Pimco Sees Taper in Worst MBS Slump Since 1999: Credit Markets – Bloomberg 08-30-13

Salient to Investors:

Michael Cudzil at Pimco said:

  • The Fed will taper because it looks at progress over a long-term period of time, rather than any one given month, and because there are doubts among some policy makers about how effective QE has been in boosting the economy amid concern it may spur excessive risk-taking.
  • The Fed has prepared the markets and will take this as an opportunity to make the move and see how they react.
  • The Fed may slow its home-loan debt buying less than its Treasury acquisitions because of signs of housing weakening and because recent academic papers argue that Treasury buying is less impactful.
  • The Fed is most likely to equally reduce mortgages and Treasuries purchases, while some Fed policy makers prefer owning only Treasuries. Falling mortgage issuance may make it harder for the Fed to find enough bonds to buy at the current pace, and slowing debt repayments mean the asset may remain outstanding for longer on its balance sheets than officials want.

Average rates for 30-yr mortgages reached a 2-year high of 4.58 percent last week. The 35 percent increase over 17 weeks in the 30-year fixed home loans is the fastest in a comparable period since at least 1972.

Joseph Galligan at DoubleLine Capital said rising rates will impact the housing recovery and Fed officials know this, and the Fed is most likely to equally reduce mortgages and Treasuries purchases.

Nicholas Strand et al at Barclays expect tapering in September, and said the Fed’s lower buying will be especially important for agency mortgage bonds because there is no obvious source of extra demand, as banks face new regulations, REITs are unlikely to raise new capital after stock slumps, and bond mutual funds face redemptions.

New US homes sales in July fell the most in more than 3 years and to a level lower than any forecast of 74 economists.

Laurie Goodman et al at Amherst Securities said higher rates have reduced refinancings in 15 of the past 16 weeks and to a 2-year low, paring expectations for mortgage-bond issuance, and that without any stimulus pullback, the Fed’s buying will account for 75 percent of the type of new bonds it is targeting by Q4. The analysts said that simple math means the Fed must taper dramatically, as it needs to cut purchases by 40 percent if it is to maintain its 56 percent share of issuance in Half1.

Ankur Mehta et al at Citigroup said investors should not jump to the conclusion that the Fed will need to reduce its buying to avoid disrupting the market’s liquidity because originators typically use forward contracts to sell future issuance a month or two before completing loans, meaning the Fed’s growing share of buying is already occurring, while at the same time, data show fewer failed trades and other measures are not signaling bonds are hard to find. The Citigroup analysts believe the Fed could modestly bias their tapering towards Treasuries in the September meeting, but that preference is unlikely to be very decisive.

Matt Jozoff et al at JPMorgan expect tapering to start in September, along with 65 percent of economists.

Mahesh Swaminathan et al at Credit Suisse assign a high probability to a September tapering despite the recent string of weak economic data, but said that even if tapering is delayed, the continued overhang of tapering soon should limit relative gains in home-loan securities, and recommended investors add to bets that certain bonds will underperform rate swaps.

Read the full article at  http://www.bloomberg.com/news/2013-08-30/pimco-sees-taper-in-worst-mbs-slump-since-1999-credit-markets.html

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S&P 500 Extends Worst Month Since May 2012 – Bloomberg 08-30-13

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Luca Jellinek at Credit Agricole Corporate & Investment Bank said it is the third time the court turns down budget-saving measures, but ultimately it won’t derail what’s going on in Portugal, it just makes it less efficient and harder to slim down the state.

Read the full article at  http://www.bloomberg.com/news/2013-08-29/dollar-gains-after-gdp-as-japan-futures-rise-oil-slips.html

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Treasuries Drop in Longest Stretch of Losses in 2 Years on Fed – Bloomberg 08-30-13

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Ian Lyngen at CRT Capital said a slightly better non-farm payrolls report would trigger tapering – it is just a question of size and composition.

65 percent of economists expect tapering in September.

Stone & McCarthy Research Associates said the securities scheduled to be purchased by the Fed during September should have an average duration of approx 9 years, and will be concentrated in the 7-to 10-yr and 20- to 30-yr sectors.

Investors bid for 2.43 times the amount of 7-yr notes for sale yesterday, the lowest ratio since May 2009. The 5-yr sale on August 28 drew bids of $2.38 for every dollar sold in debt, the least since July 2009. The August 27 auction of 2-yr notes attracted the most demand since April.

Thomas Simons at Jefferies sees no evidence of increasing inflationary pressures, and the year-over-year deflator is far below 2 percent.

The Thomson Reuters/University of Michigan final index of consumer sentiment for this month fell to 82.1, above the median economist estimate.

Read the full article at  http://www.bloomberg.com/news/2013-08-30/treasuries-set-for-fourth-monthly-drop-amid-fed-taper-prospects.html

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U.S. Mint August Sales of Gold Coins Slump to Lowest Since 2007 – Bloomberg 08-30-13

Salient to Investors:

August sales of gold coins by the US Mint were the lowest since July 2007, retreating for the fourth straight month.

Paul Kavanaugh at FuturePath Trading said after the April surge we have not seen that kind of demand as equities and the dollar look more attractive.

Read the full article at  http://www.bloomberg.com/news/2013-08-30/u-s-mint-august-sales-of-gold-coins-slump-to-lowest-since-2007.html

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Baum’s View on Money – Bloomberg 08-30-13

Salient to Investors:

Caroline Baum writes:

C. Fred Bergsten says Sweden combines a social welfare society with a free-market economy and a high degree of government efficiency: nearly two-thirds of Swedes confirm by phone that the tax form prepared for them by authorities is correct.

Michael McDonald at Bloomberg News says that Summers, as president of Harvard, used interest-rate swaps to lock in a low rate for financing a science complex.

Felix Salmon at Reuters says Summers would be the most political Fed chair in living memory: he has spent most of the past 5 years doing everything in his power to shape and advance Obama’s agenda.

 The top 5 economic blogs are: Conscience of a Liberal (Paul Krugman), Economix, FT Alphaville, Vox and Marginal Revolution.

Read the full article at http://www.bloomberg.com/news/2013-08-30/baum-s-view-on-money.html

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Investors Are Doing Better Than Workers – Bloomberg 08-30-13

Salient to Investors:

Matthew C. Klein writes:

GDP has been expanding at the same rate in half1 as it has since mid-2010, showing that Fed stimulus has offset fiscal tightening.

However, growth is still too anemic to return to anything resembling full employment for several more years, even under the most optimistic assumptions.

US Bureau of Economic Analysis data indicates that most of the modest growth has gone to the small share of the population that owns the vast majority of the country’s assets. Since the beginning of 2013, total personal income has increased by $323.3 billion, while total employee compensation has increased by $112.5 billion. Income from real estate rent, dividends on stocks and interest payments on bonds accounted for $186.7 billion. The balance came from Social Security, Medicare, Medicaid, and veterans’ benefits. Workers average share of income growth since the beginning of 2010 is about half.

Higher returns on assets have not encouraged new business investment, while disproportionate employment growth has been in low-paying services industries, despite most of the jobs lost in the recession paid wages closer to the median income.

Read the full article at http://www.bloomberg.com/news/2013-08-30/investors-are-doing-better-than-workers.html

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Weil’s View on Finance, Afternoon Edition – Bloomberg 08-30-13

Salient to Investors:

Steve Hanke at Johns Hopkins University said inflation is always and everywhere a monetary phenomenon, but hyperinflation is always and everywhere a political phenomenon.

Ricardo Hausmann at Harvard says the Fed’s planned tapering is not the only reason why emerging-market stocks and bonds are down. Hausmann said for most emerging markets, economic growth from 2003 to 2011 was caused by terms-of-trade improvements, capital inflows, and real appreciation, and these mean-reverting processes are reverting and the buoyant performance of the recent past is unlikely to return any time soon.

Gillian Tett at the Financial Times said most hedge fund leaders have done a dismal job of orderly succession.

Yves Mersch at ECB said investor confidence has been damaged by the perception that some supervisors have not been tough enough with their domestic banks. Mersch said the average price-to-book ratio of large and complex banking groups in the euro area is only 0.5, which implies that investors think banks are overvaluing their assets, will not meet their required rates of return, or will require new capital.

Read the full article at  http://www.bloomberg.com/news/2013-08-30/weil-s-view-on-finance-afternoon-edition.html

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Surrounded by Turmoil, Korea Faces Midlife Crisis – Bloomberg 08-29-13

Salient to Investors:

William Pesek writes:

Scary drops in the Indian rupee, Indonesian rupiah, Malaysian ringgit and Thai stocks are fueling anxieties almost everywhere.

Korea is a rare exception. A current-account surplus equal to 4.9 percent of GDP, a well-performing won the IMF says is undervalued, and expectations for 4 percent growth in 2014.

Investors who bet against Korea over the last 15 years have not done very well.

Timothy Moe at Goldman Sachs said in June that worries related to Fed tapering are unlikely to impact Korean equities as much as the rest of Asia.

Korea’s real challenge is to find a new economic model to replace its previous dependence on exports, but it is moving too slowly.

Lee Jin-Woo at NH Investment & Futures said how Park intends to shake up Korea is all very vague, and the definitions keep shifting – no one knows what the president means or what she is doing.

Using slogans and photo opportunities with Mark Zuckerberg hasn’t worked for Singapore.

Reducing the role of Chaebol, family-run conglomerates, is central to making Korea more dynamic, but Park’s predecessor squandered his term broadening it. Unfortunately Park this week asked the Chaebol to increase investment to hasten economic growth and in return, promised she would prevent regulations from obstructing their business activities.

Scrapping a 5-year-old proposal to sell Korea Development Bank signals that Korea plans to follow the China banking model, now shackled with bad debts run up by indiscriminate lending to favored enterprises.

Korea is not headed for a lost decade as Koreans have proved time and time again that doubting their tenacity is a sucker’s bet, but one should not ignore the risk.

Read the full article at  http://www.bloomberg.com/news/2013-08-29/surrounded-by-turmoil-korea-faces-midlife-crisis.html

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‘Caravaggio’ Miss Means $219 Art May Be Worth $16 Million – Bloomberg 08-29-13

Salient to Investors:

Charles Beddington said Caravaggio is a particularly difficult artist as the quality of his execution is variable, and so he’s easy to copy. Beddington said the big auction houses are keen to avoid bad publicity and are extremely careful about consulting the relevant academics.

Samson Spanier said several recent high-profile cases suggest a rise in art litigation as collectors are increasingly willing to sue to recoup losses, and because the authenticity of works of art is becoming easier to prove as more scientific tests are being used.

Authenticated works by Michelangelo Merisi da Caravaggio rarely appear on the art market, and no painting catalogued as being by the artist has appeared at auction this century. His paintings are coveted by many wealthy art collectors for their rarity.

Many historians regard Caravaggio as the most innovative artist of the Baroque period.

Works of art whose true value is missed by cataloguers, known as sleepers, can create difficulties for auction houses once owners become aware of lucrative after-sales. Cases involving sleepers at international auction houses have mostly been settled before going to trial.

Read the full article at  http://www.bloomberg.com/news/2013-08-29/caravaggio-miss-means-219-painting-may-be-worth-16-million.html

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