AFP Blogs

Though not quite as exciting as the first time the Dow Jones Industrials crossed the 10,000 mark back in March 1999, this was still a rather interesting week. Questions about the US and world economies continue to remain in the forefront of people’s minds.

The news started out on the bleak side as we learned that eight more US banks had failed, bringing the year-to-date total to 118. We also learned that S&P cut the credit rating for Ireland from AA to AA-. These pieces of news only caused greater concern about the state of banking and the potential for additional sovereign risk difficulties.

The news related the state of the US housing market can only be described as frightening. Existing home sales came in at the lowest level since 1996. There is now a 12.5-month supply of existing homes in the US.  A normal market has under a 6-month supply. Then we learned that new home sales declined to a new record low in July.

The market reaction was hardly surprising. The 2-year Treasury touched an all-time low yield of 45.42bps. The 5-year, 10-year, and 30-year Treasuries all hit lows that we hadn’t seen since the depths of the crisis back in late 2008 and early 2009.

With a weak but better than expected 2Q GDP of 1.6% and the soothing words of Chairman Bernanke from the hills of Wyoming, the equity markets rallied and bond prices tumbled. The market took some profits off the table in fixed income-land.

For the 33^rd straight day, 3-month LIBOR declined. The rate is now at 29.69 bps. With credit spreads widening and concern increasing in Europe, the spread between Euro LIBOR and dollar LIBOR continues to increase. The spread now stands at 88.8bps, the widest spread since June 2009.

The corporate bond market was relatively quiet this week. With volume of approximately $6 billion, this would be the lightest issuance week since May. This is not surprising since August tends to be one of the lightest months given the number of market participants who typically go on holiday this time of year.

One deal of note was Norfolk Southern’s re-opening of their 6.00% of 2105. Yes 2105, that is not a typo – this is a 100-year bond. (Technically, 95 years, but who’s counting) This was the first offering of notes of this tenor since 2005.

Next week could be a little choppy out there. We will have month-end on Tuesday, the employment report on Friday, and we will be heading into the Labor Day holiday and the end of summer. The last four months of the year will probably as interesting, if not more interesting, than the previous eight.

Stay safe!

In case you were wondering if the glass is half-full or half-empty, the market responded this week with a resounding “half-empty” answer. Though we received some pleasant news during the week, GM planning an IPO, the Ag Bank of China setting a new record size for an IPO at $22.1 billion, the Chilean carrier LAN purchasing the Brazilian carrier TAM, Intel buying McAfee, and BHP trying to acquire Potash, the weak economic releases were the focus of the week.

Disappointing news regarding Japan’s economy in the recently completed second quarter, combined with a lower than expected NAHB index, and Fed reports on New York State and the Mid-Atlantic region, had the market in a vulnerable position prior to the release of the jobless claims report. Unfortunately for the market, the joblessness report came in significantly weaker than expected at 500,000, the worst level since November 2009.

There just doesn’t seem to be any improvement in the job situation, and without that occurring it is very difficult to envision strong economic growth. In fact, we will be getting the first revision to the second quarter GDP number next week. The consensus is for a revision down to 1.4% from 2.4%.

All of this gloomy economic information provided plenty of powder for the US Treasury market to rally yet again. To sound like a song on an endless loop, the 2-year Treasury touched another all-time low yield this week of 45.47bps. The 5-yr, 10-yr, and 30-yr Treasury notes all hit yields we haven’t seen since the dark days of March 2009. With yields across the board so low, the expectations of the Fed moving to a neutral stance, much less a tightening mode, seem to be focused on late 2011 at the earliest.

Helping to support the Treasury market was the fact that the Fed was an active buyer this week, purchasing $6.16 billion of securities. This was the first time the Fed was a buyer since September 2009. Also supporting the market was the Treasury’s announcement that next week’s auction schedule will be the smallest since May 2009.

Mortgage rates continued their recent trend of setting new record lows. This week the average 30-year fixed rate mortgage was at 4.42%. Think Dwight D. Eisenhower.

Looking for shards of good news, 3-month dollar LIBOR continued its 28-day streak of resetting lower, with the rate now at 32.92bps.

McDonald’s became the first foreign non-financial company to issue yuan-denominated bonds in Hong Kong. It was a relatively small issue at $29 million but quite significant in that it was another step in the opening up of the Chinese credit market. It is expected that quite a number of other foreign issuers will be coming to this market in the near future.

The summer is quickly coming to an end with the Labor Day holiday now only two weeks away. The market may see some outsized moves given the light trading we may witness due to market participants taking time off before the school year gets rolling.

I have written before about the markets and the economy being at a point of precarious balance. This was a week where fear trumped hope. The Fed set the tone for the week at their regularly scheduled FOMC meeting on Tuesday. The Fed announced that the US economy was indeed slowing a bit and in order to support the economy the Fed would start to purchase longer-dated US Treasury securities. The source of money for these purchases would come from the interest and maturing principal on the Fed’s holdings of MBS securities. The Fed also stated it expected it would keep interest rates low for an “extended period of time”.

The market’s reaction was direct and predictable. The 2-year Treasury note touched a new all-time low yield of 48.92bps. It is now the market’s belief that the Fed is on hold for most of 2011 and maybe into early 2012.

The 5-yr Treasury note rallied to 1.41% and the 10-yr Treasury note went as low as 2.68%, the lowest since April 2009. With the Fed Fund rate at zero, the way the Fed will ease going forward will be as a function of its balance sheet.

It’s interesting to point out that only a few short months ago the market was concerned about the impact of the Fed reducing its portfolio balance. How quickly things can change in uncertain times.

With the 10-year note at a 19-month low, US mortgage rates hit the lowest levels since Three Dog Night had a number one hit with “Joy to the World”, think 1971. The average 30-year fixed rate mortgage is now at 4.44%. As a consequence of the Fed’s announcement and the drop in mortgage rates, premium MBS securities tumbled in price. Prices fell because the possibility of interest rates going even lower increased, raising the possibility of a higher rate of mortgages prepaying. As the probability of prepayment increases, the value of premium MBS decreases. Securities that investors thought had little chance of being re-financed now have a greater likelihood of that occurring.

The news from around the world only compounded a pessimistic view going forward. China announced that their economy, while still growing, was slowing down. The growth rate in the UK was also reported lower than expected. Concerns about a double-dip recession and the possibility of deflation occurring only caused more weakness in the equity markets.

In addition to a flight to quality in the US, we also witness a similar phenomenon in Europe. The 10-yr German Bund traded down to a yield of 2.69%, the lowest yield since at least 1989. The reason for the price action was concerns about the weaker economies of Europe falling further behind.  Greece, Spain and the rest of the PIG countries saw their debt widen out versus Bunds. Greek 10-yr securities are now trading at Bunds + 805bps. These are at levels we haven’t witnessed since May and not since the announcement of the $1 trillion backstop.

One positive from all of this has been for issuers of debt. Johnson & Johnson issued the lowest coupons ever on corporate debt in the 10 and 30-year sectors. Their 10-yr note had a coupon of 2.95% and their 30-year bond had a coupon of 4.50%.

The yield on 3-month dollar LIBOR fell for the 23^rd straight day to 39.6bps.

To quote Sgt. Phil Esterhaus from Hill Street Blues, “Hey, let’s be careful out there”.

The most significant economic news of the week came on Friday with the Employment report. Unfortunately, the data that was released gave us no greater degree of clarity. The headline jobs number was weaker than expected at -131k; the private sector number was weaker than expected at +71k and the unemployment rate was unchanged at 9.5%. We continue to see an economy that is growing close to its historical norm (+2.5%) and generating 100,000-150,000 jobs per month, not a robust (+5%) economy generating job growth of 300,000 per month that we need to make a dent in the unemployment rate.

With the economy just bumping along, the likelihood that the Fed will tighten interest rates, in the near future, seems remote at best. As long as market participants are discussing the chances of a double-dip recession or the possibility of price deflation, the general consensus is that the Fed is on hold until at least the second half of 2011.

Given our current low interest rate environment, US Treasuries experienced another extraordinary week. (more…)

And now as we close the books on the first month of the second half, not much has changed. We are still are just as confused about where we are heading as we were a month ago.

The two big economic reports of the week told us absolutely nothing new. Initial claims came in at 457,000. We have been stuck at around 450,000 since December 2009. By historical standards, this is a very weak number. We will need to see claims drop into the 300,000’s before the unemployment rate starts to significantly drop.

The second piece of major economic news was the second quarter GDP number. (more…)

Well, no one ever said we didn’t live in interesting times. One day the stock market is down because the Chairman of the Federal Reserve uses the word “uncertain”. The next day the stock market is up because earning reports came in better than expected. It feels like we are living each day at that very precarious point of balance. A light breeze in either direction sends us either soaring skyward or rocketing into the abyss.

During the times of the week when the market was focused on a slowing American economy, US Treasuries benefitted from a flight to quality. The two-year Treasury note touched an all-time low yield of 0.55% during the week. The ten-year Treasury note reached a 15-month low yield of 2.85%. The average 30-yr fixed-rate mortgage fell to another new 50-year low of 4.56%.

President Obama signed into law the Financial Reform bill, more affectionately known as FinReg. One of the first casualties of this law was the asset-backed debt market (ABS). The market basically came to a grinding halt when a number of the rating agencies (CRAs) refused to permit the underwriters of ABS deals to use the actual ratings of the underlying collateral in filings with the SEC. The CRAs withheld their ratings due to a change in FinReg that now exposes the CRAs to “expert liability”. It is expected that the 144a or private-placement market will pick up some of the activity but the capacity of the 144a-world is somewhat constrained. (more…)

Over the past week, we suffered from another bout of, “How slow is the US economy really recovering at” –itis. As the weeks go by, we seem to alternate between feelings of optimism and despair, call it a classic case of being bi-polar.

With the general economic news this week indicating a slow and steady improvement in the US economy rather than an explosion of economic activity, the market seemed to capitulate to the idea that generally, where we will be a year from now is where we are today.

On Friday the US stock market sold off: the Dow off 261.41, the NASDAQ down 70.03, and the S&P 500 falling 31.60 points. Using a little bit of rounding, we are living in a 10k Dow, 2200 NAS, and 1000 S&P world. Readers, this may be roughly where we are a year from now on June 30, 2011. The headwinds to our economy and to the economies around the world seem to indicate an extended period of positive but unremarkable growth. (more…)

It has been an interesting past two weeks. Concerns about the growth potential of the worlds’ economies and the threat of a double-dip recession have been the focus of late. We are really seeing the world split into three separate economies: the developing world, North America and Europe.

China has been a major area of attention lately. There have been recent indications that the incredible growth rate of China may be slowing down a bit. Due to the feeling that China has fueled the global economy during the recent financial crisis, the fear is that without their continued phenomenal growth, the world will sputter back into recession.

India has also been in the news. Last week, India raised its interest rates for a third time this year. The move from 3.75% to 4.00% caught the market by surprise, even though the IMF reported recently that it expects India’s GDP to be +9.4% during for the current fiscal year. (more…)

Public Company Accounting Oversight Board (PCAOB)

 This week I attended the PCAOB’s Standards Advisory Group (SAG) Meeting.  The topics discussed were (1) broker dealer audit considerations; (2) FASB/IASB projects and potential impact on auditors; (3) subsequent events; (4) auditors reporting framework; and (5) communications with audit committees.  (more…)