Goodbye mega huge conglomerate bank

My current mega huge conglomerate bank finally pissed me for the last time. I just got back from setting up my own personal checking account at a local credit union and I am shedding no tears for leaving US Bank.  I will not regale you with my list of annoyances designed to extract the maximum amount of money from my banking 'relationship' with them.

A typical mega huge bank manager? Perhaps.

Lest you think I'm just harping on US Bank for this rant I previously banked at Bank of America until they annoyed me too many times.  Long ago when getting my first home loan Washington Mutual backed out of a locked and approved home loan via a technicality.  I'm not playing favorites in my ever increasing disdain for the mega-huge-conglomerate banks here.

My wife has been a member of a local credit union for several years and after the Bank of America separation I opened our joint account there. What a difference.  The credit union people go out of their way to actually help you solve your problem instead of directing you to the courtesy phone for support somewhere in the world. No activity fees, no minimum balance requirements, no waiting for you to screw up to hit you with a massive fine fee.  I'm not against being charged for items but it appears the current trend in large publicly traded banks is to extract as much as possible from their customers without having them leave in frustration. I'm sure getting the fee/annoyance balance just right occupies the time of several legions of up and coming bank executives.

If your current mega bank pisses you off, take a look at your local credit union. I'm pretty sure the ethos of treating your customers fairly and in a respectful manner is much more common at your local credit union than at the very large banks.

For those of you training for a bank manager position here's the Ferengi rules of acquisition.

Muni bond redux

Late last year I mentioned the relative thrashing muni bonds had experienced.  Fast forward to today and the mass defaults as predicted by Meredith Whitney are not occurring and muni bonds have experienced a nice rebound.  Let's look at some charts:

The ETF's MUB and IEF are great for comparing the two sectors as they have almost the same duration of 7.43 vs. 7.24. While they are not precisely the same (MUB's bonds are more smeared out along the maturity curve while IEF's are very compact) it is good enough for this discussion.

As you can see MUB is now outperforming IEF on a relative basis and the yield one receives from MUB remains higher than IEF with an estimated yield to maturity of 3.30% versus 2.86% Usually municipals bonds yield less than treasuries due to their tax free income but not right now.  Assuming a return to 'normal' with muni bonds yielding 80% of treasuries you'd need MUB to increase by approximately 7.5%

[The math:  80% of IEF's ytm = 2.29%
MUB yield change (3.30 - 2.29) * duration of 7.43 = 7.50 ]

This does not include the tax free coupon one would receive while you wait for the trade to complete and also assumes treasury rates remain stable.  I'm of the opinion treasury rates will also drop in the near future so you'd gain there as well.  All in all a relatively low risk / low reward trade but considering the equity markets have been going nowhere for a couple months I'll take it.  MUB is also starting to outperform SPY on a relative basis as well, go figure...

Reminder: I don't manage your money and this is not a complete part of my investment portfolio. I may not tell you when I close out the position.  This should not be construed as investment advice as I do not know your tolerance for risk, tax situation, need for income, etc. 


Disclosure: Long MUB in both personal and client accounts.

Additional reading:
Ishares MUB etf detail
Ishares IEF etf detail
Business Insider
JPMorgan's comments


Note: Another possible reason why MUB is outperforming is the light issuance schedule for muni bonds right now. This may be due to the previous rush to market while Build America Bonds were still possible before the 12/31/10 deadline or the current high relative yield environment for muni bonds.
Bond Buyer article #1  & Article #2  (ht MuniLass)

Initial unemployment claims are going the wrong way

Initial unemployment claims are starting to creep back upwards on an absolute and year over year basis.  The standard seasonally adjusted 4 week moving average of initial claims (that's a mouthful!) has recently bounced back up to 440k from 400k.

While this does not look so bad if one looks at the data on an absolute level, one can see the trend clearly deteriorating on a year over basis [2nd chart]

Now this is only a few weeks but the trend is not going in the 'right' direction.  My previous post on initial claims data  provided two different theoretical outcomes merely by torturing the data via different means.

Some have posited the rise in initial clams is due to automotive factories laying off people because of supply chain problems stemming from the earthquake in Japan a few months back.  Another possibility is the increase in oil prices is finally starting to really bite into the consumers pocketbook and layoffs are ensuing in consumer sensitive sectors of the economy.  Regardless we will know soon if this is a short term blip in unemployment claims or a longer term trend.

The politics of oil

Yesterday President Obama announced new measures to increase drilling.  From Reuters

 U.S. President Barack Obama, under pressure from Republicans and the public to bring down gasoline prices, announced new measures on Saturday to expand domestic oil production in Alaska and the Gulf of Mexico.

Elections are hard to win with high gas prices:

High fuel prices have dented Obama's ratings in opinion polls and threaten to dampen the economic recovery that is critical to his re-election in 2012.

Considering the lead time required to get oil to market from a new find this will ironically help whomever is in office after the elections of 2012.

I seriously doubt the President would have increased leases available to oil companies if gasoline prices were $2.00 a gallon versus the current $4.00.

There's a reason alternative energies are called alternative and its because they are much more expensive per unit of energy than gasoline.  Until new forms of portable energy become cheaper than gasoline a President's politics will bend to the reality of high gas prices.

edit: if you are wondering why we are attacking Libya and not Syria, this is one reason.

Bank lending update

It's been a few months since I last highlighted total bank lending but not much has changed since late October. Just to make sure you don't think I forgot here's an update.

Total bank loans and leases as per the Fed continues its steady decline economic recovery notwithstanding.  As you can see there was a large recent spike but this was due to an accounting change in bank's loans and not a sudden increase in lending.  This lack of new lending may be one reason broad money supply is so sluggish of late.

Like last update the banks are buying US Treasuries instead of lending. If you wondering who is buying those hated T bonds look to your corner mega-huge bank.   Considering their funding costs and capital requirements are pretty much zero you could say banks would rather just play golf and clip Treasury coupons.

Money Money + Money -- Money supply update

The broadest money supply figures available (M2 + institutional money market funds) turned positive a few months ago but is only growing slowly.  Furthermore this money measure has not exceeded its pre crisis peaks.

Looking back in the mid 2000's you can see broad money supply was also very sluggish. With QE 2 ending in June we'll see if this data series can keep expanding.

Inflation expectations in the bond market

Here's an update on inflation expectations as expressed by the bond market.   While much is being said right now about inflation expectations becoming unglued the 10 year [Treasury - TIP] difference is not showing anything exceptional yet.   As you can see from the chart inflation expectations (as expressed by nominal yields - 'real' TIPS yields) are getting back to their 'normal' range of around 2.5 percent.

10 year TIP yields are near the low end of the range but some of that is due to nominal yields slowly dropping over time, pushing the TIPS yields down so the difference remains relatively constant.  With QE2 slated to end and oil prices (as well as other base commodities) rising it will be interesting to see if the implied breakeven inflation rate rises above long term resistance of ~2.6 percent.