Five Things You Need to Know: Credit Crunch Wins in Split Decision
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Credit Crunch Wins in Split Decision
The Bank of England today cut interest rates for the second time in three months, lowering the benchmark by a quarter point to 5.25%, while the European Central Bank kept its key rate unchanged at 4%; call it a split decision.
The Bank of England decision was largely expected and BoE Governor Mervyn King has recently acknowledged the "difficult balancing act" between what they are perceiving as inflationary pressures and credit market issues.
The wild card was the ECB decision. ECB President Jean-Claude Trichet's comments following the decision to leave the key rate unchanged were noteworthy. On the one hand, Trichet said he has never subscribed to a global "decoupling theory" where a slowdown in the United States, for example, could remain isolated from growth in the rest of the world. "If any component of the world goes up or down it influences the rest of the world," he said. On the other, he apparently remains unconcerned about credit market contagion, saying, "Continued strong loan growth suggests that the supply of bank credit in euro area has not been impaired by financial turmoil so far."
2. As Expected, Pending Home Sales Fall More Than Expected
Pending home sales fell more than forecast in December, which was largely expected. The National Association of Realtors reported that their Pending Home Sales Index, which is based on contracts signed but not yet closed, fell 1.5% in December. The drop follows a revised 3 percent decline for November that was larger than previously reported. The index was down 24.2% year-over-year.
Meanwhile, the NAR lowered their forecast for existing-home sales this year to 5.38 million units from their January forecast of 5.7 million. However, Lawrence Yun, NAR chief economist, is optimistic that "pent-up demand" will return, especially if loan limits for the GSE's, Freddie Mac (FRE) and Fannie Mae (FNM), are increased. "Existing-home sales have moved narrowly since last September, but when the full impact of higher loan limits for conventional mortgages begins to impact the market there is likely to be a notable rise in home sales and prices," Yun said.
The problem with this optimism is that there are actually few loans being originated that do not already qualify under current loan caps, and at the rate prices are declining, the need to expand the caps will soon be a moot point. This is an oversupply issue, not a loan cap issue, and to place the bottom of the housing market at the doorstep of expanding loan limits is, well, just a sad failure to discern reality.
3. Fed's Plosser Covers All the Bases
Taking a look at Philadelphia Fed President Charles Plosser's speech delivered yesterday to the Birmingham Rotary, it's noteworthy that not one, not two, but three different forms of "-flation" were mentioned or alluded to.
Plosser began with inflation and an allusion to stagflation: "Unfortunately, I expect little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help. All you have to do is recall the 1970s when we experienced both high unemployment and high inflation to appreciate that slow economic growth and lower inflation do not necessarily go hand in hand."
But he also uttered the central bank's dreaded D-word: "Taking expected inflation into account, the level of the federal funds rate in real terms — what economists call the real rate of interest — is now approaching zero. That is clearly an accommodative level of real interest rates. The last time the level of real interest rates was this low was in 2003-2004. But that was a different time with a different concern — deflation — and we were intentionally seeking to prevent prices from falling. Recently we have had reason to be worried about rising inflation, not declining prices."
By now, you know I think that will change.
Finally, Plosser noted the limitations of monetary policy. Increasingly, as we have seen in Fed Chairman Ben Bernanke's recent comments, the Fed is doing what all worthy bureaucratic institutions do - distancing itself from shouldering full responsibility for solving the debt crisis:
"Although it might be tempting to think that monetary policy is the solution to most, if not all, economic ills, this is not the case. I think it is particularly important, for example, to recognize that monetary policy cannot solve all the problems the economy and financial system now face. It cannot solve the bad debt problems in the mortgage market. It cannot re-price the risks of securities backed by subprime loans. It cannot solve the problems faced by those financial firms at risk of being given lower ratings by rating agencies because some of their assets are now worth much less than previously thought. The markets will have to solve these problems, as indeed they will. But it will take some time."
4. We're Talking Ourselves Into This Slowdown
Cisco (CSCO) last night warned that revenue growth in the third quarter will fall to 10%, well below the 15% level most analysts were expecting. And just who or what is to blame for this revenue slowdown? According to Cisco Chief Executive Officer John Chambers, we have no one to blame but ourselves.
Sure the overall slowdown in the U.S. and Europe is being felt as much by Cisco as other companies, but it's not a "real" slowdown, according to Chambers, but an imagined one. On the company's conference call, Chambers said, "I think we are actually talking ourselves into this slowdown."
He then used what he called "the treadmill example" to illustrate how we are responsible for the company's missed forecast. "Over the last three or four months, I felt pretty good about business until I got on my treadmill and then I quit early because of the pessimism that exists in the market.
We'll simply point out that, in a sense, Chambers is right: we are talking ourselves into this slowdown. The question is, why? Because, that's what happens in every slowdown.
Remember, social mood drives social action; social action does not drive social mood. This is counterintuitive, but a negative social mood de-motivates people to produce more, purchase more and behave generally in an upbeat manner. A positive social mood, on the other hand, motivates people to produce more, spend more, take on more credit and expand businesses.
5. Daily Contrary Indicator: Euros Being Accepted in Manhattan Stores?
This weekend while going through one of the closets, my wife and I found a decent pile of euros we had forgotten to exchange following a trip. It wasn't quite like winning the lottery, but it was close. That's how beaten down the dollar is.
Anyway, I was running through my head where the least expensive place to exchange them would be when my wife pointed out an article in the New York Times Travel section, "The Greenback Is Losing Appeal." According to the article, East Village Wines, a liquor store on First Avenue, accepts payments in euros as well as dollars.
And this morning we noticed a Reuters article on the proliferation of retailers in New York now accepting euros. Meanwhile, the lowly dollar is up .8% year-to-date even as the Federal Reserve has slashed interest rates by 125 basis points.
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I'm not all that well versed with European credit, but I'm wondering he's seeing the same kind of loan growth we're seeing in the US:
-CFC reporting an $8Bn increase in its HELOC book in the 4th quarter of 2007 alone from $25Bn (@ 9/30/07) to $33bn. Anyone else think that this new debt is likely being drawn by customers to make their 1st lien debt payments? And does anyone else think that furthermore those payments are paying almost entirely interest expense and aren't touching the principal? It's no big surprise that they shut down their borrowers' unused HELOC limits shortly after this report came out. Frankly I'm surprised this issue didn't get more press coverage.
-Corporates drawing down backup revolvers since the CP markets are shut down.
There are very few new commitments being made, but banks are being forced to made good on previous commitments. The only loan growth that is currently happening represents further capital stress on the banks. Corporate credit spreads and CMBS spreads continue to gap out daily with no end in sight. As long as that is happening, primary issuance can't improve. This credit crisis is far from over.
"We'll simply point out that, in a sense, Chambers is right: we are talking ourselves into this slowdown. The question is, why? Because, that's what happens in every slowdown."
Your answer to the question of "why are we talking ourselves into the slowdown" (A: Because it happens in every slowdown) begs another: "Why does this happen in every slowdown?" The answer to that question could also have answered your original "why" - The news media scaring the public. That's why it happens every time.
"Remember, social mood drives social action; social action does not drive social mood. This is counterintuitive, but a negative social mood de-motivates people to produce more, purchase more and behave generally in an upbeat manner. A positive social mood, on the other hand, motivates people to produce more, spend more, take on more credit and expand businesses."
So hush up already. I am not a permabull and do not pretend that the state of the financial, housing, etc. markets aren't bad, and that there is a shifting tide for some in the US, but you and every member of the media like you are scaring the bejesus out of people who are in actuality, just fine financially (which coincidentally is most people). Yes, I said it - most people in this country are just fine. They just think they are in a bad spot because everyone is telling them they are.
A dose of perspective is in order - my 62 year old father has lived through numerous recessions, finanical crises, etc. and he has lived to prosper and tell about it. If the paradigm of "it's different this time" never changes on the way up, why should it be any different on the way down? The way I read it from most sources, I should be stockpiling potable water and beenie-weenies. Yes, wealth will be destroyed in the short term, but for those who play the sure-fire (short of nuclear holocaust) winning market strategy (long term investing, DCA, asset allocation, rebalancing), things will work out ok.
As a journalist, give us the truth but also some perspective and context - don't just throw out a bunch of scary numbers and anecdotes. That goes especially for your boy Shedlock.
That being said, I read your column daily and appreciate the humor. I look forward to busting your cajones in the future.
Reality is during an expansion everyone runs like hell, at work, in investing, at play, etc. At some point we reach a collective "I'm tired" and we hit the reset button. Always have, always will. If your Dad is 62, you are most likely in your early to mid 30's so you may not have hit your first "wall" but trust me, you soon will and then all this will make sense.
On February 7th at 02:45 PM
Chris Brown wrote:
I agree with Chambers, and apparently, so do you:
"We'll simply point out that, in a sense, Chambers is right: we are talking ourselves into this slowdown. The question is, why? Because, that's what happens in every slowdown."
Your answer to the question of "why are we talking ourselves into the slowdown" (A: Because it happens in every slowdown) begs another: "Why does this happen in every slowdown?" The answer to that question could also have answered your original "why" - The news media scaring the public. That's why it happens every time.
"Remember, social mood drives social action; social action does not drive social mood. This is counterintuitive, but a negative social mood de-motivates people to produce more, purchase more and behave generally in an upbeat manner. A positive social mood, on the other hand, motivates people to produce more, spend more, take on more credit and expand businesses."
So hush up already. I am not a permabull and do not pretend that the state of the financial, housing, etc. markets aren't bad, and that there is a shifting tide for some in the US, but you and every member of the media like you are scaring the bejesus out of people who are in actuality, just fine financially (which coincidentally is most people). Yes, I said it - most people in this country are just fine. They just think they are in a bad spot because everyone is telling them they are.
A dose of perspective is in order - my 62 year old father has lived through numerous recessions, finanical crises, etc. and he has lived to prosper and tell about it. If the paradigm of "it's different this time" never changes on the way up, why should it be any different on the way down? The way I read it from most sources, I should be stockpiling potable water and beenie-weenies. Yes, wealth will be destroyed in the short term, but for those who play the sure-fire (short of nuclear holocaust) winning market strategy (long term investing, DCA, asset allocation, rebalancing), things will work out ok.
As a journalist, give us the truth but also some perspective and context - don't just throw out a bunch of scary numbers and anecdotes. That goes especially for your boy Shedlock.
That being said, I read your column daily and appreciate the humor. I look forward to busting your cajones in the future.
This is the plankton theory Pimco has written about on occaission.
Down as it is, the Dollar is still not some banana republic scrip where there's an opportunity for significant additional profits by holding onto foreign "hard" currency 'till the end of the week...
I did not say to blame the media for the structural downfalls in the economy at this point. I may only be in my early 30's, but I am not naive/paranoid enough for that.
My point had nothing to do with what actually caused the economic stressors we currently face - it had everything to do with Kevin's/Chambers point that we are talking ourselves into a slowdown, that in my opinion, is worse than it should be. People who are fine are going into hiding because every day they are bombarded with incredibly negative financial messages focused on the short term (read 1-5 years) that tell them everything is going to hell in a handbasket. When the Today Show (the beacons of intelligent financial journalism that they are) is doing features on how bad the economy is w/o any context, the housewife watching it immediately thinks "sheesh, Anne Curry just told me our economy is in big trouble, I'm scared!" whether or not anything has materially changed with her situation.
And just to be clear, I also believe the media is at fault on the other side, when markets have upside momentum. I find fault just as much with the Kudlows/Steins of the world whose endless cheerleading benefits no one.
Your response to my first post points to the psychological nature of the beast - how does the media not fan these flames with daily messages of extreme short term optimism/pessimism? In what way does the media not teach people to focus on the short term machinations of the markets and economy? I believe that disavowing the power of the media "tail" to wag the "dog" is naive itself.
I guess in the end I shouldn't be so worked up over this, though. It is the herding behavior of the masses on the way up/down that creates the great buying/selling opportunites for those of us with a long term focus and plan.
On February 7th at 03:09 PM
Scott Dietz wrote:
Blame the media. The most used explanation in all walks of life.
Reality is during an expansion everyone runs like hell, at work, in investing, at play, etc. At some point we reach a collective "I'm tired" and we hit the reset button. Always have, always will. If your Dad is 62, you are most likely in your early to mid 30's so you may not have hit your first "wall" but trust me, you soon will and then all this will make sense.
On February 7th at 02:45 PM
Chris Brown wrote:
I agree with Chambers, and apparently, so do you:
"We'll simply point out that, in a sense, Chambers is right: we are talking ourselves into this slowdown. The question is, why? Because, that's what happens in every slowdown."
Your answer to the question of "why are we talking ourselves into the slowdown" (A: Because it happens in every slowdown) begs another: "Why does this happen in every slowdown?" The answer to that question could also have answered your original "why" - The news media scaring the public. That's why it happens every time.
"Remember, social mood drives social action; social action does not drive social mood. This is counterintuitive, but a negative social mood de-motivates people to produce more, purchase more and behave generally in an upbeat manner. A positive social mood, on the other hand, motivates people to produce more, spend more, take on more credit and expand businesses."
So hush up already. I am not a permabull and do not pretend that the state of the financial, housing, etc. markets aren't bad, and that there is a shifting tide for some in the US, but you and every member of the media like you are scaring the bejesus out of people who are in actuality, just fine financially (which coincidentally is most people). Yes, I said it - most people in this country are just fine. They just think they are in a bad spot because everyone is telling them they are.
A dose of perspective is in order - my 62 year old father has lived through numerous recessions, finanical crises, etc. and he has lived to prosper and tell about it. If the paradigm of "it's different this time" never changes on the way up, why should it be any different on the way down? The way I read it from most sources, I should be stockpiling potable water and beenie-weenies. Yes, wealth will be destroyed in the short term, but for those who play the sure-fire (short of nuclear holocaust) winning market strategy (long term investing, DCA, asset allocation, rebalancing), things will work out ok.
As a journalist, give us the truth but also some perspective and context - don't just throw out a bunch of scary numbers and anecdotes. That goes especially for your boy Shedlock.
That being said, I read your column daily and appreciate the humor. I look forward to busting your cajones in the future.
I was going to reply to you and then figured others might like the thread.
First, if in any way I sugeested you were naive, sorry. Not my intent, but could see how it might be read that way. My intent was to show the folly of blaming anyone much less the media.
If what you say is true about media fanning the flames, then why did we have recessions and depression in days of yore that were MUCH more wild and hairy than anything we have seen since WWII and increased media coverage?
Sure the media may have some power to wag the tail, but only if what they say rings true to enough of those hearing their message. To ascribe significant power to the media or anyone else is to surrender your own power and your obligation to do due diligence on anything you hear, read or see. If you catch them in error, call them out on it. Kevin will tell you I at least partly have done so with him already in the short time I have been around Minyanville!
On February 7th at 03:44 PM
Chris Brown wrote:
Scott,
I did not say to blame the media for the structural downfalls in the economy at this point. I may only be in my early 30's, but I am not naive/paranoid enough for that.
My point had nothing to do with what actually caused the economic stressors we currently face - it had everything to do with Kevin's/Chambers point that we are talking ourselves into a slowdown, that in my opinion, is worse than it should be. People who are fine are going into hiding because every day they are bombarded with incredibly negative financial messages focused on the short term (read 1-5 years) that tell them everything is going to hell in a handbasket. When the Today Show (the beacons of intelligent financial journalism that they are) is doing features on how bad the economy is w/o any context, the housewife watching it immediately thinks "sheesh, Anne Curry just told me our economy is in big trouble, I'm scared!" whether or not anything has materially changed with her situation.
And just to be clear, I also believe the media is at fault on the other side, when markets have upside momentum. I find fault just as much with the Kudlows/Steins of the world whose endless cheerleading benefits no one.
Your response to my first post points to the psychological nature of the beast - how does the media not fan these flames with daily messages of extreme short term optimism/pessimism? In what way does the media not teach people to focus on the short term machinations of the markets and economy? I believe that disavowing the power of the media "tail" to wag the "dog" is naive itself.
I guess in the end I shouldn't be so worked up over this, though. It is the herding behavior of the masses on the way up/down that creates the great buying/selling opportunites for those of us with a long term focus and plan.
On February 7th at 03:09 PM
Scott Dietz wrote:
Blame the media. The most used explanation in all walks of life.
Reality is during an expansion everyone runs like hell, at work, in investing, at play, etc. At some point we reach a collective "I'm tired" and we hit the reset button. Always have, always will. If your Dad is 62, you are most likely in your early to mid 30's so you may not have hit your first "wall" but trust me, you soon will and then all this will make sense.
On February 7th at 02:45 PM
Chris Brown wrote:
I agree with Chambers, and apparently, so do you:
"We'll simply point out that, in a sense, Chambers is right: we are talking ourselves into this slowdown. The question is, why? Because, that's what happens in every slowdown."
Your answer to the question of "why are we talking ourselves into the slowdown" (A: Because it happens in every slowdown) begs another: "Why does this happen in every slowdown?" The answer to that question could also have answered your original "why" - The news media scaring the public. That's why it happens every time.
"Remember, social mood drives social action; social action does not drive social mood. This is counterintuitive, but a negative social mood de-motivates people to produce more, purchase more and behave generally in an upbeat manner. A positive social mood, on the other hand, motivates people to produce more, spend more, take on more credit and expand businesses."
So hush up already. I am not a permabull and do not pretend that the state of the financial, housing, etc. markets aren't bad, and that there is a shifting tide for some in the US, but you and every member of the media like you are scaring the bejesus out of people who are in actuality, just fine financially (which coincidentally is most people). Yes, I said it - most people in this country are just fine. They just think they are in a bad spot because everyone is telling them they are.
A dose of perspective is in order - my 62 year old father has lived through numerous recessions, finanical crises, etc. and he has lived to prosper and tell about it. If the paradigm of "it's different this time" never changes on the way up, why should it be any different on the way down? The way I read it from most sources, I should be stockpiling potable water and beenie-weenies. Yes, wealth will be destroyed in the short term, but for those who play the sure-fire (short of nuclear holocaust) winning market strategy (long term investing, DCA, asset allocation, rebalancing), things will work out ok.
As a journalist, give us the truth but also some perspective and context - don't just throw out a bunch of scary numbers and anecdotes. That goes especially for your boy Shedlock.
That being said, I read your column daily and appreciate the humor. I look forward to busting your cajones in the future.
I can see why a ton of websites are offering exchanges such as these - the free exchange of ideas is pretty addictive.
I see your point on the pre WWII depression/recession argument. However, I don't think it is quite so simple as that. There are many factors that could have contributed, i.e. serious lack of regulation in markets, newspapers/radio programs (albeit not a pervasive as today), etc. I would simply be speculating, however, if I seriously put forth a real opinion there, so I will refrain from doing so.
I think the word blame as it is being used should be qualified as well. I do not "blame" (as in take responsibility off myself and lay it at another's feet) anyone for anything. I fully believe in self-determination. However, I do think blame (as in you did something that had a direct effect) can be assigned in situations. In other words, I do not use the media as a convenient excuse for what happens to me, but I do think responsibility for certain outcomes can be assigned to them. I hope that reads the way it sounds in my head!
To your point "Sure the media may have some power to wag the tail, but only if what they say rings true to enough of those hearing their message. To ascribe significant power to the media or anyone else is to surrender your own power and your obligation to do due diligence on anything you hear, read or see." I agree 100%. The problem lies in the fact that a large portion of the general population doesn't perform the due diligence, doesn't educate themeselves, and doesn't know how/want to form their own ideas, and thereby gladly surrenders their power - they turn it over to someone else and let them do our thinking for us.
My ultimate point is that media members need to understand and remember the responsibility they have and power they hold over the public, knowing that it is an easily suggestible group...
Or maybe I should just blame the general population for being so blindly open to suggestion!
On February 7th at 04:06 PM
Scott Dietz wrote:
I was going to reply to you and then figured others might like the thread.
First, if in any way I sugeested you were naive, sorry. Not my intent, but could see how it might be read that way. My intent was to show the folly of blaming anyone much less the media.
If what you say is true about media fanning the flames, then why did we have recessions and depression in days of yore that were MUCH more wild and hairy than anything we have seen since WWII and increased media coverage?
Sure the media may have some power to wag the tail, but only if what they say rings true to enough of those hearing their message. To ascribe significant power to the media or anyone else is to surrender your own power and your obligation to do due diligence on anything you hear, read or see. If you catch them in error, call them out on it. Kevin will tell you I at least partly have done so with him already in the short time I have been around Minyanville!
By the way, failure to think for yourself applies to the media as well - that's why you get the same drivel from all sources, whether the facts are accurate or not.
On February 7th at 04:54 PM
Chris Brown wrote:
Scott,
I can see why a ton of websites are offering exchanges such as these - the free exchange of ideas is pretty addictive.
I see your point on the pre WWII depression/recession argument. However, I don't think it is quite so simple as that. There are many factors that could have contributed, i.e. serious lack of regulation in markets, newspapers/radio programs (albeit not a pervasive as today), etc. I would simply be speculating, however, if I seriously put forth a real opinion there, so I will refrain from doing so.
I think the word blame as it is being used should be qualified as well. I do not "blame" (as in take responsibility off myself and lay it at another's feet) anyone for anything. I fully believe in self-determination. However, I do think blame (as in you did something that had a direct effect) can be assigned in situations. In other words, I do not use the media as a convenient excuse for what happens to me, but I do think responsibility for certain outcomes can be assigned to them. I hope that reads the way it sounds in my head!
To your point "Sure the media may have some power to wag the tail, but only if what they say rings true to enough of those hearing their message. To ascribe significant power to the media or anyone else is to surrender your own power and your obligation to do due diligence on anything you hear, read or see." I agree 100%. The problem lies in the fact that a large portion of the general population doesn't perform the due diligence, doesn't educate themeselves, and doesn't know how/want to form their own ideas, and thereby gladly surrenders their power - they turn it over to someone else and let them do our thinking for us.
My ultimate point is that media members need to understand and remember the responsibility they have and power they hold over the public, knowing that it is an easily suggestible group...
Or maybe I should just blame the general population for being so blindly open to suggestion!
On February 7th at 04:06 PM
Scott Dietz wrote:
I was going to reply to you and then figured others might like the thread.
First, if in any way I sugeested you were naive, sorry. Not my intent, but could see how it might be read that way. My intent was to show the folly of blaming anyone much less the media.
If what you say is true about media fanning the flames, then why did we have recessions and depression in days of yore that were MUCH more wild and hairy than anything we have seen since WWII and increased media coverage?
Sure the media may have some power to wag the tail, but only if what they say rings true to enough of those hearing their message. To ascribe significant power to the media or anyone else is to surrender your own power and your obligation to do due diligence on anything you hear, read or see. If you catch them in error, call them out on it. Kevin will tell you I at least partly have done so with him already in the short time I have been around Minyanville!
Some times when I'm on the treadmill I put on a different pair of sneakers. It seems to give the workout a whole new perspective. I too hear different sources tell me they are anxious about a variety of concerns. I recently told my neighbor to just put his on the back burner. We all have concerns. His seem similar to mine. He is not working full time, while my health care is out of pocket, his is on his credit card. We both have a college age children incurring tens of thousands of dollars of debt w/6+ % interest. My son is driving without any insurance. I think I should worry about that. I also have a son recently deployed, he volunteered, said he couldn't find a livable wage. I pray his new profession does not find him catching bullets. Oh, did I mention the neighbor is a bit upside down w/the equity in his home. What the heck the water bottle next to my treadmill is half full. Hey, Mr Chambers here is an extra pair of tennies rite here in the corner, you can try these on. Yeh, they're a bit tattered but they are perfectly fine.
