WHO'S NOT SELLING BONDS?
First, the US Treasury has hundreds of billions of dollars of bonds to sell to fund the trillion dollar deficits Congress is mandating.
Second, the Federal Reserve will be selling the trillions of dollars of securities they have purchased in the recent expansion of the monetary base.
Third, and finally, any investor who owns bonds will be selling to avoid the coming bear market.
Paterson is advising its clients to continue to extend the maturity of liabilities past the 5 year mark, and look at 10 year liabilities, or more.
TACTICS
Continue to shorten the maturity of assets and use money market arbitrage to improve earnings.
Consider borrowing long term deposits.
Use extreme caution on long term lending.
STRATEGY
Warn senior management and the board that a disaster is in the offing.
The flood of money recently added by the Fed will either cause inflation or increases in long term interest rates - or both.
Showing posts with label Fed. Show all posts
Showing posts with label Fed. Show all posts
Monday, May 04, 2009
Friday, January 23, 2009
Credit Spreads at 800 Basis Points
The spread between Baa credits and 10 year US Treasuries reached 800 basis points.
The cost of long-term corporate debt has declined more than 100 BPs, but is still at historic spreads to Treasuries.
MONEY CONTINUES TO GROW
The Fed's policy of adding reserves to the system continued in the past two weeks, and the monetary base is now twice it's value in September of 2008.
Here is the raw data.
Paterson is confident that the Fed's action to support the fixed income markets with massive purchases of securities will shorten the recession by many years.
REAL ESTATE LENDING RESUMES
Even as the economy continues to deteriorate from the collapse in wealth in the stock and property markets, the business of lending is stabilizing.
In California the number of homes sold last month increased nearly 200%.
As this trend continues, the housing market will stabilize.
However, do not expect the trend of the last 20 years to resume. Growth in the value of real estate was caused by the decline in interest rates due to the elimination of inflation. That game is over.
SUMMARY
The Fed's actions to stabilize money growth are succeeding, suggesting a resumption of economic growth in months, not years.
Residential real estate lending - at prudent underwriting standards - is safe again. It is unlikely we will see much more of a sell-off in residential real estate.
Commercial real estate is in much worse shape and should be avoided except for unique situations. The economy has much farther to go to see a bottom.
New lows in stocks. As the magnitude of the disaster grows, there is a significant probability we will see new lows in the stock markets. If this happens, it will probably present a buying opportunity. Look for record volume in shares traded as the signal we've seen the bottom.
However, do not expect a quick rebound. Paterson expects a double or triple bottom in stocks before all selling is done.
TACTICS
Continue money market arbitrage. Paterson is advising clients to take advantage of the double digit yields in high quality short term paper. These assets can be funded profitably with deposits and the book matched nearly to the day.
Do not run a mis-matched book.
Avoid commercial real estate.
Expand prudent residential real estate lending and sell all long-term assets in the secondary market.
Balance sheet lending is extremely risky.
STRATEGY
Make senior management and the Board aware of the successes of the risk management team. Suggest bonuses for continued excellent performance.
Cooperate with regulators to understand their concerns and allay their fears.
The cost of long-term corporate debt has declined more than 100 BPs, but is still at historic spreads to Treasuries.
MONEY CONTINUES TO GROW
The Fed's policy of adding reserves to the system continued in the past two weeks, and the monetary base is now twice it's value in September of 2008.
Here is the raw data.
2008-09-10 874.703
2008-09-24 939.395
2008-10-08 1014.655
2008-10-22 1174.106
2008-11-05 1265.015
2008-11-19 1506.539
2008-12-03 1502.872
2008-12-17 1689.661
2008-12-31 1728.184
2009-01-14 1773.924
Paterson is confident that the Fed's action to support the fixed income markets with massive purchases of securities will shorten the recession by many years.
REAL ESTATE LENDING RESUMES
Even as the economy continues to deteriorate from the collapse in wealth in the stock and property markets, the business of lending is stabilizing.
In California the number of homes sold last month increased nearly 200%.
As this trend continues, the housing market will stabilize.
However, do not expect the trend of the last 20 years to resume. Growth in the value of real estate was caused by the decline in interest rates due to the elimination of inflation. That game is over.
SUMMARY
The Fed's actions to stabilize money growth are succeeding, suggesting a resumption of economic growth in months, not years.
Residential real estate lending - at prudent underwriting standards - is safe again. It is unlikely we will see much more of a sell-off in residential real estate.
Commercial real estate is in much worse shape and should be avoided except for unique situations. The economy has much farther to go to see a bottom.
New lows in stocks. As the magnitude of the disaster grows, there is a significant probability we will see new lows in the stock markets. If this happens, it will probably present a buying opportunity. Look for record volume in shares traded as the signal we've seen the bottom.
However, do not expect a quick rebound. Paterson expects a double or triple bottom in stocks before all selling is done.
TACTICS
Continue money market arbitrage. Paterson is advising clients to take advantage of the double digit yields in high quality short term paper. These assets can be funded profitably with deposits and the book matched nearly to the day.
Do not run a mis-matched book.
Avoid commercial real estate.
Expand prudent residential real estate lending and sell all long-term assets in the secondary market.
Balance sheet lending is extremely risky.
STRATEGY
Make senior management and the Board aware of the successes of the risk management team. Suggest bonuses for continued excellent performance.
Cooperate with regulators to understand their concerns and allay their fears.
Tuesday, January 06, 2009
Money Explosion Continues
Growth in the monetary base continues.
Since September, 2008 when the monetary base stood at $870 billion, the Fed has added more than $800 billion to the base.
With stimulus like this, the recession will be shortened by years, bringing the return to growth in the next year or two.
OTHER MONEY NUMBERS
MZM which had been stagnant, is now growing.
Here is the raw data.
Here is the rate of growth data.
M2 Growth Signals Economic Recovery
M2 is a leading indicator, signaling both financial and commercial expansion.
The rate of growth in M2 is soaring, approaching 10%
COMMERCIAL AND INDUSTRIAL LOANS
The problem now is to get banks to lend.
Though flush with cash, thanks to Fed actions, Banks are reluctant to lend to Commercial and Industrial companies for two reasons.
One, the uncertainty of every company's balance sheet in this world of Interest Rate and Credit Default swaps. Until this confusion is cleared away, very few financial institutions will take the risk of lending.
Two, economic uncertainty also brings a halt to lending. As economic activity collapses, even good companies might not be able to pay back their loans.
REAL ESTATE LOANS
The surprising fact is real estate loans are holding up well.
INTEREST RATES AND SPREADS
Credit spreads have stopped widening.
Of all the signs that the credit crisis is ending, this is the one most watched by forecasters.
The drop in BAA yields by 100 basis points is a sign that lower quality credits are finding buyers.
SUMMARY, TACTICS, AND STRATEGY
In summary, the Fed's aggressive expansion of the monetary base has shortened a 10 year depression into a 3 year recession.
Though it is not time to invest or lend yet, that time will soon be here.
Tactics
Continue money market arbitrage, extending deposit maturities to 2 years, and adding high-yield assets.
Spreads of 1,000 basis points on AAA quality credits are not uncommon.
Stragegy
Prepare senior management and the board for continued earnings enhancement thanks to the investment department. Focus attention on finding high-yield assets.
Since September, 2008 when the monetary base stood at $870 billion, the Fed has added more than $800 billion to the base.
With stimulus like this, the recession will be shortened by years, bringing the return to growth in the next year or two.
OTHER MONEY NUMBERS
MZM which had been stagnant, is now growing.
Here is the raw data.
Here is the rate of growth data.
M2 Growth Signals Economic Recovery
M2 is a leading indicator, signaling both financial and commercial expansion.
The rate of growth in M2 is soaring, approaching 10%
COMMERCIAL AND INDUSTRIAL LOANS
The problem now is to get banks to lend.
Though flush with cash, thanks to Fed actions, Banks are reluctant to lend to Commercial and Industrial companies for two reasons.
One, the uncertainty of every company's balance sheet in this world of Interest Rate and Credit Default swaps. Until this confusion is cleared away, very few financial institutions will take the risk of lending.
Two, economic uncertainty also brings a halt to lending. As economic activity collapses, even good companies might not be able to pay back their loans.
REAL ESTATE LOANS
The surprising fact is real estate loans are holding up well.
INTEREST RATES AND SPREADS
Credit spreads have stopped widening.
Of all the signs that the credit crisis is ending, this is the one most watched by forecasters.
The drop in BAA yields by 100 basis points is a sign that lower quality credits are finding buyers.
SUMMARY, TACTICS, AND STRATEGY
In summary, the Fed's aggressive expansion of the monetary base has shortened a 10 year depression into a 3 year recession.
Though it is not time to invest or lend yet, that time will soon be here.
Tactics
Continue money market arbitrage, extending deposit maturities to 2 years, and adding high-yield assets.
Spreads of 1,000 basis points on AAA quality credits are not uncommon.
Stragegy
Prepare senior management and the board for continued earnings enhancement thanks to the investment department. Focus attention on finding high-yield assets.
Sunday, November 16, 2008
Apology
For the past three months Paterson has been busy working with existing and new clients to avoid the disaster in the credit markets.
My apologies to students, casual readers, and potential clients for the absence of this weblog.
Paterson is back, explaining the situation and suggesting tactical and strategic plans for dealing with the extended downturn.
My apologies to students, casual readers, and potential clients for the absence of this weblog.
Paterson is back, explaining the situation and suggesting tactical and strategic plans for dealing with the extended downturn.
Saturday, August 09, 2008
Markets at Major Turning Points
Gold at Major Support
Most of the evidence suggests the bounce will be small, and prices will continue to drop. But, traders don't bet it that way.
Bond Refunding Successful
US Treasury sold $27 billion of notes and bonds following the largest increase in CPI since the Volcker years.
Treasury Note Futures
Treasury Bond Futures
Note that ond prices surged following a successful auction.
Corporate Bond Spreads Falling
Stocks finding Support
NYSE Composite
S&P 500
Russell 2000
SUMMARY
10 years from now this time will be seen as a major turning point in stocks. With inflation banished, and the bull market in bonds ended, only stocks will have the investment potential for the future.
Remember, stock prices rise when interest rates come down and stay down.
Most of the evidence suggests the bounce will be small, and prices will continue to drop. But, traders don't bet it that way.
Bond Refunding Successful
US Treasury sold $27 billion of notes and bonds following the largest increase in CPI since the Volcker years.
Treasury Note Futures
Treasury Bond Futures
Note that ond prices surged following a successful auction.
Corporate Bond Spreads Falling
Stocks finding Support
NYSE Composite
S&P 500
Russell 2000
SUMMARY
10 years from now this time will be seen as a major turning point in stocks. With inflation banished, and the bull market in bonds ended, only stocks will have the investment potential for the future.
Remember, stock prices rise when interest rates come down and stay down.
Wednesday, July 16, 2008
Fed and Treasury Up Again
Recent moves by the US Treasury to purchase equity in Fannie and Freddie tell us two things.
1. They are in danger of going bankrupt.
2. The treasury will not allow them to go out of business.
Even though shareholders might lose all their money, the companies will still be reconstituted by injections of US government cash.
Along with this announcement came the news that the Fed will lend to the mortgage buying behemoths if necessary.
These two actions will support home lending by ensuring the ability to sell mortgages in the secondary market.
1. They are in danger of going bankrupt.
2. The treasury will not allow them to go out of business.
Even though shareholders might lose all their money, the companies will still be reconstituted by injections of US government cash.
Along with this announcement came the news that the Fed will lend to the mortgage buying behemoths if necessary.
These two actions will support home lending by ensuring the ability to sell mortgages in the secondary market.
Friday, June 27, 2008
Inflation and the Bond Market
Bonds sank through support this month and are now back at May's support levels, now resistance for this instrument.
The question now is how low will prices go, and how high will long rates rise?
To answer this question we look at the money supply and the dollar. The first causes inflaton, and the second makes inflation worse.
MONEY SUPPLY
The monetary base is growing, but growth has been slowing for years.
This is a good sign for inflation, showing the Fed's commitment to control the supply of high-powered money.
In recent months, however, growth has accelerated slightly, but not enough to cause inflation.
Bank generated money has grown substantially in the past years, as businesses work their way through the recent Fed-caused disaster.
In recent months, growth in this leading indicator has slowed, leading to renewed confidence in the Fed's management of interest rates and the money supply.
In summary, inflationary pressures are not building, and there is no need to raise interest rates.
INFLATION AND THE DOLLAR
Price rises in the United States are connected to the falling dollar. Import prices are soaring as international demand for primary commodities pulls at suppliers.
The rise in commodity prices is directly related to the fall in the value of the dollar.
Notice the plunge in the dollar in 2006, and the simultaneous rise in PPI.
TACTICS
Prudent A/L managers will continue to lengthen liability maturities, shorten asset maturities, and work for higher spreads in lending.
Money market arbitrage is more profitable than ever, and those clients pursuing this activity have found their yields soaring dramatically.
The key to this business is a careful analysis of credit quality. High quality credits have been pushed off the curve hundreds of basis points, providing opportunities for lenders with excess cash.
STRATEGY
Now is the time to report to senior management and the Board on the A/L condition of the portfolio.
The institution is liquid, carrying good credits, good spreads, and profitable liabilities. In short, we are ready to lend to our existing customers, and prepared to take business from our weaker competitors.
The Asset/Liability department can take a bow.
The question now is how low will prices go, and how high will long rates rise?
To answer this question we look at the money supply and the dollar. The first causes inflaton, and the second makes inflation worse.
MONEY SUPPLY
The monetary base is growing, but growth has been slowing for years.
This is a good sign for inflation, showing the Fed's commitment to control the supply of high-powered money.
In recent months, however, growth has accelerated slightly, but not enough to cause inflation.
Bank generated money has grown substantially in the past years, as businesses work their way through the recent Fed-caused disaster.
In recent months, growth in this leading indicator has slowed, leading to renewed confidence in the Fed's management of interest rates and the money supply.
In summary, inflationary pressures are not building, and there is no need to raise interest rates.
INFLATION AND THE DOLLAR
Price rises in the United States are connected to the falling dollar. Import prices are soaring as international demand for primary commodities pulls at suppliers.
The rise in commodity prices is directly related to the fall in the value of the dollar.
Notice the plunge in the dollar in 2006, and the simultaneous rise in PPI.
TACTICS
Prudent A/L managers will continue to lengthen liability maturities, shorten asset maturities, and work for higher spreads in lending.
Money market arbitrage is more profitable than ever, and those clients pursuing this activity have found their yields soaring dramatically.
The key to this business is a careful analysis of credit quality. High quality credits have been pushed off the curve hundreds of basis points, providing opportunities for lenders with excess cash.
STRATEGY
Now is the time to report to senior management and the Board on the A/L condition of the portfolio.
The institution is liquid, carrying good credits, good spreads, and profitable liabilities. In short, we are ready to lend to our existing customers, and prepared to take business from our weaker competitors.
The Asset/Liability department can take a bow.
Thursday, October 04, 2007
Stock market surges following record volume
The NYSE Composite Index is bumping against record highs following record volume back in August of 2007.
As the chart below shows, stocks are still in a bull market, begun back in early 2003, and will continue higher until the Fed signals the end of monetary expansion by raising short-term rates again.
INFLATION AND THE STOCK MARKET
If inflation is coming, as we forecast in a previous weblog entry, stocks will outperform bonds by a substantial margin - perhaps as much as 10% - until the Fed realizes how badly it's blundered and starts raising the Fed Funds target again.
As inflationary pressures push into the economy, businesses will use this opportunity to raise prices on all goods and services, fattening income, earnings, and dividends.
INFLATION AND THE VALUE OF THE DOLLAR
Inflation is also lowering the value of the dollar against most trading-partner currencies, making imports more expensive, and raising domestic US prices.
The lower-valued dollar will also make exports cheaper, boosting the sales and stock prices of major US exporters.
ASSET ALLOCATION
For all these reasons Paterson Financial has moved a portion of the portfolio out of two year notes and into the NYSE composite.
The fraction of assets held in fixed income securities should be reduced to no more than 30% of assets and aggressive managers might go as low as 10% in fixed income securities.
Very aggressive money managers will consider dividend-free equities as typified by the NASDAQ 100.
Notice the index has more than doubled since the lows of 2002 and will lead the way as stocks trade higher.
If the index doubles again in the next 4 years prices will approach the highs seen last in the year 2000.
CONCLUSION
Until the Fed sees the error of its ways, prudent money managers will reduce fixed income holdings past the two year note, and will continue money market arbitrage.
STRATEGY
Asset managers must re-introduce growing inflation into their models.
The board must be notified of the potential for increasing input and output prices, interest rates, and the stock market.
Senior managers must review lending policies and procedures to make sure to place a sufficient spread in all fixed income business, and ensure a match of asset and liability maturities.
Hedging programs must be examined for opportunities presented by occasional spikes in long term debt prices.
TACTICS
Extend the amount and maturity of liabilities.
Prepare bond offerings and use the CBOT in advance of bond sales if prices spike upwards.
Increase spreads on all loan transactions.
Be aware of Treasury refundings and take advantage of price changes.
Begin active hedging on a small scale, selling into overbought US Bond futures.
As the chart below shows, stocks are still in a bull market, begun back in early 2003, and will continue higher until the Fed signals the end of monetary expansion by raising short-term rates again.
INFLATION AND THE STOCK MARKET
If inflation is coming, as we forecast in a previous weblog entry, stocks will outperform bonds by a substantial margin - perhaps as much as 10% - until the Fed realizes how badly it's blundered and starts raising the Fed Funds target again.
As inflationary pressures push into the economy, businesses will use this opportunity to raise prices on all goods and services, fattening income, earnings, and dividends.
INFLATION AND THE VALUE OF THE DOLLAR
Inflation is also lowering the value of the dollar against most trading-partner currencies, making imports more expensive, and raising domestic US prices.
The lower-valued dollar will also make exports cheaper, boosting the sales and stock prices of major US exporters.
ASSET ALLOCATION
For all these reasons Paterson Financial has moved a portion of the portfolio out of two year notes and into the NYSE composite.
The fraction of assets held in fixed income securities should be reduced to no more than 30% of assets and aggressive managers might go as low as 10% in fixed income securities.
Very aggressive money managers will consider dividend-free equities as typified by the NASDAQ 100.
Notice the index has more than doubled since the lows of 2002 and will lead the way as stocks trade higher.
If the index doubles again in the next 4 years prices will approach the highs seen last in the year 2000.
CONCLUSION
Until the Fed sees the error of its ways, prudent money managers will reduce fixed income holdings past the two year note, and will continue money market arbitrage.
STRATEGY
Asset managers must re-introduce growing inflation into their models.
The board must be notified of the potential for increasing input and output prices, interest rates, and the stock market.
Senior managers must review lending policies and procedures to make sure to place a sufficient spread in all fixed income business, and ensure a match of asset and liability maturities.
Hedging programs must be examined for opportunities presented by occasional spikes in long term debt prices.
TACTICS
Extend the amount and maturity of liabilities.
Prepare bond offerings and use the CBOT in advance of bond sales if prices spike upwards.
Increase spreads on all loan transactions.
Be aware of Treasury refundings and take advantage of price changes.
Begin active hedging on a small scale, selling into overbought US Bond futures.
Friday, April 13, 2007
Correction is Over
As the chart of the NYSE Composite shows, the correction is over.
Prices make a double bottom
Trade up through resistance
Fed warns against inflation
Fed won't lower short rates any time soon
Stock prices retreat for one day
Prices make new highs for the move.
This correction is over.
Time to get back in the market and put that new money to work.
Prices make a double bottom
Trade up through resistance
Fed warns against inflation
Fed won't lower short rates any time soon
Stock prices retreat for one day
Prices make new highs for the move.
This correction is over.
Time to get back in the market and put that new money to work.
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