Financial Headlines

White House task force rejects GM, Chrysler turnaround plans the Obama administration's autos task force, led by former investment banker Steve Rattner, warned that both General Motors and Chrysler could be forced through bankruptcy to reduce debt as it rejected their turnaround plans. "We have unfortunately concluded that neither plan submitted by either company represents viability and therefore does not warrant the substantial additional investments that they requested," a senior official said. At Rattner's request, GM CEO Rick Wagoner was forced out, an official said. CNBC/The Associated Press (30 Mar.)

Some lenders to need much government aid, Geithner warns terms of the public-private program to buy troubled assets from banks "cannot change," or investor confidence in the plan will plunge, U.S. Treasury Secretary Timothy Geithner said. He also said some lenders will need "large amounts of assistance." About $135 billion remains in the government's financial-stability fund, Geithner said, but he declined to say whether additional funding will be requested. "If we get to that point, we'll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively," he said. Bloomberg (30 Mar.)

Banks abandon foreclosure proceedings to save money. Banks holding defaulted residential mortgages are increasingly walking away from their foreclosure actions because the costs of maintenance, repairs and legal fees are more than the properties are worth. A bank walkaway, as it is called, can turn into a nightmare for the borrower, who is still on the title and legally responsible for the property, which often suffers from vandalism after it becomes vacant. The New York Times (29 Mar.)

Bernanke concerned about Fed's independence. Federal Reserve Chairman Ben Bernanke is concerned that the agency's work with the White House to resolve the financial crisis might lead to political pressure that could delay the Fed's efforts to battle inflation. To relieve those concerns, the Fed and the U.S. Treasury released a statement on each agency's responsibilities. "This is all about independence," said Laurence Meyer, vice chairman of Macroeconomic Advisers. "Even though the Fed is cozying up to the Treasury, it is important to know that the Fed would maintain some stability over monetary policy." Bloomberg (30 Mar.)

Regulatory reform could make money-market funds safer. Individual investors could find the traditional safe haven of money-market funds a little safer under wide-ranging reforms to the U.S. financial regulatory system proposed by Treasury Secretary Timothy Geithner. He asked Congress to enact tougher regulations on these funds to limit liquidity and credit risk, in hopes of heading off runs on funds of the kind triggered by Lehman Brothers' bankruptcy. The Washington Post (29 Mar.)

Headline Financial News

U.S. government's troubled-asset plan relies on investors The U.S. government's three-pronged plan to get troubled assets off the books of financial institutions relies on the participation of private-sector investors. Many investors, however, are skeptical about doing business with the federal government after the outcry over bonuses at American International Group. The plan includes creating an entity backed by the Federal Deposit Insurance Corp. to purchase loans. The Treasury will expand the Term Asset-Backed Securities Loan Facility to include "legacy" assets. Plus, a public-private investment fund will be established to buy securities. The Wall Street Journal (21 Mar.) , Financial Times (23 Mar.) , The New York Times (22 Mar.) , BusinessWeek (22 Mar.)

Geithner: "Stronger system" is goal of troubled-asset plan: U.S. Treasury Secretary Timothy Geithner explains his plan for removing troubled assets from the balance sheets of financial institutions. Geithner says the private sector will determine prices for the assets, while taxpayers will benefit from any upside. "Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again," he writes. The Wall Street Journal (23 Mar.)

Bernanke: Changes to capital, accounting rules might be needed to ensure that the ups and downs of financial markets are not magnified, regulators might need to make changes to accounting and capital rules, Federal Reserve Chairman Ben Bernanke said. "Policymakers should review existing capital rules and accounting standards to determine whether these rules and standards could be modified to reduce their potential to have unduly procyclical effects without weakening their ability to achieve their fundamental objectives," he said. Bernanke also said the Fed's move to buy significant amounts of government debt and mortgage-related securities is an attempt to improve market conditions. The Wall Street Journal (20 Mar.)

Obama indicates he would reject tax on bonuses U.S. President Barack Obama said he will not "govern out of anger" as he implied that he would not support the 90% tax on bonuses to employees of American International Group and other companies that received rescue funds. Obama also acknowledged that he was surprised with how quickly the economy had soured. "I don't think that we anticipated how steep the decline would be," Obama said on CBS' "60 Minutes." BusinessWeek/The Associated Press (22 Mar.)

Fed Announcement Today

The Federal Reserve will conclude its two-day meeting today, and release a statement at 2:15 pm Eastern time. We do not expect any rate change – the Fed’s benchmark target range remains at zero to 25 basis points. There is growing chatter in the markets that the Fed will announce the outright purchase of U.S. Treasury securities in order to bring down long-term interest rates. It has already purchased mortgage-backed securities, which has helped to push home borrowing costs lower. However, we suspect that the Fed will refrain from this next attempt at “quantitative easing” unless there is something extremely dire in the wings. The central bank may be running low on tools to combat the crisis, and has – to date – avoided the outright purchase of Treasuries. Keeping its powder dry in the event that another shock hits the financial system appears to be the more prudent move.

Potential Future Fed Action

Fed might need to ramp up asset purchases as economy falls Federal Reserve policymakers might need to accelerate their purchases of assets, including mortgage securities, as the job market and economy continue to decline. Fed watchers are concerned that the central bank's balance sheet has fallen 17% since its peak in December. "It takes massive balance-sheet expansion to generate significant easing in financial conditions," said Andrew Tilton, an economist at Goldman Sachs. "More needs to be done." The Federal Open Market Committee meets in Washington this week. Bloomberg (17 Mar.)

Drop in gilt yields might prompt Fed to buy Treasuries: Federal Reserve Chairman Ben Bernanke has discussed the idea of buying government securities to boost the supply of money, but Bank of England Governor Mervyn King actually made the move. The results have been encouraging, as yields on 10-year gilts dropped to at least a two-decade low. "The BoE is providing an actual experiment in answering some of the concerns that the Fed has about the effectiveness" of the strategy, said Laurence Meyer, former governor of the Fed. Bloomberg (16 Mar.)

The bottom has dropped out of railcar loadings. They were down 10.2% y/y at the beginning of March, based on 26-wa, the steepest decline since the late 1980s. There’s a relatively tight relationship between total railcar loadings (using 26-wa) and the S&P 500 Transportation Index, which remains in bearish territory. The recession is getting worse according to the railcar loadings data, and there isn’t much reason to expect that the Transports will provide a bull market signal for stock prices in general. Yardeni (17 Mar.)

Dividend Cuts on the Horizon

US investors are facing the worst year for dividend cuts since 1938, Standard & Poor’s has forecast, as a growing tally of blue-chip companies across the globe slash pay-outs for investors.

Cash flow is crucial for companies now and their need to conserve cash will outweigh their desire to pay dividends.

JPMorgan took an axe to its dividend last week, while investors in US companies as diverse as Dow Chemical, Motorola and Pfizer and Europe’s insurance groups Axa and Allianz have seen their dividends shrivel.

Such cuts have undermined the rationale that high dividend yields for global benchmarks are a buy signal for equities.

The S&P’s current trailing dividend yield – the past pay-outs of companies as a percentage of market capitalisation – of 4 per cent has been well above that of the 10-year Treasury yield since last year, but already this year the S&P has slumped more than 20 per cent. Consensus estimates for the S&P 500 dividend pay-out for 2009 is 3.49 per cent.

The FTSE 100 yields 5.46 per cent, more than a percentage point higher than at the turn of the year.

However, there has been rising investor concern over whether there could be cuts from BP or Royal Dutch Shell, which comprise 20 per cent of dividends on the index.

Headline Financial News

Bad bank' funding starts to take shape. The White House is said to be considering creating multiple investment funds to buy some of the bad loans and distressed assets at the core of the financial crisis. Obama's administration already announced last month that it plans to create private-public partnerships to buy these assets, but has yet to finalize the structure of the financing partnership. Sources say one leading idea is to create a series of separate funds to be run by private investment managers who would have to put up a certain amount of capital and would decide which assets to buy and at what price. Additional capital would be supplied by the government, which would share in any profits or losses. The government would also try to encourage other private investors to participate, possibly by offering non-recourse loans.

Personal income increases. Personal Income increased 0.4% ($44.8B) (vs. -0.2% consensus); disposable personal income rose 1.7% ($183B). Personal spending (PCE) increased 0.6% ($56.4B) vs. +0.4% consensus. Core PCE +0.1% in-line. Personal savings in January - 5% of disposable income - was the highest since March 1995

More mfg contraction. The ISM Manufacturing Index came in at 35.8 in February vs. 33.8 consensus, its 13th consecutive month of contraction. None of the 18 manufacturing industries reported growth. Primary Metals and Wood Products led the laggards.

Construction spending falls. U.S. construction spending -3.3% in January, far worse than the -1.5% expected, and -9.1% Y/Y. Residential private construction -2.9%; non-residential -4.3%.

February Is In The Record Books and It Was Ugly

February was a miserable month for investors. The DJIA dropped 11.7% and the S&P 500 fell 11%. The Russell 2000 declined 12.3%. It was the worst February for performance since 1933, and the 43% decline over the past six months is the worst stretch since 1932. Investors have responded by, increasingly, shunning equities. According to several measures of investment sentiment, the few remaining bulls are rapidly vanishing, and the bears are gaining converts. Investment sentiment has not been to these low levels in the past 10 years. Sentiment is, of course, a contrarian indicator. Many analysts have said that the next bull market will only commence once investors have exited stocks altogether. That may be true, but we would also like to see some improvement in the investment fundamentals – economic growth and corporate
profits – before declaring the bear market is over.

According to AAII Sentiment Index the Bears are running about 55% and Bulls a little under 25%. The Bears have increase over the past 2 weeks, with almost all of them coming from the Bull camp. This is usually a sign of a market turning point. It might be different this time. Reasoning - investors are looking for some form of direction and the new administration is not giving them one.

Uncertainty breads a lose in confidence while certainty creates too much confidence.

Buffett's annual letter is out and it is a must read.