MarketNeutral
12th April 2010, 12:45 PM
* Greenspan - Last week Alan Greenspan, the beloved Fed chairman for 18 years, appeared in front of a Congressional committee, defending the Fed's record under his stewardship. His presentation centered on the idea that the Fed was not responsible for the housing bubble and the subsequent financial crisis. Greenspan also blamed Congress, which he said was promoting the expansion of affordable credit, and said that they would have laughed at him, if the Fed tried to reign in credit. This is a classic example of passing the buck. Ironically, it was the Fed which raised interest rates from 2004 to 2005, which ultimately made it uneconomical for subprime borrowers to roll over their loans over.
My point in mentioning Greenspan's testimony, is that the Fed, while not directly mandated to be responsible for preventing a housing bubble, could have done something about the burgeoning housing bubble, as it was occuring. Given the unfolding crisis in the housing market, which still seems to have many chapters to write before it is over, no one wants to take blame for presiding over the biggest disaster since the depression of the 1930s. And while everyone is citing the Fed's performance for preventing another depression, let me say that the jury is still out on this one. The Fed can choose its battles as their purview is broad and diverse. Paul Volker implemented an unpopular inflation fighting policy in 1979, pushing interest rates above 20% and pushing the economy into a brief but severe recession. The cover he had was the crisis of higher long term interest rates, which was driven by an inflation rate pushing 10%.
In 2008, the Fed chose to rescue Bear Stearns and AIG by lending against collateral beyond the scope of their charter. The Fed could easily have said it was not in their charter to lend money against subprime collateral, and commercial real estate whole loans, but it chose to do so because they thought it was necessary. Likewise, the Fed could have intervened in the way in which loans were being written and the subsequent risk being placed on the balance sheet of the banks it over-saw.
One side comment about the Fed's easy money policy from 2001 to 2004 comes from Joe Stiglitz, at his Cornell Club speech last week. He likens complaints about rates being too low for too long as being similar to a company who is able to employ workers at half their normal rate for a period of time. With lower payroll costs, the company gets sloppy in how they run the rest of their business, and when the labor windfall disappears, they then go out of business. Joe asks, should we feel sorry for this business? Clearly not! Nor does Joe think that we should blame the Fed for giving the market lower rates, and feel sorry for those folks who abused the privilege of lower rates.
I agree. I do not blame the Fed so much for the low rates they provided the markets and economy, but I do blame them because they were in a central supervisory role. Even if they did not have a specific responsibility for verifying the efficacy of the ratings based system, the over-saw an expansion of risk, without the proper safeguards being forced on the various financial institutions involved.
My point here is that no one wants to take responsibility for the crisis. We can easily blame many aspects of the system which promoted the creation of loans, and subsequent investments by our financial institutions, which were insured by our government. Clearly the ratings based criteria was a bad method to follow, but it is one which the system still embraces. When Ben Bernanke was testifying before Congress as to the reason why the Fed should continue to supervise banks, he cited the fact that the Fed was in a unique position to gather data about the financial system and should continue with its supervisory role. If the Fed was in a position to see what is going on, then let me ask, where were they in the build-up to the financial crisis? They missed it and they blew it.
* Greece - The EU agreed to a loan package of 30 billion Euros to Greece. If Greece decides they need it, they can access these loans for a 3 year term at an interest rate of 5%. This rate is well below the 7 something rate on most of Greece's sovereign debt yield curve, and should alleviate pressure on Greece as it seeks to borrow money in the market place. Alongside the EU loan package, the IMF should have another 10 to 15 billion Euros to add to the EU's rescue package at an interest rate cost in the 3s. Last week the rate of Greek debt surged as the market was questioning whether the EU loan package would ever come about. On the announcement of this weekend's package, Greek debt yields are lower.
In order to get the EU loan, Greece had to agree to numerous deficit reducing steps. Additionally, there are likely to be addition austerity measures which the IMF will require if Greece taps into that facility. The irony is that the EU and IMF is forcing Greece into a recession/depression by virtue of the austerity measures which Greece will have to endure. Is this a bad thing? Probably not. But it is exactly opposite the prescription which the US and many European have adopted. This seems analogous to the climate in the US, where the insolvency of big banks has been allowed, while smaller banks are being closed at a record pace. So what is the right solution, austerity and conservatism, or prolifigate spending which will run the "Too Big to Fail" countries into an even more perilous predicament? I think you know how I feel on this topic. Eventually, the spending will have to end.
* Stock Market Seasonals - Approximately 95% of the stock market gains since the end of World War 2 have occured during the 6 month time period from November 1st to April 30th. This is a general guideline which should give us some idea as to what to expect. These seasonals do not always play out, nor does someone blow a whistle on April 30th, when they do work, to announce the beginning of bearish seasonals. In 2008, when the market got trashed, stocks rallied from the Bear Stearns low in March to Mid May before heading south. And so it is as we approach the end of this six month seasonally bullish time period. While I have been woefully wrong on how far and long the correction from the March 2009 lows would go, I still remain bearish and expect the sell-off which commenced in 2007, to regain its footings this spring.
As for unleveraged short positions, I continue to hold onto those, but my survival instinct has forced me onto the side-lines, in my leveraged trading account, for the time being. I expect the stock market to make an interim top over the next month or two. As the S&P approaches 1200, there are a few resistance levels to point out:
1200 - July 15th, FNMA/FHLMC worry low
1228 - 61.8% retracement of the sell-off from 1578 to 666
1256 - March 17, 2008 Bear Stearns low
I would expect that the first two spots, 1200 and 1228 to contain the current rally, over the remainder of April. The fact that I am still looking for places to short the stock market, means that I am firmly in the deflationist's camp.
http://www.moneycontrol.com/news/searchnews.php?call=687474703a2f2f7777772e72657574 6572732e6
My point in mentioning Greenspan's testimony, is that the Fed, while not directly mandated to be responsible for preventing a housing bubble, could have done something about the burgeoning housing bubble, as it was occuring. Given the unfolding crisis in the housing market, which still seems to have many chapters to write before it is over, no one wants to take blame for presiding over the biggest disaster since the depression of the 1930s. And while everyone is citing the Fed's performance for preventing another depression, let me say that the jury is still out on this one. The Fed can choose its battles as their purview is broad and diverse. Paul Volker implemented an unpopular inflation fighting policy in 1979, pushing interest rates above 20% and pushing the economy into a brief but severe recession. The cover he had was the crisis of higher long term interest rates, which was driven by an inflation rate pushing 10%.
In 2008, the Fed chose to rescue Bear Stearns and AIG by lending against collateral beyond the scope of their charter. The Fed could easily have said it was not in their charter to lend money against subprime collateral, and commercial real estate whole loans, but it chose to do so because they thought it was necessary. Likewise, the Fed could have intervened in the way in which loans were being written and the subsequent risk being placed on the balance sheet of the banks it over-saw.
One side comment about the Fed's easy money policy from 2001 to 2004 comes from Joe Stiglitz, at his Cornell Club speech last week. He likens complaints about rates being too low for too long as being similar to a company who is able to employ workers at half their normal rate for a period of time. With lower payroll costs, the company gets sloppy in how they run the rest of their business, and when the labor windfall disappears, they then go out of business. Joe asks, should we feel sorry for this business? Clearly not! Nor does Joe think that we should blame the Fed for giving the market lower rates, and feel sorry for those folks who abused the privilege of lower rates.
I agree. I do not blame the Fed so much for the low rates they provided the markets and economy, but I do blame them because they were in a central supervisory role. Even if they did not have a specific responsibility for verifying the efficacy of the ratings based system, the over-saw an expansion of risk, without the proper safeguards being forced on the various financial institutions involved.
My point here is that no one wants to take responsibility for the crisis. We can easily blame many aspects of the system which promoted the creation of loans, and subsequent investments by our financial institutions, which were insured by our government. Clearly the ratings based criteria was a bad method to follow, but it is one which the system still embraces. When Ben Bernanke was testifying before Congress as to the reason why the Fed should continue to supervise banks, he cited the fact that the Fed was in a unique position to gather data about the financial system and should continue with its supervisory role. If the Fed was in a position to see what is going on, then let me ask, where were they in the build-up to the financial crisis? They missed it and they blew it.
* Greece - The EU agreed to a loan package of 30 billion Euros to Greece. If Greece decides they need it, they can access these loans for a 3 year term at an interest rate of 5%. This rate is well below the 7 something rate on most of Greece's sovereign debt yield curve, and should alleviate pressure on Greece as it seeks to borrow money in the market place. Alongside the EU loan package, the IMF should have another 10 to 15 billion Euros to add to the EU's rescue package at an interest rate cost in the 3s. Last week the rate of Greek debt surged as the market was questioning whether the EU loan package would ever come about. On the announcement of this weekend's package, Greek debt yields are lower.
In order to get the EU loan, Greece had to agree to numerous deficit reducing steps. Additionally, there are likely to be addition austerity measures which the IMF will require if Greece taps into that facility. The irony is that the EU and IMF is forcing Greece into a recession/depression by virtue of the austerity measures which Greece will have to endure. Is this a bad thing? Probably not. But it is exactly opposite the prescription which the US and many European have adopted. This seems analogous to the climate in the US, where the insolvency of big banks has been allowed, while smaller banks are being closed at a record pace. So what is the right solution, austerity and conservatism, or prolifigate spending which will run the "Too Big to Fail" countries into an even more perilous predicament? I think you know how I feel on this topic. Eventually, the spending will have to end.
* Stock Market Seasonals - Approximately 95% of the stock market gains since the end of World War 2 have occured during the 6 month time period from November 1st to April 30th. This is a general guideline which should give us some idea as to what to expect. These seasonals do not always play out, nor does someone blow a whistle on April 30th, when they do work, to announce the beginning of bearish seasonals. In 2008, when the market got trashed, stocks rallied from the Bear Stearns low in March to Mid May before heading south. And so it is as we approach the end of this six month seasonally bullish time period. While I have been woefully wrong on how far and long the correction from the March 2009 lows would go, I still remain bearish and expect the sell-off which commenced in 2007, to regain its footings this spring.
As for unleveraged short positions, I continue to hold onto those, but my survival instinct has forced me onto the side-lines, in my leveraged trading account, for the time being. I expect the stock market to make an interim top over the next month or two. As the S&P approaches 1200, there are a few resistance levels to point out:
1200 - July 15th, FNMA/FHLMC worry low
1228 - 61.8% retracement of the sell-off from 1578 to 666
1256 - March 17, 2008 Bear Stearns low
I would expect that the first two spots, 1200 and 1228 to contain the current rally, over the remainder of April. The fact that I am still looking for places to short the stock market, means that I am firmly in the deflationist's camp.
http://www.moneycontrol.com/news/searchnews.php?call=687474703a2f2f7777772e72657574 6572732e6