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Morning Notes For October 19th 2010 at Trader’s Narrative

Morning Notes For October 19th 2010

The following is a guest post by a buy-side analyst working in a US asset management firm. The author’s comments are in italics. I welcome your feedback in the comments:

  • TARP generates ~8.2% returns for Treasury; The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years – Bloomberg – the thinking at the time was that the government was throwing money into black holes and that they would lose hundreds of billions.
  • US housing starts posted a 0.3% gain in September, while single-family housing starts fared better with a 4.4% gain. A 5.6% decline in building permits points to continued weakness in total housing starts, and the modest 0.5% gain in permits in the single-family segment indicates stabilization at a low level. – Roubini Global Economics

Number of Housing Starts since 1959
housing starts since 1959 Oct 2010

  • Republican lead widens in latest WSJ/NBC poll; among likely voters, GOP has a 50-43% lead, up from a 3-point advantage 1 month ago. WSJ
  • Industrial profits start to show signs of slowing – rising input costs and slowing end market sales are starting to weigh on the nation’s manufacturers. WSJ
  • Mortgages – the White House has been investigating the country’s 5 biggest mortgage servicers for the last four month and has found “a significant variation” among their operations, with some servicers “signing worse than others” in how they handle loans. The White House plans to publish the results of its mortgage probe within the next few weeks. WSJ
  • Bank of America – the company acknowledged receiving a letter on Monday from a group of investors alleging that BoA didn’t properly service a bunch of mortgage deals. However, BAC vowed to fight the claims. “We’re not responsible for the poor performance of loans as a result of a bad economy. We don’t believe we’ve breached our obligations as servicer. We will examine every avenue to vigorously defend ourselves.” WSJ – Moynihan went on to say that he will protect shareholders against investors who say “I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cyclinder.”

Shanghai Composite
shanghai composite Oct 2010

  • Trading this morning reflects a divergence in the interpretation of China’s rate hike yesterday with many seeing it as a positive indication for China equities (namely that policymakers are confident enough in the outlook to make the hike which is more symbolic than anything else) while other Asia economies traded off on concerns that the hike will cause China to slow (yet another factor weighing on a global economic recovery). Investors will be closely watching the release of the September economic numbers out of China tonight which will include GDP, Retail Sales, IP & CPI tonight (the rate hike ahead of the GDP release tonight raising some expectations for a strong print). – JPM

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One Response to “Morning Notes For October 19th 2010”  

  1. 1 Elizabeth

    In response to the first bullet point about TARP: TARP only made “profits” because big banks laid off huge amounts of employees in the traditional banking sector divisions in early 2009 when they got the TARP money. These divisions were staffed with thousands of modestly paid workers providing traditional banking services in the smaller markets (taking deposits, making loans)–but they were modestly profitable. The TARP bank managers laid off these workers by the tens of thousands in small markets where they thought it would be noticed–but kept their financial engineers in their big city offices. Both upper level management and the financial engineers (a group with much overlap at TARP banks) made record bonuses as a direct result of the TARP money. However, at banks like B of A, this was done by laying off 30,000 lower staff, who were providing valuable traditional banking services, at low labor cost, in small markets.

    So–every time I hear that TARP returned “profits,” I know this came at the cost of hundreds of thousands of layoffs of lower level workers who were thrown overboard so management could show short-term profits, and continue to keep TARP money flowing into their own pockets–which IS where it went–and why both the unemployment rate and income gap grew rapidly during this period. Bottom line: The TARP money “repayment” was only possible with huge increases in the unemployment rate.

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