Fundmastery Blog

Kurt Brouwer October 2nd, 2008

Senator Harry Reid (D-NV), the Senate Majority Leader, let slip a remark that is having significant consequences for insurance stocks.  Here’s the story from CNN:

Insurors Plunge On Reid ‘Bankrupt’ Remark (CNN, October 2, 2008, Aaron Smith)

Several big life insurance stocks fell sharply Thursday, dragged down by jitters about their role in the credit crisis and fears sparked by a comment from Senate Majority Leader Harry Reid, D-Nev., Wednesday about a potential bankruptcy in the industry.

“We don’t have a lot of leeway on time. One of the individuals in the caucus today talked about a major insurance company. A major insurance company — one with a name that everyone knows that’s on the verge of going bankrupt. That’s what this is all about,” Reid said prior to the Senate’s approval of the $700 billion bailout bill.

Steven Schwartz, an analyst who covers insurance companies for Raymond James & Associates, said that even before Reid made his bankruptcy comment, investors were growing worried about life insurers’ exposure to real estate as well as “secondary exposure” via investments in troubled finance firms like Lehman Bros, Wachovia and Washington Mutual.

But the comment from Reid clearly caused even more fear.

“Harry Reid didn’t help any,” Schwartz said.

…A spokesman for Sen. Reid backtracked a bit Thursday and said that the senator was not aware of any company being in danger of bankruptcy.

“Senator Reid is not personally aware of any particular company being on the verge of bankruptcy. He has no special knowledge about [a bankruptcy] nor has he talked to any insurance company officials,” said Jim Manley, spokesman for Sen. Reid, in an email to CNNMoney.com.

“Rather, his comments were meant to refer to the conditions in the financial sector generally. He regrets any confusion his comments may have caused,” Manley added…

Let’s see.  First, the good senator says that a major insurance company — one whose name we all would recognize — is on the verge of bankruptcy.  Given the jumpy state of investors, it is not surprising that insurance stocks fell anywhere from 4% to 17% shortly thereafter.  Then, essentially he cops out by saying he didn’t really mean it, but he regrets any confusion he caused.

Well, that’s nice.  In general, our political class isn Washington DC does not get very high marks.  However, this year, the level of misleading or damaging remarks seems to be peaking just as the financial markets are tanking.  In particular, I am very unhappy with frequent negative remarks made by U.S. Treasury Secretary Henry Paulson.

Obviously, this is a bipartisan problem, but it really is disturbing that these folks have so little awareness of how their words can be interpreted by the financial markets. Is it too much to ask that political leaders do not make such inflammatory comments?

• Business , Economy , Geopolitics , Money
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Kurt Brouwer September 30th, 2008

Update:  The Senate passed the Emergency Economic Stablization Act of 2008 by a 74 to 25 margin.  On to the House.  The House vote should happen tomorrow.

The U.S. Senate has set a vote on a sweetened financial recovery bill that appears likely to pass.  With the changes, there is a fair chance the House will pass it too.  This Bloomberg piece [emphasis added] has the details:

Senate Sets Bailout Vote, Sweetens Plan With Deposit Insurance (Bloomberg, October 1, 2008, James Rowley and Brian Faler)

The U.S. Senate set a vote for tonight on a $700 billion financial-rescue plan, tying it to an increase in bank-deposit-insurance limits and tax breaks to win support from Republicans.

The Senate agreed to vote on the legislation along with the measure temporarily raising the limit on federal deposit insurance to $250,000 from $100,000. That increase was proposed by Republicans critical of the plan authorizing Treasury Secretary Henry Paulson to buy troubled debt from lenders, which was rejected by the House on Monday.

Also linked to the legislation is a two-year extension of tax breaks that will save individuals and corporations about $149 billion over the next decade, another move popular among House Republicans. Two-thirds of House Republicans and 40 percent of Democrats defeated the bailout plan on a 228-205 vote. President George W. Bush and Senate leaders had vowed to revive the legislation.

The Senate is expected to pass the bill, with most Democrats and Republicans behind it. There’s also increased optimism the House will go along, as pressure mounts on lawmakers to help restore confidence in the banking system.

After a week-long torrent of calls and e-mails from angry voters opposing the rescue package, the tide turned after markets plunged on Sept. 29 in response to the House vote…

I have mixed emotions about the financial recovery plan.  Nonetheless, I expect it to pass and I hope it works very well.  If it works as advertised, then that would be good.

It is ironic that so many voters opposed the legislation initially because they viewed it as a bailout of Wall Street.  It was not a bailout in any sense I could see, but that is how it was perceived.  But, once the stock market tanked on Monday, voters changed their minds and now support for the plan is much stronger. The changes to the plan will also let those Democrats and Republicans who voted against it save face and vote for it on the second try.  Ah, don’t you love politics.

See Will The Guilty Pay — In Washington or Wall Street? and Financial Bailout Failure Roils Markets for more.

• Business , Economy , Geopolitics , Personal Finance , income taxes
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Kurt Brouwer September 30th, 2008

With all the inflammatory talk about banks not lending, these charts from the St. Louis Federal Reserve present a different picture.  I’m sure lending to certain sectors has dried up, but overall activity still seems robust.

Commercial and Industrial Lending

Source: St. Louis Federal Reserve

The chart above shows weekly commercial and industrial lending activity from large commercial banks and it would appear that lending activity is far higher than it was a year ago or even at the beginning of the year.  Activity peaked in the summer and now it is starting back up again.  This chart goes through September of this year.

But, what about the consumer?  Clearly, banks are not lending to consumers and consumers are not borrowing, right?  Maybe that’s not quite accurate either in spite of media reports:

Consumer Lending

Source: St. Louis Federal Reserve

As we can see, consumer loans from commercial banks went up at least through the most recent data the St. Louis Fed had, which was August.  The evidence is clear — at least through August, consumers were borrowing  and commercial banks were lending them money.

Finally, what about real estate loans?  We all know what the conventional wisdom is — that real estate lending has dried up.  This final chart covers real estate loans from commercial banks and these loans did peak in April of this year, but lately activity has picked up.  Even with the pullback, real estate lending is higher now than a year ago and higher than it was in the beginning of the year.

Real Estate Lending

Source:  St. Louis Federal Reserve

I realize that this information contradicts the conventional wisdom we are hearing from the media and our political leaders, but these are facts, not rhetoric.  It may well be that lending activity at banks is going to dry up, but there is no evidence from the St. Louis Fed that suggests such activity has already dried up.  In fact, the evidence is that activity in all three areas is higher than it was at the beginning of the year.

• Business , Economy , Geopolitics , Money , Personal Finance
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Kurt Brouwer September 30th, 2008

Source: St. Louis Federal Reserve

It was not long ago that pundits and currency prognosticators were predicting that the Euro would surpass the U.S. dollar as the world’s reserve currency.  Of course, years ago other such pundits predicted the same thing for the Japanese yen and that never happened.

How does the Euro look in terms of surpassing the dollar as the world’s reserve currency?  Not so good. During this credit crunch and financial crisis, it is revealing to see that the dollar is gaining value and the Euro is tumbling. The Euro’s high point was almost $1.60 to one Euro.  This chart from the St. Louis Federal Reserve actually understates the movement because today, it takes $1.40 dollars to buy one Euro.  That’s still far from the dollar’s strongest point which was in 2001 when it took 84 cents to buy one Euro, but the trend is moving towards the dollar as this piece from Bloomberg [emphasis added] illustrates:

The euro fell the most against the dollar since the introduction of the shared currency in 1999 after France and Belgium led a state-backed rescue of Dexia SA, as the widening financial crisis forces governments to prop up financial institutions across Europe.

…The euro fell 2.5 percent to $1.4081 at 3:51 p.m. in New York, from $1.4434 yesterday. The euro also slid to 149.74 yen from 150.38. It earlier reached 148.55, the weakest since Sept. 16. The yen weakened to 106.43 per dollar from 104.18, after earlier reaching 103.54, also the most since Sept. 16.

…”There is a mad scramble for U.S. dollar funding demand from a global U.S. dollar-based financial system,” said Claudio Piron, Singapore-based head of Asian currency research at JPMorgan Chase & Co, the second-biggest U.S. bank by market value…

I don’t want to make too much of this currency movement because it reflects lots of short-term uncertainty and volatility and when things ease up a bit, we may see a move back in the other direction.  Yet, it still must be noted that when things get tough, the world flocks to the U.S. dollar.

Why? Safety. Liquidity.  The rule of law.  Despite a Congress that acts like a bunch of spoiled children, investors want the dollar because they believe their money is safer here than in Europe or elsewhere.  Maybe Americans should take some comfort in knowing this.

• Business , Economy , Geopolitics , Investing , Money
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Kurt Brouwer September 29th, 2008

My wife and I were sitting quietly on the ledge talking about stock market activity tonight.  Just kidding about the ledge part, but we were talking about recent events and she did make a good point about two trends that have gone largely unnoticed.

She pointed out that the dollar was soaring and oil prices were tanking.  Had anyone told us that the dollar would be in a strong rally versus the Euro by October and that oil prices would be well under $100 per barrel, we would have cheered.  And, inflation is slowing rapidly too.  It’s all good, right?

Well, not exactly.  But, we can at least point to this good news on oil as a relief from the rest of the financial news:

Oil plunges $10 as U.S. bailout plan voted down (Associated Press/Yahoo, September 29, 2008, Stephenson Jacobs)

Oil prices tumbled more than $10 a barrel Monday, dropping back below $100 as a U.S. financial bailout failed to win legislative approval, raising fears of a prolonged economic downturn that could drastically erode global energy demand.

Light, sweet crude for November delivery sank $10.52, or 9.8 percent, to settle at $96.36 on the New York Mercantile Exchange, after earlier dropping as low as $95.04.

The dramatic sell-off capped a week of frenzied volatility in oil markets.

A week earlier, prices shot up over $16 to $120.92 a barrel in the biggest one-day dollar gain ever. But as disagreements over the government’s $700 billion bailout plan intensified over the last several days, oil market traders began moving out of their positions at a rapid clip; Monday’s decline was the second largest ever in dollar terms and the biggest percentage-wise since 2001. Crude has now fallen almost $25, or 20 percent, in the last seven days.

…”This is an acknowledgment that the global slowdown is here and energy demand is not going to be what it was,” said Phil Flynn, energy analyst at Alaron Trading Corp. in Chicago.

...Energy consumption overseas is also expected to drop, even in fast-growing developing countries such as India and China, where booming demand for cars and other goods helped drive the oil bubble earlier this year.

“With demand falling at the pace it is, nothing can support crude at levels above $100,” said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com. “There’s no underlying demand from any pocket.”

Other commodities also traded sharply lower Monday as investors bet that a widening economic malaise will swallow demand for building materials, grains and other goods.

Highlighting weak U.S. appetite for energy, pump prices kept falling Monday. A gallon of regular slipped about a penny overnight to a new national average of $3.643, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices peaked at $4.114 on July 17…

• Economy , Personal Finance , inflation
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