.
Wall Street’s reaction was predictable, given Warren’s unpopularity there. “It’s a thumb in the eye to people trying to address real issues,” said Matt McCormick, a portfolio manager and banking analyst with Bahl & Gaynor. “It is obviously more political than focused on correcting ills of what happened in the financial industry. I really doubt she will have the ability to bring people together considering the political nature of her appointment. It is troubling.”
“The Consumer Financial Protection Bureau will empower all Americans with the clear and concise information they all need,” President Obama said at the Rose Garden announcement. “Never again will folks be confused or misled by the pages of barely understandable fine print that you find in agreements for credit cards or mortgages or student loans.”
Tags: Beltway, Department of the Treasury, Elizabeth Warren, Harvard, President Barack Obama, Senate, Timothy Geithner, Wall Street
Posted in Economics | No Comments »