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Fed’s Dudley says we need more
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By Peter Boockvar - October 1st, 2010, 11:55AM

I was about to write on Income and Spending but was sidetracked by this comment from Fed voting member Dudley who said in a speech, “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.” Since we are only a month before the next meeting and the Fed seems to have little patience as evidenced by Dudley’s comments, strap on your seat belt and close your eyes.
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Two Years Since TARP – $7.8 Trillion Remaining Pillage Leftovers
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By Guest Author - October 1st, 2010, 11:30AM

by Nomi Prins

Big Bailout’s Second Anniversary and Multi-Trillion Dollar Pillage Leftovers

It’s been two years since the Emergency Economic Stabilization Act of 2008 spawned TARP, a tiny portion (at one time 3%) of the federal bank bailout and subsidization plan. Today, after TARP expires on October 3, 2010, the remaining potential subsidization still stands at $7.8 trillion, including $3.5 trillion to support the financial sector, $2.8 trillion behind the GSE’s, and $1.5 trillion of Main Street stimulus due to the Wall Street fallout.

TARP was accompanied by an unprecedented array of subsidies, which at one time totaled over $19.4 trillion. At the height of those subsidies, $15.4 trillion of this support was on offer to the banking sector, approximately $2.5 trillion – with no defined limit – was available to the GSE’s (not including another $6.8 trillion of implicit government guarantees), and $1.5 trillion was made available in Bush and Obama stimulus packages for citizens caught in the banking wars crossfire.

The significant drop from $15.4 to $3.5 trillion for Wall Street subsidies, is largely due to the closing of key Federal Reserve facilities, including a $1 trillion Term Asset Backed Securities Loan Facility, a $1.8 trillion Commercial Paper Funding Facility, a $900 billion Term Auction Facility (paused, not closed), a $540 billion Money Market Facility, and $3.7 trillion in Money Market Fund Treasury guarantees.

Remaining Open Subsidies Include:

Federal Reserve

* · $1.25 trillion of mortgage-backed securities purchases
* · $175 billion of GSE debt purchases
* · $300 billion of Treasury purchases (and counting)

Federal Deposit Insurance Corporation

* · $684 billion under the Transaction Account Guarantee Program
* · $293 billion of debt under the expired Debt Guarantee Program

Treasury Department

* · $400 billion Freddie Mac and Fannie Mae back up (technically unlimited)
* · $220 billion GSE mortgage-backed securities purchases
* · $260 billion under TARP, due to expire for new extensions October 3, 2010

Some may view the end of TARP and the dramatic reduction in open subsidies as an indication that the bailout worked. Those are the same people that swear that without it, the Main Street Economy would have been so much worse than: nearly double the unemployment rate, 7.7 million new foreclosures since September 2008, and 69.9 percent more bankruptcies. If anything, it shows what over stimulating the wrong recipients does – it rewards reckless behavior – while ignoring the ramifications and comparative remedies to the greater population and general economy. That’s not a success in my book.
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ISM moderating, Fed put into Nov meeting?
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By Peter Boockvar - October 1st, 2010, 10:51AM

The Sept ISM manufacturing index was about in line with expectations at 54.4, down from 56.3 in Aug, off 6 pts from the recent high in April and the lowest since Nov ’09. New Orders fell 2 pts to 51.1 and Backlogs dropped by 5 pts to back below 50 at 46.5, both at the weakest levels since June ’09. The Employment index fell almost 4 pts to 56.5, the lowest since Mar. Inventories at the manufacturing level moved higher by 4.2 pts to 55.6, the highest since 1984 and is not welcome if we do not see a further pickup in end demand. Customer Inventories fell 1 pt to 42.5. Prices Paid followed the recent rise in commodity prices as they rose 9 pts to the most since May at 70.5. Bottom line, manufacturing is moderating but with Fed member Dudley saying if things don’t improve they will act again, the market feels like it has a free put (again) on weaker economic data up until the Nov meeting.
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Market action/China/PIG debt/QE
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By Peter Boockvar - October 1st, 2010, 8:51AM

As we look to a new Q, lets see how Q3 ended. The last 7 trading days since the FOMC laid the groundwork for more policy initiatives, the S&P 500 is up just 1.3 pts or .1%. Over the same time period however, crude is up by $6, gasoline is up 7.5%, gold is up by $40, the CRB index is up 3%, the CRB RIND went to a record high and the $ index is down by almost 3%. PIG debt is rallying sharply for a 2nd day with the Greek 2 yr yield below 8% for the 1st time since mid June and their 10 yr close to moving below 10%. Ireland and Portugal short term yields are lower by another 30 bps. Following the lower than expected roll of ECB funds, which is a good thing, 3 mo Euribor and euro LIBOR are spiking to the highest since mid July ’09 as less liquidity is in the banking system. China followed the better than expected private sector weighted PMI with a 4 month high in the public sector focused manufacturing PMI.

I was about to write on Income and Spending but was sidetracked by this comment from Fed voting member Dudley who said in a speech, “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.” Since we are only a month before the next meeting and the Fed seems to have little patience as evidenced by Dudley’s comments, strap on your seat belt and close your eyes.
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Ireland!
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By David Kotok - October 1st, 2010, 8:30AM

Ireland!
David R. Kotok
September 30, 2010
>

“Out of Ireland this morning is the news that the Irish government has no choice but to come to the aid of Allied Irish Bank which has had enormous trouble raising the capital it needs to meet demands upon it for increased capital by the international banking authorities. The government in Ireland had previously taken a type of “preferred shares” in the bank, and now in light of the fact that the Bank cannot raise capital itself is forced to ask the government to convert those preferred shares into common shares. Somehow we cannot see this as supportive of the EUR, but then again we’ve known that this sort of thing was going to happen sooner or later and few seemed to care previously, taking the EUR higher nonetheless. Eventually, however, harsh realities have to have harsh effects… don’t they?”

Dennis Gartman, today, September 30, 2010.

Talk about timing. GIC launched a worldwide series on the post-crisis financial and economic conditions. We did this in the context of our ongoing central banking series. Many months ago, we scheduled the Governor of Ireland’s central bank to be the lunch speaker on October 12 in Philadelphia. The venue is the Federal Reserve Bank. For further information, you may call GIC at 215-898-9453 or visit GIC’s website, www.interdependence.org.

I regret I cannot be in two places at the same time and have to miss this important session. Such is the price one has to pay for holding a day job. Nevertheless, readers are encouraged to attend. As of now, there are still some spaces available.

In case you missed the ongoing news, below is the Barclays Capital summary of the latest news from Ireland. Barclays is a GIC sponsor as is Cumberland Advisors and other firms who seek to support a neutral convener of dialogue.

“The Central Bank (CB) of Ireland has released two important statements today related to additional recapitalisation requirements for the banking system: one for Anglo Irish Bank and a second on the recapitalisation requirements for the rest of the banking system (see details below). The total additional recapitalisation costs under a baseline scenario are about EUR10bn for the whole banking system (EUR15bn under the stress scenario), of which EUR4.3bn is earmarked for Anglo Irish Bank (EUR9.3bn under the stress scenario). Despite the sizeable additional capital requirements under both the baseline and stress scenarios, we see the announcements as positive as they provide clarity to the markets with a mapping from the scenarios for the path of real estate prices to the additional haircuts on the real estate portfolios and the corresponding recapitalisation costs.

Anglo Irish Bank

Under the new baseline estimates for Anglo Irish Bank, total recapitalisation needs stand at EUR29.3bn (up from EUR25.0bn in previous estimates, of which EUR22.9bn has already been injected by the government). EUR29.0bn is for the Asset Recovery Bank and c.EUR0.3bn for the Funding Bank.

Under an alternative stress scenario the additional capital requirements would be of EUR5.0bn. The additional losses are based on a hypothetical stress scenario of a fall in real estate prices of 65% from their peak values. So far there has been a 35% fall from peak values based on official statistics that do not rely on actual transactions information – it is deemed that prices have fallen by an average of 40-45%, based on evidence from actual transactions. As a result of the significant drop in house prices under this stress scenario, losses on the risky segments of the non-NAMA portfolio would range between 43% to 70%, which would require an additional capital injection of EUR5.0bn mentioned above (the post NAMA portfolio of about EUR37bn consists of mixed exposures to Ireland, the UK and the US). The estimates under these alternative scenarios are in line with our report dated 16 September entitled Ireland – the sovereign implications of the banking crisis.

With regard to the treatment of Anglo Irish Bank bondholders, the MoF in a separate note has clearly stated again that senior debt obligations rank equally with deposits under Irish law, and there are no plans to change this. However, the MoF agrees with the principle of burden sharing for subordinated debt holders (the same principle will also apply to the subordinated debt holders of INBS, the troubled building society).

According to the MoF, the additional capital will be provided by increasing the Promissory Note issued by the State and by appropriate burden-sharing exclusively by holders of Anglo subordinated debt instruments. Indeed, the MoF has stated that no additional borrowing arises this year as a result of the capital support to the banks. The promissory notes will be amortised over a 10 yr period.

The rest of the banking system

The CB also announced today that it has advised the Irish banks that participated in the Prudential Capital Assessment Review PCAR, conducted earlier this year, that the year-end deadline for meeting the PCAR standards (8% core tier 1 and 7% equity by end of 2010) remain in place. The recapitalisation requirements were conducted taking into account both NAMA losses and projected expected losses on non-NAMA portfolios through 2012.

Based on the haircuts on NAMA transfers and on the expected haircuts on the remaining loans to be transferred to NAMA, the CB has requested new capital injections for the banks, most notably, an additional EUR3bn for Allied Irish Bank by December 2010 (after taking account of disposals of AIB’s Polish and US assets). Bank of Ireland (the largest bank) is deemed to have already sufficient capital to meet the PCAR standard.

With regard to Irish National Building Society (with the highest recorded haircuts on the loans transferred to NAMA), the MoF indicates that it will need an additional injection of EUR2.7bn to cover expected losses in the residual loan book and bringing the total capital support to EUR5.4bn. The MoF plans to inject this extra capital via promissory notes as well. There seems to be ongoing discussion on its restructuring plan (in our view, this could include merger and/or acquisition by another institution).

The Central Bank will conduct its next PCAR exercise in 2011.”

~~~

David R. Kotok, Chairman and Chief Investment Officer
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Stocks in Sept, REAL vs NOMINAL
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By Peter Boockvar - September 30th, 2010, 10:52AM

In nominal terms and assuming no big change today, Sept will be the 2nd best on record for the S&P 500, a great run of almost 10%. Let’s look at the gain in another context. As is done with economic data to take out the influence of inflation, a REAL calculation is done to deflate the NOMINAL reading in order to take out the noise of higher prices vs volume. Using the CRB index as a market inflation gauge for Sept, the S&P 500 in REAL terms only rose modestly as the CRB index is up 8.7% month to date. This highlights the allure of inflation and higher asset prices from a policy perspective as it creates an image of prosperity but with a much more unstable underpinning.
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Chicago PMI solid but need to see ISM
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By Peter Boockvar - September 30th, 2010, 10:15AM

Sept Chicago PMI was much better than expected at 60.4 vs the forecast of 55.5 and up from 56.7 in Aug and 62.3 in July. The internals however were mixed. New Orders rose 6.4 pts to 61.4 but just puts it back in line with the 6 month avg of 61.3. Production, which follow new orders, rose almost 7 pts. On the softer side, Backlogs fell 7 pts to 49.1, below 50 for the 1st time since Nov ’09 and the Employment component fell by 2.1 pts to 53.4, the lowest since May. Prices Paid fell 2.2 pts to the lowest since Nov ’09 which is unusual considering the rise in commodity prices. Inventories rose 3 pts but remain lean at 49.5, about in line with the 6 month avg. Bottom line, the solid headline reading today is encouraging but is in contrast to the weaker than expected NY, Philly, Richmond, Dallas and Milwaukee Fed surveys seen this month and is why tomorrow’s ISM is so key as it will reconcile all the regional surveys.
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PIG and Japan and China! Oh my!
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By Peter Boockvar - September 30th, 2010, 10:12AM

Moody’s downgraded Spain from its top rating but is only now in line with Fitch and still a notch above S&P. From the maturing 225b euros owed to the ECB, 29.4b euros were rolled into 6 day bills today and 104b into 3 mo bills yesterday. The less than expected take from the ECB has 3 mo Euribor up at the highest level since Aug 18th ’10 and 3 mo euro LIBOR rose to the highest since Aug ’09. With details and clarity out on the cost to Ireland for rescuing their banks, particularly Anglo Irish, PIG debt are rallying although the amount that may be needed was above expectations. The Irish government will also take more control over Allied Irish and that stock is down 30% today. Bank of Ireland doesn’t need more capital. Portugal also gave details on their budget and CDS is narrower in response. The Yen and Nikkei have almost given back its entire post intervention move and we have to believe the BoJ will be back in soon.

In response to the House passing what they call the Currency Reform for Fair Trade Act by a wide margin, a Chinese Foreign Minister spokeswoman said “We firmly oppose the US Congress approving such bills…We urge the US congressmen to be clearly aware of the importance of China-US trade and economic relations, resist protectionism so as to refrain from any damage to the interests of both peoples and people around the world.” As China is our biggest banker, this is a bad fight for our officials to be picking not even mentioning that it will do nothing to create new US based jobs and will raise the cost of everything we import from them.
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So What Could Really Turn the Economy Around?
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By Barry Ritholtz - September 30th, 2010, 8:30AM

I know Carl through a mutual friend — he’s in Washington State, and had been very successfully running several 100 million dollars, primarily in small cap companies. I’ve found his views to be informative and refreshing.

We last heard from Carl when he penned Its Dues Paying Time: American Myths Being Destroyed — And What May Happen Next.

Here’s his latest missive

~~~

So What Could Really Turn the Economy Around?
by Carl Haefling

Could it be something as simple as a huge rally in the stock market? Think about it! The stock market is a reflection of what people are feeling at one point in time. One day their feeling good, another day their feeling bad. Stocks go up and stocks go down.

Since the end of 2008 the average investor has had the @@@@ scared out of them as they have confronted one negative headline after another. The real estate market collapsed, pension plans are in trouble, city and state governments are watching their tax revenues slip, slide away and our federal budget is out of control. Corporations have reduced expenses as much as possible and are socking away cash every moment of the day. They are afraid to hire–so instead they are buying businesses, and then firing even more people as they eliminate duplication of jobs. There is little confidence anywhere that tomorrow the financial system will survive, or that our jobs (your job if your working, I’m retired), will be there when you show up for work.

The federal reserve in their response to fear has lowered interest rates about as low as they can go. They have saved the day—they prevented 30% unemployment or worse instead of 10%. But what we see is the best of we may achieve, UNLESS confidence is established somewhere in our economy. The easiest place for that to happen is in the stock market.

Stocks are trading at 20 year valuation lows. You can buy blue chips yielding 5% with Treasury yields below 1%. I see stocks trading at 3 to 8 times earnings everywhere I turn. Companies are now run as tightly as possible. Employees work day and night because they fear loosing their jobs. Stock prices reflect zero confidence and many seem to be betting that the economy will not only have a second dip into a deeper recession (most people think we never escaped the first one), but it will officially called a depression. Economic fear is rampant.

There is most likely more cash sitting on the sidelines then any time in the modern history of financial choice making. If the market begins to rally and confidence builds, stocks will skyrocket—nothing else currently offers any competition. Government bonds are yielding little, CD’s yield little, and corporate bonds yield little.

The price of gold keeps climbing–a reaction to fear. Speculators are now bidding up grains and other food items—fear about supply. Fear is everywhere. Five years ago if I had attempted to discuss anything to do with the economy in a conversation people did not want to engage. Now it is the first topic of engagement. Over the last 2 years people have sat up and taken notice about how the economy works, what makes the stock market go up and down, and the relationship of the economy to politics.

The world of politics is predictably a reflection of fear. If people are fearful all politicians who are in power should be fearful. As long as the economy is suffering it will be the political party flavor of the year. Whoever is in power, will be at risk of loosing power. Two years ago the Republicans were blamed for everything that was wrong, rightfully so in my estimation, and this year the Democrats are being blamed. Since they have done a horrendous job of educating people about the problems now faced, they deserve to be blamed. If we are fearful of not being able to pay our bills you can be certain that political parties will point that out in their advertising campaigns. I now sit with my finger on the mute button when political commercials dash across my TV screen. The fear mongering must be near an all time record.

The stock market is a very emotional critter. If it starts to climb people will jump to the conclusion that things are getting better. If confidence builds the economy will get better. If stock prices go higher business people will be less interested in buying a business and more interested in building a business—and that means job creation.

I have been investing since I was 14 years old. I’m now 62. I have rarely seen stocks as cheap as they are. All that needs to happen is for the economy to improve at a 1 to 2% rate next year and stocks will become even cheaper relative to their buy out values, unless stock prices climb. Business men with excess cash are and will be buying every business in sight that is trading at a discount to future earnings. Why shouldn’t we? You could not come close to duplicating the business of many companies trading at current market capitalizations.

So if you want the economy to improve—invest in the stock market. If you want to get beyond the political wackiness now running rampant in American politics where your vote is determined by what you fear, not what is best for the country, hope for a higher stock market. I know it sounds greedy and even irrational. But having played this game for almost 40 years, I have learned that it is fear that drives stock prices higher—fear of not participating in a rally.

Its a simple formula. Higher stock prices, leads to confidence, confidence leads to investing in jobs.

Now before you think I worship at the alter of the free market, I don’t. I have my own theories about human behavior that have helped me through this life. I do not believe that humanity will for the most part make the right choice when it comes to financial self interest. I strongly believe that an unregulated market is a precursor to economic disaster and allows the worse of what it means to be human to emerge. Stock market optimism is not the free market run wild. It is a statement of belief in the future of a regulated economic system that allows us all entry into the market place. The stock market is one of the few places that one can take paper route money and turn it into a significant amount of money. I know.

When things seem bad, it is very counter-intuitive to buy stocks. I’m a buyer.

Carl Haefling
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Rosengren says why not more
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By Peter Boockvar - September 29th, 2010, 3:16PM

Following non voting Plosser’s comments saying he would not buy more Treasuries right now, voting member Rosengren, very much on the Bernanke dove side of the Fed, seems to want to in a speech titled “How Should Monetary Policy Respond to a Slow Recovery.” His view is that “it is important that policymakers be open to implementing policies consistent with achieving full employment, and an appropriate level of inflation, within a reasonable time frame.” To those that say it would be tough to reduce Treasury rates further, he says that “US Treasury rates are still well above the zero bound, roughly equivalent to rates in Germany, and well above long term rates in Japan.” He then goes on to say however that the Fed has “no desire or intention whatsoever” to monetize the federal debt. Whether intentional or not, that’s exactly what they are doing.
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