Friday, February 19, 2010

Morning Update/ Market Thread 2/19

Good Morning,

Equity futures were down hard last night after Bernanke raised the discount rate by .25% to .75%. Miracle of miracles however, once again right at midnight the markets began their low volume ramp job. That’s convenient, and much needed for those who were long just prior to options expiration. Below is a chart of the overnight hours, who knows where the market will open, it may be positive by then:

The dollar broke out above overhead resistance and is significantly higher, now above the 81 mark. Bonds moved upwards slightly, actually slightly lower in yield, oil which was down hard is now back higher again, and gold is down but not as much as it was.

Here’s Fortune’s take on the rate move:
NEW YORK (Fortune) -- The Federal Reserve raised the rate it charges banks that borrow from the central bank when they run short of funds.

The Fed said late Thursday it is raising its discount rate by a quarter percentage point, or 25 basis points, to 0.75%. The central bank said in a statement it made the move in response to improving financial market conditions.

The move is largely symbolic, because banks do little borrowing at the discount window.

The unanimous decision to boost the discount rate also has no effect on the more widely watched federal funds rate, which measures the rate banks charge each other for overnight loans. That rate is expected to remain between 0% and 0.25% for the foreseeable future, given the slack in the labor market and the still fragile state of the economy.

But raising the discount rate allows Federal Reserve chairman Ben Bernanke to take another small step toward normal monetary policy, after the past two-plus years were consumed in a financial firefight.

"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said in a statement.

The Fed also shortened the term of some discount window loans and raised the minimum bid in the term auction facilities it uses to supply overnight funds to banks. Those facilities were among the many innovations Bernanke introduced since the onset of the credit crunch in mid-2007 to supply U.S. banks with funding.

Bernanke has emphasized that the Fed will use multiple new tools to prevent the excess reserves from fueling inflation, including the payment of interest on reserves at the Fed and the sale of Fed assets.

Paying interest on “excess reserves” is nothing but another crime against America, that one REALLY bothers me every time I see it.

Remember, rising rates generally means lower prices for bonds. If this is the start of a tightening cycle, it has come earlier than most expected and it played like a knee-jerk reaction to the hot PPI numbers yesterday. I was expecting today’s CPI to be hot too thinking that they knew something about it, but it actually came in a little lower than expected but still warm enough, for sure.

Higher gasoline prices slammed consumer wallets in January but a drop in shelter costs kept both the headline and core rate softer than expected. Headline consumer price inflation in January held steady at a 0.2 percent increase-matching December's revised pace (new seasonal factors). The headline number for January was a little below market expectation for a 0.3 percent boost. Core CPI inflation actually fell at a 0.1 percent monthly rate, following a 0.1 percent uptick in December. The consensus had forecast a 0.1 percent rise for the core CPI. The gain in the headline CPI was due largely to higher gasoline prices. The core was pulled down by a 2.1 percent drop in lodging while away from home and by a 0.1 percent dip in owners' equivalent rent. Basically, hotels and resorts are still trying to lure customers with discounts. And rents are soft for housing in markets, caused by high unemployment.

In the latest month, energy was up sharply while food price inflation firmed moderately. Energy spiked 2.8 percent after a 0.8 percent increase in December. Gasoline surged 4.4 percent after increasing 2.3 percent in December. Food inflation in January firmed to 0.2 percent from a 0.1 percent uptick the month before.

Year-on-year, overall CPI inflation slipped to 2.7 percent (seasonally adjusted) from 2.8 percent in December. The core rate was declined in January to 1.5 percent from 1.8 percent the month before. On an unadjusted year-ago basis, the headline number was up 2.6 percent in January while the core was up 1.6 percent.

We got a very different report on the CPI, compared to yesterday's inflation scary PPI report. The CPI report is much softer. The CPI housing component made most of the difference. But other components outside of energy are subdued. The report should be good for bonds but markets are still reacting to yesterday's after-close announcement by the Fed of an increase in the discount rate. Equity futures are still down from that announcement.

The year over year CPI was up 2.7%. Keep in mind that the PPI is on the producer level and leads the CPI.

We’ll have to watch the flow of money between asset classes closely now. Bonds are getting to an important juncture at their long term trendlines and large H&S necklines. It is a fallacy that rising rates causes stocks to go down. It will flatten the yield curve and make earning money on the spread more difficult, but it can also drive money away from bonds as the price falls, a complicated dynamic that has to be watched closely. A break of the necklines on those patterns would be very dangerous for all holders of debt (everyone).

Speaking of people with debt, we continue to throw water on drowning people by trying to give them more or different “credit” and by trying to force the price of housing higher. I can tell you that housing is still nuts, as in way too expensive compared to incomes and rents.
NEW YORK ( -- Under pressure to do more for troubled homeowners, President Obama is expected to announce on Friday a $1.5 billion program to help borrowers in the five states hit hardest by the housing crisis.

The initiative calls for pumping money into state housing agencies in California, Arizona, Nevada, Florida and Michigan to fund programs to prevent foreclosure for people who are unemployed or who owe more than their homes are worth.

Also, the agencies can assist homeowners having trouble securing loan modifications because of second liens, as well as promote affordable housing opportunities.

Obama is scheduled to unveil the initiative, which will be funded with money from the TARP bank bailout, at events in Nevada, which has the highest number of underwater homeowners at 65% and the nation's second-highest unemployment rate at 13%.

The president will be joined by Senate Majority Leader Harry Reid, D-Nev., who is facing a tough reelection campaign.

The funds will be allocated based on a formula that takes into account home price declines and unemployment. The agencies' programs must be approved by the Treasury Department.

The move is the administration's latest attempt to fix its signature foreclosure-prevention effort, the Home Affordable Modification Program, which has been widely panned for not doing enough.
Just another politically inspired Band-Aid and attempt to manipulate prices by our government, the real beneficiaries will once again be the banks. This is also a recycling of TARP funds, a tactic that is on questionable legal grounds in my opinion.

The mainstream is finally catching up to the pension problems that states are facing. Just another trillion…

States short $1 trillion to fund retiree benefits

By Tami Luhby, senior writerFebruary 18, 2010: 7:31 PM ET

NEW YORK ( -- Just as they are contending with massive gaps in their operating budgets, states and localities must also deal with a $1 trillion deficit in public employees' retirement benefits' funds, a new report found.

The shortfall amounts to more than $8,800 for every household in the nation, according to the Pew Center on the States, which published its findings Thursday.

States largely got themselves into this mess by failing to make annual contributions while also enhancing benefits, the study found. Now, they are behind by a total $452 billion in their pension accounts and $555 billion in their retiree health funds, as of the end of fiscal 2008, which ended June 30 for most states.

The deficit is likely even more severe because the report did not take into account the crumbling of the stock market in the latter half of 2008. The typical pension plan lost 25% of its value in 2008.

States must find ways to make up these gaps because retiree benefits for public workers are largely guaranteed by union contract. And they are funded through contributions from both employees and state employers, as well as investment returns.

So when gaps appear, states must ask their residents to make up the difference, usually through property tax or income tax hikes.

"Ultimately, taxpayers could face higher taxes and cuts in services," said Stephen Fehr, one of the report's authors. "You can't ignore the problem. It's just going to be more serious budget trouble for states down the road."

To be sure, the bill isn't due all at once and no state is in danger of default. These benefits are paid out over decades. Still, the deficits must be addressed sooner than later or the gaps will simply balloon more.

In the most trouble
The consequences of the shortfall could be severe. It comes at a time when states are wrestling with a cumulative $180 billion budget gap for fiscal 2011.

Eight states are in the most dire shape, according to the Pew report. These include: Alaska, Colorado, Illinois, Kansas, Kentucky, Maryland, New Jersey and Oklahoma.

Two of these states -- Illinois and Kansas -- have less than 60% of the necessary assets on hand to meet their long-term pension obligations.

Only four states -- Florida, New York, Washington and Wisconsin -- had a fully funded system in 2008, down from just over half at the beginning of the decade.

What’s there to say about this? I am certain that the actual shortfall is much larger and will be much larger in the future. Where is the money going to come from? States are buried in debt and revenue shortfalls. It takes income to service debt and the income is not there. Markets by trailing P/E are priced the highest they have ever been in history, what happens to these funds as that situation corrects and returns to historic standards? No, don’t believe the forward looking or “operating earnings” bull, that will not pan out as it didn’t for Dell earnings in the 4th quarter as reported yesterday (they are down about 5% this morning).

While this may not be popular, I want to talk about this guy that flew his plane into the Austin IRS center. Of course performing an act like that is “nuts” in that anyone who commits suicide or an act of violence against others is obviously not in a good frame of mind, for sure. But desperate people do desperate things. Back any animal into a corner without escape and they will eventually lash out.

His “manifesto” did not sound like the ramblings of a crazy person, they sound like someone who badly mismanaged their life and got trapped in difficult circumstances, many out of his control. He was formerly a businessman and he considers himself a patriot. Importantly, he has some valid points and thus ignoring him or writing off his actions as a those of a crazy person is simply not smart on everyone else’s part. The Insane Manifesto Of Austin Texas Crash Pilot Joseph Andrew Stack

Why are government buildings being targeted in such attacks? Perhaps we should read and heed his dying words, what the media calls his “manifesto.” Oh yes, his “manifesto” is insane, but hey, I think there’s a message here that should not be ignored. I would like to point out that if we continue down the debt backed mathematically impossible path that we are headed, that events like this will only become more common unless the ones who are truly nuts, the ones who are the pushers and purveyors of debt are the ones who become marginalized as they deserve. Again, without focusing on the root cause, we are destined to see more of this. Freedom’s Vision gets to the root of these problems by taking the pressure off government to be in a state of never ending growth with debt and therefore a panic to collect more debt backed money that doesn’t belong to them in the first place.

I continue to believe that the markets are topping here and that wave 3 down is coming. Just remember that living is easy with eyes closed, misunderstanding all you see…

Beattles – Strawberry Fields: