Market Talk

- “In this recovery there is less job creation, less household formation, and less demand for housing units than a normal recovery. This is sort of a circular trap for both GDP growth and employment,” Calculated Risk says. “This is one of the reasons I expect the unemployment rate to tick up over the next several months.

- FusionIQ CEO Barry Ritholtz makes the argument that US bonds are resembling tech stocks during the dot-com bubble. “What made the dot-com situation so pernicious was that anyone who was judged on relative performance (i.e., mutual fund managers), were all but forced into these names in order to keep up,” Ritholtz says at The Big Picture. “Very few people — Buffett and Grantham come to mind — managed to both avoid both chasing these names and losing their client base.”

- There’s no denying the strong quarterly profit reports coming from S&P 500 companies in 2Q. But the notion that strong profits actually represent good news is “murky at best,” Derek Thompson writes at the Atlantic. “High unemployment is, strangely, both dampening revenue and enhancing profits.”

- Mortgage Bankers Association reports refinance activity surged 17% amid historically low interest rates. But Miller Tabak’s Peter Boockvar notes purchasing fell 3.4% and remains just 3.5% off lowest level since 1997. “This economic response to low rates is indicative of our whole economy that has the Fed now pushing on a string,” Boockvar says. “In times of deleveraging, lower rates only encourage refi’s, not new economic activity whether the purchase of a home or the expansion of a business.”

- Boston Fed argues economists aren’t to blame for missing the housing bubble, which absolutely baffles naked capitalism blogger Yves Smith. “It is truly astonishing to watch how determined the economics orthodoxy is to defend its inexcusable, economy-wrecking performance in the runup to the financial crisis,” Smith says.

- UPS recently said in a 10-Q that the impact of the health-care reform legislation “was not material” to its financial results, which shocks Footnoted blogger Michelle Leder, especially since many companies have said they’ll take big charges related to legislation, including AT&T’s (T) $1B charge.

- Since Fed’s announcement last week to reinvest proceeds from expiring MBS, the dollar’s risen while crude oil and S&P 500 have tumbled. “A cynic, however, might look at the lackluster reaction and think that the US central bank is losing some of its market-firepower in terms of unconventional monetary policy,” FT’s Alphaville says. “And an even bigger cynic might think that the market is simply holding out — or pushing — for a bigger bout of unconventional policy. Either way though, something’s out of sync here — the market or the Fed.”

- Tech blog Download Squad says Google (GOOG) and hardware maker HTC (2498.TW) are teaming up to build a tablet device that runs GOOG’s Chrome operating system. The blog says the tablet will be offered in conjunction with Verizon (VZ) and launched on Nov. 26, or Black Friday, the busiest shopping day of the year in the US.

- Is the Web really dead? The blogosphere debates.

- Looking to succeed at the dating game? Maybe its time to get off match.com and other dating sites and hit the athletic fields. WSJ explains.

Over at The Big Picture, Barry Ritholtz does a big “what if” on the 2008 financial crisis, positing an alternate-universe timeline in which the banks were bailed out. It reads like one of those Star Trek episodes where Kirk and Spock find themselves in a universe where Edith Keeler never died and everything is different.

Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history);  3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

I won’t spoil the fun for you, head over there and read the whole thing, it’s well worth it. If you’re a corporate bond-holder or creditor or counterparty, you’ll be glad Ritholtz wasn’t part of the White House cabinet. If you’re a taxpayer, you’ll wish he had been.

Incidentally, doing this little thought experiment, putting the two time lines side-by-side, reveals the one huge difference between what should have been and what was that led to our current reality: in Ritholtz’s experiment, there is no kleptocracy, no corrupted political machine being crudely wielded by the private sector for its own benefit. No string pulling.

All the bailouts, all the intervention was done in the name of the people, but make no mistake, it was done to save private players from the consequences of their own bad decisions. People innately understand this, but have no way to “fix” it. What’s done is done. That’s led to a lot of lingering hostility, which isn’t likely to go anywhere until somebody figures out how to focus it. Which, come to think of it, I believe the tea party is doing pretty well right now.

We're still waiting for some decent news.

East Shore Partners market strategist Joan McCullough perfectly summed up this morning’s jobs report:

This is a real klinker.

Couldn’t have said it any better. Economy shed more jobs than expected in July, while the unemployment rate held steady at 9.5%. Nonfarm payrolls fell 131,000 last month, well ahead of the 60,000 drop economists were expecting. The number was skewed as 143,000 census workers were let go. But perhaps more importantly, 71,000 private-sector jobs were added last month, well short of the expected 100,000 gain.

All in all, not much to like about this report. Even the unemployment rate holding steady at 9.5% has an underlying negative tone. The steady rate, even as jobs keep declining, largely reflects more and more folks dropping out of the labor force. In July, 181,000 people flat out gave up looking for work. And 791,000 frustrated folks have left the labor force since July 2009.

Those are all people that will likely return to the labor force at some point, especially when they think their prospects for getting jobs look brighter. When that happens, expect to see the unemployment rate ramp higher as the workforce expands.

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- The main difference between Citigroup’s (C) $75M settlement with SEC Goldman Sachs’ (GS) $550M settlement is GS was guilty of misleading clients while Citi was guilty of negligently misleading shareholders. But the public is much angrier over GS case, which the “Kid Dynamite” blogger finds hard to fathom. “People should be furious about this Citi case and settlement, but you’ve probably hardly heard a whisper about it.”

- Prospects aren’t looking bright for the restaurant industry. Same-store sales and customer traffic both declined for a third-straight month in June, Calculated Risk reports. “Restaurants are a discretionary expense, and this contraction could be because of the sluggish recovery or might suggest further weakness in consumer spending in the months ahead.”

- Roughly 25% of Americans sit in FICO’s least-creditworthy category, a significant jump from only 15% before the recession. “Some people will lament this, but it has a silver lining,” FusionIQ CEO Barry Ritholtz says. “Deleveraging is certainly a good thing, and forcing consumers off of the credit treadmill may actually help these folks over the long haul.”

- The commercial real estate market is getting ugly, slowly but surely. Delinquent unpaid balance for CMBS increased $3.1B in June to $60.45, and has more than doubled from a year ago, according to Realpoint. “This isn’t quite the disaster in the making that subprime was,” Yves Smith notes. But “I’m not sure why people say there isn’t a CRE crash. It’s just happening in slow motion, so far.”

- ISM manufacturing index fell for a third-straight month in July, but at 55.5, it exceeded economists’ expectations. “Bottom line, while the ISM remains firmly above 50, just ten of the 18 industries surveyed reported growth, with four reporting outright contraction and the drop in new orders is worth watching,” writes Miller Tabak’s Peter Boockvar. “With this said, the market is breathing a sigh of relief that while down for a third month, the ISM is still hanging in as inventory builds, albeit at a slower pace, and export growth continuing.”

- Newspaper advertising sales were less bad in 2Q vs a quarter ago. “But less bad is not the same as good — and the outlook for the remainder of the year is decidedly murky,” writes Newsosaur blogger Alan Mutter.

- A new website — JailbreakMe.com — has sprung up offering an easy way to hack, or “jailbreak,” an iPhone to run applications not authorized by Apple (AAPL).

- “This market is one that moves largely on the basis of economywide hopes and fears,” NYT’s Floyd Norris says. “Company specifics take a back seat.”

- “Remember when we weren’t allowed to say the word ‘recession?’ Like it was anathema?” Todd Harrison says at Minyanville. “Or when we weren’t ‘patriotic’ if we weren’t ‘bullish’ after 9/11?,” he recalls. “Is ‘deflation’ the modern day equivalent of ‘recession?’”

- Battle over the proposed Ground Zero mosque is picking up steam.

A little more detail on the nonstress tests. From from WSJ”s David Enrich over in London:

The biggest complaint on Friday stemmed from the small number of banks that failed the tests. Only 7 of the 91 banks, five of them small Spanish regional banks, or cajas, failed the test. That came in at the low end of expectations and swiftly raised questions about the toughness of the tests.

Another problem: The tests showed that the seven failed banks’ capital shortfall was just €3.5 billion, only a little more than 10% of the lowest analyst estimates and far short of the $75 billion that 10 U.S. banks needed to raise after stress tests last year.

So, five of the banks were regionals, “unlisted,” as in not public companies. Think of some three-branch local bank in your town, that’s what we’re talking about. The other two were Germany’s Hypo, widely rumored beforehand to have failed, and Greece’s ATEBank. Both of those banks had already been taken over by the government.

The rest of the European banking system apparently is doing just dandy. Glad we put those nasty rumors to rest.

Another big problem is what assets specifically were subject to testing. Banks had only to expose assets on their trading books to the tests, not those held to maturity. The distinction is important, as most sovereign debt held by banks falls in that latter category, perhaps as much as 90%, according to Bloomberg.

Then, via MarketBeat, Moody’s Economy.com economist Zach Witton says there are at least four problems (including the assets distinction):

The tests’ credibility can be questioned in at least four ways. First, they failed to include a scenario involving a sovereign debt default. Second, the assets tested involved only sovereign bonds traded, not those held to maturity by banks. Third, the bar for passing the tests was set low, at a minimum 6% capital-to-asset ratio. Fourth, the tests measured banks’ asset quality but not liquidity. Many banks that passed, such as those in Greece, rely heavily on the ECB for liquidity.

But all most people are likely to see is that 84 “passed.”

How easy was that?

The hotly anticipated results of the European bank stress tests were released at noon Eastern time. Ninety-one banks were tested, apparently tested very gingerly, and 84 of them came through unscathed. One Greek bank, one German bank, and five Spanish banks. That’s it. Only seven banks on the entire European continent were found wanting.

How credible does that sound?

Let’s be frank: there is no way, no way, these tests were designed to rigorously test the strength of the European banking system. Like their American counterparts, the tests were rigged exercise designed to shore up public confidence. The truth never entered into the calculations, and why should it? Everybody already knows the truth. American banks failed a very real stress test in the fall of 2008, when the government had to come in and save the entire industry. European banks similarly failed their very real stress test this past spring.

First off, the European tests ignored the biggest risk out there, the one that really started this whole downward spiral: a sovereign default. If reality interests you at all, you can stop right there, because if the events of 2010 made one thing clear, it’s that Europe’s banks, on the whole, absolutely were not prepared to suffer through a sovereign default.

Credible or not, these tests will probably go a long way toward fulfilling their real goal: restoring confidence among the populace. It’s amazing to me that last year’s stress tests here get as much credit as they do. I don’t think the tests themselves did anything at all. What would have happened if the feds conducted the stress tests, and did nothing else to rescue the banking system?

If European leaders hadn’t cobbled together that nearly $1 trillion bailout fund, you think anybody’d care about these stress tests? Of course not.

“Regardless of what the stress tests say about a given bank, the real factor driving the willingness of credit markets to do business with a bank in London or Paris is the condition of the government and the probability that the government will support the bank,” Chris Whalen of Institutional Risk Analytics wrote.

So now it appears the nation will get a new set of laws for the banking industry. Actually, “set” is putting it lightly; at 2,000-plus pages, the financial reform bill passed this afternoon by the Senate is as monstrous a leviathan as the healthcare bill that proceeded it.

Glass-Steagall and the other Depression-era laws that were a response to another financial crisis, created a stable environment for the banking industry for half a century. If this bill manages that feat, it will be rousing success, and investors will reap the benefits, even if they don’t realize it.

Here’s the rub, though: Glass-Steagall was 37 pages. Thirty-seven pages. It laid out concrete, simple rules. This bill we have today, this 2,000-page behemoth, doesn’t lay out simple, concrete rules. It creates councils. Agencies. “Authorities” to break up banks that “pose a threat” to the system.

“Citbank, JP Morgan, Bank of America, Wells, Goldman, and Morgan Stanley NOW constitute ‘a grave risk to financial stability.’ ” Yves Smith writes at naked capitalism. “You could extend the list further into the stress test banks (19 in the US), but let’s stick with these. If we believed this bill was meaningful, action be taken against these banks immediately upon signing. Odds of that happening? Zero.”

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Excuse me sir, can I interest you in a brand new Cadillac?

With all we’ve been through, have we learned nothing, GM?

After the financial and economic disaster experienced in the past few years, mainly at the hands of shoddy lending practices, GM apparently is hot to drive back down that road once again.

WSJ’s Sharon Terlep reports GM is negotiating with “financial institutions” in a bid to gain wider access to auto loans for its customers, “particularly those with weaker credit.” Weaker credit. Uh-oh. Why, GM? Why? 

Terlep tells us:

GM wants to boost sales “at a time when the company is looking to become more attractive on Wall Street ahead of an initial public stock offering.”

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Here’s a hint for bankers who continue to whine about being disliked: Stop with the condescension.

We got another dose of it today from Goldman Sachs, in comments from the company’s head European flack. It’s the same refrain we’ve heard countless times now since the onset of the financial crisis, and it goes something like this: We understand the public is upset, so we need to do a better job of explaining what we do and how we do it.

Baloney. That’s just a back-handed way of saying people outside the industry aren’t really bright enough to understand how we make money, and if they did, they’d really appreciate us for our benevolence and unflinching ethical behavior.

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If nothing else, the oil-spill catastrophe in the Gulf of Mexico highlights at least one urgent necessity: the need for a new cabinet-level post in the Obama administration. We humbly suggest the creation of a “Fubar czar.” The creation of this much-needed position is born partly from a deep tradition in Washington to add another layer of largely unaccountable government bureaucracy as a remedy to any easily foreseeable, fully avoidable catastrophe.

Yes, citizens, the writing has been on the wall for many years now, as we lurch from one botched reaction to a disaster to another. Hurricane Katrina, the implosion in the housing market and near-collapse of the US financial system, not to mention the motion picture “Gigli,” little Elian Gonzalez (couch potatoes remember him well as cause of pre-emption of many of your favorite shows), Toyota’s “sticky” gas pedals and the ABC sit-com “Cougar Town.” All calamities in their own right, and all would’ve been less costly to the taxpayer, or at least the public’s collective psyche, if we had a strong Fubar czar.

But in this case, the creation of a Fubar czar should, thankfully, mitigate the need for additional wasteful agencies as the post would carry the power to supersede any other government agency, upon the simple declaration from the president of the United States that a given situation is indeed “fubar.” Voila, Fubar czar then takes control, with the full faith and resources of the USA at his command.

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