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Morning Notes For October 1st 2010 at Trader’s Narrative

Morning Notes For October 1st 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:

Personal Income: Survey 0.3% Actual 0.5 Prior 0.2
Personal Spending: Survey 0.3% Actual 0.4 Prior 0.4

  • U.S. Q2 2010 GDP Revised Up to 1.7%; Final Sales Down to Anemic 0.9% - Revised estimates suggest the U.S. economy grew at a 1.7% annualized rate in Q2 2010, slightly above the previous estimate of 1.6% but far below the advance estimate of 2.4% and significantly below potential. Meanwhile, growth in final sales was revised down to 0.9% from the previous estimate of 1% and the advance estimate of 1.3%. With temporary factors that boosted growth in H1 2010 set to turn neutral or even negative in H2 2010, there are as yet few signs of a counterbalancing resurgence of final demand. Real-time indicators of economic activity in Q3 show marked weakness. – Roubini Global Economics
  • The First World War will officially end on Sunday, 92 years after the guns fell silent, when Germany pays off the last chunk of reparations imposed on it by the Allies. – London Telegraph
  • Asked whom they would support if Secretary of State Hillary Clinton were to challenge President Barack Obama for the Democratic presidential nomination in 2012, 52% of Democrats nationally say Obama, while 37% say Clinton. – Gallup
  • The massive economic stimulus package President Obama pushed through Congress last year is coming in on time and under budget - and with strikingly few claims of fraud or abuse - according to a White House report set to be released Friday. – Washington Post
  • Sources say Rahm Emanuel will resign as White House chief of staff on Friday to begin his campaign for Chicago mayor. Pete Rouse is likely replacement. – Washington Post

Year to Date sector returns for S&P 500big bets on energy, healthcare & IT did not fare well
sector performance S&P500 Sep 2010

  • The whipsawing of markets has made this an awful year for active managers with 27% trailing their benchmark by 500 bp and 30% behind their 3-year benchmark by 500bp. Given the positive bias of equity markets into year end in midterm election years, both hedge funds and asset managers are likely to make a pronounced positive shift into Beta (ß) by YE. – JP Morgan – in other words, they will buy stocks chasing returns.
  • Some Relief for Consumers as Interest Payments Fall – Interest payments as a proportion of disposable income are falling (see first chart below), indicat¬ing that pressure on the U.S. consumer is easing slightly. The ratio of total debt to income has also fallen somewhat, to 108 percent as of July from a record 115 percent in February 2008 (second chart below). Goldman’s Chief Economist Jan Hatzius delved into this topic in a recent report, discussing how high inflation in the 1980s, when required debt service payments were also elevated, eroded the real value of household debt. As Hatzius wrote, continued disinfla¬tion will require households to “continue running large fiscal surpluses”. That would prolong consumer deleveraging. – Bloomberg – this is a key reason inflation would be a good thing at this point in the cycle because one of its consequences is to reward fixed rate borrowing (while penalizing the other side of that transaction).

Household debt service ratio
household debt service ratio Sep 2010
Debt service ratio – Required payments on outstanding mortgage and consumer debt divided by disposable personal income. Source: Federal Reserve
household debt to income ratio Sep 2010

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