Richard E. Haskell, Sr.
April 16, 2010 Edition, Volume IV
Inside Signature Update
• The Market – Looking for Conviction in the Markets
April 16, 2010 Edition, Volume IV
Inside Signature Update
• The Market – Looking for Conviction in the Markets
• The Economy – Bank Size is Not the Danger Some Believe
• The Takeaway – Higher Interest Rates Can Hurt and Help
THE MARKET – Looking for Conviction in the Markets
With the DOW squarely over the 11,000 point level, investors are looking for clear signs the index is headed higher. Recent economic reports representing increasing factory orders and retail sales suggest 1st and 2nd quarter GDP gains may be better than expected, but the labor market continues to offer concerns. Federal Reserve Chairman Ben Bernanke has stepped-up the tone of his comments regarding growth expectations, now calling for “moderate growth” rather than “slow growth” for the remainder of the year. These and other factors have helped move the major markets indexes by some 5% year-to-date, but there continues to be a significant amount of investor capital resting outside of the markets and concerns that lower market volumes may suggest a lack of investor confidence have some wondering if the current market levels may soon suffer from a lack of conviction.
Many investors have become curious at what some consider low volume levels. On an absolute basis, 2010 volume is averaging about 4.7 billion shares/day. This is
down 15% vs. the 2009 average NYSE volume of 5.5 billion shares/day. Yet 2010’s average volume is only slightly less than the 2008 average of 4.96 billion shares/day. While some consider lower volume a problem, others recognize it as a sign the markets, and economy, have simply reached more sustainable levels of strength and stability.
Many forget that the NYSE single-day volume crossed 200 million shares for the first time in early 1984 and it wasn’t until the year 2000, some sixteen years later, that the daily volume reached one billion shares. Even though 2010 volume levels appear low when compared to those of 2008 and 2009, they’re more than four times higher than those of only a decade ago; at the height of the dot com craze.
On Monday, April 12th, 2010 the DOW crossed over the 11,000 point mark and invigorated investor hopes for meaningful market gains in 2010. Volume levels, as the index approached and then exceeded 11,000, were lower than average for the year and suggest to some that the gains may not be backed by sufficient conviction to remain at current levels. The DOW, though having experienced a sharp correction in late January/early February, has already seen 2010 gains
of 5% and investors are looking for more. According to a recent investor survey released by CitiGroup (C), 62% of investors expect the markets to continue to improve over the next six months. With the VIX (volatility index) at its lowest point since the 3rd quarter 2007, it appears that few are expecting significant moves in the near term; rather, a continuation of the current positive trend looks likely to continue through the remainder of the year. Lower-than-average volume isn’t the problem some suppose and as investors continue to come in from the sidelines with their cash, both market levels and volumes will rise.
THE ECONOMY – Bank Size is Not the Danger Some Believe
The “Too Big to Fail” issue continues to be at the center of financial industry regulatory reform and rightfully so; neither the American people nor the economy are prepared to endure another capital markets crisis like that experienced in 2008 and 2009. At the heart of the issue is whether Congress should seek to limit the size and impact of major consumer and investment banks or should measures be adopted that allow for greater strength and stability at banks of any size and type.
The battle lines aren’t as clearly separated by party lines as many might suppose. Certainly, free-market conservatives want to see as little legislative intervention as possible, while those more interested in central planning remain committed to long-term nationalization of the banking industry. Fortunately, neither of these groups are likely to prevail. This is truly one of those issues where a more moderate, centrist compromise will likely best serve the nation’s economy and citizens.
There remains a fallacy in the “Too Big to Fail” concept. It’s not only the size of an institution that may offer risk to the economy if it is allowed to fail, but how interconnected the bank’s products are with other banks, in both the global and domestic markets. All one has to do is recall that Lehman Brothers accurately wasn’t considered “Too Big to Fail”, but it was so interconnected with investment and consumer banks the world over for its failure to send the global markets into a tail spin. Without significantly curtailing the capital market activity of our banks there is virtually no way to avoid this inter-connective exposure. Placing the sort of regulatory constraints on US capital market makers that might possibly minimize the impact would cripple the economy. There are other solutions, of course.
The problem we experienced wasn’t one of size, it had to do with strength and stability. The current legislative proposals requiring greater reserve requirements and capitalization ratios for those banks involved in the capital markets hold credible solutions to the problem. Not only would placing such requirements on our nation’s banks create sufficient strength to lessen the possibility of future crises, but it would also make it less likely for banks to become large enough to be of concern. Those legislators seeking graduated reserve and capital ratios on banks are, in effect, able to limit the size of the bank without placing specific limits on a bank’s size.
Additionally, legislation has been proposed that would require the formation of a “super” FDIC of sorts – an insurance pool funded through transaction fees that would be available to “bail out” troubled investment banks rather than needing to seek tax payer assistance. While there are pros and cons to this concept, it could be a sensible complement to increased capital and reserve requirements. It would take a substantial length of time before such a fund were to become of sufficient size to be impactful, but once established it may offer numerous benefits to the banking system and the economy. It could also become a tempting resource for legislators and would need to have every possible safeguard associated with it’s independence to protect it from those looking for fiscal advantages.
Important to remember, however, is that any additional pressure put on the US banking system may have troubling near-term consequences. The imposition of increased requirements, transaction costs or size limitations would reduce any bank’s ability to lend, and lending remains a critical element in the recovery of the US and global economies. With real interest rates near 0%, it is difficult for banks to lend to any but their best customers, and in this case those happen to be major corporations through which the economy has seen stagnant net job growth for decades. Small and medium size businesses create virtually all of this country’s new jobs, and in the aftermath of the recent recession they’re simply not able to attract sufficient lender attention to gather the credit needed to take advantage of important growth opportunities. In order for the US labor market to see meaningful improvement, small businesses will need to have access to credit capital and be free to fund job intensive growth.
What is left is a classic conundrum: the national and global economy need to be free from the potential damaging affect of an under resourced banking system and the national and global economy need the lending resources of a banking system with limited constraints. Fortunately, the type of compromise that it may take for Congress to bring current legislative proposals towards becoming law will take time; hopefully enough time to allow reason and sensibility to gain the upper-hand over party politics and extreme action.
THE TAKEAWAY – Higher Interest Rates Can Hurt and Help
• Even at volume levels below 2008 and 2009 peaks, there is sufficient strength in the markets to continue to experience gains through the remainder of 2010.
• Jobs reports are likely to appear inconsistent until there is a clear path for small businesses to have the credit capital needed to create jobs and fund growth opportunities. Higher interest rates will come after economic recovery is maturing and will provide incentives for banks to lend. As long as rates remain reasonable (below 2 ½% to 3% Fed Funds rate), job growth will speed up.
• China’s continued growth, in excess of 11%, may need to be slowed by government intervention to avoid overheating and damaging the global economy further; it’s a delicate balance for a nation not used to capitalist nuance.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
THE MARKET – Looking for Conviction in the Markets
With the DOW squarely over the 11,000 point level, investors are looking for clear signs the index is headed higher. Recent economic reports representing increasing factory orders and retail sales suggest 1st and 2nd quarter GDP gains may be better than expected, but the labor market continues to offer concerns. Federal Reserve Chairman Ben Bernanke has stepped-up the tone of his comments regarding growth expectations, now calling for “moderate growth” rather than “slow growth” for the remainder of the year. These and other factors have helped move the major markets indexes by some 5% year-to-date, but there continues to be a significant amount of investor capital resting outside of the markets and concerns that lower market volumes may suggest a lack of investor confidence have some wondering if the current market levels may soon suffer from a lack of conviction.
Many investors have become curious at what some consider low volume levels. On an absolute basis, 2010 volume is averaging about 4.7 billion shares/day. This is
down 15% vs. the 2009 average NYSE volume of 5.5 billion shares/day. Yet 2010’s average volume is only slightly less than the 2008 average of 4.96 billion shares/day. While some consider lower volume a problem, others recognize it as a sign the markets, and economy, have simply reached more sustainable levels of strength and stability.Many forget that the NYSE single-day volume crossed 200 million shares for the first time in early 1984 and it wasn’t until the year 2000, some sixteen years later, that the daily volume reached one billion shares. Even though 2010 volume levels appear low when compared to those of 2008 and 2009, they’re more than four times higher than those of only a decade ago; at the height of the dot com craze.
On Monday, April 12th, 2010 the DOW crossed over the 11,000 point mark and invigorated investor hopes for meaningful market gains in 2010. Volume levels, as the index approached and then exceeded 11,000, were lower than average for the year and suggest to some that the gains may not be backed by sufficient conviction to remain at current levels. The DOW, though having experienced a sharp correction in late January/early February, has already seen 2010 gains
of 5% and investors are looking for more. According to a recent investor survey released by CitiGroup (C), 62% of investors expect the markets to continue to improve over the next six months. With the VIX (volatility index) at its lowest point since the 3rd quarter 2007, it appears that few are expecting significant moves in the near term; rather, a continuation of the current positive trend looks likely to continue through the remainder of the year. Lower-than-average volume isn’t the problem some suppose and as investors continue to come in from the sidelines with their cash, both market levels and volumes will rise.THE ECONOMY – Bank Size is Not the Danger Some Believe
The “Too Big to Fail” issue continues to be at the center of financial industry regulatory reform and rightfully so; neither the American people nor the economy are prepared to endure another capital markets crisis like that experienced in 2008 and 2009. At the heart of the issue is whether Congress should seek to limit the size and impact of major consumer and investment banks or should measures be adopted that allow for greater strength and stability at banks of any size and type.
The battle lines aren’t as clearly separated by party lines as many might suppose. Certainly, free-market conservatives want to see as little legislative intervention as possible, while those more interested in central planning remain committed to long-term nationalization of the banking industry. Fortunately, neither of these groups are likely to prevail. This is truly one of those issues where a more moderate, centrist compromise will likely best serve the nation’s economy and citizens.
There remains a fallacy in the “Too Big to Fail” concept. It’s not only the size of an institution that may offer risk to the economy if it is allowed to fail, but how interconnected the bank’s products are with other banks, in both the global and domestic markets. All one has to do is recall that Lehman Brothers accurately wasn’t considered “Too Big to Fail”, but it was so interconnected with investment and consumer banks the world over for its failure to send the global markets into a tail spin. Without significantly curtailing the capital market activity of our banks there is virtually no way to avoid this inter-connective exposure. Placing the sort of regulatory constraints on US capital market makers that might possibly minimize the impact would cripple the economy. There are other solutions, of course.
The problem we experienced wasn’t one of size, it had to do with strength and stability. The current legislative proposals requiring greater reserve requirements and capitalization ratios for those banks involved in the capital markets hold credible solutions to the problem. Not only would placing such requirements on our nation’s banks create sufficient strength to lessen the possibility of future crises, but it would also make it less likely for banks to become large enough to be of concern. Those legislators seeking graduated reserve and capital ratios on banks are, in effect, able to limit the size of the bank without placing specific limits on a bank’s size.
Additionally, legislation has been proposed that would require the formation of a “super” FDIC of sorts – an insurance pool funded through transaction fees that would be available to “bail out” troubled investment banks rather than needing to seek tax payer assistance. While there are pros and cons to this concept, it could be a sensible complement to increased capital and reserve requirements. It would take a substantial length of time before such a fund were to become of sufficient size to be impactful, but once established it may offer numerous benefits to the banking system and the economy. It could also become a tempting resource for legislators and would need to have every possible safeguard associated with it’s independence to protect it from those looking for fiscal advantages.
Important to remember, however, is that any additional pressure put on the US banking system may have troubling near-term consequences. The imposition of increased requirements, transaction costs or size limitations would reduce any bank’s ability to lend, and lending remains a critical element in the recovery of the US and global economies. With real interest rates near 0%, it is difficult for banks to lend to any but their best customers, and in this case those happen to be major corporations through which the economy has seen stagnant net job growth for decades. Small and medium size businesses create virtually all of this country’s new jobs, and in the aftermath of the recent recession they’re simply not able to attract sufficient lender attention to gather the credit needed to take advantage of important growth opportunities. In order for the US labor market to see meaningful improvement, small businesses will need to have access to credit capital and be free to fund job intensive growth.
What is left is a classic conundrum: the national and global economy need to be free from the potential damaging affect of an under resourced banking system and the national and global economy need the lending resources of a banking system with limited constraints. Fortunately, the type of compromise that it may take for Congress to bring current legislative proposals towards becoming law will take time; hopefully enough time to allow reason and sensibility to gain the upper-hand over party politics and extreme action.
THE TAKEAWAY – Higher Interest Rates Can Hurt and Help
• Even at volume levels below 2008 and 2009 peaks, there is sufficient strength in the markets to continue to experience gains through the remainder of 2010.
• Jobs reports are likely to appear inconsistent until there is a clear path for small businesses to have the credit capital needed to create jobs and fund growth opportunities. Higher interest rates will come after economic recovery is maturing and will provide incentives for banks to lend. As long as rates remain reasonable (below 2 ½% to 3% Fed Funds rate), job growth will speed up.
• China’s continued growth, in excess of 11%, may need to be slowed by government intervention to avoid overheating and damaging the global economy further; it’s a delicate balance for a nation not used to capitalist nuance.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
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