tfj: the fed gets aggressive

WEEK ENDED JUNE 21 2012

Thoughts

from Joe

NOTE: TFJ is being published a day early this week due to its author’s wedding nine years ago which

shall be celebrated with wine, song, and dance (depending on the amount of wine).

Steppin’ Out

The Fed Gets Aggressive

The linked article by Jon Hilsenrath is a message from the Fed: Policymakers have taken away our

toolbox.

As financial intermediaries took more and more of the blame for the crisis, Washington has instituted

penalties that are retarding the money mechanism. The article clearly lays out why lower interest rates

are not affecting the economy: Lenders are prohibited from making loans to individuals in need.

In times past, competitive forces in the banking industry drove risk-accepting behavior when rates were

lowered as banks sought out higher returns by utilizing cheap funding sources driven by lower Fed rates.

But today, the financial industry is much more concerned about:

• Litigation risk, as seen in the recent Bank of America case involving mortgage originations

• Basel III capital regulation uncertainty creating concerns about future capital raises

• Money fund reform which could drive over $2 trillion in funds toward bank balance sheets

• Deposit insurance uncertainty which could drive $1 trillion in funds away from bank balance

sheets

• Delay of mortgage reform (Fannie/Freddie), which will completely change the competitive

landscape in this crucially important industry

In short, it’s not the price of money that matters, it’s the regulation of money flows. This is the purview

of the Congress, not the Fed.

Top Eight

1. Fed “twists” again. The Fed kept rates unchanged this week but decided to extend its Maturity

Extension Program through the end of the year by selling $267 billion worth of Treasury

securities with maturities of less than three years and investing the proceeds in longer term

securities ranging from 6 to 30 years. The muted market reaction tells me this was just enough

to kick the can a bit further down the road.

2. Greece finally has a government and it is conservative. Markets had been fearful that anti-

bailout representatives would be sent to Athens and form a government which would

effectively separate the country from the eurozone. Greek voters, however, chose (barely) to

elect pro EU representatives. It looks like the authorities are going to loosen fiscal restrictions on

the country that were part of the bailout deal. Just another chapter in the move toward

breakup, in my opinion.

3. Spain’s banks may need up to €62 billion in new capital. Two independent audits of the

banking system came up with a lower number than the aid package of €100 billion offered last

week. Unfortunately, the track record of estimated Spain’s financial capital needs is not good as

the number started off at €15 billion just a few short weeks ago. The problem with these

announcements is that they are framed as ending the problem. Even if all current losses could

easily be written off, the entire Euro-experiment is going in the wrong direction.

4. Moody’s downgrades many of the world’s largest banks. As this piece went out, markets were

awaiting bulk downgrades in the banking industry by Moody’s. These downgrades are part of a

long-term review initiated earlier this year and should provide little surprise to the markets.

Few investors pay much attention to the ratings agencies anymore, except for trigger points built

into investment policies.

5. Declining profit forecasts are back. Equity analysts, economists, and central bankers all

seem to forecast a return to “normalcy” out in the future. But as that future date comes

near, the forecast cuts begin to multiply. Until global economic problems are solved, expect

the malaise to continue.

6. Crowdfunding to nearly double this year, according to Massolution. The admittedly biased

crowdfunding platform is predicting $2.8 billion will be raised in 2012 in this manner. The JOBS

Act is making it much easier for small companies to raise funds, however the role of the VC as

advisor, board member, and people-connector will remain intact.

7. The SEC’s new office for overseeing credit-ratings firms opened this week. The Dodd-Frank-

required office will oversee ratings agencies even as other divisions within the SEC are

pursuing actions against them. How about investors perform some of their own credit

analysis rather than relying on the government to improve (punish) a private sector service

model?

8. Facebook offering prompts lawmakers to propose legislation on pricing and disclosures. The

goal of this legislation is to protect the retail (uninformed) investor. Shouldn’t uninformed

investors lose?

Key Indices

Return

6/21/2012 1 week YTD Treasury 6/21/2012 6/15/2012 Change

Dow

12,574 -0.6% 2.9% 30yr 2.69% 2.69% 0.00%

S&P 500

1,326 -0.3% 5.4% 10yr 1.62% 1.58% 0.04%

Nasdaq

2,859 0.8% 9.8% 5yr 0.72% 0.67% 0.05%

Euro Stoxx

2,199

Nikkei

8,824

Hang Seng

19,265

Source: Bloomberg

Looking Ahead

• Next week marks the end of the quarter along with economic data on consumer confidence

and the factory sector.

• Earnings announcements next week include

• Potential IPOs next week include:

o Exa Corp.

o TESARO Inc.

JOE MORGAN, CFA Chief Investment Officer SVB Asset Management 555 Mission St., Suite 900 San Francisco, California 94105 PHONE 415.764.3149 [email protected] svb.com Profile

Find SVB on LinkedIn, Facebook

©2012 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve

System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB As

Management, a registered investment advisor, is a non

Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other

obligations of Silicon Valley Bank, and may lose value. This material, including without limitation to the statistical

information herein, is provided for informational purposes only. The material is based in part on information from

third-party sources that we believe to be reliable, but wh

this reason we do not represent that the information is accurate or complete. The information should not be

2.4% -5.1% 2yr 0.30% 0.28%

3.0% 4.4% 1yr 0.18% 0.17%

2.4% 4.5% 3mo 0.08% 0.09%

Next week marks the end of the quarter along with economic data on consumer confidence

Earnings announcements next week include TIBCO Software on Thursday.

Potential IPOs next week include:

and Twitter

SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve

System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB As

Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB


and may lose value. This material, including without limitation to the statistical


party sources that we believe to be reliable, but which have not been independently verified by us and for


0.28% 0.02%

0.17% 0.01%

0.09% -0.01%

Next week marks the end of the quarter along with economic data on consumer confidence

SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve

System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Asset

bank affiliate of Silicon Valley Bank and member of SVB


and may lose value. This material, including without limitation to the statistical


ich have not been independently verified by us and for


viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision.

You should obtain relevant and specific professional advice before making any investment decision. Nothing

relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any

investment or to engage in any other transaction. The rates and yields have been obtained from sources we believe to be

reliable, but we cannot guarantee their accuracy or completeness.

tfj: the fed gets aggressive

Economy & Finance