Free Investing

Edward Harrison submits:In a recent post on the money multiplier, a reader Luis Enrique asked about bank lending and capital constraints. Anecdotally, much of the reduction in credit is supply-constrained as well as demand-constrained. That means it’s a matter of banks not lending; it’s not just about firms and individuals not borrowing. Banks are capital-constrained even if it seems like they are making lots of money. We are in what I called the fake recovery in April 2009. I said then:Complete Story »

Prieur du Plessis submits: The TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) is a measure of perceived credit risk in the economy. This is because T-bills are considered risk-free while LIBOR (i.e. the interest rate banks charge each other) reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. On the other hand, when the risk of bank defaults is considered to be decreasing, the TED spread narrows.Since the TED spread’s peak of 4.65% on October 10, 2008 the measure eased consistently, but edged up from the March low (10.57 basis points) to mid June (48.64 basis points). Subsequently the default risk has once again declined to the current level of 27.44 basis points. (click to enlarge)Complete Story »

Hickey and Walters (Bespoke) submit:
Over the last week or so, we have heard several references made to last year's bank stress test results as being a catalyst that propelled the overall market, and more specifically Financials, higher. When you look back at the period, however, that comment couldn't really be further from the truth. In the chart below, we highlight the performance of the US Financial sector and the S&P 500 following the release of the US bank stress test results May in May 2009. As shown, from May 8th, through early July, the S&P 500 declined about 5% and the Financials sank over 15%. it wasn't until mid-July 2009 that the market bounced and began its next leg higher. And what was the catalyst in July that got the market going? It was the start of earnings season. In that earnings season, companies delivered strong results reinforcing the improved economic data that had begun to trickle out.Complete Story »

Annaly Salvos submits: For those who missed it (and we had, until we were tipped by James Aitken, thank you very much), a vital paper was posted to the New York Fed’s website in the beginning of the month. “Shadow Banking,” a staff report authored by Zoltan Pozsar, Tobias Adrian, Adam Ashcraft and Hayley Boesky, attempts to explain the so-called “shadow banking” system that developed over the last two decades.The shadow banking system is the financing system that developed in parallel to the traditional banking system:Complete Story »

Kendall J. Anderson submits: We believe that predicting short-term swings in the market is an exercise in humility. Longer-term market predictions can have some value, but they should be based on a form of valuation methodology of the underlying securities which make up the market of choice. A consideration of the current mood of the market participants should also be included in that short term prices can be driven by emotions. We don’t believe there are scientific factors which can be isolated and replicated to provide insight into short-term market predictions. However, we do know that over longer periods of time, the price of a security or the total market value of all the securities in a market will approximate the underlying capital retained and available for earning future income for its owners.Complete Story »

Hickey and Walters (Bespoke) submit:
Below we highlight the performance of S&P 500 sectors from the market's 2010 high (4/23) to its July 2nd low as well as since July 2nd. As shown, the Financial sector is up the most since July 2nd with a gain of 10%, followed by Materials (9.5%), Technology (7.8%), and Energy (7.6%). The Financial sector was also down the most during the correction. The four defensive sectors -- Utilities, Consumer Staples, Health Care, and Telecom -- have all underperformed the S&P 500 since July 2nd.click to enlargeComplete Story »

Of all the weapons inventoried by Bernanke back in 2002, most (and all that have been deployed so far) are conventional, indirect stimulation by way of bank lending. Set overnight rate to 0, push down yields on treasuries on increasingly longer terms, buy agency debt, etc -- all are indirect stimulation on the supply side of credit. While giving banks free money (banks get free funding and lend to Treasury for risk-free return) may be outrageously unfair to individuals struggling with mortgage payments and unemployment, it is very much a goal by design from the Fed's perspective. They specifically wanted to replenish banks' balance sheets, help them deleverage, make them more comfortable so that, hopefully, they'll start lending again.Unfortunately, banks haven't started lending. If you carefully read Bernanke's arguments in his speech on why each of the weapons should be effective you'll understand, with the help of hindsight, why none has worked. But to summarize, the reason is two-fold.Complete Story »

Hickey and Walters (Bespoke) submit:
As we come to the end of the first half of the year, below we take a look at S&P 500 sector performance so far in 2010. At this point, no sector is up year to date. The S&P 500 as a whole is down 6.17%, while the Materials sector is down the most at -12.22% and the Consumer Discretionary sector is down the least at -0.31%. Four sectors are outperforming the overall index (Consumer Staples, Financials, Industrials, and Consumer Discretionary), while six sectors are underperforming (Materials, Energy, Telecom, Technology, Health Care, Utilities). When markets are down, the cyclical sectors are usually down the most, while defensive sectors are down the least. That hasn't really been the case so far at this point in the year.click to enlargeComplete Story »

Clemens Kownatzki submits: We're almost there ... US House and Senate lawmakers agreed on the terms of the biggest overhaul of US financial regulation since the 1930s. The Wall Street Journal reported on the major provisions of the proposed bill on Friday. How the new regulations will play out in practice is anyone's guess at the moment. It is also questionable whether more regulation and bigger regulators will do a better job at preventing fraud, bubbles and busts, and whether the consumer will actually be better off after all new rules are set in place. There are many reasons to have a healthy dose of skepticism when it comes to regulators and regulatory reform. And being skeptical about regulators is not unique to the US. Other countries have raised equally strong calls for financial services reforms. Just last week, the new Chancellor of the Exchequer, George Osborne, abolished the Financial Services Authority (the UK's main financial services regulator) and gave more regulatory powers to the Bank of England.Complete Story »

Hickey and Walters (Bespoke) submit:
The S&P 500 broke above its 200-day moving average today and crept back into positive territory for the year. The percentage of S&P 500 stocks trading above their 50-day moving averages, which is one measure of underlying breadth, is now at 39%. While not great, this reading indicates that the market has at least picked itself up out of the doldrums. In terms of individual sectors, only Telecom and Utilities have more than 50% of stocks above their 50-days. Consumer Discretionary, Consumer Staples, and Technology all have readings in the 40s, while Materials, Financials, and Industrials currently have the worst readings.click to enlargeComplete Story »