Friday, September 26, 2008

O Package Where Art Thou?

This market just gets more and more surreal. Yesterday saw the release of not one, not two, but three pieces of abjectly awful US economic data. So naturally, equities surged higher and government bonds tanked....because of more hopeful noises over the passage of the TARP.

The orders data was wretched on both a headline and core basis. The core shipments figures, which get plugged straight into the GDP calculation, were also awful, prompting at least a couple of immediate Q3 forecast downgrades.

Meanwhile, just when you thought that the housing data had lost its capacity to shock, the new homes sales figures dropped 11.5% month-on-month. The way things are going, they'll soon be able to publish housing data by name, e.g. "This month Fred and Mavis Smithers bought 687 Walnut Lane in Pig's Knuckle, Arkansas." The one housing figure that Macro Man follows is the supply data; as the chart below illustrates, there is no real improvement in sight.
Finally, the jobless claims data were also poor, registering a new cyclical high. The continuing claims data, which provide a smoother series, suggest that we should unsurprisingly expect the unemployment rate to continue rising.
All of this helps to explain why Macro Man remains medium-term bearish on global equities, particularly as both the real-economy and financial-system pennies are about to drop in Europe.

In the near-term however, the Paulson Package is dominating both the headlines and market sentiment. Yesterday, markets rallied on hopes that the package would be passed imminently; today, the collapse of Wamu (is it just a coincidence that this happened during the TARP debate?) and Congressional intransigence have sent equities careening back down. Amongst Macro Man's colleagues, the US Congress is starting to look like a bunch of hapless yokels such as one finds in a Coen Brothers film. In fact, if you listen closely enough, you can hear the market shouting "O Package Where Art Thou?"

Indeed, the whole sordid situation of the past several years resembles the entire Coen Brothers ouevre. The duo's filmography offers a number of insights into the financial crisis. Consider:

Blood Simple (1984): It's bloody simple. The US economy and financial system are completely buggered, and Europe ain't far behind.

Raising Arizona (1987): The aim of the TARP and every other measure taken by Team 1250 is to raise house prices in Arizona, Alabama, and each of the other 48 states.

Miller's Crossing (1990): Somewhere, there must be a back-office clerk named Miller who is involved in trying to cross-net Lehman-facing trades.

Barton Fink (1991): "Fink" is probably among the more innocuous of the four-letter words being used to describe Mr. Fuld and others.

The Hudsucker Proxy (1994): Let's see....a group of businessmen attempt to manipulate their stock price so they can make a killing. The characters are all either deeply cynical or hopelessly simple. Hmmm....Macro Man can't find any possible correlation to the current situation, can you?

Fargo (1996): Unfortunately, Jerry Lundegaard's financial distress may soon be echoed throughout the United States. His snowballing of GMAC (obtaining a loan for a car that didn't exist) is a microcosm of this entire crisis.

The Big Lebowski (1998): A number of erstwhile financial market participants will soon be adopting the lifestyle of The Dude.

O Brother Where Art Thou? (2000): As above.

The Man Who Wasn't There (2001): Two words: Jimmy Cayne.

Intolerable Cruelty (2003): A pretty apt description of how Macro Man's mates at Lehman London were treated by Lehman New York over the past couple of weeks.

The Ladykillers (2004): Scottish Widows' parent company, Lloyds TSB, is down 35% so far this year. The outlook for UK financials remains grim.

No Country For Old Men (2007): As noted a few weeks ago, this is no market for young men.

The Coens' next film is going to be called Burn After Reading. It's hardly a stretch to believe that that is exactly what's being done to the hard evidence of various parties' misdeeds over the past few years.


CDN Trader said...

Don't forget GE's profit warning.

Forex Watcher said...

Actually my municipalities in the US do publish lists but usually only updated every few weeks reporting exactly the buyer and seller names and price paid.

Municipal records, at least in Fairfax County VA also note refinancings on the same basis and interval.

Anonymous said...

We all share the pain:


dblwyo said...

Perhaps not the Coen ouvre but an earlier work of class (ic) art captures the essence of yesterday's (literally) 13th hr overturn of a done deal. Let's call it 'Dueling Bimbos":

Which then leads to the question of who will do the squealing:

mikarsky said...

My psychic market indicator suggests that the Package kinda lost its euphoria appeal. After all, investors can hold their breath only for so long. My guess is we won't see the 1250 effect anymore.

jill said...

Hearing alot of noise about Swedbank

Macro Man said...

The rumour mil is really running at max capacity.

1) WM and MS both going belly up

2) Fortis going belly up/Wellink fleeing Chicago to return to the Netherlands

3) ECB slipping the word that they are about to turn dovish/euribor goes psycho bid.

All or none could be true...who knows.

Anonymous said...

"We will stand free or we will fall. But if we fall it will be by our own hand and a lack of resolve, a reluctance to put aside our fears and prejudices and greed that are used to play us for fools and face the facts, and listen to the truth.
When the banks make us an offer they think that we cannot refuse, we will be at the crossroads and will decide what we wish to be: slaves or free men. Yes, it really is that simple."

Anonymous said...

Macro man, you're "the stranger" in my dude like existence.

It's your narrative that makes sense of the strange things that keep happening.

mikarsky said...

MM, the KOF MPC is measuring hawkish utterances of JCT and others at ECB. It was 0.18 in June then over 0.30 for 2 months and now is at 0.23

Macro Man said...

Anon, if only I had Sam Elliot's gravelly voice or luxurious 'tash....imagine market commentary in that voice. It would be magic.

Mikarksy, I am not familiar with the indicator. Is that where they measure JCT's comments on some sort of "hawk-o-meter"?

Regardless, an A.N. Other ECB source justified the dovish leaks earlier. Nice to see that European markets are just as bent as American ones. Was this the opening salvo of "Team 3000"?????

Anonymous said...

MM- Your observations continue to help as we all try to get through this without risk overwhelming resolve. I condense your comments into two bits of important advice- soldier on and maintain a sense of humor. Congressional folks from both parties appearing this AM in US were appalling--politics as usual in the midst of a crisis. Hope other countries fare better at hands of their governing bodies.

erik said...


looks like the OEX/RUT trade is starting to come around.

Do you think its due to the recent noise or has something fundamentally changed?

mikarsky said...

MM: Yeah sort of "hawk-o-meter". The ECB's policy is to avoid surprise moves so recent statements hint where the rate is going. With over 0.3 the "hawk-o-meter" was highest in June/July. A reading of 0.23 means more dovish than last month.


shtove said...

Maybe they are yokels - but I'd prefer to see democracy take it's time rather than get run over by a herd of bellowing professionals.

Anonymous said...

Markets priced for bill passing, and it will, is my guess.
WB US doesn't look good at all.
In Europe we have plenty of choice of banks to go belly up, Fortis is only first candidate.
Ecb seems starting to aknowledge that next move will be a cut and not too far away. In light of recent data, insisting in their story about soft patch will be absurd, next week i'm looking for some hints that they are going to cut in nov/dec - still like to go long here.

sick trader

Anonymous said...

Chuck Norris thinks Credit Crunch is a breakfast cereal.

Chuck Norris's subprime CDO is par bid.

Only Chuck Norris can rollover commercial paper.

Chuck Norris funds at Libor flat.

Chuck Norris Asset Management is hiring and paying top dollar.

Chuck Norris sold Countrywide cds at +1200 and bought it back at+350

Chuck Norris can borrow at the discount window.

Chuck Norris can sell $300bln in high yield loans before lunch.

Chuck Norris's curves are never inverted.

Chuck Norris doesn't hedge. He waits.

And the best... Chuck Norris doesn't mark to market. The market
marks to Chuck Norris.

Macro Man said...

Sorry, Anon. I think you mean "Bill Gross".

Anonymous said...

Just read about Fuld selling his art collection at auction for an est US$15-20 million. Meanwhile, Nomura buys Lehman Europe and Asia ops for US$2. A cautionary tale for employees and shareholders. I don't subscribe to the CEO pay constraints so popular in the US Congress right now, but one can't help but look at Fuld v his employees and wonder.

Anonymous said...

The market seems tobe betting that WB is a gonner. TTTThat's all folks! (Apologies to non US readers of MM who will not get the other WB -Warner Bros -- reference.)

Anonymous said...

D--n! They snapped up that Walnut Lane property ALREADY?

I was hoping to buy it for me and the missus.

gramps said...

For those of you reading this blog in Europe, you may not be familiar with what a disaster the U.S. government made of the last bailout they did: $100 billion for "relief" of hurricane Katrina victims.

Basically, they through a lot of money around in a major rush. A large percentage of which went to con artists, and another large percent went to buying ice which is STILL being stored (at taxpayer expense) in Arkansas.

Quite a few people questioned the idea of bailout out a city that was purposely built below sea level. Large cities in the north of the country had massive (way above "normal" snow falls the same year, but did not get a federal bailout, nor they want one.

Years after blowing $100 billion of tax payer money, New Orleans is still no where near recovered.

So now taxpayers are supposed to fork over seven times as much, on an even more hastily designed plan?

We are supposed to bail out Wall Street types that failed Risk Management 101?

The plan does nothing to recapitalize any of the over levered banks.

The plan does nothing to address the massive over supply of houses -- both too many houses, as well as houses that are too big / unaffordable by most.

... And yet the markets are so completely out of touch with the rest of the country that they thought the bailout package would sail through easily

HoosierDaddy said...

gramps, the ice is gone. It was allowed to melt after sitting for a year and a half in rented cold storage sites around the country (where it was trucked to after they ran out of people to give it to). Apparently after being stored so long it was no longer safe for human consumption.

gramps said...

hossierdaddy: I had heard recently that the ice was still being stored, but its was hearsay so you may be right.

This doesnt change the fact that the government made a complete mess of things.

They obviously bought WAY too much ice. Stories of people who had never even been to new orleans collecting benefits were rampant.

Much like the banking "crisis", the government dropped the ball on regulation big time -- allowing massive construction in areas well below sea level.

We don't need to conduct a ten year multi-million dollar study to know that permanently evacuating a city of hundreds of thousands of people on a week's notice is totally impractical. Even military personel don't get moved that quickly; and they are trained and equipped to be relatively mobile. But regulators allowed construction that required evacuation of half a million people on a week's notice.

Predictably, the evacuation wasn't possible, people got mad, comedians told jokes, and then the government flushed $100 billion down the toilet.

So now, after allowing banks to become irresponsibly over-levered, the government wants to blow $700 billion to paint over the problem with accounting flim flam -- without actually solving anything.

Comedians are once again telling jokes, the regulators are stepping in too late, Congress is turning the whole thing into a circus.

And Wall Street is inexplicably surprised that Main Street doesnt want to play this game again

Anonymous said...

Macro Man, you should go see "Burn After Reading." Pretty light fare, but there are lots of analogies to current market conditions:

1. Almost all the characters are morons (but are funny)
2. Many of them are in way over their heads in a conspiracy to make money
3. At the end, a CIA boss asks, "So what did we learn from all this?" He shrugs, shakes his head, and says, "Not to do it again, I guess.... but what was it that we actually *did*?"

Anonymous said...

How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable

Terry Jones
Wed Sep 24, 7:19 PM ET

One of the most frequently asked questions about the subprime market meltdown and housing crisis is: How did the government get so deeply involved in the housing market?

The answer is: President Clinton wanted it that way.

Fannie Mae and Freddie Mac, even into the early 1990s, weren't the juggernauts they'd later be.

While President Carter in 1977 signed the Community Reinvestment Act, which pushed Fannie and Freddie to aggressively lend to minority communities, it was Clinton who supercharged the process. After entering office in 1993, he extensively rewrote Fannie's and Freddie's rules.

In so doing, he turned the two quasi-private, mortgage-funding firms into a semi-nationalized monopoly that dispensed cash to markets, made loans to large Democratic voting blocs and handed favors, jobs and money to political allies. This potent mix led inevitably to corruption and the Fannie-Freddie collapse.

Despite warnings of trouble at Fannie and Freddie, in 1994 Clinton unveiled his National Homeownership Strategy, which broadened the CRA in ways Congress never intended.

Addressing the National Association of Realtors that year, Clinton bluntly told the group that "more Americans should own their own homes." He meant it.

Clinton saw homeownership as a way to open the door for blacks and other minorities to enter the middle class.

Though well-intended, the problem was that Congress was about to change hands, from the Democrats to the Republicans. Rather than submit legislation that the GOP-led Congress was almost sure to reject, Clinton ordered Robert Rubin's Treasury Department to rewrite the rules in 1995.

The rewrite, as City Journal noted back in 2000, "made getting a satisfactory CRA rating harder." Banks were given strict new numerical quotas and measures for the level of "diversity" in their loan portfolios. Getting a good CRA rating was key for a bank that wanted to expand or merge with another.

Loans started being made on the basis of race, and often little else.

"Bank examiners would use federal home-loan data, broken down by neighborhood, income group and race, to rate banks on performance," wrote Howard Husock, a scholar at the Manhattan Institute.

But those rules weren't enough.

Clinton got the Department of Housing and Urban Development to double-team the issue. That would later prove disastrous.

Clinton's HUD secretary, Andrew Cuomo, "made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis," the liberal Village Voice noted. Among those decisions were changes that let Fannie and Freddie get into subprime loan markets in a big way.

Other rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks.

Since they could borrow at lower rates than banks due to implicit government guarantees for their debt, the government-sponsored enterprises boomed.

With incentives in place, banks poured billions of dollars of loans into poor communities, often "no doc" and "no income" loans that required no money down and no verification of income.

By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market -- a staggering exposure.

Worse still was the cronyism.

Fannie and Freddie became home to out-of-work politicians, mostly Clinton Democrats. An informal survey of their top officials shows a roughly 2-to-1 dominance of Democrats over Republicans.

Then there were the campaign donations. From 1989 to 2008, some 384 politicians got their tip jars filled by Fannie and Freddie.

Over that time, the two GSEs spent $200 million on lobbying and political activities. Their charitable foundations dropped millions more on think tanks and radical community groups.

Did it work? Well, if measured by the goal of putting more poor people into homes, the answer would have to be yes.

From 1995 to 2005, a Harvard study shows, minorities made up 49% of the 12.5 million new homeowners.

The problem is that many of those loans have now gone bad, and minority homeownership rates are shrinking fast.

Fannie and Freddie, with their massive loan portfolios stuffed with securitized mortgage-backed paper created from subprime loans, are a failed legacy of the Clinton era.

Anonymous said...

Sorry to say Macro Man, but looking for any underlining truth of the global financial state by all of your current charts and graphs of the stock market etc. is like trying to determine the metabolism of a mammal by counting the zits on a teenager’s face. But traders will be traders, as my grandmother used to say.
Earl L. Crockett
Satan Cruz, CA

mikarsky said...

Analyzing zits is all you can do. Plus intuition. Both tell ya lot about the underlying metabolism. Perhaps 20% analysis and 80% intuition.

gramps 9:45
I agree, focus on direct recapitalization or guarantee for system-critical banks (defined by independent body).

sicky 18:22
This year, I take ECB rates also as commodities indicator. Should the ECB become less hawkish, it sees less threats from commodities.

Anonymous said...

If indeed the wheels of credit creation can be made to turn...even just creakily....over the ensuing weeks and months.....the parrot like banter from the chattering classes could increasingly become about having found a bottom. And this would obviously be welcome.

There are still others a bit more cynical and just as clever as any optimitst. They too...having witnessed, in horror, the gyrations, contortions, bendings and outright snapping apart at times of the global financial apparatus in the past couple weeks could say.....and I wouldn't entirely disagree with them.....that there is something a bit more sinister in store for the global economy in the weeks and months ahead.