Tuesday, January 12, 2010

Morning Quickie

Macro Man only has time for a quickie this morning, as he faces an hour's journey each way to get fitted for a sports knee brace. At long last, his torn-ACL nightmare is nearly behind him (knock on wood), as he has been cleared to resume sporting activities next month.

Macro Man had to laugh last night at the resumption of an activity of an altogether different sort. Alcoa released "earnings" last night, and while the headline figure registered a slight miss (1c/share vs. 6c/share expected), the company seemed quite happy to pimp the greater-than-expected topline revenue angle. Given that cost-cutting has been a (one might argue the) major driver of industrial earnings beats, the fact that AA missed despite beating revenue estimates by more than 10% might be a trifle worrying. Macro Man also couldn't help but notice that Aloca's true earnings (helpfully highlighted by a white arrow, since Bloomberg didn't see fit to grace 'em with a red headline stripe) showed a loss of 27c/share.
Hmmmm. Is it too early to declare victory on non-prediction number four already?

Elsewhere, China continues to garner plaudits for the radical monetary tightening by the PBOC. The central bank actually let 1 year T bill yields rise 8 bps today, to 1.8434%. Following on from the rise in 3 month yields earlier this week, pictured below, it does seem as if the tightening campaign is underway. Macro Man choked on his cornflakes, though, when he saw that a DB research piece was entitled "Another decisive move by the PBOC toards liquidity tightening."

Let's be clear. Moving bill yields by 4-8 bps when they are at least 8% below sequential real GDP growth is a lot of things....but decisive ain't one of 'em. Still, it's cued the usual frenzy to sell USD/CNY today. The market's pricing less than half a percent move in the next three months, so it's not a dreadful bet from a risk/reward perspective. Then again, in a country where an 8bp in one year yields is deemed "decisive", what would constitute a "modest" shift in the exchange rate regime? Would we need an electron microscope to observe it?


Anonymous said...

A German research house also calling EUR/USD as the best performing CCY in a low rate / steep yield curve environment, based on a historical correlation analysis with equity indices. All a bit spurious if you ask me, especially since EUR looks heavily shorted.
Correlations generally holds until a new trend breaks (granted - tautological) and the howlers of 2010 have yet to come out from under the bed.

Anonymous said...

decisive - modest - electron microscope

Simply great, keep going, rofl

But What do I Know? said...

Good luck with the knee brace, MM. As an ACL-tear survivor, I can tell you that it will work if you don't expect too much too soon. . .

Greg said...

Speaking of interesting earnings reports... the US Federal Reserve reports that it "made" $52.1 billion in 2009, which was an all time record for the institution.

The previous record was about $40 billion (I don't remember the exact number) set back in 2007 -- when the Fed's balance sheet was half the size and the economy was still *reporting* a boom

So the Fed's balance sheet has now more than doubled to roughly $2 trillion, and they made $52 billion -- meaning the return on assets was about 2.6%, a better ROA than any major bank reported during the economic boom period.

The Fed made this record windfall by engaging in repo transactions that earn essentially 0%.

The headline news doesn't say whether this unbelievable result includes or excludes all the off balance sheet vehicles like Maiden Lane LLC (I and II) that we know are losing money hand over fist. Headlines also don't mention whether the losses from the Bear/JPM guarantee are included

Since the Fed only makes money (trades) with member banks, whatever money it is (supposedly) making is money the "professionals" lost trading with it.

Everyone has to promise not to ask crazy questions like "If trading is a zero sum game, how can the banks be reporting profits, while at the same time losing so much money to the Fed?"

You are also not allowed to ask "How does TARP lose billions while the Fed makes billions on essentially the same types of transactions?" TARP results are audited (at least to government standards), while Fed results are unaudited.

The Fed will be turning over $47 billion to the US Treasury, keeping about $5 billion (with a "B") in profits for itself. Do not ask where this money goes or how it is spent (expenses for running the banks are presumably already deducted / not part of "profits")

Macro Man said...

Surely a large portion of those Fed earnings are coupon payments on all the stuff (UST, MBS) that they own, in which case there is not a corresponding loss amongst private sector banks?

Ian said...

The Fed pays 0% on the liability side of its balance sheet and earns say 4%. Leverage that up enough and you can imagine some really big earnings figures. I'd be more worried if they weren't reporting record earnings, considering they are running a Lehmanesque 43 to 1 leverage (assets to equity) ratio.

Ian said...

If you really want to be a worry wort, consider the New York Fed, currently leveraged at 156 to 1. And with only $7 billion or so capital, losses in the various Maiden lane and other credit portfolios could easily render the bank technically insolvent.

Greg said...


If you look at the Fed's balance sheet, it **USED TO BE** mostly Treasuries (and some other) that collected coupons against essentially zero cost money

Since the QE programs started, the Fed has engaged in massive amounts of repo transactions -- which inflates both sides of the balance sheet but amounts to just lending cash at 0%

The Fed's outright purchases of mortgages (well, substitution for the previous Treasuries) would be the potential coupon revenue... they bought about a trillion worth, or roughly what they used to own in Treasuries. So coupon income should be up slightly (by the mortgage basis) but that basis is on top of much lower Treasury yields.

The Fed's remaining Treasury holdings (minor) are obviously yielding much much less than in the past.

Anyway you look at it, coupon income is likely to be flat or down, and repo income is going to be zero.

If the Fed bought the mortgages at a bargain price, then whatever capital gains they are reporting (we don't know) should be losses to member banks by the same amount.

Greg said...

And I have to agree with Ian's suggestion that the NY Fed might be technically insolvent...

All I know is the numbers don't make any sense at all. Much lower yields on their "investments", lending out money at zero, and probable losses on mortgage investments does not translate into record earnings

Greg said...

Annaly Mortgage is probably a lot better (and certainly more experienced) at managing mortgage portfolios than the Fed -- and their earnings are way off compared to earlier years

Macro Man said...

Annaly mortgage...the longest surviving member of the MM p.a. portfolio....love those guys.

Greg said...

I love NLY also, which is what made me blink at the Fed's numbers.

NLY has a (believable) roa of 1.12% (as of 3Q09), and I suspect these guys have both a better quality and better managed portfolio than most

Since the Fed has become (balance sheet wise) a giant hedge fund, it makes sense to compare its portfolio performance ratios against other funds for a sanity check -- and this latest Fed report looks very suspicious

leftback said...

So Alcoa misses by 5c (or more, as MM points out), now consider this: if everyone in the S&P misses by 5c on average, then that amounts to $25 off the Q4 EPS consensus of $79, which brings us to about $54 EPS... that's more like the ├╝ber-bear (Rosenberg, Macro Man) number than the bullish projection.

Ian said...

LB how wise is it really extrapolate 1 earnings report onto the entire S&P?

leftback said...

That was a somewhat tongue-in-cheek comment, Ian. Just thought the arithmetic was amusing. Predicting earnings is fraught with difficulty, especially when the normal principles of accounting have been suspended.

PJ said...

The Fed began buying MBS at the bottom of the market and has kept buying since. Many tranches were at 30 cents on the dollar when they started buying and traded at year end over 50 cents. The purchases were funded by loans from the banks on which they're paying 0.25%. It would be amazing if they didn't have huge capital gains. Their own buying is driving up the prices of the securities on their book.

The question is, when their buying stops after March 31 what happens to asset prices? They drift back down, and then the Fed starts having capital losses.

So their actual mark-to-market paper profits were probably far larger than $52.1 billion, but they are using conservative accounting because they don't want to report huge mark-to-market losses in 2010.

PJ said...

Just to put numbers on this, if MBS on average rose 20% from March to Dec 31, then they got about half those gains on average, or 10% capital gain on a $1 trn portfolio, or $100 bn gain. Take off for conservative marks, a bit for overpaying the banks on the original purchase to help bail them out (i.e. paying book value rather than market value), and for interest payments to the banks, and you're close to $52 bn.

Fleeing Yank said...

PJ - the Fed bought only Agency MBS in its purchase program. FNCL 4.0 TBAs (lowest price Agency MBS available) saw a low price of $93.5 for 2009 and an average price of $97 vs current price of $100.5.

The only places the Fed bought non-agency MBS were in the Bear Sterns Portfolio and there is probably synthetic exposure via Maiden Lane - neither one of those vehicles made money.

The bigger impact as identified early on is coupon - just for a rough exercise - assume the avg. Fed holdings of agency MBS for the year was $500bn and current coupon on Fannie MBS average 4.28% for 2009 - even backing out 25 bps of financing costs gives you a Net Interest Income of ~$20bn. This doesn't include the impact of UST or GSE Agency debt carry or what could have been made by a "Plunge Protection" team at the Fed (if you believe in the conspiracy theories.)

Also, just as a minor correction - the Fed's major source of funding has been captive bank reserves generated by buying securities from banks and for the majority of the year they paid 25 bps on these reserves. Still creates a NIM easily in the top quartile of all the US Banks

Greg said...

PJ -- first, I would like to be paid a bonus every time someone tells me they timed the market perfectly. Everyone I know got out of stocks in '87, got back in for the dot-com boom, got out exactly at the top. But for some reason, all these forecasting geniuses still have to work. I call bullsh!t

The Fed timed its purchases perfectly? You can't be serious.

Then you go completely off the deep end and suggest the Fed simultaneously bailed out the banks (which is likely) buying this stuff at the banks' book value

... AND you also claim the Fed bot mortgages at bargain market prices allowing them to capture gains since March?

Come on! Which is it?

leftback said...

The Fed is likely to make a lot of noises about profits for the taxpayers, since they are obviously eager to avoid an audit.

Speaking of distressed assets, MM, are you thinking of putting in a bid?

Macro Man to Buy West Ham?

Banker said...

Between the problems in Europe, Ireland stating that if another bank goes under they will need to tap the pension fund. Greece, well a total mess. Spain and portugal not to far behind, why would you want to own the Euro. Although the Dollar is not great I think it will totally out perform this year.

Skippy said...

Happy new year.

Commodity currencies have held up remarkably well today relative to the price action in Chinese equities and the policy noise overnight. Voldy diversifying?


PJ said...

Not sure anyone is still visiting here, but ...

Greg: I never said the Fed "timed" the market (as if one could "time" $1.5 trn in bids). They've been buying steadily from early 2009 through March 2010. It just so happens the program started around the time of the market bottom, so most purchases have come in a rising market. This is a matter of historical record.

Since the Fed refuses to allow an audit or to reveal who it bought MBS from at what prices, we have to guess whether it paid market or book value to banks. But since banks reported big profits, not losses, and book value was generally above market value, and they needed compensation for giving $900 bn in excess reserves to the Fed more or less permanently, we can take an educated guess.

"And you claim that the Fed ... captured gains since March" -- yes, since the asset prices are at their highest levels since March, and the Fed was buying throughout the period, their purchase prices must be below current prices, ergo gains.

Fleeing Yank - Banks can sell agency MBS to the Fed. And the fact that the Fed was funded by $900 bn of excess reserves lent by the banks was one of my points. So, yes, their NIM is large -- as long as the mortgages keep paying.