Steven Mango - Money and Markets

Mr. Mango is a 25 year veteran of Wall Street and its Broker Dealer community. Beginning his career as a market-maker in international equities, and currency  arbritrage, at Schwab Capital Markets, Mr. Mango then headed the exchange listed International trading Desk at Knight Securities. He has also served as the Director of Business Development for various start up and expanding financial companies in the New York Tri-State area. Mr. Mango formed Direct International Currency Exchange where he trained and mentored professional traders in equities, currencies and options. Mr. Mango has particular experience in Equities market-making, currency, and commodity trading. and has served as vice president of Institutional fixed income  sales at Southwest Securities.

YOUR FINANCIAL HEALTH SHOW 4/20/2010

I’d like to make a comment on the Goldman story. It is clear that the conduct of this firm is most certainly distasteful, and more likely than not illegal. I have true reservation that this revelation was a random, but a well timed release by the Obama administration in order to create emergency to ram through an ill thought financial reform, more likely than not, without vote.

My fear is that, as in the previous proposed reforms, there is a predisposition to re-invent, not revise policy, without the knowledge or competence to do so. You talk about systemic risk? I’m petrified with how these morons may use this moment for a political trophy.

Just this morning to prove a point Obama announced that he will suddenly come to NYC today to make a case for his reformation of Wall Street, but didn’t tell Bloomberg, police, or firefighters etc…. It feels like another backroom decision….This President seems to feel that he can do whatever he wants to without, consideration of protocol. 　

Now, this Goldman mess unfortunately came just as investors were buying up bank stocks in the belief that the sector's problems were over.

In case you haven’t heard the details. The SEC has charged that Goldman Sachs created a financial product called Abacus -- a derivative based on subprime mortgages called a collateralized debt obligation (Collateralized Debt Obligations, are sophisticated financial tools that repackage individual loans into a product that can be sold on the secondary market. These packages consist of auto loans, credit card debt, or corporate debt. They are called collateralized because they have some type of collateral behind them) -- that it allegedly sold to one client as a good investment while knowingly allowing another client, hedge fund giant Paulson & Co., to short the product and to influence what subprime mortgages went into this pool of mortgages.

Goldman, the SEC alleges, never informed the buyers of Abacus that Paulson & Co. had helped select the mortgages underlying the Abacus portfolio, and indeed represented that the mortgages had been selected by an independent third party, ACA Management.

Goldman further represented to ACA,, that Paulson & Co. had invested long in Abacus and thus its interests were aligned with other investors buying the Abacus product but, in fact, Paulson & Co. was short, betting that Abacus would go down in price.

The Abacus deal closed on Apr. 26, 2007, and within six months, according to the SEC, 83% of the mortgage-backed securities in its portfolio had been downgraded by ratings companies, while the other 17% were on negative credit watch.

By Jan. 29, 2008, the SEC says, 99% of the securities had been downgraded. The SEC alleges that investors in Abacus lost more than $1 billion.

"The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation," Goldman said in a statement.

The SEC's complaint notes that Paulson & Co. paid Goldman $15 million to structure and market the Abacus CDO. Paulson doesn't face charges in the case.

This is a big deal for Goldman Sachs. Because Goldman does so many deals for clients in often obscure corners of the financial markets and frequently becomes the market, for all intents and purposes.

Clients have long felt that Goldman uses its knowledge of these markets to trade for its own profit, even against the interest of its fee-paying clients. (This alleged conflict of interests became a big issue when Goldman's chief executive officer Lloyd Blankfein appeared before Congress's Financial Crisis Inquiry Commission in January.)

Because Goldman is so powerful, few companies have been willing to say this. But the complaint does occasionally surface.

For example, the former CEO of Washington Mutual, made it clear he didn't trust Goldman enough to hire the firm when Washington Mutual's cratering mortgage portfolio put the company at risk.

In one e-mail released as part of the Commission's investigation of the financial crisis, he wrote that Goldman was shorting mortgages big time even while they were giving CfC [Countryside Financial, another aggressive mortgage lender] advice.”

But it's one thing to have clients grumbling or a former CEO complain about your business practices, and quite another to have the SEC file a case that seeks disgorgement of profits and financial penalties from Goldman and that charges specific Goldman executives -- in this case, vice-president Fabrice Tourre -- with civil fraud.

But the worries about this case extend well beyond Goldman.

So far, Wall Street has been very successful in arguing that the financial crisis could not have been anticipated.

To hear Wall Street CEOs -- and their pals at regulatory bodies such as the Federal Reserve -- tell it, you'd think the whole bust that almost took down the global financial systemwas an act of God. Nobody on Main Street really believes that, but until today no agency or court with the power to do real harm to Wall Street's profits has challenged that view.

In its charges against Goldman Sachs, the SEC says, quite plainly, that it just doesn't buy the “act of God” defense. There was real fraud at work, it claims, and companies and individuals should pay the price.

Wall Street has been hoping its defense would hold. Even this week's Congressional hearings, at which Killinger and other former WaMu executives detailed the extent of consciousmortgage fraud at that company, weren't too big a problem.

Congress could investigate all it wanted, but it didn't have the guts to do anything that would really hurt Wall Street's profits or go after some of the biggest names. Now it's clear that the SEC does.

But most damaging is that the SEC's complaint comes just as Wall Street is trying to fend off meaningful regulatory reform in Washington and to line up its regulatory buddies at the Federal Reserve and the U.S. Treasury to fight against the tough international rules on capital proposed by the Basel Committee on Banking Supervision in what's called Basel III.

Lets review Senator Dodd’s proposed banking reform legislation, which incidentally differs in some ways from the House version. The key issue is, what does it mean? First, anyone who argues they understand all the ramifications of the bill are kidding you. His original bill was over 1100 pages long, with the revised version, taking into account some Republican and Conservative Democratic objections pushed the size of the bill to over 1300 pages. If that tells you anything, it’s that the bill is probably filled with many loopholes and outs that you could drive a truck through it....

Nonetheless, there are two important provisions of the bill: 1) Changes to the regulatory environment; and, 2) Creation of a consumer protection agency. FSOC The bill contains a provision to create a new Financial Stability Oversight Council (FSOC) under the auspices of the Treasury, which is supposed to be on guard for systemic risks. If it finds there is a risk to the system, then it is to bring it to the attention of the Federal Reserve to resolve the matter. It is proposed that $50 billion be set aside for potential crises. Conservatives have labeled this a permanent TARP. The reality is that the bill allows the Fed and Treasury to do what is needed when and if a systemic risk arises, which could easily resemble what happened during the last crisis. The hope is that such a watchdog council would see signs of a crisis brewing and therefore hope to avert it. It sounds good, but the reality, as even Senator Dodd admits, is that financial crises are always a possibility despite our best efforts. From my point of view, it is hard to oppose having a systemic watchdog council since an extra set of eyes might notice something missed by others. Some argue that because the Council would tell the Fed to do something, in the end, the Fed will have more power because it is responsible for taking action. Frankly, I don’t think it makes much difference, since central banks can usually do pretty much what they want anyway, and thank goodness they can. If we had had to wait for Congress and the Administration to act in a timely manner, we would have had a full-blown depression on our hands, instead of a recession, which I should add ended by mid-2009.

The law leaves a great deal of discretion to the Fed, the FDIC and the Council in how they deal with troubled institutions. However, this discretion is what worries the rating agencies. If a large financial institution runs into trouble for idiosyncratic reasons, then it is not clear how the problem institution would be handled. The assumption has generally been that there are “too big to fail” banks. This will mean that there is a marginal increase in the risk of a large institution in the US being allowed to fail in a way that hurts creditors, especially non-depository creditors. I say “marginal” increase in risk, because if a financial institution is large enough, and gets in trouble, the last thing a regulator would want to do is to frighten investors or depositors. Therefore, although the risk may rise slightly, the bill may affect ratings because they are based on marginal changes in risk. However, the fundamental risk posed by large US banks in terms of default, I would argue, would remain extremely small. This proposed bill would do little to change that. Small banks are already allowed to fail with losses often shared by investors and depositors. This bill doesn’t change that. On the purely regulatory front, the Fed is expected to regulate all financial institutions with over $50 billion in assets, including non-banks. State chartered institutions with assets below $50 billion would be regulated by the FDIC. The OCC (Office of the Comptroller of the Currency) would regulate nationally chartered financial institutions with assets below $50 billion. The Office of Thrift Supervision (OTS) would no longer play a regulatory role. CFPB

The second important focus of the bill is the creation of a Consumer Financial Protection Bureau (CFPB). It would have jurisdiction over financial institutions with over $10 billion in assets. It is far from clear how this would work in practice. Senator Dodd’s bill proposes that the Bureau be housed within the Fed, but be completely independent from the Fed. He argues that this way the Bureau wouldn’t be subject to the vagaries of funding which have often decimated other regulatory bodies in the past. He also argues that it won’t cost taxpayer money because the Fed pays the bill. However, since Fed profits pass to the Treasury, it is an indirect way of taxpayer finance, since it raises Fed costs. That is an example of why dealing with banking and central banking, in particular, is so tricky. In the end, it is likely that some form of this bill will pass, with most of the provisions remaining. If it is gutted, then we will know that bank lobbyists have regained clout lost during the last crisis, and That would represent a paradigm shift.

Basel III

The Basel Committee on Banking Supervision is an institution created by the central bank Governors of the Group of Ten nations . It was created in 1974 and meets regularly four times a year. The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, theNetherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Committee usually meets at the Bank for International Settlements (BIS) in Basel, Switzerland, where its 12 member permanent Secretariat is located. The Committee is often referred to as the BIS Committee after its meeting location.

252 letters in all from banks, industry bodies and associations were submitted for consideration for the framework of the reform.

The feedback paints a gloomy picture of economic growth prospects while warning on the scale of capital and funding requirements if enacted as proposed. Due to the gravity of the proposals, some respondents are calling for a second consultation period after calibration. Following the EU’s failure to agree on a bank tax, it could further indicate that the timeline to coordinate the global agreement on new rules by the end of the year is in doubt and to gain industry support, regulators may need to tone down some of the reform. In particular the liquidity ratio, which appears to have touched a raw nerve for the banks: European bank responses were of almost total rejection of the proposed framework although many supported the idea of a liquidity framework. The macro risks of imposing the current plan would mean a disruption to banks’ ability to continue lending at a time when fiscal support for the economy would be withdrawing. As we have said in the past, regulators and politicians need to understand that banks bear some liquidity risk as part of their function in the economy. Removing this function means that other economic agents must bear this risk which would mean moving risk into unregulated areas. KBW analyst Andrew Stimpson says the letter from Lloyds Banking Group is a good summary of the responses.

Here’s an excerpt:

“Second, banks that rely on shareholders have to generate (and be expected to generate) a through-the-cycle return on equity (RoE) that is greater than cost of equity (CoE). Without this return, investors will not invest and banks will have a duty to return capital to shareholders rather than continue to provide the socially useful service that they do to the economy. Impact analysis shows that the proposed changes will cause RoE to fall significantly below CoE. As a result banks may need to change aspects of their business models. Responses are likely to fall into three main categories: reduction in the supply of credit (deleveraging) in order to return equity to shareholders; or increase in the price of credit or reductions in costs and service levels in order to achieve an RoE that is acceptable to investors . . . The deleveraging and price increases are likely to have a serious impact on the economy, reduce GDP growth and could, in certain circumstances, lead to a double-dip recession not only in the UK but worldwide. This seems inevitable if the proposals are brought in on the current timetable.”

So, there you have it — squeeze us too hard and we won’t lend, or as one banking analyst, who didn’t wish to be named, put it this morning: Immediate implementation of the capital & liquidity proposals, now or even by the 2012 proposal, would require huge amounts of new capital raising across the industry. Industry RoE would fall below cost of capital, and so the industry response would require a severe knock on for the cost & availability of credit in the real economy. Now the terms of the debate have been framed expect plenty of horse trading and a lengthy implementation timetable.

Listen to Steve Mango segment for 4-20-2010

YOUR FINANCIAL HEALTH SHOW 4/13/2010

First I’d like to look back to or previous segment and pat ourselves on the back for asserting that the 10 year bond run up (post the ISM release) to above 4% was overly optimistic and a false move.  Today after 5 trading days the market is trading at a more realistic level of 3.80% and has sobered up considerably from that unrealistic move in rates.

Second, I’d like to point out that the minutes for the fed meeting which were released after our last show were extremely dovish and point to an extended period of time for a rate hike from the federal reserve.

The National Bureau of Economic Research said Monday that although most barometers show improvements in the economy, it would be "premature" to pinpoint the end of a recession based on economic data seen so far.
That assessment came after the group of academic economists met at its Cambridge, Mass., headquarters on Thursday to review mountains of economic data.
The panel looks at figures that make up the nation's gross domestic product, which measures the total value of goods and services produced within the United States. It also reviews incomes, employment and industrial activity.
The economists decided that many of the key economic indicators are "quite preliminary at this time and will be revised in coming months. NBER has already pinpointed the start date of the recession as December 2007, a determination it reaffirmed on Monday.

Second, An update of the Greece crisis,
On Sunday, eurozone governments said they would make euro30 billion ($40 billion) in loans available to Greece this year if Athens asks for the money. The International Monetary Fund would also contribute -- with about another euro10 billion (US$13.58 billion), officials said.This amount is more than enough to cover Greece's refinancing needs to the end of the year.
The finance ministers of the 16 eurozone nations have now agreed on a three-year financing formula that would mean a fixed interest rate of about 5 percent, while officials said the variable rate would be around 4 percent.
That is still high, but nowhere near the roughly 7 percent that Greece was facing last week on the international market, or the 6.25 percent it borrowed at when it issued a 10-year bond in early March.
"Five percent is certainly high at first reading," said independent economist Vangelis Agapitos. However, he said, while it was still one of the highest eurozone rates, "it's a much more realistic level than the 7 percent we had to face recently."

Third, Comments on commodities and your portfolio,
Lets try to catch up on the past year's performance…………

• The USDA has projected that farm income will rise nearly 12% to $63 billion in 2010.
• Food inflation is below 2007-2008 levels, but that’s expected to end this year as prices for meat, milk and other commodities see price increases. [Oil and Gas Plays for Rising Energy Prices.]
• It expects a 9% increase in U.S. beef exports and a 9% rise in pork exports.
• Land planted to cotton is estimated to surge 15%, with U.S. cotton exports expected to increase by 5%, and global cotton consumption could expand by 2.6% this year, according to the USDA.
• The livestock sector could be a driver for economic and jobs growth if the farm economy benefits from the broader economic recovery. [Metals ETFs Are Leading the Charge.]

There are a variety of ETFs and exchange traded notes (ETNs) that can get you exposure to agriculture, whether you want to go broad with a fund that holds a host of commodities or narrow with a cotton fund. Note that ETNs are debt instruments backed by the credit of the issuer. [Differences Between ETFs and ETNs.]

As a result, commodity exchange traded funds (ETFs) have had a good run in the past year. But some ETFs haven’t been performing as well as their underlying commodities.
For most precious metals ETFs, the ETF will likely hold the physical commodity, but in many cases, a commodity ETF just holds future contracts or notes redeemable by a bank. By investing in futures contracts and other so-called derivatives, commodity ETFs may diverge from the actual commodity they are tracking. For a better understanding of how ETF's relate to the underlying spot prices, review the following article on  Why Commodity ETFs Underperformed Spot Markets.
For example, United States Natural Gas (NYSEArca: UNG) plummeted around 50% in 2009 while natural gas prices only dropped around 12%. PowerShares DB Oil (NYSEArca: DBO) has gained 16% since its inception in 2007, but oil prices have jumped about 40%.
The world of commodity ETFs was shaken as regulators talked about imposing position limits on the funds. Commodity ETF traders suspected that some may have been exploiting the funds’ predictability of always investing in the next month’s futures contracts in which the traders would push up contract prices just before funds “roll-over” them. [CFTC's ETF Proposal.]
Commodities are still a good way to diversify an otherwise nondiversified portfolio, but before anyone decides to invest, assess your risk tolerance and act accordingly:

• If you don’t mind taking risks, narrowly focused commodity funds can give you more pure exposure to a particular commodity. With that single-commodity exposure comes more potential for volatility.
• If one wanted more safety, check out broad commodity funds that give you exposure to a diversified basket of commodities. The downside is that you won’t fully capitalize if any one commodity is performing particularly well.
• Utilize a strategy when investing in commodities. A common and widely accepted strategy is trend following.
•  

Here is a partial list of some Commodity ETF's for your review.

• iShares GSCI Commodity Indexed Trust (NYSEArca: GSG)
• PowerShares DB Commodity Index (NYSEArca: DBC)
• Greenhaven Continuous Commodity (NYSEArca: GCC)
•  iPath Dow Jones-AIG Commodity Index Fund ETN (NYSEArca: DJP)
• PowerShares DB Agricultural Fund (NYSEArca: DBA)
• Market Vectors RVE Hard Assets Producers (NYSEArca: HAP)
• PowerShares DB Energy Fund (NYSEArca: DBE)
• PowerShares DB Base Metals (NYSEArca: DBB)

Most notably for a pure corn commodity play,
 Teucrium Trading, LLC, an investment firm based in Brattleboro, Vermont, is taking a swing at offering an exchange traded fund (ETF) that offers a pure play on corn. The timing is fortuitous, since heavy spring rains could slam crops and contribute to rising prices.
The proposed corn ETF will track three separate Chicago Board of Trade corn futures contracts, making it the first to offer investors pure exposure to the grain. The Teucrium Corn Fund (NYSEArca: CORN) will track a daily weighted average of closing settlement prices for the second-to-expire CBOT futures contract, weighted at 35%; the third-to-expire contract, weighted at 30%; and the final 35% based on the contract expiring in the December following the expiration of the third-to-expire contract. [ETFs to Play Agriculture.]
The idea of blending futures is ideal as it will lesson the impact of contango, (When the futures price is above the expected future spot price. consequently, the price will decline) ... if any. This is the first shot at a pure play on corn. [Why Ag Prices Could Rise.]

• PowerShares DB Agriculture (NYSEArca: DBA): Holds wheat, corn, soybeans and sugar futures, among others.

• PowerShares DB Agriculture (NYSEArca: DBA)

• UBS E-TRACS CMCI Food TR ETN (NYSEArca: FUD)

• UBS E-TRACS CMCI Agriculture TR ETN (NYSEArca: UAG)

• UBS E-TRACS CMCI Livestock TR ETN (NYSEArca: UBC)

• ELEMENTS Rogers Intl Commodity Agri ETN (NYSEArca: RJA)

• iPath DJ-UBS Agriculture TR Sub-Idx ETN (NYSEArca: JJA)

• iPath DJ-UBS Cotton (NYSEArca: BAL)

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG)

Listen to Steve Mango segment for 4-13-2010

YOUR FINANCIAL HEALTH SHOW 4/6/2010

Here is the result of the fed meeting minutes we were waiting for.  

Housing activity remained flat and the nonresidential construction sector weakened further.

A sizable increase in energy prices pushed up headline consumer price inflation in recent months.

The level of initial claims for unemployment insurance benefits remained high.

Household income appeared less supportive of spending than at the January meeting, reflecting downward revisions to estimates by the Bureau of Economic Analysis of wages and salaries in the second half of 2009.

Activity in the housing sector appeared to have flattened out in recent months. Sales of both new and existing homes had turned down, while starts of single-family homes were about unchanged despite the substantial reduction in inventories of unsold new homes. The underlying pace of housing demand likely remained weak.

The Fed minutes reiterated that the federal funds rate will remain unchanged for an “extended period.” In my opinion the Fed is in no hurry to raise rates, and my definition of an “extended period” is the next three to six FOMC meetings.

Total bank credit contracted substantially in January and February. This includes continued declines in the loan categories I've been tracking in the FDIC Quarterly Banking Profile.

Commercial and industrial (C&I) loans declined.

Commercial real estate loans also posted significant declines.

Household loans on banks' books contracted as well, in part because of a pickup in bank securitizations of first-lien residential mortgages with the government-sponsored enterprises in February.

Consumer loans originated by banks declined, primarily reflecting a large drop in credit card loans.

The FOMC staff did make modest downward adjustments to its projections for real GDP growth in response to unfavorable news on housing activity, unexpectedly weak spending by state and local governments, and a substantial reduction in the estimated level of household income in the second half of 2009.

The committee will maintain the target range for the federal funds rate at 0% to 0.25% and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Today the US Treasury auctions $21 billion in new 10-Year notes. $13 billion 30-Yearbonds on Thursday.

The 3-Year note auction went well, holding my tight weekly and daily supports at 1.768 and 1.778. The $40 billion was auctioned at 1.766 with a strong bid to cover at 3.1 times and indirect bid at 52%, well above my assumed 30% to 40% neutral zone.

For the 10-Year note auction the yield is testing levels not seen since June 11, 2009. Semiannual support is 4.25 with daily and weekly pivots at 3.980 and 3.953. The rise in yields is now overdone.

Source: Thomson / Reuters

For the 30-Year bond auction the yield is under the influence of daily, weekly, and semiannual pivots at 4.842, 4.828, and 4.823.

Comex Gold -- Quarterly and annual supports are $1052.8 and $938.7 with annual and semiannual pivots at $1115.2 and $1139.7, and daily, weekly, semiannual, and monthly resistances at $1148.6, $1162.6, $1186.5, and $1202.5.

Source: Thomson / Reuters

Nymex Crude Oil -- Annual and quarterly supports are $77.05 and $58.41 with monthly and daily pivots at $84.54 and $87.15, and weekly resistance at $89.90. Annual and semiannual resistances are $97.29 and $97.50.

Source: Thomson / Reuters

The higher 30-Year bond yield has made all 11 sectors overvalued:

The Dow is now overbought on its daily, weekly, and monthly charts. The “Wall of Resistances” stretch from 11,202 for this week, 11,228 for April, 11,235 for 2010, and 11,442 until the end of June. A weekly close below my annual pivot at 10,379 indicates risk to quarterly support at 7,490. Dow 8,500 before 11,500 remains my call. The Armadillo Rally -- bad news bounces off its coat of armor, and on down days it burrows into a self-created hole.

Source: Thomson / Reuters

Click to listen to Steve Mango's commentary on the global markets, commodities and things to keep your eye on. 4/6/2010

YOUR FINANCIAL HEALTH SHOW 3/30/2010

A look at ETF’s
 

In our past shows we’ve discussed Currencies, The US Economy and unemployment, Fannie Mae, Freddie mac, Social security, and The looming Chinese Currency and trade war.

Today I’d like to discuss ETF’s, what they are, and how to invest in them.  ETFs or "Exchange Traded Funds" are open end investment companies that are designed to track specific markets including global stock indices, commodities and metals. They are growing in popularity in recent years partly due to their simplicity. Some brokers offer the option to trade these exchange traded funds on margin giving the opportunity for greater gains, but also greater losses. Most Exchange traded funds have the option or objective of going long or short the underlying asset, security, or indices.
 
There are many advantages associated with ETFs. They are generally very cost effective to hold for the longer term. Annual fees vary from around 0.2% to 2% per year….. They are very easy to buy and sell and require no knowledge of the futures markets like when trading index futures.
 
Like all forms of investing, ETFs are no different when it comes to risk. Your investment will fluctuate and can go down as well as up, so a good understanding of the underlying security is essential. It is also good to understand exactly how the fund is planning to track the underlying security. Many of the index ETFs buy the individual shares so you are able to track the index closely.
 
Many of the metal ETFs actually buy the metal and store it. However, some other commodities are not as easy to buy and store, like oil…. Most Oil ETFs actually buy oil futures to track oil which means the fund will be subjected to the risk of the futures market.
 
For the first half of 2007 oil futures were trading at a premium, as a result the oil ETFs tracked oil very poorly. What is most important to know is that, it is not essential to learn about the futures market to invest with ETFs, but it is important to understand that they are not guaranteed to track the underlying security.