Thursday, April 30, 2009
Wednesday, April 29, 2009
Tuesday, April 28, 2009
Monday, April 27, 2009
The world will continue to have epidemics and pandemics. These have not required airplanes to spread. One theory of the decline and fall of the Roman empire in fact draws upon two massive epidemics, both currently diagnosed as smallpox, that weakened the military as well as wiped out various populations.
It appears that based on the early returns, the course of this flu ex-Mexico is ordinary. Will some deaths outside of Mexico be caused by this virus? Almost certainly. But this swine flu pandemic is no SARS. That one was often fatal and almost always very serious; the global health care system acquitted itself wonderfully in limiting the spread of SARS as rapidly as it did.
Please do not adjust your portfolios based on the latest fear or relief regarding the swine flu. The institutions will react faster than any individual. (Do take all reasonable precautions that you should take every flu season all the time. Standard flu is a miserable experience, and vaccination is never close to 100% effective.)
The global economic and financial pandemic continues to roll on. Unlike influenza, there is immense debate amongst academics about what to do about it. Furthermore, much as one may agree or disagree with different points of view and priorities in a big picture way that will inform your policy preferences in the financial sphere, there is no disagreement about the importance of limiting the spread of infectious diseases.
Just in the past 24 hours, news has continued to accumulate about the international ramifications of the economic disaster.
1. Per a Naked Capitalism link, consider Two-Thirds Facing a Pay Cut or Freeze from the Independent in Britain. This is astonishing news:
More than two-thirds of British companies plan to cut or freeze their workers' salaries this year, the British Chambers of Commerce said yesterday, as it warned that private sector employers face a desperate battle to survive the recession.
A BCC survey of 400 companies from across the UK revealed that 58 per cent of firms plan to freeze salaries this year, while a further 12 per cent are expecting to cut pay. The BCC warned that half the firms in the survey were considering making job cuts over the course of the year, or had already planned a redundancy programme.
DoctoRx here: So much for price increases as an inevitable result of money printing.
2. TrimTabs reports:
Companies around the world are treating the rally as a selling opportunity. . .
We do not see any “green shoots” in our macroeconomic data. Tax revenue fell by a record 6.8% in Germany in March, and consumption loans plummeted by 5.8% in France. Therefore, we are cautiously bearish (50% short) to leveraged bearish (200% short) on all the markets we track.
DoctoRx here: EBR has no expertise in foreign markets. But TrimTabs does collect lots of data on overseas economies. That it is so bearish after a big run-up in prices, based on the trends it is seeing, is a negative.
3. The financial situation in Germany is likely horrible, as discussed at length by Ed Harrison at Credit Writedowns in German banks loaded with 816 billion in toxic paper. Here are some main points:
On Friday, the German daily Süddeutsche Zeitung (SZ) leaked a bombshell - a confidential report by Bafin, the Federal Financial Supervisory Authority, found that German banks were sitting on over 800 billion euros in toxic assets. Just three months ago, the reports coming out suggested the problem was only half as large, 400 billion euros. . .
This account should make clear how shaky many of Germany’s financial institutions are. Moreover, it is not altogether obvious which markets are deemed ‘toxic.’ German banks have a lot of residential real estate-related paper. But they also have assets related to the imploding European commercial property market and the Eastern European property markets. I suspect that the problem is even larger than is mentioned here.
If you recall, there was a big dust-up in February over a leaked EU document which suggested there were 16.3 trillion in toxic assets amongst European banks. In my view, the Europeans have their heads in the sand regarding the magnitude of the problem. The banking situation is much worse on the continent than its citizens are lead by government to believe.
In any event, Bafin is now seeking to obtain prosecutions for the damaging leak. Forget about the toxic asset problem, go after those who have brought it into the full light of day.
4. CNN reports in Spain unemployment tops 17 percent:
Spain's jobless rate rose sharply, to 17.36 percent in the first quarter, with just over 4 million people out of work, the government said Friday. . .
Spain's previous rate of 13.9 percent, issued early this year for the fourth quarter of 2008, already was the highest in the European Union.
When Spain's jobless figure earlier topped 3 million, officials predicted that it would not reach 4 million.
(We will avoid the obvious puns about the pain in Spain . . .)
The economic news is so horrible in so many places that it is hard to keep up and hard to fathom.
The world is not ending, of course, but the real problem is that medical science is a lot more reliable and certain than the "soft science" of economics and the theoretical constructs of Keynesianism.
It still seems that those who trade stocks are making lots of assumptions about a return to a post-World War II normalcy that was abnormally prosperous based on a longer-term economic history of the world.
Copyright (C) Long Lake LLC 2009
That post by Yves Smith and the lengthy NY Times article that it keys off of, are not in conjunction with an apparent pandemic of swine flu enough to knock the stock market off its stride.
Yesterday, however, Larry Summers was reported on by Bloomberg as follows:
“I expect the economy will continue to decline,” with “sharp declines in employment for quite some time this year,” Summers said yesterday on “Fox News Sunday.”
In conjunction with this downbeat comment from Dr. Summers, TrimTabs reported today via Email that:
- U.S. Economy in Much Worse Shape Than Wall Street Realizes: Income Tax Withholdings Drop 3.1% Y-o-Y in Past Four Weeks, and TrimTabs Online Job Postings Index Falls 4.2% in April.
In addition, the debt monster is back: Bloomberg reports that companies have sold a record $468 B in debt so far this year (presumably this is a record for this far into a calendar year).
The news remains poor, and a veteran market observer comments (courtesy of Zero Hedge and GreenLightAdvisor Views):
Richard Russell of Dow Theory Letters, provides the following note April 20, 2009:
“(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideways move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither - no indication of accumulation. And that bothers me.
“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).
“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.
“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.
“(5) The rally moved up ‘too fast’ - action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.
“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).
“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.
“All of the above have kept me skeptical and cautious about this rally.”
To the above list one might add that around now is the time that a traditional honeymoon period ends for a media-favored new President. The Geithner lashing out of the leading Democratic organ, the Times, may signal a less gauzy picture of the new administration reaching the public, which in turn could lead to a less optimistic view of the future.
We shall see what we shall see.
Copyright (C) Long Lake LLC 2009
Sunday, April 26, 2009
War Is Hell Except When It Is Heck, and Fighting Over the Difference Is Structural Bear Market Stuff
The favorable geopolitical and economic trends that developed after the end of the Cold War, rise of the tres cool Internet, and then the fin de siecle stuff led to the greatest distribution of stock to the unwary since the late 1920s. Then the American mood changed with the stock market collapse and 9/11. Then came failure in Iraq, quaqmire in Pak-ghanistan, and then evidence followed by proof that the whole real estate story was a fraud, and with it the whole credit structure of the Western world partly collapsed. Baby boomers realized that they could not count on the stock market for retirement; it is now clear that even if it rises again, it could fall when funds are needed, so more savings and less consumption is the vogue.
The social mood is more sober. The politics reflect this. The freewheeling, roguish Bill Clinton was replaced by two apparently abstemious family men as the next two presidents.
The latest flap in Washington reflects similar dynamics that have pulled the markets down, which is intense division in the country on a core issue. That issue is whether to have a Truth Commission or similar investigation with the goal of justifying criminal charges against Bush Administration officials up to and including the former President for torture. What has already happened with the release of various memos and the promise of release of more photos is similar to Khruschev denouncing Stalin, and reflects a dark public mood, as is seen in structural bear markets.
Arguing over whether the CIA interrogation techniques were evil and criminal ("Hell") or merely abusive but not worth pursuing individuals in the courts over ("heck") looks to be reflective of negative national emotions as are typically seen in down-cycles for the stock market.
Econblog Review predicts that it will not serve the Establishment's interests to look too deeply into this matter, and that criminal charges will not be filed. For now, the publicity about this issue very much serves the interests of Big Finance, as it represents yet another distraction from the ongoing looting via PPIP, AIG conduit payments/payoffs to Big Finance, the $750 B "placeholder" in the first Obama budget proposal (which is somehow tagged to only cost $250 B!), and who knows what else.
In the meantime, America is acting more and more like Oceania, no matter who sleeps in the White House. The New York Times recently reported in United Militants Threaten Pakistan’s Populous Heart that indeed the first important foreign action of the Obama administration was an aggressive one that failed, ramping up the war in Pakistan against the Taliban that the U. S. helped to create in the 1980s:
As American drone attacks disrupt strongholds of the Taliban and Al Qaeda in the tribal areas, the insurgents are striking deeper into Pakistan — both in retaliation and in search of new havens. (Ed: If you want to be depressed and have not read it, please read the entire article via the link in the title; emphasis added.)
Tit for tat. It never ends. The military-industrial complex has joined with Big Finance for mutual profit by continually fighting in obscure places Over There. The Home Front loses, however.
If the conflict in Pakistan heats up, that war will be Hell, not heck. From an investment standpoint, the only durable beneficiaries if this catastrophe actually happens will be military companies and gold.
Copyright (C) Long Lake LLC 2009
Saturday, April 25, 2009
Now the St. Louis Fed has come out with "A Simple Model of Trading and Pricing Risky Assets Under Ambiguity: Any Lessons for Policy-Makers?"
The abstract almost says it all from a policy standpoint:
The 2007-2008 financial crises (sic) has (or, "sic" the verb) made it painfully obvious that markets may quickly turn illiquid. Moreover, recent experience has taught us that distress and lack of active trading can jump “around” between seemingly unconnected parts of the financial system contributing to transforming isolated shocks into systemic panic attacks. We develop a simple two-period model populated by both standard expected utility maximizers and by ambiguity-averse investors that trade in the market for a risky asset. We show that, provided there is a sufficient amount of ambiguity, market break-downs where large portions of traders withdraw from trading are endogeneous and may be triggered by modest re-assessments of the range of possible scenarios on the performance of individual securities. Risk premia (spreads) increase with the proportion of traders in the market who are averse to ambiguity. When we analyze the effect of policy actions, we find that when a market has fallen into a state of impaired liquidity, bringing the market back to orderly functioning through a reduction in the amount of perceived ambiguity may cause further reductions in equilibrium prices. Finally, our model provides stark indications against the idea that policy makers may be able to “inflate” their way out of a financial crisis. (emphasis added)
Your humble blogger has slogged through the lengthy paper, skipping the equations that a non-economist finds more than a mite obscure. It would appear that the St. Louis Fed has two policy objectives, the more topical one taking dead aim at PPIP.
One of the most important set-ups in the paper involves the situation in which SEUs (subjective expected utility) maximizers own securities which become illiquid due to a financial crisis. AA's (ambiguity averse) then enter the market with government assurance against a worst-case scenario. The authors state (pp. 36-37) for example that:
The implication is that starting from situations of SEU-only participation, it will take large jumps in "mu"-min (=minimum projected return, I believe-though never specifically defined) for the equilibrium to be significantly affected; however, when this happens, one can also expect a detrimental effect on risky asset prices. Interestingly and realistically, as the fraction of AA investors "alpha" increases, the threshold level mu-min required for inducing participation reduces, since now each AA agent has to bear a lower amount of risk. This is relatively surprising; even though the policy action consists of ruling out the worst possible scenarios increasing mu-min, for an action of sufficient magnitude its eventual effect on equilibrium prices will be negative and the cost of enforcing a participation equilibrium will consist of a higher risk premium. This means that when a market has fallen into a state of disruption (a SEU-only equilibrium), bringing the market back to higher liquidity and orderly functioning through a reduction in the amount of perceived ambiguity may actually go through further reductions in equilibrium prices. (emphasis added)
Later on p. 37, the authors summarize the above:
As we have seen, when a market has already broken down in terms of participation, trying to affect the perceived uncertainty by increasing mu-min may actually depress prices and inflate risk premia, although this policy can eventually raise liquidity and induce full participation. (emphasis added)
The above appears to describe the current situation in which the largest holders of CDOs and the like are faced with an auction to sell to risk-averse buyers, with government intermediation. Lower prices for the securities are projected. That would appear to describe the Public-Private Investment Program to a PPIP!
Regarding the different problem of the Fed's expanded balance sheet and inflation risks, in addition to the strong language in the abstract, the paper specifically addresses inflation in section 5.5.3., which contains the following (page 40):
Once more, inflation as a policy tool seems ineffective or perverse because it may induce limited participation and depress equilibrium real asset prices. . .
Therefore low inflation has only virtues, leading to steady, widespread participation, steady liquidity, and (with high probability) even to higher risky asset prices in real terms. Therefore, it seems that a sensible policy-maker interested in supporting a well-functioning, non-segmented asset market ought to reduce inflation.
The heartland is making itself heard. Let us hope that being "from Missouri" means something to Team O and Gentle Ben.
Copyright (C) Long Lake LLC 2009
On another related front, one of the centerpieces of the stimulus program was an enhanced roads program. We recall VP Biden proudly standing in Michigan touting the alacrity with which a 4-lane roadway was being transformed into one with 6 lanes.
And many of us remember Dr. Christina Romer on Meet the Press 6 weeks ago saying the following:
I think we know that consumers have lost a lot of wealth and that normally what you'd say is they should be saving more. I think the truth is consumers have also not done a lot of spending for the last 14 months. So what I would predict and I think would be a perfectly reasonable thing is you go out and you buy that car that you've been thinking about for 14 months and you do some of the spending.
So Barack Obama is strongly in favor of keeping lots of people busy building autos, making driving hassle-free, and of course busy adding another vehicle to the roads.
There is however a great big green BUT . . .
Barack Obama personally has informed us that we must reduce our carbon emissions. Being green means to the administration that every human exhalation is contributing to the rising of the seas. Therefore, every time anyone drives a vehicle anywhere, some grains of sand on a beach are being murdered as the oceans rise in response.
The U. S. contains about 9 motorized vehicles for every ten Americans. The green solution is to reduce that ratio substantially. The politically expedient solution is for taxpayers to keep subsidizing all of the following: auto manufacturers, the pensions of the UAW, the providers of financing to purchasers or lessees of the vehicles, and the maintenance and expansion of the roadways. Not to forget that taxpayers are going to subsidize improvements on the internal combusion engine.
Houston, we have a contradiction. An important part of Federal policy is to support the auto industry as we know it. Please don't use the end product, though, because when you do, you are an environmental villain.
We have other contradictions. Since this is a President who is emphasizing personal responsibility, what about him ending his addiction to cigarettes? Every time he lights up, he is adding to the global burden of carbon in the air. In addition, he is supporting some of the worst of the worst corporate offenders. He is adding a health care burden on society. He is setting a horrible example for American teenagers. Etc.
Cumulatively, if 60 million Americans smoke an average of 20 cigarettes a day, is that not as meaningful from an environmental + health point of view than the recent Administration goal of taking $100 M out of Federal expenditures is to a $3+ trillion budget?
Mr. President, put out that butt! (Please)
Copyright (C) Long Lake LLC 2009
Friday, April 24, 2009
Excluding items the second-largest U.S. automaker considers one-time costs, the loss of $1.8 billion, or 75 cents a share, beat the $1.24 average of 11 analyst estimates compiled by Bloomberg.
“This is a fantastic performance,” John Wolkonowicz, an IHS Global Insight analyst in Lexington, Massachusetts, said today. “They’re burning cash at a much lower rate. They’re going to come out of this OK. I now believe they won’t need a government handout.”
What Bloomberg goes on to report (below-the-fold, as it were) is:
Ford’s U.S. vehicle sales fell 43 percent, contributing to its largest first-quarter loss since 1992.
The net loss was $1.4 billion, or 60 cents a share, compared with net income of $70 million, or 3 cents, a year earlier, the company said.
Revenue fell to $24.8 billion from $39.2 billion, excluding special items, as Ford slashed North American production by half. The average analyst estimate was for $23.2 billion.
The automaker has been able to forgo U.S. aid because it borrowed $23 billion in 2006 before credit markets froze. As collateral for that financing, which Mulally called “the world’s largest home equity loan,” Ford put up all major assets, including its headquarters and blue oval logo.
Ford lost a record $14.7 billion in 2008, and analysts expect the company to be unprofitable this year and next. Mulally has said he expects to break even by 2011.
Here are some of Ford's financials as of 12/31/08 as reported to the SEC (per Yahoo's Finance section):
Net tangible assets: Negative $19 B
Net working capital: Negative $31 B
Ford is going to continue to lose money year after year. Some "performance".
On second thought, it is a performance: the stock market is now more of an act than usual. Much of it is a bad act. Perhaps Mr. Mulally is a better actor than Cerberus and the unending stream of guys whose names all kind of sound the same who have run GM into the ground decade after decade.
Re the stock market as a whole, Louise Yamada continues to hold to her bearish technical view as she recently has been pointing out that the averages are continuing the trend of finding resistance at progressively lower levels. Resistance now is around Dow 8000, down from 10,000 and then 9000.
Unfortunately supporting this bearish view is the alacrity with which insiders have jumped to the sell side, as Bloomberg reports in Insider Selling Jumps to Highest Level Since ‘07 as Stocks Gain":
Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market. . .
Insiders from New York Stock Exchange-listed companies sold $8.32 worth of stock for every dollar bought in the first three weeks of April, according to Washington Service, which analyzes stock transactions of corporate insiders for more than 500 mostly institutional clients.
That’s the fastest rate of selling since October 2007, when U.S. stocks peaked and the 17-month bear market that wiped out more than half the market value of U.S. companies began. The $42.5 million in insider purchases through April 20 would represent the smallest amount for a full month since July 1992 . . .
Obviously the data only covers 2/3 of April, but considering that the Dow has almost tripled since the 1992 comparison month, we are looking at a huge diminution in insider buying over time.
As Nassim Taleb keeps reminding us, the past is a very imperfect predictor of the future, but I for one find the unchanging emphasis and dubious enthusiasm about beating (managed, lowered and poor) analysts' estimates; government-created bank "earnings"; and the refusal of many of the most eminent pre-bear market bears such as Louise Yamada, Nouriel Roubini and Meredith Whitney to change their tune to be important considerations. The Great Depression had shoots of green as well, with ECRI's long leading indicators showing largely positive year on year comparisons for about an entire year between 1930 and 1931.
Finally for now, please consider Mish's Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis. This blog has used/reported on the term "looting" for what has happened to the use of taxpayer funds to support stockholders and bondholders of financial companies.
EBR continues to believe that there are elements of both the Great Crash of 1929-32 and Watergate/S&L looting crisis extant. Anyone perhaps outside of Barack Obama and other insiders of the highest levels who believes he or she has a good read on how the future will unfold, including pricing of almost any asset, is in my humble opinion overly confident.
Copyritght (C) Long Lake LLC 2009
Thursday, April 23, 2009
Here is most of the article:
Power generation and consumption is a leading economic indicator, a wind vane for future economic trends. A February bounce in power generation that continued in the first half of March was welcomed by economic policy makers, not least Premier Wen Jiabao, as a sign of recovery. It was, perhaps, a false hope as power generation again declined in late March. China Electricity Regulatory Commission officials predict a 4% decline in power generation in April.
Nationwide first quarter tax revenue totaled 1.302 trillion yuan, a fall of 10.3%, year on year. Consumption tax maintained rapid growth of 38.5%, year on year, in the first quarter, but other major taxes all declined. Domestic VAT, import linkage tax, corporate income tax, and personal income tax dropped by 2.4%, 15.8%, 16.7%, and 0.3%, respectively.
According to Vice-Minister Lou Qinjian of Industry and Information Technology, important industries such as cars and steel face serious production surpluses and 9 among the 12 key industries are seeing year-on-year profit decreases.
Rumor has it that the National Development and Reform Commission released an urgent notice on April 15, after an executive meeting of the State Council, requiring local governments to submit a third batch of qualified projects for central government investment as soon as possible. Projects funds are expected to be allocated in the first half of May at the earliest.
According to statistics from the State Grid, power generation dropped 0.7% year on year in March, after a rise of 5.9% in February and a fall of 12.3% in January. Experts believe the fallback indicates economic uncertainties. State Grid figures also show that power generation in the first quarter of this year dropped 2.25%, year on year.
In keeping with this winter's L. A. Times expose of massive overbuilding of commercial real estate in Beijing, one consideration that is not in the Street's worldview is true ongoing economic weakness in China rather than an ordinary growth recession. More and more evidence keeps surfacing to question the accuracy of the consensus viewpoint.
Copyright (C) Long Lake LLC 2009
Wednesday, April 22, 2009
Clinton's "Mortal Threat" Statement and Mullen's Pakistan Visits Mean that Pakistan Could Become Obama's Viet Nam
The New York Times is reporting that Taliban Seize Vital Pakistan Area Closer to the Capital.While investors are paying close attention to every month-to-month economic jiggle, those with more experience remember that in prior to the 21st century, everyone recognized that data always vary from month to month and that year to year comparisons are stabler. That was until our government deliberately moved away from leading off its economic press releases with year-year changes to now emphasize month-month changes in order to distract the populace from noticing unpleasant trends.
In any case, enough economists are still watching year-year and smoothed trends that you will gain limited competitive advantage from making decisions based on the same data, though of course one needs to keep one's knowledge base current. Watch for outlier events, such as news of the insertion of American military "advisers" into Pakistan (not that they are not there already). Afghanistan is not really a country as we in the West think of one, but Pakistan is a real country. Any U.S. move to "defend" Pakistan will come with the argument that it has nukes etc., etc. If President Obama wants to go that route, Pakistan's economy is alive only because of IMF sufferance, so it will have to go along with almost anything the U.S. wants. Here are some snippets from the Times article that may make you wonder if American "advisers" or an actual U. S. armed forces presence are in fact coming:
On Wednesday, Secretary of State Hillary Rodham Clinton said she was concerned that Pakistan’s government was making too many concessions to the Taliban, emboldening the militants and allowing them to spread by giving in to their demands.
“I think that the Pakistani government is basically abdicating to the Taliban and to the extremists,” Mrs. Clinton told the House Foreign Affairs Committee on Capitol Hill.
She added that the deterioration of security in nuclear-armed Pakistan “poses a mortal threat to the security and safety of our country and the world.”
A senior American official said Mrs. Clinton’s remarks were prompted in part by news of the Taliban takeover in Buner. The officials said that the further erosion of government authority in an area so close to the capital ought to stir concern not only in Pakistan but also among influential Pakistanis abroad.
The chairman of the Joint Chiefs of Staff, Adm. Mike Mullen, arrived in Islamabad on Wednesday for the second time in two weeks, reflecting the sense of alarm in the Obama administration. He was scheduled to meet with Pakistan’s top military and intelligence commanders.
The "mortal threat" terminology means that an overt U.S. military presence in Pakistan is being seriously and I suspect favorably contemplated at the highest levels of the Obama administration. Two visits by the chairman of the Joint Chiefs within two weeks is proof positive that such a scenario is realistic rather than an obscure blogger's fantasy.
War is bad, but war at a time of economic depression is more than bad. If war involving the U.S. should come to Pakistan, gold will tend to strengthen, as may the dollar (at first), and very possibly so will Treasuries. If so, EBR believes that the Treasuries should be sold on any price strength but gold should be held and/or purchased.
Copyright (C) Long Lake LLC 2009
Tuesday, April 21, 2009
The Troubled Asset Relief Program (“TARP”) now includes 12 separate, but often inter-
related, programs involving Government and private funds of up to almost $3 trillion
— roughly the equivalent of last year’s entire Federal budget. From programs involv-
ing large capital infusions into hundreds of banks and other financial institutions, to
a mortgage modification program designed to modify millions of mortgages, to public-
private partnerships purchasing “toxic” assets from banks using tremendous leverage
provided by Government loans or guarantees, TARP has evolved into a program of
unprecedented scope, scale, and complexity.
Any effort this immense, "unprecedented" in peacetime, including the Great Depression, will only be done for a truly major catastrophe, not just a "recession". Paul Volcker, who is still at least nominally allied with the Administration, uses the euphemism "Great Recession" to describe the current downturn. Since the word "recession" was introduced solely for PR reasons and means what "depression" meant before the Great D, we must interpret his use of the term for what it is. TARP is response to an economic depression.
Caterpillar reports sales down 29% year on year and states that it may cut its dividend (see Q16). The stock is selling at 4X tangible book value. It drastically lowered its yearly 2009 sales estimate from about $40 B only 3 months ago- when the worldwide economy also stank- to about $35 B today. The stock is only modestly down, in keeping with another report, wherein Bloomberg reports:
German investor confidence rose to the highest level in almost two years in April after stock markets rallied on government and central bank efforts to revive economic growth.
Since market close yesterday, IBM, Coke and Cat have missed sales projections. To miss sales projections this far into a bear market is disconcerting; yet the stock price, in keeping with the German optimism, are trading the stocks with minor price changes.
Meanwhile, there is no leadership. Amongst the financials, BofA and Citi have suffered huge percentage declines in the past couple of trading days. Perhaps most worrisome is that the banking company with the best chart on a longer-term basis, Northern Trust (NTRS), had a big earnings miss and the stock got crushed. The stock is now decisively below its 50 day and 200 day moving averages; and, the ascending 50 day MA never quite crossed above the descending 200 day MA.
In conjunction with today's earlier post documenting more than a weak straw in the wind that the tide is indeed turning against Big Finance, EBR takes the NTRS news and stock reaction as evidence that more pain probably lies ahead for the stocks of the financials- and with them the real economy given that the dependence of the economy on debt remains excessive.
Structurally strong charts remain with the mutual funds BTTRX, which tracks the long zero coupon Treasury market, and Ginnie Mae funds such as VFIIX and FGMNX. Of them, BTTRX is the safest buy from both a chart and fundamental standpoint, though nothing is optimally safe at present, unfortunately including cash in the bank given that FDIC is essentially bankrupt as a going concern.
Copyright (C) Long Lake LLC 2009
Members of Congress may be reluctant to tackle the recommendations of such an inquiry because of financial industry donations to political campaigns, said Wall Street historian Charles Geisst.
Financial services has been the biggest contributor in every U.S. election cycle in the last 20 years, according to the Center for Responsive Politics, a Washington research group that tracks campaign money. Its individual and political action committee donations in 2007 and 2008 totaled $463.5 million, compared with $163.8 million from the health-care industry and $75.6 million from energy companies.
Individual and PAC donations from Goldman Sachs Group Inc. which totaled $30.9 million, and Citigroup Inc., at $25.8 million, were higher than those from any other company except AT&T Inc.’s $40.9 million over the last 20 years, the center’s compilation of Federal Election Commission data shows.
“How can you seriously propose a law when you’ve been taking money from ‘The American Poodles for Wall Street’ or whatever fund for the past 10 years,” said Geisst, a professor of finance and economics at Manhattan College in New York and author of “Wall Street: A History.”
Concomitant with this, Naked Capitalism is out with a "must-read" post, Bailout Inspector General to Warn that Public Private Partnership Vulnerable to Fraud. Please read the whole post; here is a sample that quotes the Times.
Mr. Barofsky said the plan posed “significant fraud risks,” especially when it came to buying up securities backed by exotic mortgages made during the peak of the housing bubble, when the excesses of poorly documented loans and no-money-down loans reached their zeniths.
The report said that the Federal Reserve intended its lending program, known as the Term Asset-Backed Securities Loan Facility, or TALF, to finance new lending rather than to buy up existing assets. It warned that the Fed was not currently planning to examine the securities that it would finance, and would be relying instead on the evaluation by credit rating agencies that originally failed to spot the dangers of subprime mortgages.
Apparently the report clearly takes the side of the many academic experts and bloggers who have flayed the plan, and therefore Barack Obama and Timothy Geithner, for being yet another giveaway to Big Finance.
I suspect that the tide is turning. No industry stays on top forever.
From an economic standpoint, if PPIP is in fact doomed in anything like its current form, then we have to hope that Messrs. Obama and Geithner have a Plan B ready. If not, this could be the spring and summer of our banks' discontent- and our discontent as well.
Copyright (C) Long Lake LLC 2009
Monday, April 20, 2009
Saturday, April 18, 2009
As . . . the president promised tax cuts for most, new data showed that the federal income tax burden is already hovering near its lowest level in three decades for all but the wealthiest Americans.
The nonpartisan Congressional Budget Office estimates that the average family forked over barely 9 percent of its earnings to the IRS in 2006, the most recent year for which information is available.
. . . Middle-class families -- to whom President Obama has delivered even more tax relief since he took office in January -- have fared especially well, according to the CBO. The middle fifth of taxpayers, who earned an average of $60,700 per household in 2006, paid just 3 percent in federal income tax that year, down from a high of 8.3 percent in 1981.
"We start from the simple premise that we should reduce the tax burden on working people, while helping Americans go to college, own a home, raise a family, start a business and save for retirement," Obama said (Ed.: speaking on April 15). "Those goals are the foundation of the American dream, and they are the focus of my tax policy."
DoctoRx here. In opposing G W Bush's tax cuts in 2001 and 2003, a united Democratic Party (and for a time, John McCain) opposed them in large part on the argument that though there was a recession (2001) and a near-relapse into recession (2003), they were unfunded. Vast increases in cumulative deficits later, and even more gigantic Federal deficits ongoing and proposed, where is the President's thinking on the continuing "simple premise" that, las with President Bush, he is really not Santa Claus?
Back to the article:
The White House stuck to its own low-tax message yesterday, as Obama repeated his "clear promise that families that earn less than $250,000 will not see their taxes increase by a single dime." Asked whether Obama is confident that he can stick to that pledge throughout his administration, press secretary Robert Gibbs told reporters: "He is. He is. He is."
DoctoRx here. Let us remember the three "He is"'s. Will they be the 2012 equivalent of "Read my lips: no new taxes"?
Those with a longer sense of history also recall Ronald Reagan pushing through the "riverboat gamble" of a tax cut at the outset of his first term, then finding the rest of his budgets "dead on arrival" and agreeing to a multiplicity of tax increases through the rest of his tenure in office.
Of course, he never asked anyone to read his lips or gave a triple promise as Robert Gibbs has just done.
Back to the article:
To add heft to that promise, the White House released a lengthy list of tax breaks included in the stimulus package to benefit college students, car buyers, first-time home buyers, families with children, poor people and others -- all told, about 120 million households.
DoctoRx here. Where's my tax break?
Back to the conclusion of the article:
This year, with the profusion of new credits in the stimulus package, about 65 million households -- or 43 percent of all filers -- are likely to owe no income taxes . . .
Of course, even filers who have no income tax liability still pay federal taxes, due in large part to the payroll tax, which funds federal insurance programs like Social Security. According to the CBO, taxpayers shelled out an average of 7.5 percent of their earnings in payroll taxes in 2006.
But if the recession lingers and Congress and the White House consider another economic stimulus package, that tax could temporarily disappear, as well. Economists say one of the first items that should be considered is a payroll-tax holiday.
DoctoRx here. Presumably any lost revenues to the Government from a payroll-tax holiday will be provided by the Tooth Fairy if Santa is either worn out from overwork or finally has an empty red bag.
Copyright (C) Long Lake LLC 2009
Uppermost in the mind of Econblog Review in this regard is the widespread use of "bank" to refer to giant holding companies that own a bank. Here is the definition of a financial bank (as opposed to a riverbank, e.g.) from Merriam-Webster on-line:
an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds.
Clearly, a "bank" is defined as exactly what the average Joe thinks it is: a plain vanilla commercial depository institution, that with its deposits makes loans (extends credit); provides wiring of funds (facilitates the transmission of funds). A "bank" per this (correct) popular definition does not meet the description of Citigroup as listed on its website:
Citi is organized into four major segments – Consumer Banking, Global Cards, Institutional Clients Group, and Global Wealth Management.
Only the first of the above is what people think of when they think of a "bank" in relation to Citigroup. And of course Citigroup deliberately confuses the issue by calling both itself and Citibank "Citi" whenever it can.
The average citizen hears President BushBama and Treasury Secretary HankTimothy GeithPaulson, and their allies and acolytes talk about bailing out the "banks", and hears that terminology repeated even by staunch opponents of these bailouts in general and/or specific bailout policies, and thinks that this is somehow different from bailing out ExxonMobil when oil prices and demand may plummet because, these are BANKS.
The average person has no idea that when money goes to Citigroup, it goes to a corporation that owns Citibank N.A. and other banks in foreign countries, but that mostly tries to make money doing other things, such as trading for its own account, advising companies on takeovers, etc.
Econblog Review believes that over time, the public needs to think of companies such as Citigroup as Big Finance (or some similar term), just as it thinks of ExxonMobil and its brethren as Big Oil. Once this terminology is used, it will be easier to make the case for reinstatement of a modernized version of Glass-Steagall and for the numerous other reforms required to prevent recurrent systemic financial crises.
Copyright (C) Long Lake LLC 2009
Friday, April 17, 2009
From CNN: Experts: Some foreclosed homes too damaged to sell
"About a third of all of the foreclosed properties nationwide have been so damaged, either by the previous owners or by criminal gangs coming in after the foreclosure, that they no longer qualify for standard mortgage financing," [researcher] Thomas Popik told CNN. "So there is going to be all kinds of government programs to help, but if they don't qualify for standard mortgage financing, there's no one to buy these properties."
Popik says responses from thousands of real estate agents nationwide to the questionnaires he sends out quarterly indicate that badly damaged foreclosed homes ... are a much bigger element of the national housing picture than officials in Washington have acknowledged.
"In many cases, it costs so much to rehabilitate these houses, it's just not cost-effective," he told CNN. "And the properties are eventually going to be bulldozed."
DoctoRx here. This is a national disgrace. Both a Democratic Congress in power since the real estate implosion began and Presidents Bush and Obama bear moral blame. People were sold or "sold" homes to benefit the finance and construction industries, then kicked out of their homes. The homes are now going to be knocked down, thus reducing excess inventory that competes with builders who want to build new homes. This recalls the worst of the Depression-era programs, later found to be illegal, in which for example millions of piglets were killed and crops were plowed under to inflate prices that made farmers and financiers unhappy (rather than give away to the millions of desperately poor Americans (or foreigners) these foodstuffs).
And the lack of specific attention by the Party and a President that postures as the friend of the common man to the shantytowns growing all over this country is a further shame. For moral and pure political reasons, they should be all over this one. Instead they are reworking the President's budget proposal which reserves $750 B for Big Finance and ? nothing for the newly homeless/newly jobless. As stated here almost endlessly, this reprises the failed Hoover trickle-down theory. It was ineffective though not necessarily illogical then. Given our current knowledge of its prior failure, it is completely unacceptable now.
As F. Scott Fitzgerald wrote in The Great Gatsby, which presaged the Roaring 20s and the fallout from the party that never ended till, suddenly, it was no more, we are being borne back ceaselessly into the past; another long national nightmare which we thought we would never see again: deflation and depression. Let us hope this one is not "Great".
Copyright (C) Long Lake LLC 2009
Most respondents cited little or no difficulty obtaining financing for either long-term commitments (capital investment) or short-term needs (operating expenses). Moreover, fewer than 10 percent of those surveyed indicated that problems obtaining credit had adversely affected their production or sales.
A bigger surprise is that any manufacturing remains in New York State anymore!
In any case, the above but ignored statement by the New York Fed gives the lie to President Obama's argument that taxpayers need to subsidize Big Finance so that lending can resume. The truth is that the country overproduced beyond what it could afford in the last up-cycle. Let us be Green and use what we have rather than strain to satisfy the gods of output and employment, and just produce what we need and can afford, paying down debt and abjuring new debt along the way.
Copyright (C) Long Lake LLC 2009
The loss of GE's AAA rating merited a display on a supplemental slide that it remains well within the top 10-rated Dow 30 stocks, of which only 3 are AAA: XOM, JNJ, and MSFT (and of those, MSFT is only AAA-rated because it recently sold long-term debt for the first time; thus the AAA rating of MSFT is in fact reflective of a downgrade of its financial strength). The saddest thing about the top-10 listing is that T is the 10th highest rated Dow 30 stock with only an A rating.
Perhaps for the first time in modernity, nowhere in GE's press release or either of the additional presentations available on its website is any mention of book value. Econblog Review has therefore gone to Yahoo's Finance section and found GE's tangible book value for the years ending 12/31 2006-8. Here they are:
2006: $25.9 B
2007: $18.3 B
2008: $7.9 B
GE has a market cap of $130 B with a tangible book value of $8 B at the end of last year, and won't even tell investors in writing what that value was at the end of March this year. As a rough estimate, assume that GE's financial services arm accounts for half the company and half the book value. If it is worth even twice book, that leaves the non-financial part of GE selling for about 30X book. GE stock may be greatly overvalued, even at today's shrunken stock price.
In the meantime, we have the charade of financial firms beating analysts' estimates. Citi is the latest. How even an enabler of the financial industry such as Bloomberg has the gall to begin its review of earnings reports from JPM, GS and C with the statement that they beat estimates of the Street when they comprise the Street confounds the mind. Even the fact that C's earnings per common share were negative after payment of preferred stock dividends (in part to you know who) was reported after mentioning allegedly positive operating earnings.
Ignoring GE's and C's "bottom lines", there are many bottom lines for investors. The elephant in the room that is not commented upon much is that by most definitions, the U. S. economy is indeed in a Depression. That this Depression is not the Great Depression is irrelevant to the proper term to use. Retail sales are down an astounding approximate 10% year on year in real and nominal terms. The Fed reports that industrial activity is down low double digits in nominal terms year on year. 20% of the 2000 largest shopping malls have closed recently. Look at the giant companies in or essentially in bankruptcy (or, rescued from such by you and me; don't you feel rich that you could afford to bail these guys out?):
The largest auto company: GM
The two largest mortgage companies: FNM and FRE
The largest insurer: AIG
The largest financial services company, and 2 other giants: C, LEH, BSC
The second largest mall operator: GGP.
There is one defining characteristic of these companies: They were debt-driven companies.
Via the theory of alternation of cycles, these sorts of companies will not be good long-term investments over the next investment/economic cycle. Debt-free companies, and those whose assets are visible, are more likely to provide better risk-rewards. This includes information and medical technology companies, as well as well-positioned natural resource companies with strong financial positions. Not that many such underpriced investment opportunities are available in the public markets. Sometimes the best investment strategy is the best one in life: just sit there, and keep on thinking and learning. A 2% CD or Treasury at a time of falling prices is not disaster.
Copyright (C) Long Lake LLC 2009