What a Market!

Stock earnings reported last night and so far this morning were mostly positive, but it failed to give the overall Stock Market a big boost.




President Obama is scheduled to sign the Financial Regulation Bill into law at 11:30am ET this morning. As we have been discussing with you, the impact of the 2300 pages of legislation are very far-reaching, and could be devastating. Many are already incurring significant expenses to pay teams of attorney’s huge sums of money, just to try and understand what the impact on their business and sector will be. No doubt that the signing of this Financial Regulation will come with much fanfare and applause – but most business leaders and economists, including Alan Greenspan himself, are very concerned.

That said – the pending legislation is already driving unintended consequences. And this morning, Bond rating agencies Moody’s, Fitch, and Standard and Poor’s all announced they would not allow their Bond ratings to be used in new Bond offerings out of concern for potential legal liability resulting from Financial Reform. The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately – and the agencies are saying that until they have a better understanding of what their exposure may be, they will refuse to let Bond insurers use their ratings. It remains to be seen how this will impact Bond pricing and salability.

At 2pm ET this afternoon, Federal Reserve Chairman Ben Bernanke will begin his testimony on monetary policy in front of the Senate Banking Committee. This testimony has been pushed back from its normal 10am start because President Obama wants center stage for his signing of the Financial Reform Law. We expect Mr. Bernanke to say that the economy has indeed slowed but will not slip into another recession. And if Mr. Bernanke does not comment on what additional measures the Fed might take to prevent a double dip, it is likely to come up during the Q & A session with members of the Senate. One question that will likely come up is whether the Fed will continue to pay interest on excess reserves. By eliminating interest paid on these reserves, it is thought that the funds may find their way back into the economy.



Another question that may come up for Bernanke, is whether the Fed would consider more quantitative easing. The Fed already purchased $1.25T of Mortgage Bonds, as well as several hundred Billion in Treasuries. These purchases have helped drive rates down towards historic low levels - and yet, the housing market is not responding. This begs the question, would more of the same tactic cause a different result? The Fed's balance sheet is already bloated. And we feel that the Fed, like most in Washington, is missing the target. The problem, as we see it, is not that rates need to be lower. Many individuals would either purchase or refinance but are unable to do so because of tighter underwriting guidelines, as well as low valuations. One example - no income verification loans, which have been called "liar loans", have been placed in a negative spotlight and virtually eliminated. But there has been a good track record for those loans in the past when underwritten with LTVs at 75 or less and excellent credit scores. If the government were to direct some resources towards reestablishing some of these more reasonable lending tools, the results might be better.



And as if that wasn’t enough from DC – the Unemployment Extension Bill cleared a procedural hurdle in Washington yesterday, and will go to a final vote in the Senate today. It must still clear the House of Representatives as well – but is expected to do so. This legislation will provide extended benefits for up to 2.5M people whose benefits expired before the 99 week cut off.



And here's an important developing story. China's reserves, which are held mostly in US Treasuries, as well as Mortgage Backed Securities, stand at $2.5T. But last quarter marked the first time in a long time that these holdings did not increase. Does this mean that China is slowing its US debt purchases? We will have to keep tabs on this because a slowdown in US debt purchases from China could adversely affect the Bond Market, as their purchases have contributed to the low interest rate environment in the US.