Monitoring the Precipice

August 31, 2011

As the month of August has ended, on a suspiciously positive note, lets take a look at some recent undertow, and expectations for tomorrow’s PMI data.  The real story looks quite gloomy, particularly since some much economic data has been falling, quickly.

The chart below illustrates T-Bill rates intraday yesterday as the market was continuing a low volume rally post Bernanke’s comments on Friday.  Note that both the 4W and the 3M T-Bill rates posted negative prints.  Hmmm, I don’t know about you but I find it hard to believe that the stock market is such a good value when so many people are willing to lose 1 bps to own a US T-Bill for a month or two.  Historically this happens just before we go off a cliff.

Bloomberg BTMM 8-30-11 US Money Market Rates

Note the chart below offers a general perspective on sovereign currency risks as measured by the Option Adjusted Spread of the G-8 currencies.  Story seems to be short the Euro and go long everything else.  Guess we can confirm where this disaster is about to emanate from.  Makes sense if the European banks are in as bad shape as many have been reporting.  Funny though, I don’t recall a time where banks distinguished their risks by borders.  I don’t see how the European banking system would not take down the US.

Bloomberg LOIS Currency 8-31-11

And then there is the widely anticipate Manufacturing PMI number due tomorrow.  This will be the first data point to illustrate how much the tail has wagged the dog, and how much real damage the August roller coaster did to the US economy.  I’m also surmising that Bernanke in his infinite wisdom chose to punt to the September meeting to avoid taking action and then have the data come in so anemic.  Note that the Consensus estimate will mean that the economy actually CONTRACTED in August. Any number below 50 represents a contraction.  Also interesting to note that only a handful of economists think we will print a number above 50.  Certainly at least worth a hedge, ay?  Might mean the recession has already begun.  Crazy stuff.

Bloomberg NAPMPMI Estimates Manufacturing PMI 8-31-11

Note that the last time this data came in with estimates this low we were watching the aftermath of Lehman’s failure.

Bloomberg NAPMPMI Estimates and Actual Manufacturing PMI 8-29-11

While the Manufacturing PMI is not as important as its half-brother the Non Manufacturing PMI due next week, it has often been a leading indicator preceding both economic contractions and expansions.  This chart illustrates periods when the two data points were at their widest.  Make your own judgements.  Orange line is tomorrows Manufacturing PMI series.  The white line is next week’s Non-Manufacturing PMI series.  The crossover we are seeing is indicative of past recessions. Since the market is up about 10% from its recent lows, and the DOW is about even to positive for the year, for the market to price a recession in, we need to drop at least about 20%.  And that would be a mild one.  September will be a very long month on Wall Street.  I think we will know better next year how it all has affected Main Street.

Bloomberg NAPMPMI vs NAPMNMI Actual Manufacturing & Non-Manufacturing PMI 8-29-11

No matter how pricy puts look, they are cheap if you are on a precipice.


Banks To Exit Stoxx Europe 50 Index

August 31, 2011

This is being reported today throughout the media.  I have added a chart of the banks (Societe General, Intesa Sanpaolo, Unicredit & Credit Agricole) plus Nokia who are being removed.  Odds are a lot of this is being priced in, question is how much.  The banks are underperforming the EAFE, a broader international market index by 40%.  Nokia has recently begun to regain some ground.  Hard to tell how much of this news is priced in.  Odds are also that the Stoxx Europe 50 is likely to outperform other broad market indexes with the number of banks coming out, assuming the banks are about to implode.

1-Year Performance of Companies Being Removed from the Stoxx Europe 50

Struggling mobile-phone maker Nokia (NOK) and three European banks — Societe Generale (FR:GLE), Intesa Sanpaolo (IT:ISP) and Unicredit (IT:UCG) — will be deleted from the Stoxx Europe 50 index, effective on the Sept. 19 open, Stoxx said Wednesday. Unilever (UL), LVMH Moet Hennessy (FR:MC), National Grid (NGG) and Air Liquide (FR:AI) will replace them. Stoxx also changed the Euro Stoxx 50 index — which only includes companies that trade in euro-area nations — by adding Volkswagen (DE:VOW3) preference shares and the clothing giant Inditex (ES:ITX) and subtracting conglomerate Alstom (FR:ALO) and French bank Credit Agricole (FR:ACA). 

-Steve Goldstein; 415-439-6400;

The Price Of Weed in the US

August 31, 2011

The Price Of Weed in the US

Its a slow holiday week, and with the end of August on us, we can have a little fun with the maps below from floatingsheep… Read more

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Guest Post: Mr. Cheney’s Victory Lap

August 30, 2011

Definitely Op-Ed porn, but a must read!!

Guest Post: Mr. Cheney’s Victory Lap

Submitted by Gonzalo Lira Mr. Cheney’s Victory Lap

Dick Cheney is taking a lap around all the talk shows, peddling his … Read more

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(BN) FDIC Objects to Bank of America’s Proposed $8.5 Billion Mortgage-Bond Pact

August 30, 2011

I would not be surprised to see this objection dismissed or eventallt repealed seeing as it emanated from Washington. Compromise would be to force originators to drop a penny in the FDICs cup on a go forward basis. Of course that undermines new efforts to reduce borrowing costs and puts the hand further into the bank’s pockets.

Until we experience pain, there will be no gain.

FDIC Objects to BofA’s $8.5 Billion Mortgage-Bond Settlement

Aug. 30 (Bloomberg) — The Federal Deposit Insurance Corp. filed an objection to Bank of America Corp.’s proposed $8.5 billion mortgage-bond settlement with investors, joining investors and states that are challenging the agreement.

The FDIC, the receiver for failed banks, owns securities covered by the settlement and said it doesn’t have enough information to evaluate the accord, according to a filing yesterday in federal court in Manhattan.

Under the agreement, Bank of America would pay $8.5 billion to resolve claims from investors in Countrywide Financial Corp. mortgage bonds. The settlement was negotiated with a group of institutional investors, including BlackRock Inc. and Pacific Investment Management Co. LLC, and would apply to investors outside that group.

Bank of New York Mellon Corp., the trustee for the mortgage-securitization trusts covered by the agreement, has asked a New York state judge to approve the settlement in November. An investor group is trying to move the case to federal court, which Bank of New York opposes.

Investors that would be bound by the settlement, including American International Group Inc., have criticized the deal and Bank of New York’s role representing investors in the mortgage bonds. New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden have sought to intervene in the case and asked the court to reject it.

FDIC’s Involvement

The FDIC’s involvement may make it more difficult for Charlotte, North Carolina-based Bank of America to get approval for the settlement, said Bert Ely, a bank-industry consultant in Alexandria, Virginia.

“You would think as a regulator or as an investor or both that they would be kept apprised of what was going on,” he said. “Any time you hold up a deal it becomes more likely it doesn’t happen.”

If the settlement doesn’t get court approval and Bank of America goes back to the negotiating table, it will become more expensive for the bank, Paul Miller, an analyst at FBR Capital Markets, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene.

“If the judge accepts it, then that’s going to be a big positive, because that starts to ring-fence those private-label losses, and we can start to move forward and say ‘This is what we think the losses are going to be,’” he said.

Andrew Gray, an FDIC spokesman, said in an e-mail that the FDIC generally doesn’t comment on pending litigation.

“This filing is simply a formal notice to preserve our right to make claims as a part of the settlement and seeks additional information to evaluate those potential claims,” he said. “It is not an evaluation or opinion on the settlement itself.”

‘Trustee Acted Reasonably’

“We believe that the trustee acted reasonably in entering into the settlement, and that there are compelling reasons why the agreement should receive judicial approval,” Lawrence Grayson, a Bank of America spokesman, said in an e-mail.

Kevin Heine, a spokesman for Bank of New York, said the the company had no comment.

The state case is In the matter of the application of The Bank of New York Mellon, 651786-2011, New York State Supreme Court, New York County (Manhattan). The federal case is In the Matter of the Application of Bank of New York Mellon, 11-cv- 5988, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9 Dakin Campbell in San Francisco at dcampbell27

To contact the editors responsible for this story: Michael Hytha at mhytha David Scheer at dscheer .

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(BN) No Erasure Left Behind Is Key to Stopping Test Mischief: View

August 30, 2011

In the real world we fire people for this behavior. It mistifies me that it’s not even mentioned. Shakespear had it wrong. First thing we do is fire all the corrupt, evil, wrong doing teachers and school administrators. What are they teaching our kids of they are allowed to keep going?

No Erasure Left Behind Is Key to Stopping Test Mischief: View

Aug. 30 (Bloomberg) — The plague started in Georgia, then made its way to Washington, Philadelphia and New Jersey. No, it’s not the trailer for “Contagion,” September’s big pandemic movie, but a distressing number of suspected cheating scandals in elementary and middle schools.

The No Child Left Behind Act, enacted in 2002, didn’t invent standardized tests, but it set national standards based on them. Meeting those standards now plays a huge role in determining school financing, teacher promotion and student advancement.

The theory of high-stakes testing and the wisdom of the legislation are subjects for another day. The question now, though, is this: If so much depends on the test, then shouldn’t it be better protected from manipulation?

The suspected cheating, it’s worth noting, is not by students but by teachers and school administrators, whose career prospects are at stake. The scale of the problem became apparent in October 2010, when agents from the Georgia Bureau of Investigation descended on 56 Atlanta-area schools to ask why a statistically surprising number of student answer sheets had shown wrong answers erased and correct ones inserted.

Investigations by education officials and newspapers, particularly USA Today, have also exposed evidence of wrongdoing in Arizona, California, Florida, Michigan, Texas, Ohio and elsewhere. In Washington, D.C., which had been held up as a beacon of educational reform under former schools Chancellor Michelle Rhee, officials are now scrutinizing dozens of schools.

Monitor Answer Sheets

Obviously, the first line of defense against cheating is at the schools themselves, where states and districts should mandate strict prevention measures. Schools are generally required to have testing protocols and compliance officers but would be wise to step up oversight of testing booklets and answer sheets before and after the exam period, and to bring in independent monitors such as former teachers on testing days.

Another idea is to have the tests administered by a private party. Yes, that would cost money, but so does an investigation like Georgia’s, which will probably run into the millions of dollars.

States must also be more willing to use available technology to catch wrongdoing. The scanners used to grade the answer sheets, provided by companies such as Pearson Plc, can detect erasures and raise a red flag if there are an unusually high number, especially of wrong-to-right switches. Other indicators of potential trouble include a single class or grade vastly outperforming the others at a school; a prevalence of identical answers, wrong and right, within a class; and large numbers of students doing better on the harder questions of an exam than on the easier ones.

While the testing companies are able to supply all this data, many states do not ask for it or fail to look into suspicious results — after all, nobody likes to seek out bad news. Investigations by private companies can cost thousands of dollars per school and subject principals and teachers to uncomfortable questioning. Unfortunately, recent history shows just how necessary they are.

As a prod, any legislative reform should tweak the NCLB act’s grant-making to reward states that are more active on cheating prevention. It should also ensure that schools return any money they received for gains that they didn’t truly achieve and that states provide avenues for whistleblowers to come forward.

In the end, it is in a state’s interest to nip cheating in the bud — if left unchecked, it will fester, leading to a scandal that can scar a school district for a generation. Just ask the parents in Atlanta.

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Global recovery in dangerous phase: IMF’s Lagarde – MarketWatch

August 28, 2011

“[European] banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion,” Lagarde said.