Fed's Evans Joins the Chorus

"This is a far grimmer forecast than we ought to have," he said, for which reason he favors "much more accommodation than we've put in place."  The U.S. Federal Reserve should do "much more" monetary easing to spur a sluggish economic recovery, a top Fed official said in an interview published on Tuesday.  "In the last several months I've stared at our unemployment forecast and come to the conclusion that it's just not coming down nearly as quickly as it should," Chicago Federal Reserve Bank President Charles Evans told the Wall Street Journal.


Article here:   Fed's Evans Speaks

Add this to the choir of Fed speakers (past, present and probably future) and we can see the balance sheet expanding from sea to shining sea.  Some pumps can't be primed.  Let the market clear and move on.

Surprise RBA Decision Lifts AUD

The Reserve Bank of Australia surprised analysts by holding its interest rate at 4.50 percent, contrary to expectations of a 25-basis point rate hike. However, the central bank cautioned about further hikes before the end of the year.

 

A$ has gained steam against the greenback on the news.

Buffet - Hinting at Bond Bubble?

Investors buying bonds at the prevailing high prices are 'making a mistake,' billionaire investor Warren Buffett said.

Buffett, speaking Tuesday at Fortune's Most Powerful Women Summit in Washington, said it's "quite clear stocks are cheaper than bonds" now. He added that he "can't imagine" the rationale for adding bonds to your portfolio at current prices.


Article here:  New warning from the oracle

Question:  Is his stable of insurers pulling out of the bond market or ceasing their fixed income activities?  Thought not.

IMF Warns the West is Stuck in Near Depression

Thought there was some interesting thoughts in the following article:


IMF on Fiscal Consolidation

Some of the highlights:

• Based on a historical analysis of fiscal consolidation in advanced economies, and on simulations of the IMF’s Global Integrated Monetary and Fiscal Model (GIMF), it finds that fiscal consolidation typically reduces output and raises unemployment in the short term. At the same time, interest rate cuts, a fall in the value of the currency, and a rise in net exports usually soften the contractionary impact.
• Fiscal consolidation typically has a contractionary effect on output. A fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point. Domestic demand—consumption and investment—falls by about 1 percent.
• The model simulations also imply that, if interest rates are near zero, the effects of fiscal consolidation are more costly in terms of lost output.

Now imagine you are a country implementing fiscal austerity measures when interest rates are near zero and you cant devalue your currency.  Sound familiar?  Ever get that feeling the European vacation is going to get cheaper (as will the asking price on Greek islands).

Citi Mayo - Round 2

CITIGROUP SAYS MAYO 'HAS BEEN FLAT-OUT WRONG' ON CRITICISMS

Citi Statement on Mike Mayo Meeting

 "Citi CEO Vikram Pandit and CFO John Gerspach met with Mr. Mayo and investors on Friday afternoon. We had a productive dialogue with the investors and covered a number of topics including Citi's unique global footprint and prospects for future growth as well as other business-related matters.

 "Mr. Mayo raised several topics that he has written about recently in his research reports. He has been flat-out wrong and those criticisms were rebutted very clearly.

 "First, Mr. Mayo's claim that Citi has incorrectly accounted for our deferred tax assets is without merit.  A critical factor in determining the value of a company's deferred tax asset (DTA) is its future earnings power.  Citi has returned to profitability in 2010, and importantly, our core businesses in Citicorp represent a strong, profitable franchise.  Mr. Mayo himself estimates that Citi's net income will grow over 30% per year between 2010 and 2012 and Citi's total net income during this period by his estimates will exceed $37 billion.  Mr. Mayo's own analysis underscores Citi's return to sustained profitability and growth. This view contradicts Mr. Mayo's statement on Citi's DTA.

 "Next, Mr. Mayo recently claimed that Citi is cutting its capital expenditures and that this is a risk to the firm's long-term success. Mr. Mayo based his claim on the 'Capital expenditures on premises and equipment' line in the
Consolidated Statement of Cash Flows.  Mr. Mayo is incorrect in his assertions. In fact, the recent reduction in the capital expenditures to $1.1 billion in 2009 reflects Citi becoming a more efficient firm.  During 2006-08, we
committed the resources to build several large data centers as part of a strategy to centralize our technology. That "large ticket" spending is now completed and we are concentrating on developing platforms that support our
global businesses instead of continuing the past practices of having platforms built for each local business.  We have reduced our real estate costs by leasing more and buying less; put in place stringent cost controls; and reduced our headcount by 110,000 people -- all of which helped reduce our expenses by $11 billion last year.

 "Mr. Mayo has also asserted that Citi's discussion of our future growth prospects is a source of concern.  According to Mr. Mayo, Citi will be tempted to take inappropriate short-term risk to meet what he describes as a growth target.  Again, we disagree with his conclusion.  Citi remains very comfortable with its previously disclosed future growth expectations that were first stated by CEO Vikram Pandit on March 11 at the Citi Financial Services Conference.  Mr. Pandit said: "Over time, we believe that a compound annual growth rate for
these assets [in our core Citicorp businesses] of around 5% is not unreasonable, particularly given our growth opportunities in emerging markets."
We believe this comment on future growth is prudent and reflects the uniqueness of our global footprint, which we believe to be a source of significant future growth.  For example, approximately one-third of Citicorp's assets are in emerging markets, where GDP growth is expected to be 2-3 times that of developed economies.  Citi believes providing management's perspective about our long term growth prospects is helpful to investors and is in line with industry practice.  Mr. Mayo's assertion that our providing this perspective will somehow encourage inappropriate risk taking does not add up.

 "In summary, and as Mr. Pandit and Mr. Gerspach noted in the meeting, Citi continues to make steady progress in 2010. Despite a challenging market environment, we have earned $7.1 billion in net income year to date.  Our
capital strength remains very strong with a Tier 1 Capital Ratio of 12.0%, one of the highest ratios amongst our peer group. We have also continued to make progress on Citi Holdings, which we are unwinding in an economically rational way -- these assets made up less than 25% of our balance sheet as of June 30 -- and we expect them to be less than 20% by year-end with the sale of The Student Loan Corporation.  Throughout Citi, we are executing our strategy to serve our clients with a singular focus on our three core businesses - Transaction Services, Securities and Banking, and Regional Consumer Banking - while taking advantage of our global footprint and ability to innovate."

S&P Earnings Estimates Cut

Estimates for S&P 500 companies’ combined 2011 profit fell as low as $95.17 last month from an August high of $96.16 and posted the first quarterly reduction since the three months ended June 2009, according to more than 8,500 analyst forecasts tracked by Bloomberg. The revision came as the benchmark gauge for U.S. equities rose 8.8 percent last month, the largest September advance since 1939.

A massive one moth rise followed by an earnings cut.  Nice.

Read it all here:  S&P Earnings Cut

Market Review Friday/Sunday

Yeah, I didn't get to posting the recap on Friday (or anything since), but sometimes a fella has work outside the blog to do.  Anyway, here goes:  A quiet Friday in bonds - primary and secondary markets were light compared to recent days,equities were up a bit, and US$continued its fall.



Fixed Income:

Secondary volume was light on Friday as only $15B of straight corporate debt changed hands.  Adv/DEC ratios for IG and HY were 1.05 and 1.03, respectively.  Ig still has some room IMHO, as does HY, although high yield looks like its getting heady although fund flows into both are still strong.

The curve steepened a bit, with 30yr bonds trading down while other maturities traded up marginally.  QE2 (or the equivalent) ought to help put a floor under prices (see article below).  I think that govvies still have room to move up given the somewhat lackluster economic data we have seen recently and the policy goal of increasing employment and stabilizing housing.



Elsewhere in bond market news: 

• China offered on Saturday to buy Greek government bonds when Athens resumes issuing, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout. Premier Wen Jiabao made the offer at the start of a two-day visit to Greece, his first stop on a tour of Europe, and also said he wanted to boost shipping and trade ties with Athens, underscoring Beijing's use of economic strength to win friends.  "With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue," Wen said, speaking through an interpreter. 
• Federal Reserve policy makers are now debating how to deploy tools for more unconventional easing as two top officials indicated action may be needed to lower unemployment persisting near 10 percent.
  “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long,” New York Fed president William Dudley said yesterday. His comments, following Chairman Ben S. Bernanke’s statement on Sept. 30 that the Fed has a duty to aid the economy, indicate that the outlook has weakened enough for action, said former Fed Governor Laurence Meyer. Dudley, vice chairman of the Fed’s policy-setting Open Market Committee, said additional securities purchases can have a “significant” effect on the economy.
   

Equity:

Stocks rose modestly as higher-than-estimated consumer spending and confidence were somewhat offset by a drop in manufacturing. Financial stocks rebounded, and energy firms rose as crude oil futures hit a seven-week high














Growth - value continues its divergence generally, what is interesting is that in large cap space, value is making a run at growth.






Currencies:


Reserve Bank of Australia will have their interest rate announcement tomorrow (10/4).  Due to the hawkish stance of policy makers, we might see a 25bp increase in the benchmark rate to 4.25%.  This should help support (and drive) the Aussie due to its high yield.

Key Pairs:

Watch the Euro as it has been testing highs.  It is off slightly in Asia (as of this writing).  I like the yen vs. euro, A$ and C$ vs. US$.  One thing that could throw the wrench in these though is if Europe rolls over again (still?) and investors keep showing the love to the US cap markets.








Asia is currently pointing to a higher US open.  Good luck this week, lets be careful out there.