CMBS update -- very bullish

Here's a graph of the price of a AAA-rated commercial mortgage-backed security index that is published by the folks at markit. Earlier this year, prices fell as low as 56, whereas today they are over 82 and rising. That's an impressive gain, and it comes despite the ever-increasing drumbeat of concern for commercial real estate. What this means is that the market was way too pessimistic earlier this year about the prospects for commercial real estate loan defaults. Even though defaults are likely to rise next year, they are now projected to rise by less than previously expected. This ties into a reply I made on a recent post comment, to the effect that rising default rates are not likely to be bearish for the market or for the economy, since the market has already discounted those losses. Enormous losses have been booked already in our forward-looking markets; what remains to be seen is whether the actual losses are more or less than what has been anticipated. Moral of the story: don't look at the level or even the projected level of CRE defaults, look at the behavior of the prices of securities that will be affected by those defaults. On that score things are getting better even though defaults are rising.

Obama must realize he's in trouble, that's why he's becoming more centrist

As Obama continues to slide in the polls—the Rasmussen daily tracking poll today shows his Approval Index reaching another all-time low—he's being forced to move to the political center. This is very good news for the economy and the markets. Larry Kudlow recently noted Obama's embrace of the virtues of tax cuts here: "Is Obama Going Supply-Side?" Peggy Noonan has an excellent article in today's WSJ which explains the extent of Obama's political shift: "Obama Moves Toward Center Stage." Excerpts:

The political headline this week is that President Obama appears to be attempting to move toward the center, or what he believes is the center. We saw the big pivot in two major speeches, one on the economy and the other, in Oslo, on peace.

If it is real, ... it tells us White House internal polling is probably worse than the public polls. It tells us the mounting criticism from Republicans, conservatives and others has had a real effect. It tells us White House officials have concluded they were out on a cliff.

The economic speech took place Tuesday at the Brookings Institute, the generally left-leaning think tank in Washington. The president put unusual emphasis on—and showed unusual sympathy for—Americans in business, specifically small businesses. "Over the past 15 years, small businesses have created roughly 65% of all new jobs in America," he said. "These are companies formed around kitchen tables in family meetings, formed when an entrepreneur takes a chance on a dream, formed when a worker decides it's time she became her own boss." This is how Republicans, moderates and centrists think, and talk.

The president claimed success in reducing taxes—"This fall, I signed into law more than $30 billion in tax cuts for struggling businesses"—and announced a new cut: "We're proposing a complete elimination of capital gains taxes on small business investment along with an extension of write-offs to encourage small businesses to expand in the coming year." He called it "worthwhile" to create a new "tax incentive to encourage small businesses to add and keep employees."

All this was striking, and seemed an implicit concession that tax levels affect economic activity. It was as if he were waving his arms and saying, "Hey taxpayer, I'm not your enemy!" The only reason a president would find it necessary to deliver such a message is if he just found out taxpayers do think he's the enemy. The emphasis on what it takes to start and build a business, seemed if nothing else, a bowing to reality. And if you're going to bow to something, it might as well be reality.

Thursday, at his Nobel laureate speech in Oslo, the president used an audience of European leftists to place himself smack-dab in the American center. He said, essentially: War is bad but sometimes justified, America is good, and I am an American. He spoke of Afghanistan as "a conflict that America did not seek; one in which we are joined by 43 other countries—including Norway—in an effort to defend ourselves and all nations from further attacks." Adroit, that "including Norway." He said he had "an acute sense of the cost of armed conflict" and suggested America's efforts in Afghanistan fit the criterion of the concept of a "just war." It continues to be of great value that a modern, left-leaning American president speaks in this way to the world. "The world" didn't seem to enjoy it, and burst into applause a resounding once.

Retail sales are strong -- another V-sign

Here's yet another V-sign (and a very graphic one at that): the impressive strength in retail sales over the past six months. This, despite 10% unemployment and a significant amount of "resource slack" in the economy. What it means is that there are still an awful lot of people working; they have been working harder and more productively, and their incomes have been rising faster than inflation. In addition, their confidence in the future has risen, so some of what they are spending is money they had hoarded last year when the future looked disastrous.