Trader's Digest

Diffusion

Daily reading and my take away.

[Companies switch from recession mode to expansion mode]
http://money.cnn.com/2010/03/10/news/economy/CEOs_quit/index.htm

Chief executive departures jumped 48% to 132 in February, from 89 in January, according to a report out Wednesday from Challenger, Gray & Christmas, Inc., an outplacement consultancy. That's the highest level of turnover in the corner office since 140 CEOs left office in September, 2008.

Last month's total was also up 61% from February, 2009.

"For the past 12 to 18 months, companies needed leaders who could see them through the recession," said John A. Challenger, chief executive officer of Challenger, Gray & Christmas, Inc.

"Now, they are reassessing and, in many cases, replacing executives with those who are better equipped to take advantage of expansion," he said.

[House price is systemetically undervalued]
http://money.cnn.com/2010/03/10/ ... _redlight/index.htm

But there's something holding green technology back: It simply costs more to include it than it adds to resale value

Appraisals for newly built green homes do not fully reflect the cost of green technology, and the lower appraisal values mean buyers often cannot get the full financing they need from banks.

Appraisers feel their hands are tied.

"It doesn't do a lot of good to simply add value based on cost," said David Snook, a California-based appraiser who serves on the real property committee on education for the American Society of Appraisers. "The question is 'How much will the market pay on resale?'"

Diffusion

8/2/2010
[MBS overpriced]
http://noir.bloomberg.com/apps/n ... LvAkyTDVU&pos=4

An incomplete agreement can lead to a “daisy chain” of unsettled trades because a broker-dealer acting as a buyer in one transaction may fail to deliver those bonds as a seller in another, according to Alexander Yavorsky, a senior analyst at Moody’s Investors Service in New York. Investment banks are required to hold capital against both sides of the trades, which also makes the agency mortgage-backed market less attractive to make markets in, according to Wipf.

“From a broker-dealer perspective, this uses your credit resources, this uses your balance-sheet resources and it uses your capital resources,” he said. “It’s a drag on the business.”

The Fed was willing to accept some trading disruptions as a byproduct of its mortgage-bond purchases because its primary aim was to bolster the housing market by reducing financing costs and help the economy emerge from the deepest recession since the Great Depression, according to Yavorsky. If reduced liquidity in the mortgage-market persists and causes investors to seek other assets, that would run counter to the Fed’s goal of buoying demand for the securities. The program began in January 2009 and officially ended in March.

Official End

“The program was a major success and kept home prices from really collapsing,” Scott Simon, head of mortgage-backed securities at Newport Beach, California-based Pacific Investment Management Co., said the day it ended. At the same time, it’s left mortgage-bond prices too rich for Pimco, which reduced the world’s biggest bond fund’s holdings of the securities to 16 percent in June, down from 83 percent in January 2009, according to its disclosures.

[Eyes on new orders]
http://noir.bloomberg.com/apps/n ... 6fZgikLlQ&pos=2

The Institute for Supply Management’s manufacturing gauge dropped to 55.5 last month, exceeding the median forecast of economists surveyed by Bloomberg News, from 56.2 in June. Readings greater than 50 indicate growth. The group’s bookings gauge, considered a leading indicator, fell to a one-year low.

“It’s important to keep an eye on the new-orders index, which has lost a lot of ground in the past two months,” said Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York, who accurately forecast the ISM reading. “It’s signaling a slower pace of growth, though it still suggests expansion in the economy.”

[Best starts to August]
http://www.bespokeinvest.com/thi ... arts-to-august.html

Today's gain of 2.2% for the S&P 500 was the second best start to August over the last 50 years.  The first day of August 1984 is the only day that saw a bigger gain at 2.27%.  Below is a table showing the best starts to August since 1960.  After the 2.27% gain on the first trading day of August in 1984, the S&P 500 went on to gain another 8.18% during the rest of the month.  The index has goner higher during the rest of the month following all gains of 1% or more on the first day of August.

Diffusion

8/1 - 8/2 Midnight
[Time to buy dollars as Europe reach austerity limits]
http://noir.bloomberg.com/apps/n ... e4pOq6apU&pos=4

FX Concepts LLC, the hedge fund that bought the euro in June just as it began a 9.7 percent surge against the dollar, now says it’s almost time to get out of the currency.

The firm, which manages $8 billion in assets, expects the euro’s advance from a four-year low on June 7 to come undone by September, partly because European austerity programs will start to weigh on growth. Reports last week that showed Spanish consumer confidence falling to the lowest level this year and banks tightening credit standards in the region suggest the budget measures may already be undermining the recovery.

The same fiscal measures that helped restore confidence in the euro may soon weaken the region’s economies and torpedo the rally. A July 30 survey of 21 money managers overseeing $1.29 trillion by Jersey City, New Jersey-based research firm Ried Thunberg ICAP Inc. found 75 percent don’t expect Europe’s common currency to strengthen over the next three months.

“Austerity is really bad for growth,” said Jonathan Clark, vice chairman at New York-based FX Concepts, the world’s biggest currency hedge fund. “In the U.S., austerity is mainly on the state level, but in Europe they are whole-hog into cutting spending to reduce deficits. Under a pessimistic scenario, the European currencies are in a lot of trouble.”

[Smartphone as credit card]
http://noir.bloomberg.com/apps/n ... RWn1cXQXo&pos=5

AT&T Inc. and Verizon Wireless, the biggest U.S. mobile carriers, are planning a venture to displace credit and debit cards with smartphones, posing a new threat to Visa Inc. and MasterCard Inc., three people with direct knowledge of the plan said.

The partnership, which also includes Deutsche Telekom AG unit T-Mobile USA, may work with Discover Financial Services and Barclays Plc to test a system at stores in Atlanta and three other U.S. cities that would let a consumer pay with the contactless wave of a smartphone, the people said. The carriers have been searching for a chief executive officer.

The trial would be the carriers’ biggest effort to spur mobile payments in the U.S. and supplant more than 1 billion plastic cards in American wallets. Smartphones have encroached on tasks ranging from Web browsing to street navigation and now may help the phone companies compete with San Francisco-based Visa and MasterCard, the world’s biggest payments networks.

“This is definitely a game-changer,” said industry consultant Richard Crone of San Carlos, California-based Crone Consulting LLC. The firm advises card networks, issuers and phone companies. The mobile carriers “are the biggest recurring billers in every market. They are experts at processing payments,” Crone said.

Diffusion

7/30/2010
[Companies expand spending]
http://noir.bloomberg.com/apps/n ... NPkzyHr7I&pos=6

Increased business spending is helping support the recovery from the worst recession since the 1930s. Capital expenditures rose an average 11 percent for non-financial companies in the most recent quarter for which figures were available, according to data compiled by Bloomberg, as declines in advertising and research and development narrowed.

“Free cash flow,” which measures money generated beyond capital spending, climbed to about $139 billion for those companies, Bloomberg data show, and some plan to use the money for share repurchases and dividend increases.

Diffusion

7/29/2010
[What happened to the EU double dip]
http://www.bespokeinvest.com/thi ... -eu-double-dip.html

Two months ago, it was generally considered a slam dunk that the EU economy was going to sink back into recession.  Two months later, though, the double dip is missing in action.  Today's release of EU confidence in the manufacturing sector for July rose from -6 to -4.  While still negative, this represents the highest reading since May 2008, and the 16th straight month without a decline.

[Something buried in the reform bill]
http://money.cnn.com/2010/07/28/ ... from_foia/index.htm

The SEC's reason this time? Section 929I of the new Wall Street reform signed into law by President Obama last week exempts the SEC from disclosing documents related to its "surveillance, risk assessments, or other regulatory and oversight activities."

This new legalese has journalism industry groups up in arms about public information laws and the media's assumed role as an additional check and balance on government. The law's broad wording has some journalists wondering if the agency can interpret the law to block all requests for information.

Diffusion

7/27/2010
[Guidance remains strong]
http://www.bespokeinvest.com/thi ... remains-strong.html

So far this earnings season, 10% of US companies have raised guidance while 2.7% have lowered guidance.  Below is a chart showing the quarterly spread between the percentage of companies raising guidance and lowering guidance.  As shown, the 7.3 percentage point spread so far this quarter is higher than any other quarter since 2001.  There are still a significant amount of companies left to report this season, but for now, guidance numbers have been very strong.

Also worth noting is that this is the fifth straight quarter where positive guidance has outnumbered negative guidance.  The second longest streak (since 2001) of positive guidance spreads was three quarters from Q3 '03 to Q1 '04.

[Pessimism overdone]
http://noir.bloomberg.com/apps/n ... 2oM6BrDrA&pos=2

Treasury two-year note yields rose the most in more than a month after a $38 billion sale of the securities, while U.S. equities fluctuated as better-than- estimated earnings were offset by a drop in consumer confidence.

Two-year yields, which reached a record low last week, jumped six basis points to 0.64 percent at 2:22 p.m. in New York. The Standard & Poor’s 500 Index fluctuated near 1,115 as DuPont Co. and Lexmark International Inc. climbed following better-than-estimated earnings, while Amazon.com Inc. and Lowe’s Cos. led retailers lower. Oil dropped from an 11-week high, while copper slipped for the first day in seven.

Treasuries fell even as the sale drew a record low yield of 0.665 percent, below the 0.675 percent forecast in a Bloomberg News survey of seven of the Federal Reserve’s 18 primary dealers. Gains in bank stocks helped buoy U.S. equities after UBS AG and Deutsche Bank AG posted better-than-estimated earnings and regulators eased some proposed capital rules.

Diffusion

7/26 - 7/27 Midnight
[Softened Basel rules]
http://noir.bloomberg.com/apps/n ... xJDH1kQT4&pos=2

The Basel Committee on Banking Supervision softened some of its proposed capital and liquidity rules while introducing new restrictions on how much lenders can borrow in order to rein in their risk-taking.

The panel agreed yesterday to allow certain assets, including minority stakes in other financial firms, to count as capital, according to a statement. The committee set a leverage ratio to apply to banks globally for the first time, which could become binding by 2018, pending further adjustments to the method of calculating banks’ assets.

[Banks faces squeezed interest margin]
http://noir.bloomberg.com/apps/n ... ncwk4vFlk&pos=7

The Federal Reserve’s policy of keeping interest rates persistently low, which has helped boost bank earnings over the last six quarters, is beginning to make it harder for the biggest U.S. lenders to make money.

Firms including JPMorgan Chase & Co. and Bank of America Corp., which have benefited from record low costs of funding mortgages and other assets, face a squeeze on their net interest margins -- the difference between what they pay to borrow money and what they get for loans and on securities. Analysts say the margins may have peaked in the first half and that banks will struggle to replace high-yielding assets as they pay off.

The Fed’s near-zero target rate for interbank overnight lending that has buoyed profits for so long will have an opposite effect in coming quarters, said Christopher Whalen, a Federal Reserve Bank of New York analyst in the 1980s and co- founder of Institutional Risk Analytics in Torrance, California.

“That’s the gift from the Fed,” Whalen said of the rate. “But at the same time, the cash flow on your assets eventually starts to re-price and match the low-rate environment. The zero- rate environment is eventually bad for everybody.”

Diffusion

7/25 - 7/26 Midnight
[Historical divergence]
http://noir.bloomberg.com/apps/n ... 1QFL02Rr8&pos=3

Mutual funds, pensions and endowments are spending more on stocks than at any time since the start of the bull market, just as individuals grow the most pessimistic in a year.

Institutions pushed equities up to 68 percent of their holdings in July, the highest level in 15 months, from 63 percent in April, a Citigroup Inc. survey showed. The ratio of bullish to bearish respondents in a survey by the American Association of Individual Investors has fallen to 0.68, the lowest level since July 2009, based on a four-week average.

The last time money managers and individuals were this far apart was in March 2009, before the Standard & Poor’s 500 Index began its 63 percent rally, according to data compiled by Bloomberg. It may signal another buying opportunity after concern the U.S. economy will fall into a recession wiped out $1.6 trillion from American equity values since April, according to Fritz Meyer, a Denver-based senior market strategist at Invesco Inc., which oversees $558 billion.

“That’s good news,” Meyer said. “The retail guy has gotten it wrong more than gotten it right. The odds favor a continued, reasonably healthy economic expansion.”

Diffusion

7/24/2010
[Why stock market diverges from bond market]
http://online.barrons.com/articl ... html?mod=BOL_twm_mw (May require subscription)

While the stock market was on pace for its best month of 2010, short-term Treasury-note yields again touched a record low, which suggested at best sluggish growth ahead.

There are legitimate reasons that the two markets could diverge. Stocks' summer rally has been driven largely by strong earnings reports, but with nearly half the revenues in the Standard & Poor's 500 coming from abroad, that says less about the U.S. economy than the business of multinational mega-caps.

newsoft

Diffusion

7/22 - 7/23 Midnight
[Very little conviction]
http://noir.bloomberg.com/apps/n ... 6gPfMbybw&pos=6

Investors are exiting the oil- futures market at the fastest pace since the collapse of Lehman Brothers Holdings Inc. amid evidence the global economic recovery is slowing.

Bets on West Texas Intermediate crude slumped 13.2 percent in the 60 days through July 20 to the lowest level since November, data from CME Group Inc.’s New York Mercantile Exchange and London’s ICE Futures Europe exchange show. The last time open interest fell more was the 13.7 percent decline over the similar period through Oct. 7, 2008, three weeks after Lehman filed for the biggest bankruptcy in U.S. history.

“There’s very little conviction among our customer base in terms of where we are in the global economic cycle,” Sabine Schels, a commodity strategist at Bank of America Merrill Lynch, said in an interview in London. “The flows are very low, and I think it has to do with the fact that the macro environment is very uncertain right now.”

Diffusion

7/22/2010
[Negative reaction]
http://www.bespokeinvest.com/thi ... rnings-reports.html

Last earnings season, stocks reacted very poorly to earnings reports, averaging a one-day decline of 0.7%.  This was tied with Q2 '07 and Q3 '08 for the worst reading since at least 2002.  So far this season, things haven't gotten much better.  The average stock that has released earnings has gone down 0.4% on its report day (the next day if the company reports after the close).  There's still a long way to go before the reporting period ends, but in terms of price movements, things haven't gotten off to a good start.

[Bernanke runs out of bullets]
http://noir.bloomberg.com/apps/n ... oyX5khXcw&pos=2

Federal Reserve Chairman Ben S. Bernanke said extending the tax cuts passed during former President George W. Bush’s administration would help strengthen a U.S. economy still in need of stimulus.

“In the short term I would believe that we ought to maintain a reasonable degree of fiscal support, stimulus for the economy,” Bernanke said today in testimony before the House Financial Services Committee. “There are many ways to do that. This is one way.”

Bernanke aims to bolster the faltering economic recovery while urging lawmakers to reduce federal budget deficits in the medium term, which he defined today as the period from 2013 to 2020. His predecessor, Alan Greenspan, last week said lawmakers should allow the tax cuts to expire at the end of 2010, citing a need for the revenue to reduce the budget gap.

Diffusion

7/20/2010
[Building permits for single-family housing dropped]
http://noir.bloomberg.com/apps/n ... jN2CbpE1M&pos=3

Building permits, a gauge of future construction, rose 2.1 percent last month to a 586,000 pace, propelled by a 20 percent jump in multifamily applications that are often volatile. Permits for single-family housing, the biggest part of the market, dropped 3.4 percent to a 421,000 pace, the lowest since April 2009.

Diffusion

7/19 - 7/20 Midnight
[Deflation]
http://noir.bloomberg.com/apps/n ... hiwQR7nVc&pos=4

Investors are buying longer-maturity corporate bonds at the fastest pace in more than three months, speculating that declining inflation expectations will keep the Federal Reserve from raising interest rates.

Charles Schwab Corp. and Bancolombia SA sold $1.2 billion of notes due in 2020 yesterday, according to data compiled by Bloomberg. That followed $14.6 billion of issuance last week of debt due in 10 years or more, the most since the period ended March 26. Investment-grade bonds due in 10 to 15 years returned 1.22 percent this month, the best-performing maturity range, Bank of America Merrill Lynch index data show.

Treasury Inflation Protected Securities have lost 1.25 percent this month, the worst performance for the debt since December, signaling investors are less concerned that rising consumer prices may erode the value of their bonds. Futures show a 13.6 percent chance the Fed will raise its target rate for overnight loans between banks by at least a quarter-percentage point by December, down from 21.4 percent a month ago.

“You’re getting more bang for your buck in longer- maturity” bonds, said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $59 billion.

Diffusion

7/16/2010
[Could be a lot worse]
http://www.bespokeinvest.com/thi ... be-a-lot-worse.html

While a 2% decline is bad enough, today's breadth is absolutely abysmal.  In the S&P 500, there are currently only ten stocks trading higher and 489 trading lower (one stock is unchanged).  Going back to 1990, there have been 59 other days where the S&P 500 has had a one-day breadth reading of -450 or more (as of 11:45 Eastern today's breadth is -479).  On those days, the S&P 500 has seen an average decline of 3.7%, and there have only been six days where the decline was less than 2%.  So as of now, the longs are getting off easy!

Diffusion

7/15/2010
[Earnings season stats]
http://www.bespokeinvest.com/thi ... s-season-stats.html

Last earnings season, 63.7% of companies beat earnings per share estimates.  This was down from the prior three quarters that saw 68% each time, and the relatively weak reading contributed to the market's woes from April to June.  One thing the weakness last quarter did was lower expectations heading into this quarter.  As shown in the second chart below, the net upside earnings revisions reading has been declining since the end of June.  More analysts have recently been lowering earnings estimates than raising estimates.  At the same time, we saw relatively few companies come out and lower guidance this past off-season.  With analysts lowering estimates and the companies themselves keeping their estimates the same, it sets up a scenario where the beat rate could come in strong this earnings season.

While just 29 companies have reported so far this earnings season, the beat rate has indeed started out pretty strong.  Of the 29 companies that have released numbers, 76% have beaten earnings estimates and 85% have beaten revenue estimates.  The strong beat rate hasn't really caused the stocks reporting to do exceptionally well, however.  Thirteen of the companies that have reported have gone higher on the day in reaction to their reports, while 16 have gone lower.  The median one-day change in response to these earnings reports has been -0.50%.

[Foreclosure falls 5%]
http://money.cnn.com/2010/07/15/ ... level_off/index.htm

The foreclosure plague seems to have reached its peak and started to fade, but the recovery is still fragile.

The number of foreclosure filings of all types -- including notices of delinquency, auction notices and repossessions -- fell during the first six months of 2010, according to RealtyTrac, the online marketer of foreclosed properties.

There were 1,654,634 properties with foreclosure filings, a 5% decline compared with the previous six months. That equates to 1 out of every 78 homes being at risk.

He pointed out that the filings data showed improvement because fewer properties were entering the foreclosure process. Part of that is because lenders are now more committed to modifying defaulting mortgages or allowing homeowners to sell their homes for less than they owe.

At the same time, lenders have cleared many properties out of the foreclosure pipeline, finalizing repossession proceedings rather than allowing homes to sit in limbo.

[Back-to-school spending to jump 11%]
http://money.cnn.com/2010/07/15/ ... _spending/index.htm

Back-to-school spending is set to jump by 10.5% this year, according to a new study, as Americans loosen their purse strings following a cash-strapped 2009.

The average family with students in grades kindergarten through high school is expected to spend $606.40 on school supplies, up from $548.72 in 2009, trade group the National Retail Federation said Thursday.

Combined K-12 spending will be $55.12 billion, second only to holiday shopping, according to the NRF. Overall, the report boded well for the retail sector, which has been hit hard since the beginning of the recession.

"The industry still remains cautiously optimistic about recovery," NRF president Matt Shay said in a statement.

Diffusion

7/14/2010
[Deficit narrowed for two consecutive months]
http://www.bespokeinvest.com/thi ... at-else-is-new.html

For a record 21st straight month, the US government spent more money last month than it took in.  During the month of June, the total deficit was $68.45 billion on revenues of $251.05 billion and outlays of $319.5 billion.  On a twelve month rolling basis, the Federal deficit in the year ending June 30th was $1.34 trillion.  Believe it or not, this is actually down from levels seen earlier this year, and it represents the second straight month where the rolling twelve month total deficit declined.  We haven't seen two straight months of decline in the twelve month total since January 2007.  While there is still a huge gap between revenues and outlays, at least the gap is narrowing, albeit modestly.

Diffusion

7/13/2010
[Who's buying CMBS]
http://money.cnn.com/2010/07/13/ ... y.fortune/index.htm

More recently this year, there has been another trend that has focused interest on legacy CMBS. Another group of buyers has stepped in: real estate investors looking to control the underlying properties by buying into the CMBS, helping to choose the "special servicer" that extends the loan, and influencing the way the loan modifications work.

The biggest play in the future might well be CMBS investors trying to get close to these special servicers. There are 18 of them, including LNR Partners -- the largest, with $185 billion of exposure, according to Todd -- CWCapital Asset Management, Midland and Centerline. The servicer business is also attracting big investors, including Cerberus Capital Management and Warren Buffett.

Once the special servicers take over a loan, they can sell the underlying property, usually at a fair market value that is much cheaper than appraisal value. "You're not seeing money managers buying legacy CMBS; you're seeing real estate industry experts buy so that they can have inputs on the workouts of all of these loans," said Keith Mullen, head of the financial services industry group at law firm Winsted, and a founder of the commercial real estate blog toughtimesforlenders.com. Whatever the reason, the CMBS accidental, experimental, free-market, government-backed recovery, somehow continues.

[State tax revenues rise]
http://money.cnn.com/2010/07/13/ ... ue_rising/index.htm

After nearly two years of seeing their tax revenues plummet, states are finally getting a little good news.

States' tax revenues rose 2.5% in the first quarter of 2010, compared to the year earlier period, according to a report published Tuesday by the Rockefeller Institute of Government in New York.

The income tax and sales tax grew at 2.5% and 0.4%, respectively, while the corporate income tax declined by 0.6%.

This bump marks the first gain since the third quarter of 2008. And the data backs up a June report, co-authored by two other state-focused organizations, that predicted states were hitting bottom.

Diffusion

7/12 - 7/13 Midnight
[Water down Basel rules]
http://noir.bloomberg.com/apps/n ... 1LW35dtRo&pos=1

European banks, rattled by investor uncertainty about their ability to withstand a sovereign-debt crisis, are poised to win a reprieve in Basel, Switzerland, this week as regulators from 27 countries shape new capital rules.

A push to water down stringent standards proposed last year by the Basel Committee on Banking Supervision, and to allow more time to implement them, is led by France and Germany, according to bankers, regulators and lobbyists involved in the talks. Representatives from the U.S. and the U.K., who have sought to rein in risk-taking, are willing to compromise on how capital is defined to reach an agreement at a committee meeting that begins tomorrow, the people said.

Another concession may involve granting transition periods of up to 10 years to ease concerns of some member countries that their banks and economies won’t be able to bear the burden of tougher capital requirements until a recovery takes hold. As a result, the amount of capital European banks will be forced to raise in the next two years won’t be as much as investors fear.

“Politicians in France and Germany are worried about the impact of the rules on their economies,” said Chris Bates, a regulatory lawyer at Clifford Chance LLP in London. “Basel has managed to bring diverging banking systems and economies together. It’s more than just a capital regime. It’s a showcase of global cooperation. So the U.S. and the U.K. cannot let it break down.”

[Greece sold bond successfully]
http://noir.bloomberg.com/apps/n ... MulqT_Rco&pos=2

Greece sold 1.625 billion euros of 26-week Treasury bills at a yield of 4.65 percent, the debt agency said today. Investors bid for 3.64 times the securities offered, the Public Debt Management Agency in Athens said.

wower

Thank you!