March 19 (Bloomberg) -- The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.
The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.
The Fed had argued that it could withhold the information under an exemption that allows federal agencies to refuse disclosure of “trade secrets and commercial or financial information obtained from a person and privileged or confidential.”
The U.S. Freedom of Information Act, or FOIA, “sets forth no basis for the exemption the Board asks us to read into it,” U.S. Circuit Chief Judge Dennis Jacobs wrote in the opinion. “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute.”
Friday, March 19, 2010
March 19 (Bloomberg) -- The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.
Dow Jones Newswires | Caterpillar Inc. said the health-care overhaul legislation being considered by the U.S. House of Representatives would increase the company's health-care costs by more than $100 million in the first year alone.
In a letter Thursday to House Speaker Nancy Pelosi (D-Calif.) and House Republican Leader John Boehner of Ohio, Caterpillar urged lawmakers to vote against the plan "because of the substantial cost burdens it would place on our shareholders, employees and retirees." Caterpillar, the world's largest construction machinery manufacturer by sales, said it's particularly opposed to provisions in the bill that would expand Medicare taxes and mandate insurance coverage. The legislation would require nearly all companies to provide health insurance for their employees or face large fines.
The Peoria-based company said these provisions would increase its insurance costs by at least 20 percent, or more than $100 million, just in the first year of the health-care overhaul program.
"We can ill-afford cost increases that place us at a disadvantage versus our global competitors," said the letter signed by Gregory Folley, vice president and chief human resources officer of Caterpillar. "We are disappointed that efforts at reform have not addressed the cost concerns we've raised throughout the year."
Business executives have long complained that the options offered for covering 32 million uninsured Americans would result in higher insurance costs for those employers that already provide coverage. Opponents have stepped up their attacks in recent days as the House moves closer toward a vote on the Senate version of the health-care legislation.
A letter Thursday to President Barack Obama and members of Congress signed by more than 130 economists predicted the legislation would discourage companies from hiring more workers and would cause reduced hours and wages for those already employed.
Caterpillar noted that the company supports efforts to increase the quality and the value of health care for patients as well as lower costs for employer-sponsored insurance coverage.
"Unfortunately, neither the current legislation in the House and Senate, nor the president's proposal, meets these goals," the letter said.
Wednesday, March 17, 2010
March 17 (Bloomberg) -- China is in the midst of “the greatest bubble in history,” said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.
The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.
“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.”
Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s economy. The government has raised banks’ reserve requirements twice this year after economic growth accelerated and property prices rallied.
China has pegged the yuan to the dollar since July 2008 to help exporters weather the global recession. The central bank buys dollars and sells its own currency to prevent the yuan strengthening, driving foreign-exchange reserves to a world- record $2.4 trillion as of December.
The Shanghai Composite Index of stocks jumped 80 percent last year and property prices rose at the fastest pace in almost two years in February, helped by a record 9.59 trillion yuan ($1.4 trillion) of new loans in 2009.
The World Bank indicated today that China should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations. The nation’s “massive monetary stimulus” risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, Washington-based World Bank said in a quarterly report on China released in Beijing.
“People making comments about bubbles possibly don’t have all the facts,” HSBC Holdings Plc Chief Executive Officer Michael Geoghegan said in Shanghai today. Regulators are in control of the banking industry, and have the ability to curb lending as needed, he said.
Rickards said leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance-sheet debt through regional governments and the country’s human rights record are concerns.
“Take Russia and China together, neither of them is really deserving any investment” except for short-term speculation, Rickards said. India and Brazil are two of the “real economies” among the developing countries, he said.
China is poised to overtake Japan as the world’s second- largest economy this year, according to the International Monetary Fund, and Nomura Holdings Inc. forecasts it will contribute more than a third of global growth. The nation has surpassed the U.S. as the world’s largest auto market and Germany as the No. 1 exporter.
Harvard’s Rogoff said Feb. 23 that a debt-fueled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates Ltd., predicted a slump after excessive property investments.
Investors Bob Doll and Antoine van Agtmael say China’s stock market isn’t a bubble.
Equities will gain by the end of the year as the government takes measures to prevent the economy from overheating, Doll, BlackRock Inc.’s chief investment officer for global equities, said on March 5. China is unlikely to face “chaos” or experience a hard landing, Van Agtmael, who helps manage $13 billion as chairman and chief investment officer of Emerging Markets Management LLC, said in a Bloomberg Television interview yesterday.
The Shanghai Composite Index is valued at 32 times reported earnings, compared with 52 times at its peak in October 2007. The U.S. benchmark Standard & Poor’s 500 Index trades at 19 times earnings.
China’s economic growth quickened to 10.7 percent last quarter, helped by a 4 trillion yuan, two-year stimulus plan for railways, airports and homes. Property prices in 70 cities rose 10.7 percent from a year earlier in February.
Bank loans slowed to 700 billion yuan last month after surging more in January than the previous three months combined, central bank data showed. Growth of the broadest measure of money supply, or M2, slowed for a third month to 25.5 percent.
The banking industry has “very low impairment charges compared to what you’d expect this time in the cycle,” HSBC’s Geoghegan said. “I wouldn’t be surprised if there’s a gradual increase in impairments, but long term I’m confident that the structure of the banking industry is very, very sound.”
Rickards disputed an argument that China could hold U.S. policies hostage through its Treasuries holdings. The nation remained the largest overseas owner of U.S. debt after trimming its holdings by $5.8 billion in January to $889 billion.
China would suffer massive losses if the debt was dumped, reducing the funds available in the U.S. securities market and forcing the prices lower, he said. The U.S. president also has the authority, rarely used, to freeze such positions, he said.
Rickards worked for LTCM between 1994 and 1999 and helped to negotiate its rescue by 14 Wall Street firms after the fund lost $4 billion in a few weeks in 1998. The Federal Reserve brokered the bailout on concern that LTCM’s collapse would cause a meltdown in financial markets.
Monday, March 15, 2010
WASHINGTON—China continued selling U.S. Treasurys in January, although it remained the top foreign holder following upward revisions to past data, the Treasury Department said.
Overall, foreigners were modest net buyers of long-term U.S. financial assets in January, according to the monthly Treasury International Capital report, known as TIC.
China remained a net seller of Treasurys, with its holdings falling $5.8 billion to $889.0 billion in January, following net sales of over $34 billion in December.
The Chinese are wise! This is the mother of all bubbles!
March 15 (Bloomberg) -- The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.
The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.
Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.
“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”
The pound fell against the dollar and the euro for the first time in three days, depreciating 0.8 percent to $1.5090, while the dollar index snapped a four-day drop, adding 0.3 percent to 90.075.
The U.S. government will spend about 7 percent of its revenue servicing debt in 2010 and almost 11 percent in 2013, according to the baseline scenario of moderate economic recovery, fiscal adjustments in line with government plans and a gradual increase in interest rates, Moody’s said.
Under its adverse scenario, which assumes 0.5 percent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said.
U.K. Debt Service
The U.K. is likely to spend 7 percent of revenue servicing debt this year and 9 percent in 2013, rising to almost 12 percent under the adverse scenario, Moody’s said.
Financing costs above 10 percent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce their debt burden by raising taxes or reducing spending. The U.S. has a 4 percentage-point band, while the U.K. has a 3 percentage-point band.
“Those economies have been caught in a crisis while they are highly leveraged,” Cailleteau said, referring to the level of private and public debt as a percentage of gross domestic product. “They have to make the required adjustment to stabilize markets without choking off growth.”
The U.S. would be the “most affected” under the adverse scenario, as the only country that would face a downgrade, Cailleteau said. The company’s baseline scenario assumes that all current AAA sovereigns will keep their ratings over the next three years, he said.
“On balance, we believe that the ratings of all large Aaa governments remain well positioned, although their ‘distance-to- downgrade’ has in all cases substantially diminished,” Moody’s said in the report.
None of the current Aaa rated countries are likely to lose their ratings, said Peter Chatwell, a fixed-income strategist at Credit Agricole CIB in London.
“This report is a warning shot to governments, setting out the line that they can’t cross with their budgets,” he said.
While the U.S. is likely to benefit from economic growth more than other AAA nations, weak public consumption is likely to weigh on GDP this year, the ratings company said.
“The pattern of growth and the high rate of unemployment raise the question of how strong the recovery will be going forward,” Moody’s said. “The ability of the U.S. economy to grow more rapidly and, therefore, for government revenues to contribute to fiscal consolidation, will have to depend on a revival in the growth of consumption.”
I was also stunned to learn that Moody's warned that coming "fiscal adjustments" will be required that will likely cause social unrest. Wow!
Sunday, March 14, 2010
How you can profit from seasonal patterns in stocks
What's behind this seasonality? Human nature, said Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac, a weathervane for the market's calendar-based moves.
"There is a habitual nature to society and human activity," Hirsch said. "People's behavior and what they do with their money and time bears upon economics and the stock market."
If you recognize these patterns, you can increase the odds of matching or even outperforming the market with considerably less risk. Plus, transaction costs are no longer an issue nowadays using a discount broker and exchange-traded funds such as SPDR S&P 500 (NYSE:SPY) , iShares Russell 2000 Index (NYSE:IWM) , or any comparable fund tracking a broad-based benchmark.
One of the most visible calendar patterns is the so-called Halloween effect, also known as the "Sell in May" indicator, which holds that stocks typically are weaker during summer than winter. Another pattern appears in the final trading days of the month and the first trading days of the new month. A subset of that is the "first day of the month trade" -- buying and selling a market index on the first trading day of the month and not going back in until the first day of the next month.
Other market biases surface as well: Stocks tend to be stronger during the middle of the month, particularly over the five trading days before St. Patrick's Day, March 17. As part of that, Hirsch said, the ninth trading day of March has been positive for the Nasdaq index more than 70% of the time since 1986, including most recently its rise on Thursday. Stocks also tend to rise in the two or three trading days before a market holiday, such as July Fourth or Christmas.
To be sure, many skeptics dismiss calendar effects as random events, giving them about as much predictive credit as astrology. Naysayers have even more reason to disbelieve after the past couple of years. Going long U.S. stocks in November 2008 and holding through April 2009 would have cost you big money. You'd have compounded the injury by selling then and sitting out until November as stocks recovered.
Accordingly, use these indicators as a market guide, not a GPS. "These things don't happen every time; it's a general tendency," said Ed Clissold, senior global analyst at market strategists Ned Davis Research. "You're talking about odds that are modestly better than 50-50. You have to look at them in the context of what else is going on in the market."
Moreover, individual investors tend to lack the discipline such trading strategies demand. If you do attempt seasonally driven trades, venture just a small portion of your money. And be wary of "experts" peddling timing systems that purport to outperform the market year-in and year-out.
"It's like being a card counter; you have to play many rounds to get the numbers in your favor," said Mark Hulbert, editor of the Hulbert Financial Digest, which tracks the performance of investment advisory newsletters and is a service of MarketWatch, the publisher of this report. "There's never a guarantee that these systems will work every year. The merit is to come close to the market's return while incurring below-average risk."
1. Halloween effect"Sell in May and go away" is a time-worn market adage, referring to the period from May through October that has been the weakest for U.S. stocks going back at least 60 years. May, June and August typically have been lackluster, with September especially treacherous, according to the Stock Trader's Almanac.
Meanwhile, the six months from November through April, with the exception of February, have marked the strongest period for the benchmark Standard & Poor's 500 Index (INDEX:SPX) .
S&P 500 monthly average performance*
(Jan. 1970 - Feb. 2010)
Data: Standard & Poor's Inc.
In fact, for the past 20 years or so, dreaded October also has been a generally winning month for the markets, suggesting that traders may be trying to front-run the traditional year-end buildup.
"There's a sprint to the finish," said Richard Ross, global technical strategist at Auerbach Grayson, a New York-based brokerage. Traders start to focus on bonuses, holidays, vacations, he said, adding that "There are a lot of tailwinds behind the market."
The pattern continues into January and through the spring, with the first month's performance tending to be a barometer for the rest of the year.
"The cycles of greed and fear happen to coincide with the seasons," Ross said. "This has been ingrained in the markets from the very beginning."
The Halloween effect's notoriety should have eliminated it as an opportunity long ago, or in the words of Yogi Berra: "Nobody goes there anymore; it's too crowded."
But it has persisted in the U.S., and many countries. "Even though it does not work every year, I think it is hard to find periods of, say, a decade when it would not have worked," said Ben Jacobsen, a finance professor at Massey University in New Zealand who has published seminal research on the Halloween indicator.
"Generally," he said, the November through April trading pattern "works often enough to make the believers happy and a bit richer on average and the skeptics happy as well but a bit poorer on average."
2. Turn of the month indicatorIn this strategy, you buy on the last trading day of the month and sell after the first three or four days of the next month.
Why has this approach succeeded? Again, you're following the money. Money managers are "window-dressing" portfolios at the end of the month to improve returns, while pension funds and automatic retirement plans are also contributing to buying demand.
"Selling into the early month's strength is a good strategy," Ross said. "If you get a pickup in the first couple of days, money is definitely coming off the sidelines out of retirement programs, and money managers have a clean slate and you get a nice lift up."
The best illustration of this indicator's power comes from "The Seasonality Timing System," backed by research from veteran market strategist Norm Fosback, editor of Fosback's Fund Forecaster newsletter.
The system calls for being 100% invested on the last trading day of the month and selling after four trading sessions of the next month, and also being fully invested for the two trading days preceding a market holiday.
"The Seasonality Timing System has been superb on a risk-adjusted basis," Hulbert wrote in a recent MarketWatch article. In an interview, he added: "It's the best market timing system of any." See Mark Hulbert's column on this timing system.
According to Hulbert's research, a portfolio that switched between the Wilshire 5000 Index and 90-day T-Bills on the seasonality system's signals gained 4.1% annualized on average from the end of December 1999 through the end of February 2010, versus a 0.3% decline for a buy-and-hold investor. Importantly, you took only one-third of the market's risk.
That makes sense in a declining market, when missing the worst days would have been to your benefit. What about a bull run? From Dec. 31, 1989 through Dec. 31, 1999, the seasonality system gained 13.4% on average each year, compared to 17.6% for buying and holding.
While that's a smaller total return, the strategy carried only about 40% of the market's risk. On a risk-adjusted basis, that puts the timing system ahead of buying and holding, Hulbert said.
Fosback created the system in the mid-1970s, based on data going back to 1926.
"It's been 35 years in real time," Fosback said. "Over this 35-year period it has continued to demonstrate above-average returns. You wouldn't have beaten the market, but you would have earned a return pretty close to the market's average."
And you'd have captured this performance without suffering through the market's unpredictable swings. "You're exposed to the risk of market fluctuations just 30% of the time; 70% of the time you're absolutely risk-free," Fosback said.
If the turn of the month effect is due to month-end paycheck, pension contributions and other sources, what accounts for the bullish sessions leading into market holidays?
Fosback attributes this to the unwillingness of short-sellers to leave positions exposed to market-changing events over holidays. "My hypothesis is there was short covering the day before the holiday in particular, and traders put back their positions after," he said.
Fosback added that the seasonality system seems more valuable nowadays for smaller stocks, and suggested that investors starting out might consider a small-cap ETF that tracks the Russell 2000 Index (INDEX:RUT) , for instance.
3. First day of the month tradeA subset of the turn of the month effect is the "first day of the month" trade, where you're in the market for one full day each month and in cash for the remainder of the month.
This strategy, not surprisingly, dominates in bearish periods For example, from the end of 1999 through March 1, an investor who followed the trade using the S&P 500 as a proxy would be up 28% on a cumulative basis, and a $10,000 investment would be worth about $12,800, according to S&P. A buy-and-hold investor, on the other hand, would have lost 25% cumulatively and $10,000 would be worth only about $7,600.
"In a bear market, it does better," said Howard Silverblatt, senior index analyst at Standard & Poor's.
Not so in bull markets. From the first trading day of 1990 until Dec. 1, 1999, the first day trade in the S&P 500 would have netted you about 3.5% annualized, excluding dividends, and a $10,000 investment would have been worth $10,406.
Buy and hold, meanwhile, would have delivered a yearly gain of 15.3% and that $10,000 would have grown to more than $41,000.
So be careful when utilizing this or any other trade and pay attention to broader market trends and technical analysis. "There's no indicator or strategy in isolation that generates a buy or sell signal," said Auerbach Grayson's Ross. "You need a cluster of evidence supporting or disproving your case."
Still, the odds are in the first-day trade's favor. From 1926, about 57% of these trades were up, versus 52% of all the days, S&P reports. Said Silverblatt: "More cash coming in pushes the market up, even in a declining market."
NEW YORK--U.S. consumer sentiment took a surprise negative turn in early April due to a persistently grim outlook on income and jobs, a private survey released Friday showed.
A slip in economic expectations to its lowest in a year likely stemmed from consumers hearing negative information on government programs and a perception that the recovery is too slow, according to Thomson Reuters/University of Michigan's Surveys of Consumers.
"While consumers think the overall economy will continue to improve, they still hold quite negative views on their own income and job prospects," Richard Curtin, director of the surveys, said in a statement.
Consumer sentiment is seen as a proxy for consumer spending, which fuels about 70% of the U.S. economy.