The Big Picture |
- Honest Rating Agency Is Punished for Telling the Truth
- 27 Below 0°F; 45 Below 0°F Wind Chill
- 10 Mid-Week PM Reads
- Can This Man Save Merrill Lynch?
- SocGen: Pensions Have Too Many Bonds, Too Few Stocks
- Star-Forming Region NGC 1763
- 10 Mid-Week AM Reads
- UK to call referendum on continued membership of the EU – in 2017
- Everyone Hates Bonds, 2013 Edition Volume 2
- MUST SEE TV: The Untouchables
- Explosive Apple Facts: A Big Opportunity Lies Ahead
- SEC Bans Wrong Ratings Agency
| Honest Rating Agency Is Punished for Telling the Truth Posted: 23 Jan 2013 10:30 PM PST While Hooey-Peddling Agencies Are RewardedThe big 3 government backed ratings agencies (technically known as Nationally Recognized Statistical Rating Organization) – S&P, Moody's and Fitch – all committed massive fraud, which was a prime cause of the 2008 economic crash. They took bribes for higher ratings, "sold their soul", engaged in a "culture of covering up improper ratings", and said that anyone who believed them was an idiot. And see this. They also played games to avoid downgrading U.S. credit. Basically, they scratched the government's back, so the government scratched their back. On the other hand, government-backed rating agency Egan-Jones has consistently been more honest and forthright in its ratings of countries and corporations, and more aggressive than Moody's or S&P in downgrading U.S. credit (and see this). So guess which rating agency just got stripped for a year and a half of its government-backed rating agency status? Yup … Egan-Jones. Given that the government's whole strategy in dealing with the financial crisis is to cover up the fraud (the "financial reform" legislation didn't do anything much to reform rating agency shenanigans), honesty cannot go unpunished. Postscript: It is possible that Egan-Jones did something wrong. But given that the main business model of S&P, Moody's and Fitch is fraud – and Egan-Jones is in general much more objective and honest – it is clear that Egan-Jones was singled out and punished because of its cynicism as to the creditworthiness of the U.S. and its favored sons, such as the big banks. |
| 27 Below 0°F; 45 Below 0°F Wind Chill Posted: 23 Jan 2013 04:30 PM PST Ever been out in near 50 below temperature? I recommend it. Since I am in Winnipeg to speak at a CFA conference today, and I had to eat lunch anyway, I thought — what the hell — let’s see what it is like out there. How often do you get to voluntarily go out in insane weather? As long as I am here, I was determined to experience life in great white north. I had told the steward on the flight in I was staying at the Delta, and he recommended a local place — Thida’s Thai Restaurant (one of 22 Thai restaurants in town). The concierge said it was less than 10 minutes walk away. I wore jeans, very thick Timberland socks, Merrill shoes, a turtleneck, over which went an insulated Spyder sweater, then my Descente ski coat (I am not name dropping, if you ski you know the insulating qualities of these articles). That was followed with scarf, than a full turtle (to cover my mouth and nose) then a fleece earband. No long johns, no hat. The restaurant was 3 blocks away — about as far as my office on 44th & 5th is from a food truck that parks on 46th & 6th. I asked the desk clerk the temp, and he said “right now its 27 Below 0°F; 45 Below 0°F with the wind chill. I set out for my 10 minute adventure. It was cold, but I felt protected . . . for the first 20 seconds or so. You quickly realize that it is damned cold out. I was heading SouthWest, and despite it being 12:30pm, the sun was low in the sky, casting very long shadows. After about 2 minutes I felt my eyes kinda freeze close — batting my eyelashes untangled whatever ice had accumulated. The inner part of my nostrils and nasal passage also felt frozen — pulling up the turtle so my mouth and nose were covered helped a lot. This is one of the only cities I have ever visited where people walk as fast as they do in New York City. Everyone was hustling: Jogging, trotting or fast walking to where they had to be. No one was lollygagging down the street. I approached what looked like my destination — only it was an Indian buffet joint. I looked up and down the street, didn’t see any other restaurants. Hey, maybe its set back from the road. I turned west and kept going. I stopped to wait for a light — big mistake — the wind kicked up and my legs and head felt naked. (Mental note: Do whatever you have to do to not have to wait for a light up here). Your head begins to pound like you have a headache — brain freeze! — from the cold. The light changed, and I hustled across the street. Still no Thai restaurant in sight. Its funny, when you don’t know where your destination is, time takes on a weird perspective. I could not tell you how long I was out, or how much further I had to go. I felt the early sensation of panic. Damn, it was cold out here. I was pretty objective about my emotional state (Is that sensation actual panic rising? I do believe it is!). Never hurts to ask for help, so I duck into a tailoring shop to request direction. “Down the street” she says in broken English. The 30 seconds indoors rejuvenated me. I head out down a block, and set back from the street is a little Thai joint. The food was not bad, but did that really matter? IT WAS INDOORS. Warmed by my repast, I gird myself for the long trip back. Only this time, I use the timer on the iPhone to see how long I am out in this almost 50 below with the wind chill environment — 10 minutes? 15? Fully dressed, ready for bear, I head out. Its so cold, the snow does not even crunch under your feet — its solid like white cement. I walk by a public lot, where many of the cars parked outdoors were also plugged into electrical outlets, keeping their engine blocks warm. I begin to think about the people who went to Alaska or the South Pole a 100 years ago. How impossible was that? I remember reading about what you need to do to stay alive if you fall through the ice in sub zero temperatures. If you had paraffin coated matches (they stay dry) and some flint and dry kindling, and keep your wits, you stay alive. Most often, you died. If you were really smart, you would not find yourself within 1000 miles of anywhere those things mattered. No wonder the Germans lost to the Russians on the Eastern front. The wind slices through my pants, I feel the front of my thighs chapping in real time. The top of my head hurts, as does the little exposed skin between my hairline and forehead muff. It is brutal out. I try to stay on the sunny side of the street, but the shadows are now even longer than before. The sun is behind me, and I make a dash across the street just before the light changes — no way am I waiting there again. A quick left then a right and a short block to the corner, then another left — there is the hotel. In through the goddamned automated revolving doors — they are too slow! — I pull off my glove and hit the stop button on the stopwatch. WTF? 5:09. A lesson in perspective, to say the least. Yes, I am a giant pussy. I wrote a lost in the tundra short story for a mere 5:09. I would have guessed at least 10 minutes, maybe more. If you ever have a chance to be outside in utterly insane conditions for a mere 309 seconds, I strongly suggest you give it a shot. |
| Posted: 23 Jan 2013 03:00 PM PST My afternoon train reads:
What are you reading?
Firms Keep Stockpiles of ‘Foreign’ Cash in U.S. |
| Can This Man Save Merrill Lynch? Posted: 23 Jan 2013 11:30 AM PST
A flash from the past about the guy who really ignored all of the risk management warnings and helped push Mother Merrill into the red zone. Lot of people are to blame for the firms eventual firesale to BofA but no one deserves more credit than Stan O’Neal. (At least he improved his short game). So in sum, I guess the answer was no . . . |
| SocGen: Pensions Have Too Many Bonds, Too Few Stocks Posted: 23 Jan 2013 09:00 AM PST click for larger chart
I am putting the finishing touches on a presentation for tonight in Winnipeg and working in the chart above. It comes from Albert Edwards, the London-based global strategist at Société Générale. "I am starting to think the move by institutions away from equities has gone too far" he writes. Edwards argues that Pension funds and insurance companies are becoming over-invested in bonds at the expense of stocks. Since 1985, the long term mix between debt and equity has changed, according to Federal Reserve data. Bonds were 34% of assets as of Q3 2012 — that is up from 20% in 2006. Over the same period, Stocks fell to 39% from 61%. (source: David Wilson of Bloomberg) Similar under exposure exists amongst UK pension managers (source: UBS Asset Management data). Equities accounted for 75% of UK pension-fund assets in 1999 (UBS data). Insurers have less than 10% of assets in stocks. This is, to my way of thinking, a long term bullish factor. Edwards is in agreement with the long term view, but he has shorter term concerns that “stocks are in a bear market — "The Ice Age" — that may bring the lowest prices in a generation.” The bullish counter-argument is that occurred back in March 2009. The counter-counter-argument is that gains are mostly Fed-driven, and history shows those tend to be ephemeral. The counter-counter-counter-argument is that as time elapse, the economy heals, individuals deleverage, and we get that much closer to the end of the secular bear that began in March 2000. One last note: “Edwards wrote that the situation is the opposite of what occurred in the late 1990s, when institutions' focus on stocks made them vulnerable to the market drop that followed.”
Source: |
| Posted: 23 Jan 2013 07:40 AM PST click for larger image
I know that space doesn’t look like this in real life, but that does not stop these images from tickling my fancy and sense of adventure . . . |
| Posted: 23 Jan 2013 06:45 AM PST My morning reads:
What are you reading?
Top-Line Numbers Coming In Strong
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| UK to call referendum on continued membership of the EU – in 2017 Posted: 23 Jan 2013 06:30 AM PST Australian inflation is heading lower, increasing the scope for the RBA to cut interest rates. The trimmed mean gauge of core prices rose by +0.6% in Q4 2012 Q/Q, lower than the +0.7% forecast. CPI rose by just +0.2% Q/Q, last Q, half the rise expected and just 2.2% for 2012, as opposed to +2.4% forecast. The A$ declined on the news, but recovered and is currently trading at US$1.0555; I remain bewildered by yesterday's BoJ's announcement. As I read it, the BoJ will increase its asset purchase programme not by the headline rate of Yen 13 Tr, but by a net Yen 10 Tr in 2014, according to the FT, well below the previous estimates for monetary easing. In addition, statements by the Finance Minister suggest fiscal tightening next and in future years. Completely perplexing. The Japanese Yen continues to strengthen and the Nikkei closed -2.1% lower today; Chinese authorities are rushing to address their pollution problem. Bloomberg reports that the acting mayor of Beijing is to replace old cars and coal-burning heaters. In addition, the city will push government departments to switch to clean-energy vehicles. The Chinese authorities also intend to reduce coal consumption by 1.4mn tonnes, close polluting plants and reduce emissions. Great, but a great deal more will be necessary, with the cost negatively impacting Chinese GDP for years to come; Unexpectedly, PM, Mr Netanyahu’s support dwindled following the recent general election, with voter turnout high. His party, together with its partner, Beitenu, won 31 seats in aggregate, down from 42 previously and lower than the 37 predicted. The results were marginally in favour of right wing parties (61 to 59). The outcome could force Mr Netanyahu to include the more centrist Yesh Atid party, which gained 19 seats, much more than was expected. However, the political situation in Israel is likely to remain difficult, if not unstable, given the number of parties (with differing views) necessary to form a stable coalition; The EZ economy is expected to contract by -0.3% this year, though the President of the ECB, Mr Draghi, is becoming increasingly optimistic. He stressed the need to agree measures to establish the single European bank supervisor; The Bank of Spain reported that Spanish Q4 GDP shrank by -0.6% Q/Q (-0.3% in Q3 Q/Q) with domestic demand continuing to contract. GDP is expected to have contracted by -1.3% last year. It is the 6th consecutive quarterly contraction, with little to suggest that anything will change in the immediate future. Indeed, even the finance minister does not believe that Spain will achieve positive GDP until Q4 2013. Furthermore, Spain will not meet its budget targets for last year and this – the only question is by how much. Markets remain complacent over Spain, mainly due the ECB's OMT programme – I remain far less sanguine. In my opinion, Spain remains a very major threat to the EZ, as does France; The UK PM Mr Cameron has promised to call a referendum by 2017 to decide whether the UK remains in the EU, if reelected. It will be a simple yes/no vote. However, unfortunately, I do not believe that the UK will exit the EU. Interestingly, my well informed friends, particularly from the UK, tell me that Germany is getting keener that the UK remains in the EU. With relations between Germany and France deteriorating and given Mrs Merkel's agenda, the UK remains its only credible partner – Austria, Holland and Finland are far too small. Expect Mrs Merkel to make positive comments, though other EZ countries, France in particular, will remain hostile to offering any concessions. Furthermore, Germany is not as enamoured with Brussles/EU bureaucracy as many think – the UK’s help to restucture Brussles would be helpful. The US has urged the UK not to hold a referendum and is concerned if the UK exits; The UK's December jobless claims declined by -12k, better than forecasts for a flat reading and the lowest since June 2011. The claimant count rate was unchanged at 4.8%, though the better ILO data reports that claims fell by -37k in the 3 months to November, with an unemployment rate of 7.7%, slightly below forecasts of 7.8%. One of the major reasons I believe that the UK economy is doing better than official numbers is that unemployment has declined or, at worse, stabilised. Employment related taxes are also stable to better; US sales of existing homes declined by -1.0% in December, to an annual rate of 4.94mn, as opposed to the increase to 5.1mn expected. However, annualised sales were the 2nd highest since November 2009. Supply of homes is shrinking – the number of existing homes on the market declined to 1.82 mn, the lowest since 2001 – another very bullish sign. The median price of a home rose by +6.3% in 2012, the highest rate of increase since 2005. The tightness of supply of homes suggests that prices will increase. November's sales rate was revised lower to 4.99mn homes. Real estate brokers report that 4.95mn homes were sold last year, up +9.2% from 4.26mn in 2011 and the most since 2007. Whilst far below the peak of housing sales of 7.05mn in 2005, home sales continue to rise, which bodes well for the US economy. Cheap mortgages, combined with an easing of lending standards, should result in a (material?) increase in home purchases this year; The US House of Representatives is to vote on suspending the US$16.4bn US debt ceiling until 19th May, at which time the debt ceiling would rise to accommodate US borrowings over that period. The Senate may not accept the attached conditionality though. Automatic spending cuts kick in on 1st March, with a proposal that the House and the Senate must adopt a budget for the next fiscal year by 15th April. Bloomberg reports that global investors view the US government finances as the greatest threat to the world economy. Around half those surveyed stated that they were withholding investing in the US until this issue is resolved Outlook Asian markets (ex Japan which closed -2.1% lower) improved, with European markets mixed. US futures suggest a higher open. US earnings season generally has been positive to date. The Euro is trading higher at US$1.3331, with the Yen stronger at Yen 88.53 Spot gold is trading around US$1694, with March Brent at 112.54. The gathering at Davos should produce some interesting insights this week. A number of flash EZ PMI's are due tomorrow, which will focus the markets attention. Kiron Sarkar 23rd January 2013 |
| Everyone Hates Bonds, 2013 Edition Volume 2 Posted: 23 Jan 2013 05:30 AM PST Comment
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It is important to note that bonds have outperformed stocks over the last few years because it shows that investors are not losing sleep in bonds as they are doing better than the stock market. This is confirmed by the chart below which shows the weekly flows into bond funds (top panel in blue), domestic equity mutual funds (second panel in green), world equity funds (third panel in red) and hybrid funds (bottom panel in blue). The data is current through Wednesday, December 26. As of 10 days ago the public was showing no interest in moving out of the bond market and into the stock market. This has been the case for several years. Why should they? The bond market is the best performing option.
<Click on chart for larger image> Now at some point the bond market will underperform the stock market. When will that happen? As we detailed in our December 7, 2012 conference call: One, the buyer of Treasury securities has a printing press, and he is located in Washington, D.C., in the Marriner Eccles Building. That is the Federal Reserve. They buy $40 billion a month in mortgages, $45 billion a month of Treasuries. The dealer community is so afraid of the Federal Reserve's open-ended buying that the dealer community no longer shorts the Market as a speculative trade. We detailed the dealers' hesitance to short Treasuries on December 4: In a crude way, the amount or volume of "specials" in the repo market tells us something about the willingness of credit market dealers and speculators to short US treasuries. An elevated volume or number of special repo securities would indicate that there are a lot of short positions in the liquid markets. Conversely, a dearth of specials might indicate a lack of short US treasury positions. The chart below is current through January 7 and it shows the dealers have still not borrowed Treasuries on special from the Federal Reserve since late July, save two days around a technical short in late October because of Hurricane Sandy. Prior to 2008, it would be rare to see the dealers go an entire week with borrowing on special from the Federal Reserve. Now they are approaching six months! Until the Federal Reserve backs off its promise to buy bonds (which we do not believe is the case as we detailed last week) and the dealers are confident enough to short Treasuries, we would not look for a significant selloff.
<Click on chart for larger image>
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| Posted: 23 Jan 2013 05:12 AM PST FRONTLINE investigates why Wall Street's leaders have escaped prosecution for any fraud related to the sale of bad mortgages. Watch The Untouchables on PBS. See more from FRONTLINE.
THE LATEST  Did Wall St. Get Away With It? Live Chat Wed. 2 pm ETJanuary 22, 2013, 10:52 pm ET · by Nathan TobeyJoin us for a live chat on "The Untouchables" with producer Martin Smith and New York Times DealBook reporter Peter Eavis at 2pm ET on Wednesday, January 23rd. You can leave a question now.  Blowing the Whistle on the Mortgage BubbleJanuary 22, 2013, 9:44 pm ET · by Azmat KhanWell before the 2008 financial meltdown, mortgage industry insiders discovered a ticking time-bomb that they say went up to the very top of Wall Street. What did they find? Who did they warn? And what happened to their warnings?  Too Big To Jail? The Top 10 Civil Cases Against the BanksJanuary 22, 2013, 9:44 pm ET · by Jason M. BreslowIn nearly every major legal case to emerge from the crisis, government prosecutors have won multi-million dollar settlements, but companies and officials have not been required to admit wrongdoing.  Were Bankers Jailed In Past Financial Crises?January 22, 2013, 9:43 pm ET · by Jason M. BreslowNot one Wall Street executive has been prosecuted for fraud related to the subprime crisis. How does that compare to past downturns?  Phil Angelides: Enforcement of Wall St. is "Woefully Broken"January 22, 2013, 9:42 pm ETThe current system of enforcement in the financial services industry has done little to deter pervasive fraud, says the former chairman of the Financial Crisis Inquiry Commission.  Lanny Breuer: Financial Fraud Has Not Gone UnpunishedJanuary 22, 2013, 9:42 pm ETProsecutors are holding Wall Street to account for the financial crisis, but success should not be measured solely by the number of convictions to date, says the head of the Justice Department's criminal division.  Ted Kaufman: Wall Street Prosecutions Never Made a PriorityJanuary 22, 2013, 9:41 pm ETThe lack of high-level prosecutions from the financial crisis can be traced to the Obama administration's ambivalence to upset the banks, the former U.S. senator told FRONTLINE.  As Deadlines Loom for Financial Crisis Cases, Prosecutors Weigh Their OptionsJanuary 22, 2013, 9:40 pm ET · by Jason M. BreslowFor more than four years, regulators have struggled to successfully prosecute a Wall Street bank or its executives for alleged misconduct during the financial crisis. Now, time may be running out.
"Fraud Was … the F-Bomb"January 22, 2013, 10:29 am ET · by Jason M. Breslow Well before the housing bubble burst, alarm bells were beginning to sound among key players in the mortgage industry: due diligence underwriters. |
| Explosive Apple Facts: A Big Opportunity Lies Ahead Posted: 23 Jan 2013 04:33 AM PST Explosive Apple Facts: A Big Opportunity Lies Ahead Are Apple’s Best Days Behind It? |
| Posted: 23 Jan 2013 04:11 AM PST
The WSJ is reporting that the Securities and Exchange Commission has suspended small ratings firm Egan-Jones from issuing any “official ratings” on bonds issued by countries, U.S. states, or local governments. They also were suspended from rating securities backed by mortgages. The ban will last the next 18 months. The basis of the regulatory punishment was negotiated agreement between the SEC and Egan-Jones regarding the filing of “inaccurate documents with the regulator in 2008,” mislead investors about their expertise, and violating conflict-of-interest provisions. No word on when similar conflict of interest charges are coming for Standard & Poor’s Ratings Services or Moody’s Investors Service for similar misleading, conflicted and otherwise compromised ratings. The major credit rating agencies were the prime enablers of the credit crisis. They put Triple-AAA ratings on securitized sub-prime mortgage bundles, primarily because they were paid by the underwriters to do so. But for those actions, much of the securitized junk would not have been able to be purchased by the many bond funds, pensions and other large institutional investors mandated to buy only Investment grade paper. (The bond markets eventually figured this out and has learned to ignore the ratings agencies commentary as conflicted and corrupt). Thus, what should have been a tiny, high risk corner of the mortgage market instead became an enormous, A-rated, mainstream asset class for yield hungry fixed income managers. This is why S&P and Moody’s are thus amongst the prime causes of the financial crisis of 2008-09. It is a damned shame the SEC has to to figure this out and act on it . . . .
Previously: Surprise! Ratings Agencies Still Suck! (January 5th, 2011) Source: |
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