The Fed Puts Off the Stress Tests

Good day… And Happy May Day to everyone. Most associate May Day with the Soviet Union, where the communists turned it into a ‘celebration of the worker.’ But its origins are actually in central Europe where it developed from a combination of several pagan holidays celebrating the end of winter in the Northern Hemisphere. It never really took flight in the United States, but it’s still a popular holiday in most other parts of the globe. With the way our government has been using taxpayer funds to take over struggling companies, May Day could become a larger holiday here in the U.S. also! Most of the trade desks throughout Europe are closed today, and many of the traders left early yesterday, so the currency and metals markets were pretty quiet.

The big news in the U.S. yesterday was the announcement that Chrysler had filed for a ‘precision’ bankruptcy and would be shutting down all of its plants temporarily in order to reduce an inventory overhang. Unfortunately, I heard this morning that both Chrysler plants here in St. Louis would be closing for good, with Chrysler looking to sell them off to pay down debt. It is definitely a sad day for those thousand Chrysler workers here in St. Louis. I received a call from a reporter from Reuters shortly after the announcement, asking me how it was affecting the currency markets. In short, it had no impact whatsoever, as traders were already shutting down for the holiday, and the news has been pretty much baked into the market for some time.

The closing of the Chrysler plants will add to the already large number of unemployed workers here in the United States. The weekly jobless data, released yesterday morning, showed a slight improvement in weekly claims from an adjusted 645K to 631K. But the continuing claims just kept on growing with close to 6.3 million ‘officially’ out of work. Other numbers released yesterday included the personal income and spending data, both of which dropped slightly more than economists’ estimates. This was the first drop in purchases this year, and offsets the big jump in consumer confidence that we saw at the beginning of the week. Employment continues to be a drag on the U.S. economy, and with yesterday’s announcement by Chrysler, bad news just keeps rolling in for U.S. workers.

The one positive out of yesterday’s data is that the savings rate improved again and now stands at 4.2%. This number won’t be welcomed by the administration, who would much rather see consumers borrow and spend to pull us out of recession; but I think the increasing savings figure is just what the U.S. economy needs. While still a long way from the double-digit savings rates in Asia, the 4.2% is a huge improvement from a year ago, when the U.S. savings rates was zero. Again, an increase in the savings rate won’t speed up the recovery (in fact it will probably slow it down a bit), but it is vital to the long-term health of the U.S. economy. Now if we could just get our government to start tightening their belts.

The Federal Reserve announced that it would be postponing the release of stress tests on the biggest U.S. banks, originally scheduled for May 4th. I have been meaning to write about these stress tests the past few days, but have run out of room. With the holiday in Europe, today is a perfect day to dig into the subject.

There have been several leaks of the results of these stress tests, which apparently illustrate a shortfall of capital for both Bank of America and Citigroup. The Wall Street Journal ran an article on Tuesday that indicated BOA was looking at a shortfall in the billions of dollars. Now the results of these stress tests are being withheld from the public while executives at each of the banks debate the findings with examiners. The fear is that the stock prices will fall dramatically if the results are made public. But wait a second, aren’t the U.S. taxpayers major investors in all of these banks now? Don’t you think we have a right to see the results before executives get a chance to ‘dress them up’?

The additional capital will likely come in the form of converting preferred shares held by the U.S. government into common shares. This will allow the administration to avoid going back to congress to ask for additional funding for these institutions. U.S. taxpayers are in no mood to continue throwing money down the bottomless pits of these failed institutions, so the administration will look for ways to support them without having to go back to Congress for approval. This is just further proof of the cozy relationship between Wall Street and the Treasury department.

Chuck wrote about this cozy relationship last week when he pointed out the questionable tactics that former Treasury Secretary Paulson used to force the Bank of America to merge with Merrill Lynch. The Securities and Exchange Commission Chairman Mary Schapiro called the decision by Paulson to exclude the SEC from the talks ‘troubling.’ According to then BOA Chairman Ken Lewis, the Treasury and Fed pressured him to complete the deal for Merrill, and to withhold details about surging losses from BOA stockholders. The SEC is now investigating whether those involved violated laws by not being truthful and transparent. Sure seems like a clear case of wrongdoing to me!! But does anyone really think the SEC will go after Paulson and Bernanke? Nope, they will claim that they kept everything hush hush for the benefit of the country, and the whole affair will likely be swept under the rug.

For his involvement in this sordid affair, Ken Lewis was ousted from his duties as chairman of BOA at the annual meeting on Wednesday. I guess he just didn’t have enough friends on Wall Street! The Chairman of Citigroup, Bikram Pandit, sure did. He was compensated $38.2 million in 2008 according to a report from the AP. Unbelievable!

The Japanese yen (JPY) continued to drop yesterday as investors moved back into higher yielding currencies. The Japanese jobless rate surged to a four-year high in March, and consumer prices fell for the first time in 18 months, indicating that the Japanese economy is continuing to wallow in a state of stagflation. Japan’s economy won’t recover anytime soon, and when it does start growing, the recovery will likely be weak.

China, on the other hand, looks like it is headed for a much faster recovery. Manufacturing in China expanded for a second month, as the government stimulus spending seems to have kicked in. Stronger Chinese demand is helping the exporting nations of Australia, Canada, and South Korea. Goldman Sachs now predicts China’s economy will grow 8.3% in 2009, just above the government’s target of 8%. It certainly looks like China will lead the world out of this recession, with internal demand in China taking the place of lost demand in the United States and Europe. All data indicate that China’s economy will continue to recover, as the economy appears to have bottomed last quarter with a 6.1% growth in GDP.

The Australian dollar (AUD) gained again overnight, and headed for its ninth weekly gain versus the U.S. dollar on the good news out of China. The New Zealand dollar (NZD) also rose, reversing its recent losses after Central Bank Governor Bollard said he would keep rates low for an extended period. Both of these currencies are somewhat dependent on a recovery in the Chinese economy, and the increase in demand for commodities that will accompany it. These two currencies continue to be popular choices with our investors, as they combine a decent interest rate with the possibility of positive currency gains.

This morning we will get an indication of the state of U.S. manufacturing, with the release of Factory orders for March and the ISM numbers for April along with April’s vehicle sales numbers. I don’t expect any of this data to surprise on the upside, and with trading desks lightly staffed, I wouldn’t look for any major swings in the currency markets. Should be a pretty quiet Friday, so with that I will head into the currency wrap-up:

Currencies today 5/1/09: A$ .7318, kiwi .5717, C$ .8423, euro 1.3277, sterling 1.4895, Swiss .8791, rand 8.4208, krone 6.5399, SEK 8.0449, forint 216.83, zloty 3.3035, koruna 20.1634, yen 99.34, sing 1.4797, HKD 7.75, INR 50.09, China 6.8210, pesos 13.80, BRL 2.1904, dollar index 84.45, Oil $50.92, Silver $12.15, and Gold… $881.91

That’s it for today… Looking forward to this weekend, as I am heading out to a friend’s farm with my teenage son to see if we can get him his first turkey. Turkeys are a real challenge, as they have incredible eyesight and always seem to spot you before you see them. They say if a turkey could smell, you would never be able to get near them. Brendan is convinced this is the year he gets his first gobbler. It is supposed to rain most of the weekend, but the weather predictions haven’t put a damper on my son’s excitement. I just hope the turkeys show up! Hope everyone has a Fantastic Friday, and a Wonderful Weekend!!