Market Commentary

Several months ago it appeared the prevailing view was
April 08, 2010

Several months ago it appeared the prevailing view was a double dip recession was all but inevitable.  Today consensus is suggesting that such a rare event will not occur and the recovery is gaining momentum. [Note:  As written many times there was only one such occurrence of a double dip recession, one that was orchestrated by the Federal Reserve in 1981 to crush inflationary pressures.]

This much heralded but misguided double dip forecast is about accurate that the largest banks were bailed out by the tax payer, costing billions.  As widely known most of the largest banks were forced to take TARP regardless of need in an attempt to quell financial panic.

For the record, I supported and still support TARP.  It accomplished its objective for where I sat I ardently believed the financial system was on the verge of total implosion and drastic action was required.

As per SNL, 18 of the19 largest banks have repaid TARP.   The one that has not is the non public 55% government owned GMAC.  As per SNL of the 49 firms that have “fully exited” and repaid $118.9 billion in TARP loans, (approximately $245 billion in TARP funds were lent to banks) the Treasury has made $10.5 billion or 8.5%.   Treasury data states $179 billion has been or is expected to be repaid.

As per a March 2010 CBO estimate, the Treasury is expecting to lose a total of $109 billion of the $750 billion of TARP loans made, a total that includes financing to AIG and the auto industry.  This is down from the March 2009 estimate of $356 billion. 

While any comments regarding potential losses would be rhetorical and conjectural in nature, any potential losses are not from the largest banks.  As already written the largest banks have already repaid the Treasury and the taxpayer made money. 

As per the CBO the majority of the anticipated losses are expected to come from the auto industry ($35 billion) and from AIG ($34 billion)

I would briefly like to comment about AIG.  AIG received about $180 billion in tax payer assistance.  I ask was AIG bailed out or were the policy holders of AIG bailed out?  AIG was/is a leading global insurance company involved in every aspect of the industry.

If AIG failed because of the reckless use of credit default swaps (CDS), synthetic securities to lower premium costs and to increase policy holder yields to capture more assets, many globally would have been wiped out, the effects of which would have been catastrophic.

What does yesterday’s news have to do with today?  As inferred above, today’s popular headlines are not factual.  AIG was not bailed out.  It was the policy holders.  The majority of TARPs losses are not from the banks but rather from the auto industry and an insurance company.  Making a quantum leap, a double recession is a one off event.

Yesterday the treasury auctioned $21 billion of the ten year bond.  Demand was “solid,” probably the result that yields have increased eight out of nine weeks for a myriad of reasons.  The yield curve across the entire spectrum however is extremely steep suggesting the possibility of growth induced inflation, an environment perhaps amplified by a record $1.4 trillion held in excess bank reserves as per the Federal Reserve.  As noted many times, excess reserves are historically around $1-$2 billion.

What is the odds 2010 growth could be around 4.25%-4.75%, jobless rate declining to an “eight handle” and fed funds rising to 1.0%.  As noted ad infinitum the consistency of this crisis is its inconsistencies with prevailing wisdom wrong.  The velocity of change has been incredible. 

I place the odds of the above scenario materializing around 50%.  The financial system is extremely liquid, an environment that is conducive for unexpected growth.

Commenting briefly about yesterday’s market action, bond rallied because of a successful 10-year treasury auction. Stocks fell as consumer credit declined more than expected during February.

What will occur today? Initial jobless claims are released at 8:30.

Last night the foreign markets were down. London was down 1.10%, Paris down 1.63% and Frankfurt down 1.11%.  Japan was down 1.10% and Hang Sang down 0.28%.

The Dow should open moderately lower on increasing uncertainty regarding Greece’s bailout.     The 10-year is up 1/32 to yield 3.85%.