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Tuesday, June 2, 2015

Disposable Income Up, Merrill Lynch's ETB Charges, Buyouts & Beta, Monetary Policy Vs Income Inequality And More

  • Personal income and disposable income went up 0.4 percent in April, according to the Bureau of Economic Analysis. In March, personal income decreased less than 0.1% and disposable income increased less than 0.1%. 
  • Merrill Lynch was charged by the SEC for using inaccurate data for short sale orders. The firm is expected to pay $11 million to settle the charges. “Firms must comply with their short-selling obligations by making sure they do not rely on inaccurate ETB lists,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “When firm personnel determine that a security should no longer be considered easy to borrow, the firm’s systems need to incorporate that knowledge immediately.”
  • Liberty Street Economics, the research leg of the New York Federal Reserve, published a fascinating paper titled What Drives Buyout Booms and Busts? The paper suggests that buyout activity is a function of the overall risk in the market more so than the availability of financing. The authors use the cost of capital to show that when the risk premium increases, the discount rate for firms with high beta increases at a faster rate. "By extension," the authors figure, "the present value of the buyout declines more for high beta firms than low beta firms." As a result, when the risk premium is high there are fewer buyouts of higher beta firms. The authors expect the same logic to hold true for IPO's, mergers and acquisitions, and other types of corporate actions; that is, corporate actions are a function of the time variation in the risk premium more so than access to credit. It's hard to say what the ultimate implication of the paper is for investors, but it appears to be saying that this is a great time to own high beta stock.
  • Liberty Street Economics published another fascinating paper titled Regional Heterogeneity and Monetary Policy in which the authors looked at the effect of monetary policy on households in different regions of the country. "We find," said the authors, "that if regions with low relative income also have depressed collateral values (as in 2008), then expansionary monetary policy will further exacerbate regional dispersion of economic activity and will also be less effective at stimulating aggregate spending." The implications of the paper are clear and somewhat disturbing as it seems the current monetary policy supports income inequality.
  • Federal Reserve Vice Chairman Stanley Fischer gave a speech at the International Monetary Conference in Toronto, Canada titled What have we learned from the crises of the last 20 years? "No-one," says Fischer, "should underestimate the costs of the financial crisis to the United States and the world economies. We are in the seventh year of dealing with the consequences of that crisis, and the world economy is still growing very slowly." Fischer goes on to suggest that we may have either entered a period of "secular stagnation as Larry Summers argues", or a "deep and long" recession, "as Carmen Reinhart and Ken Rogoff's research implies." 
Fischer also makes no apologies about the wave of supervisory action over banks suggesting that the increased regulation may have failed only in its ability to go after the individuals with bad behavior rather than just the banks involved. "Individuals should be punished for any misconduct they personally engaged in", Fischer said. This is a fascinating read as Fischer has held many roles including his role at the IMF, his role as Governor of the Bank of Israel, and his role now as Vice-Chairman of the Fed which he's held since 2014.
Source: United States Department of Commerce
The good news is that as the Federal Staff has consistently said, Q1's manufacturing challenges were most likely transitory in nature which is supported by the March reading.
  • The Federal Reserve published an enforcement action against State Street Bank after identifying deficiencies in SSC's firm-wide compliance particularly with respect to "internal controls, customer due diligence procedures, and transaction monitoring processes." The bank has 60-90 days to correct deficiencies to avoid penalty.