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For those that haven't noticed, I've begun sharing my early morning news and data routine with the blog. Here goes Monday moring EST.
Is the Fed running out of ammo?
| Reserve Aggregates (Mil. $ sa) | |||
| Two Weeks Ended Mar 26: | Latest Week |
Prev. Week Change |
Year Ago Change |
| Total Reserves: | 44,477 | 43,057 | 40,328 |
| Nonborrowed Reserves 1 | - 61,788 | - 17,174 | 40,268 |
| Required Reserves2 | 39,856 | 41,654 | 38,643 |
| Excess Reserves: | 4,621 | 1,403 | 1,684 |
| Borrowed Reserves (are those I banks hittin' the piggy bank too hard?) |
80,000 | 60,000 | 60 |
| Free Reserves 3 | - 75,379 | - 58,597 | 1,624 |
| Monetary Base | 829,648 | 823,819 | 812,763 |
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| 1 Fed supply of permanent reserves provided. | |||
| 2 Demand for reserves to back deposits. | |||
| 3 Free reserves equal excess reserves minus discount window borrowings | |||
| other than extended credit. Free reserves are a shorthand method of | |||
| determining the degree of ease of Fed policy, or when they are negative net | |||
If so, Trichet, King May Support Fed as Ammunition Runs Low: Federal Reserve Chairman Ben S. Bernanke has so far shouldered most of the burden of saving the global economy and financial markets. He may be about to get more help. With the credit crisis entering its ninth month, Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet are on the verge of new steps to spur lending and increase liquidity, say economists at Lloyds TSB Group Plc and Royal Bank of Scotland Group Plc. Interest-rate cuts may be next if the crisis persists.
``We're inching closer to the great global monetary easing,'' says Joachim Fels, co-chief economist at Morgan Stanley in London. Lloyds predicts King's next step will be to accept more types of collateral for loans. Trichet will pump more money into banks, RBS forecasts. Such measures would take Europe's two biggest central banks further down the path laid out by Bernanke this month.
The Fed chairman needs all the help he can get. In addition to lowering interest rates at the fastest pace in two decades, Bernanke has committed as much as 60 percent of the $700 billion in Treasury securities on his balance sheet to expand lending. The Fed has also offered a $29 billion loan against illiquid securities to assist the buyout of failing securities firm Bear Stearns Cos...
Rate Cuts
Meanwhile, the Fed has already lowered its target overnight rate by 3 percentage points, to 2.25 percent, since August. Unless the gap between the Fed and the European banks narrows, it risks fueling inflation in the U.S., slowing economies elsewhere and causing banks more pain, Deutsche Bank economists said in a March 24 report. "Stresses in markets have reached new heights,'' the report said. ``The significant difference in the approach to managing what is now a truly global financial crisis could aggravate the problems and cause more severe damage to the world economy.''
That has some analysts predicting that Trichet and King will have to cut rates sooner rather than later: Morgan Stanley's Fels predicts the U.K. central bank will cut in the next quarter, and the ECB will follow later in the year. "The ECB and BOE have stubbornly refused to cut rates, although extreme stress is visible in European financial and commercial real-estate markets,'' says Michael Shaoul, chief executive officer at New York investment-research firm Oscar Gruss & Son Inc. ``This intransigence is unlikely to last much longer.''
When I hear words like the great global monetary easing, my mouth waters. For this is an opportunity for easy money. Do you remember the Great Macro Experiment? Unless central banks allow us to go through some real pain to purge the sysetm (something which is apparently highly unlikely, especially in a presidential election year), the world is condemned to these extreme boom bust cycles. This is good for me since I won't have to change the name of my blog
, and more importantly this befits my investment style quite well, allowing me the opportunity to do my thing. Unfortunately, I feel it wreaks havoc with global economic stability and health, but hey, what the hell do I know.
Pressure rises on Morgan Stanley board
Morgan Stanley’s board has come under renewed pressure to take accountability for the group’s latest lapses in risk control after two shareholder advisory firms called for a vote against several directors at next month’s annual meeting.
Axis Bank Ltd., India's fourth- largest by market value, fell in Mumbai trading after its stock rating was cut to ``underweight'' from ``equal-weight'' by Morgan Stanley on concern earnings will face pressure.
The bank fell 44.4 rupees, or 5.5 percent, to 760.5 rupees at 1:06 p.m. in Mumbai.
``Earnings will come under significant pressure,'' Morgan Stanley analysts including Anil Agarwal wrote in a note to clients today. ``This, coupled with extremely stretched valuations'' at 23 times fiscal 2009 earnings and three times the bank's book value, ``imply that stock performance will be weak,'' the report said.
If you remember, I am planning on making a bull rally entry point into the European/Asian banking and building markets, just as I did in the US - Bear market rallies only delay day of reckoning
Every slump is punctuated by exuberant bursts of optimism, known to traders as "bear market rallies". Japan had four false dawns during its long slide into the abyss. Each lifted Tokyo's Nikkei index by an average of 53pc. Such bounces can be intoxicating.
Teun Draaisma, Morgan Stanley's stock guru, expects the current rally to boost Europe's MSCI 600 index by 21pc from its trough in late January, with similar moves on the S&P 500. The battered shares do best: builders and banks this time.
There have been nine bear rallies since 1970. The average length is four months. The surge misleads investors into believing that sunlit uplands lie ahead. Then the sucker punch hits.
"The Federal Reserve's actions have averted financial Armageddon, but they cannot avert an earnings recession. We don't expect a new bull market until early 2009," he said.Morgan Stanley says earnings will fall 16pc this year as debt leverage kicks into reverse.
I may not be moving fast enough in Asia. I am pretty much bearish globally at this point - India's Axis Bank Falls After Downgrading by Morgan Stanley. In addition:
M O R G A N S T A N L E Y R E S E A R C H
India Strategy
BSE Fair Value: 13651 An unprecedented credit crunch in the US combined with some aggressive tightening by RBI and capital out-flows of roughly $ 6 bn in a mere three weeks has rocked sentiment. Although the long-term story looks very attractive and many in the market have yet to recognize it, the challenge for longterm investors is that market’s price action has compressed the long-term returns being implied by share prices. On our residual income model, the market is implying a 10-year compounded annual return of less than 12%, or an equity risk premium of under 4% compared with the 17% annual return that it has delivered over the past decade. Investors will need stronger than the 15% CAGR in earnings growth that we are assuming to earn the long-term return they have earned in the past.
Japan's March tankan to reveal deepening gloom: An influential Bank of Japan survey is expected to show on Tuesday that confidence among Japan's larger manufacturers deteriorated sharply in the three months ending March 31 as a slowing U.S. economy, rising yen and higher energy and food prices undermine business conditions.
The EU and the UK are stuck between a rock and a hard place as their economic growth slows, their equity markets face lesser earnings, violent deleveraging and unprecedented asset write downs and Europe Inflation Accelerates to 3.5%, Sentiment Drops. As I have been saying for some time now, Asia and Europe are right behind the US in this mess, and I will have no shortage of medium to long term shorting opportunities.
European inflation accelerated to the fastest in almost 16 years in March, heightening the European Central Bank's quandary at a time when the economy is cooling and confidence is falling.
Consumer-price inflation in the euro area accelerated to 3.5 percent this month, the highest rate since June 1992, the European Union's statistics office in Luxembourg said today. That is faster than the 3.3 percent median forecast of 36 economists in a Bloomberg News survey. A separate report showed consumer and business confidence fell more than economists expected.
Rising food and energy prices are stoking inflation in the euro area, eroding consumers' purchasing power and pushing up costs at companies. ECB council member Erkki Liikanen said today that inflation expectations have ``hardened'' and the growth outlook has ``become more subdued,'' summing up the dilemma for the central bank, which is resisting cutting interest rates as inflation accelerates.
``The ECB's hawkish stance will be reinforced, but hoping that the economic slowdown will be moderate and short-lived seems too optimistic to us,'' said Aurelio Maccario, an economist at Unicredit MIB in Milan, said before the report. Europe's economic growth ``has settled below trend.''
Fed eyes Nordic-style nationalisation of US banks
While the responses varied in each Nordic country, there a was major effort to avoid the sort of "moral hazard" that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems. Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure. "We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.
"The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said.
As I have been crooning, even without Bear Stearn's style crashes, the I bank industry is approaching a natural, and sharp cyclical down turn as the primary value drivers dry up after a big bull run: M&A Bankers Suffer 35% Drop in Fees as Deals Dry Up From Record. Despite this, I still believe we have another big blow up or two before this is all over. I am preparing a major update to my The Riskiest Bank on the Street opinion, just to make sure I am not wrong, since I am building up a large position here in an attempt to replicate the Bear Stearns and monoline results, which were windfalls.
...and the usual flight to quality story: Two-Year Yield Seen Falling to 1.5% in Treasury Rally - The most accurate forecasters of Treasury yields say it's too early to call an end to the rally that propelled U.S. bonds to their best annual start since 1995.Yields on two-year notes will decline to 1.50 percent by July from 1.65 percent last week and 3.05 percent at the end of last year, according to Goldman Sachs Group Inc. and Barclays Capital Inc. They were the only two of the 20 primary dealers that trade directly with the Federal Reserve who at the start of 2008 predicted yields would be less than 2.5 percent by now.
Demand for government debt will increase as investors shift their attention from the more than $208 billion in writedowns and credit market losses over the past year to the likelihood that the economy is already in a recession, Jan Hatzius at Goldman and Michael Pond of Barclays said. Treasuries of all maturities have returned 4.2 percent this year, including reinvested interest, Merrill Lynch & Co. index data show.
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