What Happened?

Posted by T.W. Hanson - Mar 11th, 2008 at 20:03

buy

The Dow finished the day up 416.66 points or 3.5%. The rally began before the market opened and continued through the day. These moves weren’t echoed in the larger credit market, but we will get to that in a later post. What did happen was that the Federal Reserve decided to make available $200 billion to banks, and what is unique is what the banks can post as collateral.

The banks can now borrow that $200 billion using the highest rated pools of defaulting mortgages as collateral. This is intended to free up capital to help the markets function properly.

Many analysts were pointing to a negative feedback loop in the credit markets last weeks as cause for real concern. Hedge funds like Carlyle and Peloton and institutions holding mortgages like Thornburg were receiving margin calls from banks. This forced them to liquidate securities for which there wasn’t a robust market. This depressed prices in those markets. Other holders of the these securities were facing margin calls, and these events threatened a serious melt down in the capital markets. This infusion by the Fed should help ameliorate some of these issues.

That being said Bear Stearns was down approximately 10% at times during today’s trade on fears that it doesn’t have adequate liquidity to operate. And, it cannot be stated enough, the credit markets moved in a very muted fashion compared to equities today.

The question is what has the Fed done. Have they lanced the boil, provided adequate antiseptic and bandaged the wound properly or given the wound a third shot of cortisone and left the rest to the audacity of hope?

Work = Force * Distance

Posted by T.W. Hanson - Mar 10th, 2008 at 20:03

Hopefully physics class in high school didn’t keep you awake at night like it did for me. One puzzle that always bothered me was the formula work = force * distance. Lying in bed, it was very clear that I was in the same spot where I began the day. My net displacement was zero meters. Therefore, the amount of work I accomplished was zero. How much work has the stock market done since January 14, 2000?

INDU

The Dow Jones Industrial Average closed today March 10, 2008 at 11,740.15. It closed on January 14, 2000 at 11,722.98. 0.1% price appreciation! This is not adjusted for inflation. In purchasing power, the January 2000 value is significantly higher.

Over the past 8 years, we haven’t moved very far. I’ll leave it to you to figure out how much work we have accomplished.

What to Look for Tomorrow: The Jobs Report

Posted by T.W. Hanson - Mar 6th, 2008 at 21:03

worker

Every four to five weeks, we get to see whether more or fewer people are finding jobs.  The number comes out on the first Monday of each month.  This is one of the most important economic releases of the cycle.  It shows us what happened is happening in the U.S. labor markets and allows us to better forecast what is coming next.  Look for it not only to set the tone for the markets for the rest of the day but permeate into political discourse as well.

Economists are currently forecasting an increase of 25,000 jobs and an unemployment rate of 5.0%.  A large deviation from either of these numbers will move the financial markets.  If the numbers are as predicted, you will only need to suffer a few newspaper headlines and political rhetoric as the statistics are spun.

Watch the futures at 8:30AM Eastern for the reaction.

The Bond Insurance Version of “My Dog Ate My Homework”

Posted by T.W. Hanson - Mar 3rd, 2008 at 21:03

homework dog

Radian Group, one of the bond insurers, notified investors and the SEC today that they are unable to file their annual report. When a company cannot file a report on schedule, they must cite reasons. Radian’s was that they couldn’t keep people employed who knew how to value their assets. Their exact wording follows.

We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting requirements. Specifically, this deficiency resulted in audit adjustments to Derivative Liabilities and Change in Fair Value of Derivative Instruments line items in the consolidated financial statements for the year ended December 31, 2007 primarily arising from insufficient (1) identification of derivative instruments; (2) review, approval and testing of complex derivative valuation models, including assumptions, data inputs and results; and (3) identification of contract terms and transactions requiring consolidation in accordance with generally accepted accounting principles, related to such financial statement line items.

Wow! Is this what the end of capitalism looks like?

Stagflation?

Posted by Tad Johnson - Feb 23rd, 2008 at 12:02

Guest post from Ryan over at ActionsTalk.com

Stagflation on the horizon?

20070413_money_grip_2.jpgThe sub-prime mortgage mess has led to a looming recession. The combination of that looming recession and continued inflation causes an economic state called stagflation. This is a state we have not seen in the US since the 1970’s. The US Labor department reported yesterday that over the last 12 months the CPI or consumer prices have risen 4.3%.
Rising prices (inflation) + Mortgage mess (recession) = STAGFLATION

What to do…?

Nothing in the mean time. Economist agree that there are no monetary or fiscal policy actions that are considered sufficient to remedy stagflation. There is really nothing that can be done in the short-run (less than 5 years). If a restrictive monetary policy is implemented the “stagnant” part increases, (further recession) but if a fueling monetary policy is implemented the “inflation” portion increases.

How did we fix stagflation last time?

The Federal Reserve chairman at the time, Paul Volker, significantly increased interest rates (the opposite of what is occurring now) to reduce the money supply. This was called a “disinflationary” scenario. Fiscal stimuli and money supply growth combined to create a sharp economic recovery, but during that time there was a significant rise in unemployment. Volker trusted that these unemployment concerns would self correct. They did and by the early to mid 1980’s we had recovered from stagflation.

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