Market Update 2 27 10 _ Goldman vs Congress

Testify before Congress?

 

One of the first things you should be taught when you are given access to e-mail is that some things sound a lot funnier in an e-mail than they do when read aloud in a court of law.  Some folks at Goldman Sachs are in the process of learning this lesson today.  Goldman Sachs is fighting for its reputation as it testifies in front of Congress this week.  The irony here kills me…someone is forced to testify before Congress (a political body that has a 22% approval rating) in an effort to save their reputation. 

 

There are certainly some Goldman e-mails that sound bad in the naked light of day…but rather than make me question Goldman (I mean after all should it be a big surprise to me that one of the most profitable firms on Wall Street was caught making money?), it really makes me want to see some of the e-mails exchanged by Congress as they shoved a few trillion dollars worth of spending and commitments down our throats.  I guess I’ll never see those though.  The point here seems to be to take the spotlight off of Congress and put it on someone else.  Enter the SEC (with their 3-2 vote along political lines) and the charges against Goldman. 

 

This looks like it will be a circus…and a circus created to help Congress jam more legislation through.  I don’t know if Goldman did or didn’t do anything wrong at this point.  What I do know is that with the un-employment rate near 10% and the US on very shaky fiscal ground, Congress has far more important things to be dealing with than whether a highly sophisticated institutional sub-prime credit-default-swap insurance company was “tricked” into buying a CDO by a Street firm in 2007.

 

Bloomberg is reporting that the Senate has sifted through about 2 million Goldman documents.  At this point I’d be willing to wager that more politicians have read Goldman Sachs internal e-mails than read the Health Care Bill.

 

Back to Reality

 

This morning’s economic data showed us that Home Prices across the US increased very slightly, but at a lower rate than the survey expected.  Richmond Manufacturing was also released.  This series tracks manufacturing trends in the Richmond Federal Reserve District.  The survey expected a reading of 10, but we actually saw a 30.  The Richmond number is the second Fed manufacturing number to beat the estimate this week.  These indices are coming off a run of very negative numbers so while the upside surprises are a nice thing, they still have a long way to go before they get back to their old levels.

 

Treasury prices are up along the length of the curve this morning, pushing yields lower.  The 10-year Treasury is up over half a point and is trading at a 3.72%...down from the 3.80% start.  Stocks are slowly trending lower as the morning grinds on.

 

Treasuries appear to be rallying this morning on more credit news out of Europe.  S&P cut their rating on Portugal by two notches (from A+ o A-) this morning.  This European sovereign debt crisis is beginning to look like a game of Jenga.  Remember that game?  It’s the one where you stack up all of the rectangular blocks and everyone takes turns pulling one out.  As more pieces are pulled the tower starts to lean, then shake, and ultimately it comes crashing down.  It’s interesting to watch from this side of the Atlantic. 

 

Here are a few excerpts from the S&P report on the downgrade:

 

The downgrade “reflects our view of the amplified fiscal risks Portugal faces”. 

 

“We expect the Portuguese government could struggle to stabilize its relatively high debt ratio over the outlook horizon”

 

I only hope that the folks in Washington are paying attention so we don’t end up playing the game next.

 

If you have any questions or if there is anything I can be doing for you just let me know.

 

Steve Scaramastro, SVP

800-311-0707

 

******POST SCRIPT******

 

Just as I was about to hit “SEND” on this e-mail my corporate trader announced that S&P cut the sovereign credit rating of Greece to Junk.  In the two minutes since that announcement the DOW has dropped an additional 80 points and the 10 year Treasury is up another 12 tics, pushing its yield down to 3.69%.  This could be a very interesting day. 

 

 

 

 

Market Update 4 15 10 _ Bernanke and his testimony

Tax day

I have a confession to make…I don’t do my own taxes.  My beautiful wife is an accountant and she volunteers to do this chore every year.  I think her motive is more self-defense than altruism.  She knows that if I do the taxes one of us is likely to go to jail when I forget to file them (I’m not a congressman or a Treasury Secretary so I’d face real consequences for failure to file).  Because I get out of this dreadful chore I figure I need to make some sacrifice to justify my existence…therefore I chose to watch, in its entirety, the Fed Chairman’s testimony before congress and report back to you with my findings.

The Joint Economic Committee

Bernanke testified before the Joint Economic Committee of Congress yesterday.  In general the questions coming from this committee were much better than those we usually hear from the House Financial Services Committee.  It was a nice change of pace.

Bernanke’s prepared remarks to the committee stressed that we are in the midst of a moderate economic recovery.  As he weighed the positives against the negatives you began to see the picture come to life.  We have an increasing array of slightly positive data contrasted against a backdrop of large negatives…like housing and employment.  Bernanke pointed out that the risk of a double-dip seems to have receded, but went on to state that a primary risk to the recovery was consumers becoming more cautious in their spending due to persistently high levels of unemployment.  Any drop off in spending at this point in the recovery would be very unwelcome news.

Q&A

The Q&A session is where the real fun begins.  The first 20 minutes of these meetings are usually filled with long winded statements that I believe are tuned out by everyone except the congressman that is actually speaking.  They love to hear themselves talk…for the rest of us it’s a nice time to get more coffee.  After the diatribes are over the Q&A starts.  I have to give the Joint Economic Committee credit, they asked a number of intelligent questions. 

The question of the day revolved around the Feds language that rates would remain “exceptionally low” for an “extended period”.  Bernanke pointed out that the factors driving this language are low resource utilization, high unemployment, and stable inflation expectations.  As always the Feds actions are data dependent…when they see material changes in the aforementioned items we can expect some change in the language of the statement.  Let’s get a current look at the three factors Bernanke mentioned.

Resource Utilization

US Industrial Production was released this morning.  This data series measures real output and is expressed as a percentage of real output in a base year (a higher number is better).  The survey expected a reading of 0.7%...the actual release was 0.1%.  Clearly we still have a lot of unused capacity.  In the words of the hip academics this is called a “high rate of resource utilization slack”.  In redneck terms it means “we ain’t makin’ near as much stuff as we could be makin’.”  That’s one item the Fed is looking at and it continues to show weakness.  Strike one.

Inflation

As far as inflation goes…CPI Ex-Food and Energy on a Year over Year basis was released this week at 1.1%.  To find a lower CPI release you have to go all the way back to 1966.  I wish I had a good 1966 story to include for perspective but I wasn’t born until 1969.  I might have to call my brother to get a good point of reference…it would be a nice time to remind him how much older he is than me.  At any rate, inflation doesn’t appear to be a concern at the moment either.  Strike two.

Unemployment

This morning Initial Jobless Claims were released a bit worse than the survey expected.  The survey expected to see 440,000 people file for first time jobless benefits…we actually had 484,000 people show up to file.  Continuing Claims were also a bit higher than the survey estimate.  Strike three.

In summary

So this morning we find ourselves in a world where we have a lot of idle manufacturing capacity, a stubbornly high unemployment rate, and historically low rates of inflation.  Given those conditions it seems that the Fed will continue to remain on hold, and that they will continue to use the “extended period” language.  There will undoubtedly be some public squabbling among Fed members as we go forward but keep an eye on these three factors as they were called out by name as conditions that help form the basis of Fed policy going forward.

As always if you have any questions comments or complaints…just let me know.  Now that I think about it just send me the questions and comments…send the complaints to George…he looks like he needs something to do.

Steve Scaramastro, SVP

800-311-0707