The TED Spread measures the difference between the 3 month LIBOR and 3 month T-bill.  The TED Spread is considered ‘normal’ when it is below 50 basis points. Here is a multi-year chart of the TED Spread going back to 2006 (source: Bloomberg)

The TED spread increased from the mid-teens to 50 basis points in the second quarter of 2010, and has since lowered to the mid-30s – within our ‘normal’ range.  Can you guess when Lehman Brothers filed bankruptcy?  The TED Spread spiked to over 400 basis points that week.

Filed under: General
Posted on July 19th, 2010 by Bob Brinker

Many investors are convinced a double-dip recession is inevitable. Not me. One of the most reliable forecasters of recessions is the yield curve. A simple way to measure the steepness of the yield curve is to calculate the difference between the 10-year Treasury note and 3-month Treasury bill. Since 1955, there have been 9 recessions (per NBER), and every one of them saw the 10yr-3mo spread dip below 50 basis points – and most below 0 meaning the yield curve inverted.

The following chart from January 1955 to June 2010 clearly illustrates this point. Recessions are marked by vertical grey bars and the 10yr-3mo spread is the green line. You will notice that each grey bar (recession) is preceded by the green line (spread) dipping near or below the 0.00 level (below 0 = inverted yield curve). 

Data Source: St. Louis Fed FRED  http://research.stlouisfed.org/fred2/

Filed under: Federal Reserve, General, Gross Domestic Product, U.S. Treasury
Posted on July 19th, 2010 by Bob Brinker

On 7/15 we reloaded our database with 781 upcoming municipal bond auctions totaling $21.3 billion in new issues. These include a $900MM offering by the State of Illinois and a $635MM offering by the State of Minnesota. There are upcoming auctions in 49 different states.

Click HERE to Search for municipal bond auctions in your state.

Filed under: General, Municipal Bonds
Posted on July 15th, 2010 by Bob Brinker

Over the weekend I read Gregory Zuckerman’s The Greatest Trade Ever. The book details the story of John Paulson’s gutsy, ingenious (at the time) trade against the housing debt bubble. Paulson and co-manager Paolo Pellegrini not only identified the correlations between home price appreciation and mortgage defaults, but more importantly identified a way to manufacture huge profits if their thesis was correct. They purchased billions of dollars worth of CDS (credit default swap) insurance on a variety of subprime MBS debt related securities. This enabled them to limit their exposure to the annual premiums if the housing bubble continued, and earn many multiples on their return when the debt bubble popped. In the end, the Paulson hedge funds made tens of billions on their investments and pulled off the greatest trade in Wall Street history. The book also includes tales of a few others who were able to place the same trade, but focuses on the personalities of Paolo and John. (if you read The Big Short by Michael Lewis many of the same characters appear)

What I enjoyed about this book most is that it focused not only on identifying the housing bubble – which many did – but on the more difficult task of developing and implementing an investment portfolio to earn outsized gains based on this view. This was not easy as most investors were not well versed in CDS and did not have the ability to trade them. It required ‘rolling’ the CDS to ensure the subprime MBS in your investments were the most recent – and most risky – created. And at the time, most on Wall Street thought your were crazy to bet on a national housing price decline – something that had not occurred since the Great Depression.

What did Paulson do with the proceeds of his great trade? He catapulted them into another massive winning trade purchasing CDS on the investment banks that were on the hook for paying him his CDS payouts. Bear Stearns, Lehman Brothers, Merrill. Just an amazing run … and a fun read for investors everywhere.

Filed under: General
Posted on July 12th, 2010 by Bob Brinker

The July 2010 edition of the Brinker Fixed Income Advisor is available for subscriber download at www.BrinkerAdvisor.com

1-Year Model Portfolio Performance
Aggressive Portfolio + 16.5%
Moderate Portfolio + 11.8%
Conservative Portfolio + 9.9%
Tax-Exempt Portfolio + 8.7%
**1-year portfolio returns through 6/30/2010

Filed under: General, Investment Letter
Posted on July 1st, 2010 by Bob Brinker

The June 2010 edition of the Brinker Fixed Income Advisor is available for subscriber download at www.BrinkerAdvisor.com

Filed under: General, Investment Letter
Posted on June 1st, 2010 by Bob Brinker

Look at how little rates have changed on the U.S. Treasury yield curve over the past year:

The 30-yr bond yield closed at 4.35 today and the 3-mo bill closed at 0.16 leaving us with a curve that is 419 basis points steep. The 10-year (3.47) minus the 2-year (0.81) is 266 basis points steep.  It is the curve’s steepness, more than anything else, that has imposed a cap on longer-term yields. Until rate hikes commence at some point in the future, longer-term rates will have difficulty going materially higher.

Filed under: Federal Reserve, General, U.S. Treasury
Posted on May 17th, 2010 by Bob Brinker

I recently completed two books worth mentioning. Confidence Game details the six-year battle between hedge fund manager Bill Ackman, of Pershing Square Capital Management, and monoline bond insurer MBIA. Bloomberg News reporter Christine Richard tells a gripping tale of perseverance of a short-seller against MBIA’s questionable accounting and excessive risk taking. It details the bond insurance business and how the risk taking increased during the housing boom. Most surprisingly, it details the personal attack waged against Bill Ackman and others by regulators and government officials, rather than addressing the issues raised.

 Fooling Some of the People All of the Time details the ongoing crusade of Greenlight Capital’s David Einhorn against Allied Capital, a publicly traded business development company (BDC). The saga begins when Mr. Einhorn makes a 2002 presentation at the Ira Sohn conference. For reference, you can still watch his presentation online. Much like the previous book, the personal attack waged against Mr. Einhorn by regulators and government officials is deeply disturbing. The company even goes as far as illegally pretexting his home and office telephone lines. David’s wife Cheryl is eventually fired from her job as an Editor at Barron’s as a result of his campaign against Allied.

I recommend investors read both books to learn how to indentify questionable accounting. Pay attention to the tactics management employs to counter-attack the claims made by their critics. Do they address the issues?  Or do they attack the messenger? These books raise many unanswered questions. Why did regulators investigate the short-sellers rather than the companies? Why are reporters unwilling to write critical reports? Why are analysts so quick to downplay the problems without investing anytime to understand the issues? Why are ex-regulators (think SEC) permitted to leave the agency and work at private firms only to exploit the flaws in the regulatory system? Can the agency effectively regulate colleagues? 

Filed under: General
Posted on May 14th, 2010 by Bob Brinker

The May 2010 edition of the Brinker Fixed Income Advisor is online at www.BrinkerAdvisor.com

Our 1-Year Model Portfolio total returns through 4/30/2010:
Aggressive Portfolio + 30%
Moderate Portfolio + 18%
Conservative Portfolio + 13%
Tax-Exempt Portfolio + 9% **this a tax-exempt return**

Filed under: General
Posted on May 3rd, 2010 by Bob Brinker

I have been asked about my thoughts on financial reform so let me put down some thoughts.  First, I was supportive of the bailout efforts in 2008/2009 not because I cared about Wall Street banks, but because a multi-decade economic collapse was going to be bad for everyone. As difficult as it was to ‘save the banks’, I thought (and still do) that it was the best of a bunch of lousy options. I think the recovery reinforces that view, but since we did not experience the alternative, that is difficult to argue.

I cannot fathom that having gone through the financial collapse, there is anyone on the planet that does not want major changes on wall street. Here are a few of them I think make sense:

Close the Casino  I heard Michael Lewis say this and I think it is a good guiding principle and excellent talking point. No more highly levered, off-balance-sheet, exotic, black-box trading operations. You can be an investment bank or you can be a hedge fund. Make your choice. If you are going to be a primary dealer of the Federal Reserve and take deposits from citizens and conduct investment banking operations, you cannot run a hedge fund in the basement. You also cannot trade the securities that you make a market in. Too many ethical issues for ultra smart 20-something’s to make.

Regulation We had a lot of regulations removed in the 90s and 00s that did not need to be removed. A reasonable limit on leverage ratios ( well below 30-1 or 40-1 ) make obvious sense. An up-tick rule on shorting is simple enough. Everyone says it is ineffective, so no reason to not do it. Some limit on why a person might buy CDS as something other than a speculative bet might make sense. It also makes sense that if you are going to buy or sell a derivative which is essentially an insurance policy, that you hold either an offsetting position or a sizable reserve to cover the eventual payment (AIG clause). I remember well the circular linkage between buying the CDS, shorting the stock, wait for the credit agencies to downgrade the company, rinse/wash/repeat.  In a fractional banking system, a perfectly healthy bank is still susceptible to a run on the bank. In our markets, we should put up barriers to it occurring, not encourage this behavior.

Exchange/Transparency  This is a no brainer. One of the obvious problems throughout the crisis is nobody seemed to know the exposure of any bank’s books. It should be very simple at the end of each day – or intraday – to know the exposure of each financial institution. Open exchanges make sense, and anything that trades in the billions to trillions of dollars should be on an exchange.

What are the decoys? I am not overly concerned about Too Big Too Fail from a balance sheet size standpoint. I do not think size in and of itself caused the problem. Canada’s banks perfectly illustrate this. It was caused by complexity, leverage, inadequate reserves, and lack of regulatory oversight. Compensation is another non-starter. I see no way for regulators to control private sector compensation, nor should they.  I am supportive of changes to corporate boards, but not in this initial legislation. I am a supporter of term limits as I realize the only way elected officials will do what is right, which is often unpopular, is if they are not running for re-election.

We suffered the downturn. We backstopped the recovery. We deserve reform to prevent it from happening again for at least another 80 years. Tell your elected officials to make it happen. If they do not, vote them out of office.

Filed under: General
Posted on April 28th, 2010 by Bob Brinker

Today we updated our searchable online database of upcoming municipal bond auctions. Our database contains more than 700 upcoming new offerings in 47 states totaling more than $20 billion in securities. These include a $1 billion offering from the City of Chicago, a $700 million deal from the State of Illinois, a $592 million offering from the Massachusetts Department of Transportation and a $344 million deal from the State of Oregon.

For just $99.00/yr, you can subscribe today and you will receive our monthly Brinker Fixed Income Advisor investment newsletter and have full access to our www.BrinkerAdvisor.com website.

Filed under: General, Municipal Bonds
Posted on April 15th, 2010 by Bob Brinker

The minutes of the March 16th Federal Open Market Committee (FOMC) meeting were released this afternoon. Below are the highlights:

• nearly all of the Fed’s special liquidity programs are closed and there are no market strains
• spreads on ABS (asset-backed securities) remains tight
• Fed’s balance sheet grew to $2.3 trillion
• All maturing agency debt and agency MBS (mortgage-backed securities) are not being replaced. Spreads on agency MBS were little changed.
• So far, maturing Treasuring securities are being reinvested into newly issued Treasury securities – Committee members want this practice to continue for now
• economic activity expanding at moderate pace in early 2010
• labor market stabilizing
• consumer spending improving
• housing activity leveling out
• wages and salaries fell sharply last year
• activity in advanced foreign economies was mixed in the fourth quarter
• total bank credit contracted substantially in January and February
• M2 decreased in January – partly due to technical reasons associated with FDIC insurance fee changes
• staff made modest downward adjustments on GDP growth
• core PCE price inflation for 2010 and 2011 revised slightly lower
• real disposable income in January was unchanged from one-year ago level
• no final decisions were made regarding exit strategy tools at this meeting

Filed under: Federal Reserve, General, Inflation, Money Supply
Posted on April 6th, 2010 by Bob Brinker

This morning the Bureau of Labor Statistics released the March 2010 Employment Situation report. According to the initial figures, the economy added 162,000 new nonfarm workers during the month. In addition, the January and February monthly figures were revised upward by a total of 62,000. The Unemployment rate remained unchanged at 9.7%, were it has been for three consecutive months. The peak unemployment of this recession was reached in October 2009 at 10.1%.

Nearly everyone knows the monthly nonfarm jobs figures fluctuate wildly due to weather and temporary market factors. The most talked about example this month is the expected impact of roughly 30,000 new government Census workers. For this reason, we prefer to analyze the moving average over three, six, and twelve month periods. The following chart illustrates the change in nonfarm payrolls showing the 3-month and 12-month moving averages.

It is clear from this chart that nonfarm payrolls bottomed in the early part of 2009 and have been rebounding for the past year. It is also encouraging to see the 3-month average turn positive (+54,000) for the first time since February 2008 – more than 2 years ago. The 12-month average reading of –193,333 still reflects the damage which has occurred during this deep recession. 

A five year chart of the Unemployment rate also illustrates how quickly jobs were shed during the recession. It also remains likely that the peak unemployment level (10.1%) has been reached and a slow, gradual decline is about to begin.

We have been discussing the employment trends in our monthly investment letter for some time. If you are interested in receiving a complimentary back issue, please send us your request at our website: www.BrinkerAdvisor.com

Filed under: Employment, General
Posted on April 2nd, 2010 by Bob Brinker

The April 2010 edition of the Brinker Fixed Income Advisor is online at www.BrinkerAdvisor.com.

Our 1-Year Model Portfolio total returns through 3/31/2010:
Aggressive Portfolio + 35.6%
Moderate Portfolio + 19.8%
Conservative Portfolio + 13.8%
Tax-Exempt Portfolio + 9.9% **this a tax-exempt return**

Filed under: General, Investment Letter
Posted on April 1st, 2010 by Bob Brinker

I recently received a copy of The Big Short by Michael Lewis and read the book immediately. It is a quick read and  is one of those books you do not want to put down. The characters are full of interesting quirks and traits and there are many laugh-out-loud moments.

This book will appeal to nearly everyone, and I think non Wall Street readers will enjoy it as much as those that lived it. Michael has a great ability to tell a story, and he does it well in this book. It also does a decent job of explaining what went on with in the subprime mortgage industry and the subsequent securitization of  MBS/ABS/CDO/etc. that ultimately lead us to the brink of financial collapse and, perhaps more importantly, how few people actually understood what was going on. It is also correctly critical of the ratings agencies and their lack of diligence. 

In my view, here is the breakdown of who was at fault to varying degrees:

* borrowers willing to lie about their income wanting to play the housing bubble

* lenders – really originators – who only cared about feeding the system with new loan apps and had no care about the quality of the loans or the consequences

* banks who purchased loans – and even originator firms – to feed the system and fed them with money and instructed them to get as many apps as you can with little standards

* ratings agencies – willingly sold their triple-A ratings for profit – with little understanding of what they were rating

* regulators – totally asleep the entire time… even when explained what was happening, did not care.

* investors – trusted the ratings assigned to the product, without any research on their own part.

* politicians – have pushed the idea that homeownership is somehow an important indication of success, and pushed the limits of credit in order to elevate the homeownership rate on their watch… ultimate leading to credit being extended to people with no business owning a home

* auditors – also asleep at the wheel and never questioned what was inside these ‘investment grade’ assets or the accounting of the risk being taken. Much like Enron, these investment banks were simply ‘black-box’ earnings machines.

Many things ultimately led to the crisis, and the madness of crowds certainly played a role. Still, if we learn from it and change the system, there can be a benefit. If we pretend it was a one-off event and change nothing, we are bound to repeat it. It will be exceptionally difficult to change the system. In this political climate were we cannot appoint judges and Fed members, I am skeptical we can accomplish the serious reform needed. In any event, read this book and understand how these few people saw what was happening ahead of time and turned it into the opportunity of a lifetime.

Filed under: General
Posted on March 31st, 2010 by Bob Brinker