Thursday, April 30, 2009

Stress Test Incompetence

Seeing the news that the promised May 4 release of bank stress test information is going to be delayed so that the Fed (in league one suspects with the constitutional lawyer-in-chief and his team) can hold a series of debates with the wealthy lawyers representing Big Finance brought DoctoRx out of travel-preparation mode for a bit more venting and opining.

(Technically this is a Federal Reserve undertaking.  In this and most relevant bailout regards, the Fed under Ben Bernanke is as independent as a two-year old child is of Mother.)

A cardiologist, DoctoRx knows a thing or two about stress tests.  Let's just say it's his medical-legal opinion that the investing public has a right to sue all players involved for stress test-related malpractice.

Returning to the news of the day, the defeat of the mortgage cramdown bill today smells like a victory for Robert Rubin/Timothy Geithner/Larry Summers.  The administration appears not to have fought hard if at all for this bill.  Why?  EBR suspects that Mr. Obama wanted it to lose, or at least did not care much either way.  The President now wins twice.  Most important, Big Finance gets what it wants.  Second, he can pillory Big Finance because the public has no idea of his true alliances, and as well he can go after the Republicans for being the major opposition to the bill.  A great double game.  EBR thinks this view is not overly cynical:  when a President with the Congressional majority and popularity rating of Mr. Obama wants a bill passed, he gets it essentially through unless it's looney tunes.

Barack Obama may already have done as much for Big Finance in 100 days or so as George Bush did in eight years.  A crisis is, indeed,  a terrible thing to waste, and Mr. Obama is no wastrel when it comes to such matters.

Copyright (C) Long Lake LLC 2009

A Pre-Travel Screed

One final comment before taking a day or two off for travel.

Yahoo/Finance reports that Jim Cramer says to ignore the comparison of the U. S. to Japan.
EBR agrees.  The financial position of the U. S. consumer is vastly worse than that of the Japanese, who have been net savers throughout their 20 year post-bubble experience.  Thus, Japanese consumers are not financial serfs to financial companies, unlike Americans, who have been successfully and deliberately marketed by the Merchants of Debt to transfer most of their equity in their most important and long-term stable financial asset, their personal residence, to financial companies to finance either current consumption, more debt, speculative investments, and the like.

When evaluating Barack Obama's post-100 day performance, please recall that companies and even governments that were marketed "AAA" collateralized debt obligations based on these mortgages by Big Finance have written these securities down to fair value, with fair value often being zero or close to zero.  The Citigroups of the world that created and marketed these same securities financed their growth and their bonuses with this garbage and are specifically and self-consciously overpricing them at near 100 cents on the dollar, and Barack Obama and his party that controls Congress is doing what even George Bush and Henry Paulson shied away from doing, which is going along with this obvious falsehood and misusing the Fed and the FDIC to have hedge funds and even these same Big Finance companies purchase this debt at inflated prices.

It is the transparency of the lie that these "legacy" securities are "illiquid" and therefore in need of your funding that has led the blogger Yves Smith of Naked Capitalism to say that Team Obama engages in the "Big Lie" technique.

It may be quixotic, but I for one am rooting for the failure of the PPIP and the failure of an economic recovery if it is built upon a Big Lie.  

The banking predecessor to Citigroup led the financial abuses of the late 1920s.  Citigroup is the worst big "bank" in this cycle.  The best thing for America would be for Citi to die and the bondholders of the troubled banks provide the bailout funds they need rather than taxpayers.

Copyright (C) Long Lake LLC 2009 

News Flow Remains Poor, so Why Shouldn't Stocks Soar?

Chrysler is going under, almost 30 years after the Feds bailed the company out with a now modest loan guarantee.  Its impending bankruptcy is a testament to two major factors:
dysfunctional management-labor relations that pervaded the Big Three; and the over-financialization of auto purchasing, wherein auto companies became finance companies with unprofitable manufacturing facades.

In other negative news, the Commerce Department reported today that private wage and salary disbursements dropped $33 B in March on top of $29 B in February; these are seasonally adjusted annual rates.  This $62 B (annualized) two-month drop in wages and salary is a 1% drop.

There is massive human and physical overcapacity in the United States and in many other places.

With secure income on financial assets hard to find, riskier assets such as stocks and high-yield bonds have attracted positive cash flows.  

In the meantime, the $5.2 million salary hedge fund genius ($26 million annualized salary given his reported 1 day of "work" per week) Larry Summers continues to advise President Obama that a further massive wealth transfer from taxpayers to large financial institutions is necessary via PPIP, the $750 billion "placeholder" in the first Obama budget, direct Fed purchase of Treasury debt, etc.

The Federal Open Market Committee reported yesterday a downbeat assessment of the economy.  

We know in retrospect that the jobless recovery from the mild 2001 U. S. recession was spurred by a lunatic housing and commercial real estate boom.  That boom that at some point entered bubble territory was a continuation of a bull market in real estate that began in the mid-1990s and that initially was simply a recovery from the bear market in real estate that tied into the S&L mess.  Similarly, the tech bubble in the late 1990s was an excess that grew out of a real boom and real innovation.

Where is the ongoing positive industry trend, even one without innovation, which will underpin and provide a theme for and employment/investment options, a true economic growth cycle?

The answer is obviously none, which is why Econblog Review is skeptical of the prospects for a strong economic recovery.  Printing money only goes so far and then fails.

Currently, the major leadership in the stock market is the financial sector due to your money going straight to the banksters' pockets.  The canary in this coal mine, beyond all the obvious matters, may be Northern Trust (NTRS).  NTRS is perhaps the best-regarded TARP recipient, yet it needed to raise equity at a significant discount to its stock trading range.  Its stock chart had begun looking very promising, and in a typical bull market, you want to buy the leader of the damaged sector that would be poised for a bull market recovery.

If NTRS needed to sell below-market price equity rather than debt, bad news on JPM could follow.  This has been a scripted recovery in the financials created solely by the continuing alliance between Big Finance and Big Government, an unholy alliance which continues to drain America of its money and its spirit.

Copyright (C) Long Lake LLC 2009 

Wednesday, April 29, 2009

Advance GDP Data Show Domestic Consumption Collapse

The Advance GDP data are out.  Spinmeisters will crow about the decline ending, as massive inventory reduction accounted for much of the downturn.  What will receive little publicity is the following, taken from the BEA Press Release (, see "Latest Release"):

Real gross domestic purchases - - purchases by U. S. residents of goods and services wherever produced - - decreased 7.8% in the first quarter, compared with a decrease of 5.9% in the fourth.

This shows a true collapse in domestic consumption.  My quick explanation is that imports collapsed 34% while the smaller quantity of exports collapsed less, at 30%.  Thus the country enjoyed a significant diminution in its share of the world's goods and services (consistent with the need to start running trade surpluses).   The implication appears to be that consumers could not afford imported goods.

Please recall that GDP relates to domestic production.  As a reductio ad absurdum, if the U. S. became a colony of another country and produced only for export except for food and water etc., GDP could grow and grow but the American people would not see any of that production.
So what good is GDP?  That's a good question.

Stock market futures are up on the GDP report.  They are also reportedly experiencing a relief rally that the swine flu pandemic is not as bad as SARS, or some other thought of the day.  This blog advised readers on April 27 to more or less ignore the swine flu news in their investing activities.  This pandemic is a non-trivial problem, but there is no way EBR sees to profit from it.  Overall it is obviously bad for worldwide economies, so on a short-term basis, it is a negative for stocks, but over the long run (which is what stock prices are supposed to discount)
what we see now is unlikely to have major macro effects on the economy of the world.

In the meantime, all the money-printing is converting bears to bulls.  Yet as Louise Yamada points out, there is no real leadership, unlike 1982, when long-suffering groups such as consumer goods showed real relative strength all throughout the 1981-2 bear market and had long bases from which long advances began when the bear market ended.  In contrast, leaders of one year ago, such as gold and oil, are going nowhere, and the high-quality Dow leaders of 2008, WMT and MCD, have stock charts that are becalmed.

Fitting that theme, a recent report found "millionaires" more confused than ever as to where to put their funds.  Increased interest in investing in both stocks and bonds was reported.  Meanwhile, a recent poll of money managers showed only about 4% bulls on Treasuries.  Louise Yamada has pinpointed about 3.1% on the 10-year Treasury as a recent top in yields, which corresponds exactly to the low yield in the prior cycle (2001-3), and therefore feels it may represent support in price/resistance in yield.  Given that mortgage-backed securities are now a bit rich historically vs. Treasuries, a trade from the former to the latter may be of interest.

Copyright (C) Long Lake LLC 2009


Tuesday, April 28, 2009

Sheila Bair's Errors in Yesterday's Speech to the Economic Club of New York

The Chairman (not Chairperson?) of the FDIC, who has unfortunately signed on to the veritable destruction of the FDIC by going along with PPIP, gave a speech yesterday to the Economic Club of New York designed to improve her image and, in the nature of bureaucrats, to further increase her power.

She decried the Too Big to Fail doctrine of bank holding companies.  She asked that the FDIC be given the power to take over all of a company that owned a bank that was a member of the FDIC system, even if that company primarily was not in the depository banking business, such as Citigroup.  Basically, she wants a potentially bigger FDIC so that can be on a par with the giants of Big Finance.

Econblog Review agrees with Ms. Bair that new thinking is needed.  EBR also agrees with FDR and probably with the philosopher/mathematician Nassim Taleb that bank holding companies themselves are the problem.  Bring back the Glass-Steagall law and let a company either be a plain vanilla regulated depository institution, with its depositors accepting low-ish interest rates for the security of a government guarantee, or let it be an investment banking company, or a trading/gambling company etc.

Ms. Bair said:

Everybody should have the freedom to fail in a market economy.  Without that freedom, capitalism doesn't work

EBR would ask Ms. Bair what PPIP is about if not preventing Citigroup and others from failing, using my money and yours.  If she really believed the above statement, she would resign from her position rather than risk far more than FDIC's capital for an unfair bailout of the gamblers in Big Finance.

She also offered a misdiagnosis of the status of the banking industry:

As I see it, we are now in the cleanup phase.  We need to get in, do the repair work, and get out.

This is like saying that it is time to clean up after a hurricane before it has left the area.  

Earth to Sheila Bair:  the economy is still shrinking.  Even after the downturn technically ends, the economy will not suddenly become the 1999 economy.  And we can be almost certain that the commercial real estate sector will be in recession or worse even after the economy returns to positive growth.  Worse, there can be no way except in the future looking backward to be sure that another liquidity crisis will not occur.

Count no chickens before they are hatched; don't consider a crisis over till it truly is over.

It's never over till it's over.

Copyright (C) Long Lake LLC 2009

Monday, April 27, 2009

A Medical Opinion: Financial Pandemic Remains a More Extreme One than Swine Flu

While comparing a disease that has just caused acute and often painful death and that is spreading rapidly with the past almost two years' financial and economic mess is of course comparing two very different beasts, we should keep a sense of proportionality in dealing with disasters.

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

Monday Morning Update: Good News Remains Scarce

This blog has since inception considered Tim Geithner to be the bad penny and asked that his nomination as Treasury Sec'y be withdrawn. Thus it is with positive emotions that an important blog from Naked Capitalism was seen this morning, titled Are the Knives Coming Out for Geithner? If you haven't, please read it.

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

Kevin Depew at and Mish at GlobalEconomicAnalysis have each blogged persuasively that structural bear markets a la 1965-82 are characterized by social discontent.

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

New Research from the St. Louis Fed Appears to Add Academic Credibility to the Battle Against PPIP

The St. Louis Fed has just released a working paper that joins its neighbor, the K. C. Fed, in pushing back against Fed and Administration policies. First, let us recall that the K. C. Fed's chief, Thomas Hoenig, pulled no punches in joining much of the blogosphere when he testified before Congress that policy toward financial institutions was tilted far too much in favor of the companies rather than the taxpayer, as well as that there had been far too much of the Japan rather than the Stockholm syndrome in creating and then nurturing zombie banks.

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

The Administration Says: Please Buy a New Car But Leave Home Without It

The Administration is all over the auto industry these days. On the one hand, there is immense effort to deal with the miserable condition of GM and Chrysler. The government is in charge and will have its way, one way or another, with all the other parties trying to game the system as best as they can.

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


Ford Motor Co. had an earnings "beat" (surprise!). In Bloomberg's Ford Loss Is Smaller Than Estimates as Cash Use Drops (Update2), the following quote is presented:

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

The Stock Market is Yesterday's Leftovers with Mr. Softee the Latest Case in Point

Stock prices will indeed fluctuate, because that is how the financial community makes money.
Behind the worn facade of beating the Street by a penny or two, reality does exist in the form of historical quarterly reports by corporations.  Today, Microsoft fessed up to its maturity.  It has rapidly gone grey.

The December quarter for Mr. Softee represented a negative surprise, with earnings of $0.47.  The Value Line MSFT report of 2/20/09 indicated March quarterly sales of $14.00 B and earnings of $0.40/share.  Today we learned that sales were only $13.6 B, earnings excluding writedowns on assets (this is not limited to financial companies!) were $0.37, and guidance was withdrawn.  Operating margins were about 34% and have been eroding for 10 years, when they were 56%.  The company has about $17 B of net working capital and little other tangible book value.

Operating expenses are being cut.  Microsoft is not in "runoff" mode, but it is trading post-earnings release at 10X tangible book value and almost 3X sales.  It has lost almost all creativity; it has made no impact on the Internet.  Yours truly has no idea what the discounted present value of its future cash flows will be, and neither does any analyst.  

Consider however that earnings in the March quarter were $0.50, 0.47 and now about 0.37 per share in 2007-9.  

MSFT exemplifies much of what is wrong with American business.  It is too big to grow much more and in fact is shrinking for real ($60 B in sales); it is too strong and important to fail; its management is rich and entrenched; it is discounting its wares:  there is no pizzazz.  Yes, the stock was halved in a year and a half and may be ready to rebound, but the thrill is definitely gone.  

AmEx also reported this afternoon, projected ugly consumer default rates, missed earnings estimates that Value Line also published 2/20/09 (when it traded at $16/share).  In keeping with the times, naturally it traded up sharply after hours.  Earnings for AXP this quarter were about 1/3 less than in the same quarter 4 years ago.  Absent government action and conversion to bank holding company status, who knows what this company would be like by now?

Perhaps stock traders are relieved that these behemoths aren't going bankrupt!  

Seriously- when giant companies such as MSFT and AXP ruthlessly cut costs (meaning fire people) and show extreme cyclicality, yet trade well above book value and have uncompelling dividend yields, they are not on the true bargain counter.  And these are high quality, beaten down stocks.

The "laws" of cyclicality suggest that at some point there will be true bargains in some financial asset class, as stocks were in the late 1940s and early 1950s and bonds were in the 1980s.  It's hard to find any such assets now.  Patience continues to make sense.

Copyright (C) Long Lake LLC 2009 

More Evidence of Ongoing Recession in China

Courtesy of Naked Capitalism comes a link to an article from China Stakes, titled Falling Power Generation in April= China’s Economy Still in the Woods. Now that we are all skeptics, let us consider whether it is even possible for China's economy to have grown much at all over the past year, much less the amount claimed, when tax receipts are down 10% year on year. Has an epidemic of tax evasion swept a totalitarian country? One suspects not, and the lack of growth of power generation year on year supports the view that the same forces that have kept over-exaggerating U.S. economic performance have been doing the same regarding China.

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

More Fed Data Demonstrating 'Lack of Lending' is a Lie

In a non-proprietary E-mail message sent today, Bob Eisenbeis of Cumberland Advisors addressed the recent WSJ article alleging that TARP recipients have not lent their government-provided funds out.  This blog has no expertise in that argument, but notes with extreme interest the conclusion of the message, which is titled, simply, "Bank Lending".  Here is the intro and the (more relevant for our purposes) finale:

In an article this Monday the WSJ reported that lending by banks that had received TARP funds had continued to decline since the inception of the program and that this “paints [a] starker picture than official government snapshots.”  The article focused almost exclusively on the recently released loan origination data by Treasury on lending by major TARP recipients, but failed to consider other information in the data set or more current data on bank lending provided by the Federal Reserve. . .

When one (reviews) data from the Federal Reserve's H.8 release on bank lending, which is now available through the month of March and into the first week of April, overall bank credit is currently only slightly below what it was at its peak in October of 2008, which was nearly one year into an economic downturn.  More importantly, given the severity of the downturn, lending is still substantially above where it was at the start of the recession or any month prior to the peak in October 2008.  This is true for virtually every single type of credit, be it real estate lending, consumer loans, or C&I loans.  In short, whatever retrenchment that has taken place in the TARP institutions in the C&I loan or credit card areas looks to be a rather recent phenomenon and seems to be relatively minor when compared to the volumes of outstanding credit currently being provided by the banking system as a whole.

Assuming that Dr. Eisenbeis' interpretation of the lending data is en pointe, several conclusions occur.  One is of course that there is enough lending going on, and perhaps too much for a "normalized", sustainable level of economic activity.  Other conclusions of course relate to various explanations for the need to transfer taxpayer wealth to Big Finance.

One suspects that just as the 2001 recession and bear market in stocks was minimized by excessive debt creation, the authorities are trying to do the same with this worse "recession".  The suspicion here is that this strategy is dealing with a sicker patient, so that the remedy will likely be less affected; or an addict who is now more tolerant of (resistant to) the addicting substance.

What the economy really needs is another new new thing.  In the past this has been the wave of consumer goods in the 1920s, victory in World War II, better living through chemistry in the 1950s-60s, disinflation in the 1980s, and the Internet etc. in the 1990s.  Eventually, perhaps green energy could help fill that bill, but that's far from a 2009-10 situation.  Until then, one should be skeptical that more of the same will do any more than another drink will do for an alcoholic.

Copyright Long Lake LLC 2009

Bloomberg Headline Inadvertently Lets the Banksters' Cat Out of the Bag

"Soaring U.S. Budget Deficit Will Mean Billions in Bond Sales" informs us today.  Quelle surprise!  (Why did Bloomberg consider this newsworthy?  (No link-disabled by Bloomberg-see to find article, though there's nothing special in the article.)

There is a deeper implication of the headline than the obvious ones.  This blog has argued since its inception last year that the Obama administration was going to follow the Bush policies and support the banksters:  there would be no change in that key regard.  Now, let us think of the massive government spending not in terms of Keynes but in terms of money flow to explain why two otherwise very different Presidents have had such amazing policy continuity vs. Big Finance.

Who benefits first from increasingly massive government bond/bill sales?  Why, it is the primary dealers, that's who, plus the entire debt distribution chain.  So, whether or not the cost to the public per job created (name your metric) is a good deal is, in fact, not very relevant to the Establishment.  The Establishment- call it banksters plus their allies in Government and the media etc.- loves debt financing because it is so profitable from day one.  Eliminate the debt and you eliminate the initial fees plus all the unending fees from trading the debt, sliced and diced as the debt may be, forever and ever.

Viewed from this perspective, the current economic depression is fine for the financial industry.  States and other localities now "need" to float more and more debt just to finance their operations. (Cutting spending in a serious way just won't serve the needs of the financiers until the very brink of bankruptcy.)  How else can one explain a 9% expenditure increase in New York State's next proposed budget at a time of falling revenues and no price inflation?  How else can one explain the truly massive California debt sales to "invest in the future" in the face of already large current deficits?  

The only way to truly reduce the influence of Big Finance, and the financial industry in general, is for all of us and our governments to go on a fiscal diet, live within our means, and only issue/take on debt only when it is really and truly needed.  From a policy perspective, it means such things as avoiding another quagmire in Asia (think Pak-ghanistan) and making the shareholders and bondholders of troubled companies responsible for the consequences of the troubles the businesses are undergoing before the taxpayer steps in. Forget "better" regulation. Instead, follow Nassim Taleb's advice and ban complex financial products.  Then put in the financial equivalent of an FDA and only allow new financial products if they are proven both safe and they are effective in that they solve an existing problem that cannot be solved by existing financial instruments.  

If you analyze the current crisis from the standpoint of what government policies are best for the Merchants of Debt and ignore the competing policy arguments (e.g. Keynes vs. Friedman), you will have a coherent framework that will allow you to readily understand all governmental and business decisions that have been made.  

Copyright (C) Long Lake LLC 2009 

Tuesday, April 21, 2009

Why the SIGTARP Report Suggests Both Looting and that a Depression Is Underway

Today's Quarterly Report of the Special Inspector General for the Troubled Asset Relief Program is quite troubling.  Early on, it summarizes matters:

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.  

Re the looting charge, SIGTARP has already initiated almost 20 preliminary or full criminal investigations.  These may be non-trivial:

. . . the cases include large corporate and securities fraud matters . . . insider trading, public corruption . . .

In addition, six areas of audit are underway.  These include special mention of BofA and BofA/Merrill; all 9 initial TARP funds recipients; and the payments to AIG's counterparties.

SIGTARP is specially critical of Treasury's refusal to monitor what has happened to the funds given to large financial institutions in return for preferred stock.  On its own, SIGTARP looked into the matter and received significantly detailed responses as to what the companies had done with the funds, sometimes in "granular" detail.  Why has Treasury refused such a simple matter?

SIGTARP has numerous complaints about the PPIP, which will be thoroughly analyzed by other bloggers much more expert than I.

There will be multiple "bottom lines" in this mess.   It is clear that at best Chairman Bernanke incompetently misdiagnosed matters as rosier than they were.  I wonder if Big Hank Paulson also misdiagnosed things.  In my humble opinion, he knew exactly how bad things were, given that he had recently run Goldman Sachs, which more or less runs Wall Street.  He exposed himself by waiting for the crisis that he knew was coming after he put Fannie and Freddie into receivership, then making sure in a 2 1/2 page document to request immunity for any misdeeds he might be accused of doing in implementing TARP.  How well is he sleeping these days?  

We have had unprecedented stock market manipulation by the SEC, twice putting short squeezes on to harm those who (correctly) were shorting financial stocks, then taking the pressure off after insiders and favored institutions were allowed to unload a lot of stock at unfairly high prices.

We have a Democratic Congress that would not even investigate a Republican President for alleged contractor abuses in Iraq.  One has to worry about how much zeal it will have to investigate a Democratic President's Treasury Department, especially when the Treasury Sec'y has been the glue in this disaster all along.

What is going on has elements of the Great Crash, in its financial and economic dimensions; and Watergate, with its political dimensions; as well as the S&L fiasco writ large.  One cannot think of anything like this festering toxic mix within the past hundred or more years in this country.  In this situation, where Big Finance and Big Government have been lying both by commission and by omission, there is no way to use historical economic tools to predict the future.  We just do not know what we may not know, other than that as a pretty young bride said to Rick in Casablanca, the devil has the people by the throat. 

Copyright (C) Long Lake LLC 2009

Investor Optimism Premature?

One might think that 6 quarters into a recession, it would be time for big companies to finally exceed the expectations they feed the Street. Not so. And investors don't seem to care. About the first point, EBR has little comment. About the second point, EBR is concerned that complacency has returned, even with the stock market down in real terms as much as in the 1929-31 period the same number of months from the market peak.

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

Pecora Rides Again? And Barofsky Takes Aim at PPIP

Bloomberg is reporting momentum for a cause that Econblog Review has supported from its earliest days- that of a modern-day Pecora Commission to investigate "Wall Street" and the current mess, in Pelosi Wall Street Probe Modeled on Pecora After Market Crash. The major debate appears to be on how the probe is structured. Bloomberg reports:

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

Of Roll-Ups and Markets

Roll-up #1:  BofA, originally a modest Charlotte, N. C.  bank, then the pretentiously-named Nations Bank, then a truly national bank with a name to match after merging with/taking over the San Fran-based BofA, has announced an upside "earnings surprise".  The stock has more than quadrupled since its low point this winter.  How any financial journalist/editor team can use that term "earnings surprise" to refer to a TARP recipient with the journalist equivalent of a straight face is, well, a surprise.

Because with Big Finance it is all politics, all the time, their stocks are unanalyzable and therefore  untradeable, as stated here a while ago.  Having been short financials or long puts these entities on and off since last year and having stopped that behavior with AXP around 10 and BofA around 4, my temptation is to go to the well one more time.  Too far too fast at the very least; but why fight the Fed?  Perhaps systemically less important entities such as AmEx (AXP)?  TBD . . .

To both explicate some current issues and show how confusing matters are with Big Finance, please see the post from last night by James Kwak (h/t Naked Capitalism) at the Baseline Scenario, titled More Accounting Games, which both explains the lack of real importance of converting preferred stock to common stock and then goes on to clarify/correct one of his points.  

Roll-up #2:  Oracle (ORCL) is buying Sun Microsystems (JAVA) for about $7.4 B, or about $6 B after net cash.  ORCL currently has a negative $3 B tangible net worth, after years of profitability and only one quarter of a dividend payment.  Basically, ORCL has used most of its positive cash flow over the years to buy its common stock from people and institutions who no longer want to own it, without rewarding the long-term holder with dividends until very recently.

ORCL has turned into another Citigroup, it would appear, or perhaps a once-superior acquirer, namely Nations Bank.  Yet even Wachovia and Fifth Third were until not long ago viewed as very well run banks that were also great roll-up acquirers.  Wrong!

ORCL stock has, on the heels of well-received earnings, punched above its 50 and 200 day moving averages for the first time since last August.  One wonders if if the company will be viewed as making a material error by acquiring an unprofitable hardware/software company at a premium valuation.  If so, and if the stock collapses in any way similar to what happened to Pfizer when it plummeted much more than the market after announcing the Wyeth takeover, that might be a bad metaphor for the market as a whole.

Other comments:  Following the bear market script, the best chart performers of last year, namely Treasuries, gold and the two Dow 30 winners, WMT and MCD, are underperformers the last few months, with charts that look similar to various falling markets and stocks from last year.  Short term, no asset class looks attractive.  Longer term, the view here is that belief in paper/fiat money will continue to be eroded as everyone sees how easily trillions of dollars have been "poofed" into existence by the strong will of the Establishment.  The greenback is a Federal Reserve note, and the Federal Reserve now holds assets that are increasingly dodgy.

Re the argument that stocks are a good inflation hedge, the truth is that they were in the early-t0-mid 1980s,  but only after immense inflation had driven up the nominal value of various assets and after a commitment to a disinflation/high growth (Volcker/Reagan) economy had been made.  Matters are more fundamental now:  the survival of the central bank absent a bailout, the survival of a now-lapdog FDIC (which should NOT be participating in PPIP), and any belief that the reserve currency of the world is being managed responsibly.

Thus it appears likely that on a secular basis, more rather than fewer people will seek out alternatives to the dollar as a store of wealth.  The Euro?  Too risky.  The Deutschmark?  Yes, but sorry, see the Euro.  The yen?  Laughable.  The yuan/renminbi?  Premature at best.

Except for the dollar, there is only one "thing" that will get one past border guards, out of prison, and that in general will be accepted where feasible in a transaction.  The fact is that everyone reading this knows what that mystery "currency" is.  Case closed.  Longer term investors should consider accumulating on weakness.

Copyright (C) Long Lake LLC 2009

Saturday, April 18, 2009

Has Santa Claus Come to Town? He has. He has. He has.

In Americans' Tax Burden Near Historic Low, the Washington Post today provides a good summary of how the current administration is channeling and exceeding the failure of the prior one to tell the people that sorry, there really is no Santa Claus. Here are some excerpts:

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

Why Citigroup Should Not Be Called a "Bank"

Marketers and revolutionaries are among the few who recognize how very important language is in winning public debates. EBR believes that financial writers are inadvertently contributing to the victory of the "banksters" by using language that helps them.

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

Tear Down This Home?

Via Calculated Risk reporting from CNN, a report on a new national strategy to deal with real estate overcapacity: knock it down:

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

New York Fed Proves Lack of Lending Argument a Lie

From this week's New York Federal Reserve Board's "Empire State Manufacturing Survey":

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

GE and Citi Beat the Street!

GE proudly announced today that earnings per share were down 40% from the year-ago quarter. We are thrilled to recognize that these earnings were a nickel per share above those of the all-seeing, all-knowing analysts.

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