The first thing one notices about the GE earnings release today is the reader-unfriendliness of the title, along with the lack of information about the actual 4th quarter results:
"GE Earned $18.1B in ‘08; 4Q ‘08 Results in Line with December Outlook; Industrial CFOA of $16.7B up 5%; Cash on Balance Sheet Grew from $16B in 3Q to $48B at YE".
The next thing at least this scribe noted is the current GE motto: "Imagination at Work". In these times, we assume that the imagination relates to earnings manipulation.
In any case, we don't care much about earnings. We care a bit about outlook ("We expect 2009 to be extremely difficult."). We don't give a hoot about dividends, which can lie. We also don't care about a AAA rating. Clearly GE is in practice not a triple-A company, of which there are almost none left in America. (A headline today in Bloomberg.com suggests that France may stop being a AAA-rated country.)
What really matters here, as readers will have noticed, in this environment, is equity. Here's the real bad news. As of 12/31/08, GE had stockholder's equity after goodwill and intangibles of 8 billion dollars. A year early, the same number was 18.3 billion dollars. So the Company is down $10 B in tangible equity. Great year, guys! Keep paying out those dividends!
The corporation as a whole reports tangible equity of $8 B. GE Capital reports $365 B in net receivables.
At the close of business yesterday, GE had a stock market value of $134 Billion. Of this, $126 Billion is "air" under Generally Accepted Accounting Principles. Let Wall Street's geniuses with their valuation models pick fair value and a stock price target for this wheezing behemoth that even today is predicting double digit growth as soon as the recession ends. I can't even guess at what this company is worth. As far as I'm concerned, unthinkable though it sounds, this stock could have no bottom.
Copyright (C) Long Lake LLC
Friday, January 23, 2009
Thursday, January 22, 2009
Nightcap/Bloomberg Video Indicator
In a bull market, the trend is your friend on the upside, so that when good news breaks out, even if it is expected, the asset class goes up. Thus in an established or prospective bull market one looks for a combination of gloomy sentiment but a good chart and some good news for a buy point, and the upside can be great.
In a bear market, the opposite is true. Breakouts tantalize, get to or above key numerical targets or moving averages, but good news has only a transient ability to push the asset class higher, whereas bad news and gloom are no longer contrary indicators suggesting that the smart money should be buying a dip. Rather, the bear market got going for a reason, and bad news is taken as confirming that there is no reason to buy and a rally a good time to "lighten up". Currently that reason not to buy or to lighten up is that very bad things are actually happening in the economy in every part of the world that matters. Somehow it is hard to see that GE will have legitimately good news when it reports earnings tomorrow, no matter whether it "beats expectations" (that horrible, horrible phrase).
In that context, I will assert without detailing that the Bloomberg.com Video Indicator, a proprietary indicator that we use here, has finally shown some net negativity tonight. While it is nice to see this, it is only reflecting reality for a change, and has not gotten overwrought on the downside. So I ignore it tonight and believe it has no predictive value right now.
What may well have predictive value is that every bear I know who manages money was waiting for Inauguration Day or the signing of a stimulus bill (which might have been the same day, it was once said) to sell the November-January rally short. But as pointed out here about 2 weeks ago, the markets peaked once they realized that the economic and financial strategy of the new administration was one of continuity, not dramatic change. Frustrated bears who have not pulled the short-selling and put-buying trigger are waiting for a rally to do so. This makes me nervous about any rally in the short term.
Now we have the headline that Mr. Geithner, incoming Treasury Secretary, opined that China is manipulating its currency. Not that this is a surprising opinion, but many sources indicate that China is being hit very hard economically. How could it not, given that every important export market it has is collapsing? Yet Bloomberg warns that "Geithner Warning on Yuan May Trigger Renewed U.S.-China Economic Tensions". I'm not hyperlinking this article because I'm not going to read it. If you and I know that China manipulates its currency, then for sure China knows it, and therefore that knowledge cannot trigger anything, even a phone call from Beijing to D.C. China will in fact work with its customers to keep its factories going, but there's no easy solution to this problem. Naked Capitalism has been a great source of updates on the China story and is worth checking out daily if China is a special interest of yours.
With Japan's stock market picking up energy on the downside, lwith ots of bears on the U.S. stock market frustrated because they missed this current down-move, with proprietary services such as Lowry's getting very bearish recently after the 2-month rally, and with some bears such as the redoubtable Mr. Fleckenstein having publicly turned bullish, and with almost every economic headline looking scary (and some sugar-coated to look better than they are), it seems to this blog that the conditions are aligning for a further sharp move down to new lows in the market. (I hope NOT and recall that a year ago, when the SocGen news broke, it was reported that Jan. 22/23 is the statistical gloomiest time of the year for people's mood.) Calculated Risk reports real improvement in commercial paper spreads between high- and low-quality issuers, but numerous severe bear markets have existed without this spread being an issue. If stocks were to move to new lows soon on the back of new unexpected bad news (as predicted by Dr. Roubini as being in the cards) and therefore provide an almost unfair test to the nascent Obama Administration, and were to do so without the sort of financial crisis that the collapse of Lehman led to, then I would also predict that the global financial anxiety that has led to the Perth Mint being sold out re its gold production would ebb, and that the price of gold would then find that down is the path of least resistance. In other words, what might be happening is that the financial crisis that began 18 months ago is "in" the markets, but that a more traditional recession bear market is taking over. After all, with former blue chip bank stocks trading at $3 to $5 per share, further declines in them won't affect the averages much.
As Mish keeps pointing out, the reality right now, today and tomorrow, is deflation. There are essentially no bull markets anywhere. I can't remember a time in 30 years in the financial markets when that has been the case. The usual buyers of stocks on declines are in disarray, which explains why rallies have failed for a year-and-a-half straight. Governments hate gold and will not allow it to be money. Gold costs money to store and insure. It can be confiscated. Bond principal and interest can be confiscated as well via default or inflation. The most highly valued stocks in the U.S., such as Procter & Gamble, IBM, AT&T, and GE, either have large negative tangible net worths or trade so far above tangible net worth that they are valued like small rapid-growth companies with very high ROIC. IBM's main business is manufacturing earnings, often supported by treating its employees disgracefully and using every accounting trick in the book. So there is risk everywhere for all major asset classes. (Forget commodities.) Cash in the bank yields little or nothing; perhaps a 2% CD is a great risk-reward investment. One of these days the risks will be to the upside and against the bears. My heart wants to be bullish now. My head says to fuggetaboutit. The ultimate lows of this bear market could be much lower than anyone is talking about, even Nouriel Roubini.
Let's hope that GE tells it like it is tomorrow without playing IBM-like games, and let's hope that what it has to say isn't too bad.
Copyright (C) Long Lake LLC 2009
In a bear market, the opposite is true. Breakouts tantalize, get to or above key numerical targets or moving averages, but good news has only a transient ability to push the asset class higher, whereas bad news and gloom are no longer contrary indicators suggesting that the smart money should be buying a dip. Rather, the bear market got going for a reason, and bad news is taken as confirming that there is no reason to buy and a rally a good time to "lighten up". Currently that reason not to buy or to lighten up is that very bad things are actually happening in the economy in every part of the world that matters. Somehow it is hard to see that GE will have legitimately good news when it reports earnings tomorrow, no matter whether it "beats expectations" (that horrible, horrible phrase).
In that context, I will assert without detailing that the Bloomberg.com Video Indicator, a proprietary indicator that we use here, has finally shown some net negativity tonight. While it is nice to see this, it is only reflecting reality for a change, and has not gotten overwrought on the downside. So I ignore it tonight and believe it has no predictive value right now.
What may well have predictive value is that every bear I know who manages money was waiting for Inauguration Day or the signing of a stimulus bill (which might have been the same day, it was once said) to sell the November-January rally short. But as pointed out here about 2 weeks ago, the markets peaked once they realized that the economic and financial strategy of the new administration was one of continuity, not dramatic change. Frustrated bears who have not pulled the short-selling and put-buying trigger are waiting for a rally to do so. This makes me nervous about any rally in the short term.
Now we have the headline that Mr. Geithner, incoming Treasury Secretary, opined that China is manipulating its currency. Not that this is a surprising opinion, but many sources indicate that China is being hit very hard economically. How could it not, given that every important export market it has is collapsing? Yet Bloomberg warns that "Geithner Warning on Yuan May Trigger Renewed U.S.-China Economic Tensions". I'm not hyperlinking this article because I'm not going to read it. If you and I know that China manipulates its currency, then for sure China knows it, and therefore that knowledge cannot trigger anything, even a phone call from Beijing to D.C. China will in fact work with its customers to keep its factories going, but there's no easy solution to this problem. Naked Capitalism has been a great source of updates on the China story and is worth checking out daily if China is a special interest of yours.
With Japan's stock market picking up energy on the downside, lwith ots of bears on the U.S. stock market frustrated because they missed this current down-move, with proprietary services such as Lowry's getting very bearish recently after the 2-month rally, and with some bears such as the redoubtable Mr. Fleckenstein having publicly turned bullish, and with almost every economic headline looking scary (and some sugar-coated to look better than they are), it seems to this blog that the conditions are aligning for a further sharp move down to new lows in the market. (I hope NOT and recall that a year ago, when the SocGen news broke, it was reported that Jan. 22/23 is the statistical gloomiest time of the year for people's mood.) Calculated Risk reports real improvement in commercial paper spreads between high- and low-quality issuers, but numerous severe bear markets have existed without this spread being an issue. If stocks were to move to new lows soon on the back of new unexpected bad news (as predicted by Dr. Roubini as being in the cards) and therefore provide an almost unfair test to the nascent Obama Administration, and were to do so without the sort of financial crisis that the collapse of Lehman led to, then I would also predict that the global financial anxiety that has led to the Perth Mint being sold out re its gold production would ebb, and that the price of gold would then find that down is the path of least resistance. In other words, what might be happening is that the financial crisis that began 18 months ago is "in" the markets, but that a more traditional recession bear market is taking over. After all, with former blue chip bank stocks trading at $3 to $5 per share, further declines in them won't affect the averages much.
As Mish keeps pointing out, the reality right now, today and tomorrow, is deflation. There are essentially no bull markets anywhere. I can't remember a time in 30 years in the financial markets when that has been the case. The usual buyers of stocks on declines are in disarray, which explains why rallies have failed for a year-and-a-half straight. Governments hate gold and will not allow it to be money. Gold costs money to store and insure. It can be confiscated. Bond principal and interest can be confiscated as well via default or inflation. The most highly valued stocks in the U.S., such as Procter & Gamble, IBM, AT&T, and GE, either have large negative tangible net worths or trade so far above tangible net worth that they are valued like small rapid-growth companies with very high ROIC. IBM's main business is manufacturing earnings, often supported by treating its employees disgracefully and using every accounting trick in the book. So there is risk everywhere for all major asset classes. (Forget commodities.) Cash in the bank yields little or nothing; perhaps a 2% CD is a great risk-reward investment. One of these days the risks will be to the upside and against the bears. My heart wants to be bullish now. My head says to fuggetaboutit. The ultimate lows of this bear market could be much lower than anyone is talking about, even Nouriel Roubini.
Let's hope that GE tells it like it is tomorrow without playing IBM-like games, and let's hope that what it has to say isn't too bad.
Copyright (C) Long Lake LLC 2009
Oy: Nokia; Another Nail in Endless Growth's Coffin
The economy continues to do its Schumpeterian destructive thing, though once again without the creativity. Economic reality has finally and definitively come to cellphones. The wonderfully named Juho Erkheikki reports from Helsinki for Bloomberg.com that Nokia Oyj (NYSE: NOK) is a troubled company. Lowering its financial estimates once again and cutting its dividend, the company "has also halted share buybacks and plans to reduce capital spending this year to preserve cash." Nokia also "forecast a 10 percent slide in industry sales."
To the left is a chart of Nokia's stock since it joined the NYSE on July 1, 1994. The triangles on the up-part of the chart are stock splits.
The stock peaked at 62 when the NASDAQ peaked in early 2000, then had a secondary peak at around 42 when the market as a whole peaked in fall, 2007, but then fell 58% in 2008.
Since 2003, the company has bought back 1 billion shares at what I will guess, looking at the chart, is a total price of $18 B. It has paid far less than that in dividends. Guess how much stock officers and directors have? Providing no surprise to readers of this blog, it is less than 1% of the total. An amateur chart reader will look at the rapidly deteriorating industry fundamentals, the fact that this cash-rich company is cutting capital spending, and the double bottom in the stock (2002 and 2004 just under $11/share), and conclude that there is not a lot to stop this stock from descending into the single digits. This would be the reverse of the one-way move up in the 1990's.
Corporate sales for 2008 were close to $70 B. Nokia is too big to succeed, and it is the biggest success in its field. (I have spared you the far worse stock chart of Motorola, which stock is more or less back to levels reached in the 1970s.)
As with so many other companies, Nokia sold itself and investors on the belief in endless growth. It finds itself already in a cyclical industry. The half of the world's potential cellphone users who are not now owners of a cellphone are the poorest ones. Nokia is a tired giant. Its stock price is due to open today at about $12.50 in New York trading, it appears. Nokia's markets are tired. Cellphones are just unexciting consumer items. (Even Blackberries are ubiquitous, it appears.)
What is worst for the cheerleaders for endless growth, whether it be in cellphones in specific or the economy as a whole, is that we in the "developed" world who are middle class or better don't need more toys. We don't need more cars than we have. We don't need more Starbucks, fast food outlets, discount retailers, luxury brands, variations on vodka, etc. In the cities where I live or travel, including South Florida and Southern California, I don't see many potholes that need filling to "stimulate" the economy. (I do however see miles of construction equipment lining Florida's Turnpike but slow progress in the road-widening project.)
What everyone I know feels we need is a sense that our money needs to stop being given to the sharpies who goofed (polite term) when running our biggest financial institutions. Their stockholders and bondholders need to take responsibility for their investments. This belief is universal amongst everyone I speak with, including one friend who describes himself as "to the right of Attila the Hun" and another friend who marched over the last two years for the simultaneous impeachment and removal from office of George Bush and Dick Cheney so that Nancy Pelosi could become President. In this time of recession, when more and more the homeless cease to disproportionately be mentally troubled or addicted to alcohol or illegal drugs, what is needed is more assistance for the needy. That's the truly needy, not the financial crowd. This assistance can include a free Nokia phone and service contract!
What is going on in Nokia is going on over and over again in the economy. Even the best large companies, such as Nokia, don't know what to do to provide legitimate growth, so they resort to gimmicks such as speculating in their own stock under the guise of returning money to shareholders (such as the insiders who want to cash in their options at the best price), lobbying to gain tax benefits, unfair changes to pension plans (think IBM), but only start raising dividends when business is about to go downhill (Nokia, AIG, IBM) as a last resort to try to attract "value" investors.
The next new thing that will energize stock investors and the economy may come with Government support and creativity, such as the Internet, which was a U.S. Government invention. It may come privately, the way air flight and the automobile developed privately. Until it/they arrive, those with money are likely to continue to be very careful how they invest it.
Copyright (C) Long Lake LLC 2009
To the left is a chart of Nokia's stock since it joined the NYSE on July 1, 1994. The triangles on the up-part of the chart are stock splits.
The stock peaked at 62 when the NASDAQ peaked in early 2000, then had a secondary peak at around 42 when the market as a whole peaked in fall, 2007, but then fell 58% in 2008.
Since 2003, the company has bought back 1 billion shares at what I will guess, looking at the chart, is a total price of $18 B. It has paid far less than that in dividends. Guess how much stock officers and directors have? Providing no surprise to readers of this blog, it is less than 1% of the total. An amateur chart reader will look at the rapidly deteriorating industry fundamentals, the fact that this cash-rich company is cutting capital spending, and the double bottom in the stock (2002 and 2004 just under $11/share), and conclude that there is not a lot to stop this stock from descending into the single digits. This would be the reverse of the one-way move up in the 1990's.
Corporate sales for 2008 were close to $70 B. Nokia is too big to succeed, and it is the biggest success in its field. (I have spared you the far worse stock chart of Motorola, which stock is more or less back to levels reached in the 1970s.)
As with so many other companies, Nokia sold itself and investors on the belief in endless growth. It finds itself already in a cyclical industry. The half of the world's potential cellphone users who are not now owners of a cellphone are the poorest ones. Nokia is a tired giant. Its stock price is due to open today at about $12.50 in New York trading, it appears. Nokia's markets are tired. Cellphones are just unexciting consumer items. (Even Blackberries are ubiquitous, it appears.)
What is worst for the cheerleaders for endless growth, whether it be in cellphones in specific or the economy as a whole, is that we in the "developed" world who are middle class or better don't need more toys. We don't need more cars than we have. We don't need more Starbucks, fast food outlets, discount retailers, luxury brands, variations on vodka, etc. In the cities where I live or travel, including South Florida and Southern California, I don't see many potholes that need filling to "stimulate" the economy. (I do however see miles of construction equipment lining Florida's Turnpike but slow progress in the road-widening project.)
What everyone I know feels we need is a sense that our money needs to stop being given to the sharpies who goofed (polite term) when running our biggest financial institutions. Their stockholders and bondholders need to take responsibility for their investments. This belief is universal amongst everyone I speak with, including one friend who describes himself as "to the right of Attila the Hun" and another friend who marched over the last two years for the simultaneous impeachment and removal from office of George Bush and Dick Cheney so that Nancy Pelosi could become President. In this time of recession, when more and more the homeless cease to disproportionately be mentally troubled or addicted to alcohol or illegal drugs, what is needed is more assistance for the needy. That's the truly needy, not the financial crowd. This assistance can include a free Nokia phone and service contract!
What is going on in Nokia is going on over and over again in the economy. Even the best large companies, such as Nokia, don't know what to do to provide legitimate growth, so they resort to gimmicks such as speculating in their own stock under the guise of returning money to shareholders (such as the insiders who want to cash in their options at the best price), lobbying to gain tax benefits, unfair changes to pension plans (think IBM), but only start raising dividends when business is about to go downhill (Nokia, AIG, IBM) as a last resort to try to attract "value" investors.
The next new thing that will energize stock investors and the economy may come with Government support and creativity, such as the Internet, which was a U.S. Government invention. It may come privately, the way air flight and the automobile developed privately. Until it/they arrive, those with money are likely to continue to be very careful how they invest it.
Copyright (C) Long Lake LLC 2009
Wednesday, January 21, 2009
Follow-ups: IBM and Stock Regulation for Individuals
In last evening's post, "Hope? No Hope for Some: Requiem for a Russo", comments on IBM and its propensity toward financial engineering were made. This was made irrespective of a well-received earnings report, which drove the stock much higher today. Tonight, however, the WSJ is suggesting that perhaps it wasn't such a great quarter after all ("Closer Look Shows Little to Cheer at IBM"). Before providing our take on the quarter, a note: the IBM website makes it very difficult to find anything out about the quarter except the general press release. The website is very happy to discuss Calendar year 2007 and all 2008 quarters except the fourth quarter whose results sent the stock up so much in trading today, but it took a lot of clicking to find the detailed slide show presentation on Q4.
There are good reasons why IBM would want to hide it. Here is the link to the detailed discussion of the quarter. The key slides are 17 and 18. From end 2007 to end 2008, total assets declined by $10.5 B. Total liabilities rose by $4.1 B. Excluding the Global Financing balance sheet, debt/capital rose yoy from 30% to 49%. Over all, shareholder equity dropped from $28.5 B to $13.5 B, a drop of a cool fifteen billion dollars. Great year, guys! Keep on repurchasing that stock at premium prices!
Slide 18 shows the yoy explanation for the reported earnings growth (despite a sales decline) between Q4 in 2007 vs Q4 in 2008. Reported earnings grew from $2.80 yo $3.28/share. However, of that 48 cents per share improvement, 41 cents came from pension benefits and a lower tax rate. Another 15 cents per share came from share repurchases. As noted above, the company borrowed money to fund those repurchases. So, from operations, earnings per share declined.
IBM has moved decisively to focus on manufacturing reported earnings rather than computer gear that the world needs. In this they join Citigroup, BofA, General Motors, General Electric and many other behemoths that have lost their way. Anyone who owns IBM stock should, in my opinion, sell it. Whether it goes up or down is not the point. This is the worst of American capitalism. The leading computer company in the world hides the details of its quarterly report on its own website. It in effect lies about a great quarter which was really a not-so-great quarter. All us market vets can recall intermittent quarters in which IBM cheer-led a "Great quarter, guys" reaction and squeezed those shorts for about a couple of days. Then there is always a disappointment somewhere, for which there is always an excuse, for which there is always, like Scarlett O'Hara, another day, another quarter, another year, another way to steal its employees' pension funds, another way to manipulate the global tax system to engineer a favorable earnings reporting stream. This is likely to catch up to this company some day, some quarter, some year.
Switching gears, with regard to today's post on regulating stock sales ("Stocks as Consumer Items Needing Increased Regulation"), I had a conversation with a veteran of the global financial services industry. He suggested simply that all but qualified individuals should be prohibited from buying individual stocks, and that stocks should in some fashion be "marked" with a skull and crossbones. He also called me "Don". When I asked why, he said that I reminded him of Don Quixote, tilting at windmills. So, with apologies to Paul Simon, you can call me Don.
Copyright (C) Long Lake LLC 2009
There are good reasons why IBM would want to hide it. Here is the link to the detailed discussion of the quarter. The key slides are 17 and 18. From end 2007 to end 2008, total assets declined by $10.5 B. Total liabilities rose by $4.1 B. Excluding the Global Financing balance sheet, debt/capital rose yoy from 30% to 49%. Over all, shareholder equity dropped from $28.5 B to $13.5 B, a drop of a cool fifteen billion dollars. Great year, guys! Keep on repurchasing that stock at premium prices!
Slide 18 shows the yoy explanation for the reported earnings growth (despite a sales decline) between Q4 in 2007 vs Q4 in 2008. Reported earnings grew from $2.80 yo $3.28/share. However, of that 48 cents per share improvement, 41 cents came from pension benefits and a lower tax rate. Another 15 cents per share came from share repurchases. As noted above, the company borrowed money to fund those repurchases. So, from operations, earnings per share declined.
IBM has moved decisively to focus on manufacturing reported earnings rather than computer gear that the world needs. In this they join Citigroup, BofA, General Motors, General Electric and many other behemoths that have lost their way. Anyone who owns IBM stock should, in my opinion, sell it. Whether it goes up or down is not the point. This is the worst of American capitalism. The leading computer company in the world hides the details of its quarterly report on its own website. It in effect lies about a great quarter which was really a not-so-great quarter. All us market vets can recall intermittent quarters in which IBM cheer-led a "Great quarter, guys" reaction and squeezed those shorts for about a couple of days. Then there is always a disappointment somewhere, for which there is always an excuse, for which there is always, like Scarlett O'Hara, another day, another quarter, another year, another way to steal its employees' pension funds, another way to manipulate the global tax system to engineer a favorable earnings reporting stream. This is likely to catch up to this company some day, some quarter, some year.
Switching gears, with regard to today's post on regulating stock sales ("Stocks as Consumer Items Needing Increased Regulation"), I had a conversation with a veteran of the global financial services industry. He suggested simply that all but qualified individuals should be prohibited from buying individual stocks, and that stocks should in some fashion be "marked" with a skull and crossbones. He also called me "Don". When I asked why, he said that I reminded him of Don Quixote, tilting at windmills. So, with apologies to Paul Simon, you can call me Don.
Copyright (C) Long Lake LLC 2009
The Economy as Predicted by Stocks and Inflation as Predicted by Gold
The following graph was taken from Jesse's Cafe Americain.
What is of special note is not only that CEO Business Confidence, per the Conference Board's Jan. 16 writeup, is at its lowest level ever (it began in 1976), but that a cursory review of the worst bear markets shown, the ones ending in 1982 and 2002/3, show CEO confidence rebounding significantly before the ultimate stock market bottom. In this case, I fully expect to see the equivalent of the perp walks seen at the end of the most recent bear market or the Pecora Commission of FDR's time.
To save you clicking on the report from the Conference Board, it's grim: basically no CEO saw improvement in his industry or general economic conditions. What is most disconcerting to me is that they still predicted price increases, though only 1% for the year ahead. This may be over-optimistic, however.
Next, please review the most stalwart of all Dow Industrials. McDonald's (MCD) has broken down. I take this to be big and bad news. "Mickey D" made a lower high recently below the September high. Its 50 day moving average is below its 200 day ma for the first time in a long time, and both look to be in danger of turning down. In terms of its own long-term valuation metrics, it is neither cheap nor expensive, and it appears to have a secure yield far above competing short-term money rates. Its products are almost necessities in a world where people are trying to work two jobs if they can find them. It is highly international. Despite today's up-move in the markets, all it could do was to rally to what is now chart resistance. What this may portend for the economy scares me. If the market has seen its bottom, it should have been holding up better and then should be poised to break out to new all-time highs. Perhaps it will, but it's acting opposite to that currently.
The best
Dow performer of 2008 was Wal-Mart. It is farther along the stock breakdown stage than MCD. Here is its chart. It moved down today. Perhaps Target is sharpening its pricing; I wouldn't know, but something appears amiss here. You would have been better off buying a Treasury security of any duration from 1 to 30 years than Wal-Mart one year ago, despite its nicely positive 2008 return. This, with MCD, is classic big bear market action. Bears wear out the bulls. In fact, one additional point relates to some uber-bears, such as Bill Fleckenstein.Last year, I read his book on Greenspan's bubbles. Mr. Fleckenstein publicly converted to the more-bull-than-bear camp late last year. I believe that the conversion that he announced and that of some other bears helped fuel the rally off the November lows. He announced that being bearish had simply become wearing on him. This is again, to me, classic big bear action. We generally get interested in markets because we are bullish on this or that. It is tough to be bearish; it's against a healthy emotional state.
But that's why quants use computers. Here at Econblog Review, we find it emotionally easier to basically ignore investing in the stock market when we don't like its looks, while following its twists and turns. Trying to make money on the downside is tough to do and tough on the spirit. We wish Mr. Fleckenstein very, very well, having admired his work and iconoclastic spirit for some time, but worry that his mini-conversion from the short-only camp was premature.
We all know that T-bonds have sold off lately, but the canary in the coal mine of inflation is gold. Gold, in the form of the GLD exchange-traded fund, looks to be in a critical technical position.The first thing to notice, though the image is a bit obscured, is that GLD has provided a negative total return over the past 12 months. You can't eat relative strength. The second is that there are four (4) price peaks, and each one is below the prior peak. So far, each price peak has been followed by a lower low. The price peaks are out of phase with the stock market price peaks, but interestingly the price lows are in phase.
Most recently, GLD bounced off its upsloping 50 day ma and rebounded near its downsloping 200 day ma. With T-bonds selling off today, if there were true inflation fears, GLD should have been up in follow-through to its recent significant short-term rally. That it was down slightly may mean something.
Every stock and every market of importance over the past year of which I am aware that has had this sort of pattern of lower highs and lower lows has failed to break out to the upside. If Dr. Roubini is correct along with the TIPS market, and the Roubini "stag-deflation" is in the cards, then the fundamentals for gold are poor and those for 2-5 year Treasuries are OK. Most gold is purchased for jewelry use, though much of that is in Asia where people where jewelry that is not highly engineered and therefore sells close to the bullion price and therefore serves as money as well as adornment. Nonetheless, I know NO ONE who is spending on fripperies lately, and I know people both with good jobs such as doctors and people with serious money.
Every stock and bond professional I know who "called" this stock bear and Treasury bull at least one year ago doesn't trust today's stock market bounce. They are divided on the prospects for inflation vs. deflation over the short and medium term, though there is no interest in betting on low inflation over the long term. They all believe that the stock market is headed for new lows.
Also, some long-term wealthy investors I know who have bought and held stocks individually or through non-Madoff truly high-quality managers have been selling stocks over the past year and have now decided to get further out of the market. These people were truly in the market for decades. They are dismayed by what they see happening. They may well have voted for Barack Obama, but nonetheless they are moving definitively away from stocks. It is certain that a short-term bounce in the stock market will not tempt these serious investors back to the stock market any time soon. Unless the collapse of the large financial institutions worldwide is miraculously revealed to have been a big joke, they are getting out and staying out for some time.
The stock market remains too risky for most people. It is OK to miss the bottom of the market should we have seen it last November. If the stock market were a stock, and it were ranked by a standard earnings and price momentum screen such as the one Value Line pioneered and that has been widely imitated, the stock market would scream "sell". Gold would be more of a "Neutral", but we remain both viscerally attracted to it as a concept but skeptical of its price prospects over the short term due both to fundamental and technical factors. Treasury bonds would be more like NASDAQ stocks of the late 1990s, which is to say glamor, but the fundamentals and basic chart patterns are both OK to bullish. Just as the stock bubble, including the large-cap S&P stocks of the late 1990s, sent sensible hugely successful investors into retirement because the were too sensible too early and too long, so might this Treasury bull destroy short-seller after short-seller before rolling over, finally having sucked in the public at large, which may finally come to believe in bonds for the long run just when the dawn of a long-term Treasury bear market is born.
Anyway, it's time to support the local economy and support our favorite local eatery. You can't eat either relative performance or computer pixels.
Copyright (C) Long Lake LLC 2009
Stocks as Consumer Items Needing Increased Regulation
I have come to believe that just as are other consumer items, stocks need to be more closely regulated to protect the public.
Even in the greatest bull market of our times, the average investor in mutual funds was reported to have barely made money. Why? Because he/she tended to chase performance, thus guaranteeing purchase as the smart, early money was exiting after the upside had been achieved.
In the go-go late '90s, a national mania was created by the financial community and its enablers in business, the media and government that sucked vast numbers of America into believing that they too could be Bernard Baruch or Warren Buffett.
The whole mantra of "stocks for the long run", even as propounded by such honorable men as John Bogle, who built up the Vanguard Funds, clearly depends on the valuation of stocks when the long run begins. Beyond that, the future is unknowable. All we can say is that common stocks in the U.S. have, over many years, provided X return, but that achieving those returns was not necessarily easy for an individual person, and that individuals must be aware that they should not rely upon past history to predict the future. For example, they should be told that the very data that indicate that stocks have outperformed cash and bonds for the past hundred years (say) may logically suggest that they will underperform the same alternative asset classes for the next hundred years.
All consumer items are subject to some sort of prudential regulation. Even when a physician prescribes a medication, the patient is provided a list of potential side effects. And the prescriber has no financial interest in whether the patient takes any medicine, or which one is given. (Quite different from the selling of financial products!) Even so, patients are by law given information about the downside of the medicine.
Yet when the average investor purchases a mutual fund, all he or she tends to see is a bland warning that it may lose value and that the cost of running the fund is a certain amount. For the millions of investors who buy/trade their own individual stocks, there is no necessary disclosure of the facts of what they are buying. I propose that the boom-bust cycle of the stock market is of such importance both to individuals and to society at large (given the importance of public companies to the economy) that greater disclosure is required. Here are some modest proposals:
1. When a stock that has significant institutional ownership is purchased by an individual, the individual should be informed that large investment organizations that can be expected to have greater knowledge of the value of the company, greater sophistication and greater financial ability to withstand moves down in the price of the stock may either be selling the stock to the individual or are currently unwilling to pay a higher price; in other words, presumably "better" investors have declined to value the stock at the current time at any higher price than the individual is proposing to pay. Further disclosure (where appropriate to the stock) should be made that in addition, sophisticated people are actually paying significant interest and other costs to bet that the stock price will actually decline, and that these individuals can be assumed to have engaged in sophisticated analysis of the Company's financial position and business prospects, and have not only decided not to own the stock but to take on the potentially unlimited risk of borrowing it and selling it without even owning it, in the hope of profiting by buying it back at a cheaper price.
2. The individual must be shown financial data for the company before being allowed to buy the stock. This data should include dividend history and asset value with AND without intangibles and goodwill. Earnings data are insufficient for a variety of reasons. Data on an individual stock could for example have warnings such as the following:
A. If you purchase this stock, you may never receive any income from it. The stock may become worthless for any of a number of reasons.
B. In addition, you have the ability today to purchase a U.S. Government bond that will pay you (prevailing interest rate) for (1, 5, 10 years, for example) and that will return you the face value of the bond in (# of years). You are thus forgoing that guaranteed income and return of principal when you purchase this stock.
C. Management and the board of directors of the company own X% of the stock. In general, the less stock those controlling the company earn, the less their interests are aligned with those of stockholders.
D. Management's interests in the stock may be different from those of stockholders, no matter what % of the company's stock it owns. For example, executive compensation may be high enough to materially affect the profitability of the Company. Substantial amounts of stock options or restricted stock may be granted that would diminish your current ownership of the Company, even if the Company succeeds.
E. Management owns options in the company at X% above/below the current market value. To the extent that the options are exercisable above the current stock price, management may take extra risks in an attempt to increase the stock above that price. These risks may be disproportionate to the chance of success and thus may be adverse to the interests of stockholders. To the extent that management owns options below the current market price, it may fail to take prudent risks to increase the stock price.
F. Even if the stock market as a whole rises, the price of the stock you are purchasing may decline or fail to rise.
G. (If applicable): The company in which you have expressed an interest in purchasing stock also has bonds available for purchase. The current price at which you may be able to purchase a bond of the company is approximately X, which would provide a yield to maturity of Y. A company's bonds may be sound investments even if the stock price of the company goes down.
H. The aggregate market value of the company you may purchase stock in is X. The Company reports that its financial value is Y based on Generally Accepted Accounting Procedures, of which Y' is in net cash and the rest is in more difficult-to-value assets. Thus, by purchasing this security, you are expecting that over time, the company will earn at least Z money (X-Y). In addition, financial professionals adjust upward the value of Z by a variable amount that takes into account such factors as the amount of money that their money could earn in safer places such as a Government bond, bank deposits, corporate bonds, and the like.
I. If a broker has recommended the purchase of this stock to you, he/she will earn income from it and will earn income again if you sell it. The broker therefore has a greater financial interest in you purchasing a stock that you are likely to sell at some point than one that you will never sell. The broker therefore has an inherent, unavoidable interest in you purchasing a stock that is more suited for trading than for long-term investing.
One can go on, but you get the point. In addition, mutual funds and closed end stock funds could be required to disclose the average ratios of price to net cash, price to book value, price to earnings of their stock holdings.
I suspect that if such disclosures were mandated, people would be less willing to part with their money in the "market" in general or individual stocks in particular. This could impart a salutary influence on the valuation of stocks and thus help prevent bubbles. By doing so, these actions would in fact tend to lead to stocks once again being good investments for the long run.
Ferdinand Pecora led the investigation of the U.S. Senate Committee on Banking and Currency in 1933-34 (the "Pecora Commission"). In 1939, he published the book, "Wall Street Under Oath". This is the first paragraph of his "Author's Preface" followed by snippets:
"Under the surface of the governmental regulation of the securities market, the same forces that produced the riotous speculative excesses of the "wild bull market" of 1929 still give evidences of their existence and influence. Though repressed for the present, it cannot be doubted that, given a suitable opportunity, they would spring back to pernicious activity."
" . . . Wall Street . . . looks forward to the day when it shall, as it hopes, resume the reins of its former power."
"The public, however, is sometimes forgetful. As its memory of the unhappy market collapse of 1929 becomes blurred, it may lend at least one ear to the voices of The Street subtly pleading for a return "to the good old times." Forgotten, perhaps, by some are the shattering revelations of the Senate Committee's investigations, forgotten the practices and ethics that The Street followed and defended when its own sway was undisputed in the good old days."
As I stated in my prior post, "Where is Jurassic Park When You Need It?", we need another Pecora Commission to deal with the abuses of the financial system of the past decade.
Copyright (C) Long Lake LLC 2009
Even in the greatest bull market of our times, the average investor in mutual funds was reported to have barely made money. Why? Because he/she tended to chase performance, thus guaranteeing purchase as the smart, early money was exiting after the upside had been achieved.
In the go-go late '90s, a national mania was created by the financial community and its enablers in business, the media and government that sucked vast numbers of America into believing that they too could be Bernard Baruch or Warren Buffett.
The whole mantra of "stocks for the long run", even as propounded by such honorable men as John Bogle, who built up the Vanguard Funds, clearly depends on the valuation of stocks when the long run begins. Beyond that, the future is unknowable. All we can say is that common stocks in the U.S. have, over many years, provided X return, but that achieving those returns was not necessarily easy for an individual person, and that individuals must be aware that they should not rely upon past history to predict the future. For example, they should be told that the very data that indicate that stocks have outperformed cash and bonds for the past hundred years (say) may logically suggest that they will underperform the same alternative asset classes for the next hundred years.
All consumer items are subject to some sort of prudential regulation. Even when a physician prescribes a medication, the patient is provided a list of potential side effects. And the prescriber has no financial interest in whether the patient takes any medicine, or which one is given. (Quite different from the selling of financial products!) Even so, patients are by law given information about the downside of the medicine.
Yet when the average investor purchases a mutual fund, all he or she tends to see is a bland warning that it may lose value and that the cost of running the fund is a certain amount. For the millions of investors who buy/trade their own individual stocks, there is no necessary disclosure of the facts of what they are buying. I propose that the boom-bust cycle of the stock market is of such importance both to individuals and to society at large (given the importance of public companies to the economy) that greater disclosure is required. Here are some modest proposals:
1. When a stock that has significant institutional ownership is purchased by an individual, the individual should be informed that large investment organizations that can be expected to have greater knowledge of the value of the company, greater sophistication and greater financial ability to withstand moves down in the price of the stock may either be selling the stock to the individual or are currently unwilling to pay a higher price; in other words, presumably "better" investors have declined to value the stock at the current time at any higher price than the individual is proposing to pay. Further disclosure (where appropriate to the stock) should be made that in addition, sophisticated people are actually paying significant interest and other costs to bet that the stock price will actually decline, and that these individuals can be assumed to have engaged in sophisticated analysis of the Company's financial position and business prospects, and have not only decided not to own the stock but to take on the potentially unlimited risk of borrowing it and selling it without even owning it, in the hope of profiting by buying it back at a cheaper price.
2. The individual must be shown financial data for the company before being allowed to buy the stock. This data should include dividend history and asset value with AND without intangibles and goodwill. Earnings data are insufficient for a variety of reasons. Data on an individual stock could for example have warnings such as the following:
A. If you purchase this stock, you may never receive any income from it. The stock may become worthless for any of a number of reasons.
B. In addition, you have the ability today to purchase a U.S. Government bond that will pay you (prevailing interest rate) for (1, 5, 10 years, for example) and that will return you the face value of the bond in (# of years). You are thus forgoing that guaranteed income and return of principal when you purchase this stock.
C. Management and the board of directors of the company own X% of the stock. In general, the less stock those controlling the company earn, the less their interests are aligned with those of stockholders.
D. Management's interests in the stock may be different from those of stockholders, no matter what % of the company's stock it owns. For example, executive compensation may be high enough to materially affect the profitability of the Company. Substantial amounts of stock options or restricted stock may be granted that would diminish your current ownership of the Company, even if the Company succeeds.
E. Management owns options in the company at X% above/below the current market value. To the extent that the options are exercisable above the current stock price, management may take extra risks in an attempt to increase the stock above that price. These risks may be disproportionate to the chance of success and thus may be adverse to the interests of stockholders. To the extent that management owns options below the current market price, it may fail to take prudent risks to increase the stock price.
F. Even if the stock market as a whole rises, the price of the stock you are purchasing may decline or fail to rise.
G. (If applicable): The company in which you have expressed an interest in purchasing stock also has bonds available for purchase. The current price at which you may be able to purchase a bond of the company is approximately X, which would provide a yield to maturity of Y. A company's bonds may be sound investments even if the stock price of the company goes down.
H. The aggregate market value of the company you may purchase stock in is X. The Company reports that its financial value is Y based on Generally Accepted Accounting Procedures, of which Y' is in net cash and the rest is in more difficult-to-value assets. Thus, by purchasing this security, you are expecting that over time, the company will earn at least Z money (X-Y). In addition, financial professionals adjust upward the value of Z by a variable amount that takes into account such factors as the amount of money that their money could earn in safer places such as a Government bond, bank deposits, corporate bonds, and the like.
I. If a broker has recommended the purchase of this stock to you, he/she will earn income from it and will earn income again if you sell it. The broker therefore has a greater financial interest in you purchasing a stock that you are likely to sell at some point than one that you will never sell. The broker therefore has an inherent, unavoidable interest in you purchasing a stock that is more suited for trading than for long-term investing.
One can go on, but you get the point. In addition, mutual funds and closed end stock funds could be required to disclose the average ratios of price to net cash, price to book value, price to earnings of their stock holdings.
I suspect that if such disclosures were mandated, people would be less willing to part with their money in the "market" in general or individual stocks in particular. This could impart a salutary influence on the valuation of stocks and thus help prevent bubbles. By doing so, these actions would in fact tend to lead to stocks once again being good investments for the long run.
Ferdinand Pecora led the investigation of the U.S. Senate Committee on Banking and Currency in 1933-34 (the "Pecora Commission"). In 1939, he published the book, "Wall Street Under Oath". This is the first paragraph of his "Author's Preface" followed by snippets:
"Under the surface of the governmental regulation of the securities market, the same forces that produced the riotous speculative excesses of the "wild bull market" of 1929 still give evidences of their existence and influence. Though repressed for the present, it cannot be doubted that, given a suitable opportunity, they would spring back to pernicious activity."
" . . . Wall Street . . . looks forward to the day when it shall, as it hopes, resume the reins of its former power."
"The public, however, is sometimes forgetful. As its memory of the unhappy market collapse of 1929 becomes blurred, it may lend at least one ear to the voices of The Street subtly pleading for a return "to the good old times." Forgotten, perhaps, by some are the shattering revelations of the Senate Committee's investigations, forgotten the practices and ethics that The Street followed and defended when its own sway was undisputed in the good old days."
As I stated in my prior post, "Where is Jurassic Park When You Need It?", we need another Pecora Commission to deal with the abuses of the financial system of the past decade.
Copyright (C) Long Lake LLC 2009
Tuesday, January 20, 2009
Hope? No Hope for Some: Requiem for a Russo
This is continuing to act more and more eerily like the Great Depression.
First, there is the historic nature of the headlines.
The current two headlines on Bloomberg.com - "Economy subsection" -are:
1. Singapore economy may shrink a record 5%;
2. King says Bank of England may buy assets soon as effect of rate cuts wanes
Left unsaid is that the Bk of England is going to buy assets with funny money. (Of course rate cuts had no real effect, as the banks are now revealed to be insolvent.)(And buying "assets" doesn't impress the markets, but it does allow sellers to dump their assets.)
More and more we are reading things like the following:
"Irish property tycoon Patrick Rocca was found dead Monday morning at his home near Dublin, in a suspected suicide.
Mr. Rocca, 42 years old, was involved in property through his company Accorp Properties Ltd. in Dun Laoghaire, Dublin, according to company filings. He was a member of a prominent Irish family of Italian descent. Mr. Rocca was married with children. His sister Michelle is musician Van Morrison's partner."
Not long ago a German tycoon (or, ex-tycoon?) did himself in. I don't remember many dot-bomb flame-outs taking some computer wires and strangling themselves in the NASDAQ crash.
This is more serious.
In various posts since I began this blog, I suggested that social policy aside, the Obama Administration was one of general continuity with the Bush Administration. I pointed out that the same inert, dysfunctional Congress that did nothing for homeowners but did everything for finanical companies would be essentially unchanged. The stock market ignored the Obama speech and the spectacle of his inauguration. It will respond to change that is real change, not just a name change.
How low can stocks and the economy go?
The scariest thing about stocks is that so many are trading at elevated levels relative to their actual assets. See "Procter & Gambling" from yesterday, where it is revealed that this old, venerable company can by some criteria be considered insolvent (though it reports robust profits). The problem with stocks that are selling far above actual asset value is that there then is no effective floor if even a temporary but severe business setback occurs. Please take the time to go to a free service such as Finance.Yahoo.com, type in a stock symbol, and go to "Balance Sheet". Look at the most recent tangible book value. If one is dealing with a large company such as IBM, yes of course patents have no tangible book value, but neither does the potential for a large fine, environmental penalty, or anti-trust charge. The best thing a company can have is cash and hard assets, so that even if business stinks for a period of time, there are real things that can allow a lot of money to be made quickly. One will find, for example, that IBM is selling way above the accounting value of its net cash and physical assets. Try to tell me what IBM will be worth/trading for if in 2009 and 2010, it makes no money but loses none either. I have no idea. But if it now had $50 a share in net cash and financial assets, and another $50 a share in the depreciated net value of its other assets such as plant and equipment, I would say that the current share price of $81.98 already discounts such a disaster.
As it happens, IBM has a stock market value of $110 B. After the September 2007 quarter, it told the SEC that excluding goodwill and intangibles, the value of its assets over liabilities was $12.1 B. What happened after a year of strong reported profits? How much did the $12.1 B grow to? $5.6 B, that's what it "grew" to. See link to the IBM page.
What happened? The company had so much faith in its own stock that it bought 85 million shares of IBM stock over the past year. (Good going, guys! Great market judgment) Why didn't it pay dividends or at least follow the lead of some companies and give non-selling shareholders the choice of taking a proportional dividend or additional shares? Because officers and directors own less than 1% of the stock, that's why.
IBM stock has gone nowhere for over 10 years. In that time, I estimate it has spent over $60 B on share buybacks and perhaps only $8 B on dividends (a very rough guess).
IBM has, perhaps, been as much a gambler as Citigroup and BofA. They, P&G, and many other companies have been stock jockeys. A couple of years ago, IBM predicted about 4-5 years of rapid earnings growth. How could it know that if it were not manipulating its earnings?
In an economy dominated not by company founders whose net worth is tied up in the stock but instead with managers who take risk after risk to get the stock moving up, the stock market and the economy have the potential to tank together.
If a well-run economy such as Singapore can see GDP drop 5%, the U.S. economy can do worse than that and the U.K. can do even worse than us.
This really could be Great D 2 rather than just a Great Recession.
Copyright (C) Long Lake LLC
First, there is the historic nature of the headlines.
The current two headlines on Bloomberg.com - "Economy subsection" -are:
1. Singapore economy may shrink a record 5%;
2. King says Bank of England may buy assets soon as effect of rate cuts wanes
Left unsaid is that the Bk of England is going to buy assets with funny money. (Of course rate cuts had no real effect, as the banks are now revealed to be insolvent.)(And buying "assets" doesn't impress the markets, but it does allow sellers to dump their assets.)
More and more we are reading things like the following:
"Irish property tycoon Patrick Rocca was found dead Monday morning at his home near Dublin, in a suspected suicide.
Mr. Rocca, 42 years old, was involved in property through his company Accorp Properties Ltd. in Dun Laoghaire, Dublin, according to company filings. He was a member of a prominent Irish family of Italian descent. Mr. Rocca was married with children. His sister Michelle is musician Van Morrison's partner."
Not long ago a German tycoon (or, ex-tycoon?) did himself in. I don't remember many dot-bomb flame-outs taking some computer wires and strangling themselves in the NASDAQ crash.
This is more serious.
In various posts since I began this blog, I suggested that social policy aside, the Obama Administration was one of general continuity with the Bush Administration. I pointed out that the same inert, dysfunctional Congress that did nothing for homeowners but did everything for finanical companies would be essentially unchanged. The stock market ignored the Obama speech and the spectacle of his inauguration. It will respond to change that is real change, not just a name change.
How low can stocks and the economy go?
The scariest thing about stocks is that so many are trading at elevated levels relative to their actual assets. See "Procter & Gambling" from yesterday, where it is revealed that this old, venerable company can by some criteria be considered insolvent (though it reports robust profits). The problem with stocks that are selling far above actual asset value is that there then is no effective floor if even a temporary but severe business setback occurs. Please take the time to go to a free service such as Finance.Yahoo.com, type in a stock symbol, and go to "Balance Sheet". Look at the most recent tangible book value. If one is dealing with a large company such as IBM, yes of course patents have no tangible book value, but neither does the potential for a large fine, environmental penalty, or anti-trust charge. The best thing a company can have is cash and hard assets, so that even if business stinks for a period of time, there are real things that can allow a lot of money to be made quickly. One will find, for example, that IBM is selling way above the accounting value of its net cash and physical assets. Try to tell me what IBM will be worth/trading for if in 2009 and 2010, it makes no money but loses none either. I have no idea. But if it now had $50 a share in net cash and financial assets, and another $50 a share in the depreciated net value of its other assets such as plant and equipment, I would say that the current share price of $81.98 already discounts such a disaster.
As it happens, IBM has a stock market value of $110 B. After the September 2007 quarter, it told the SEC that excluding goodwill and intangibles, the value of its assets over liabilities was $12.1 B. What happened after a year of strong reported profits? How much did the $12.1 B grow to? $5.6 B, that's what it "grew" to. See link to the IBM page.
What happened? The company had so much faith in its own stock that it bought 85 million shares of IBM stock over the past year. (Good going, guys! Great market judgment) Why didn't it pay dividends or at least follow the lead of some companies and give non-selling shareholders the choice of taking a proportional dividend or additional shares? Because officers and directors own less than 1% of the stock, that's why.
IBM stock has gone nowhere for over 10 years. In that time, I estimate it has spent over $60 B on share buybacks and perhaps only $8 B on dividends (a very rough guess).
IBM has, perhaps, been as much a gambler as Citigroup and BofA. They, P&G, and many other companies have been stock jockeys. A couple of years ago, IBM predicted about 4-5 years of rapid earnings growth. How could it know that if it were not manipulating its earnings?
In an economy dominated not by company founders whose net worth is tied up in the stock but instead with managers who take risk after risk to get the stock moving up, the stock market and the economy have the potential to tank together.
If a well-run economy such as Singapore can see GDP drop 5%, the U.S. economy can do worse than that and the U.K. can do even worse than us.
This really could be Great D 2 rather than just a Great Recession.
Copyright (C) Long Lake LLC
Hope for the Buiter?
Now that the 44th President of the United States is learning his way around the White House, we can get back to adding our two cents to the discussion of how to improve the world's economy and financial markets. All readers will have noted that today had the worst performance of the Dow on an inauguration day in the Dow's 112 year history. This is not Mr. Obama's fault. The news stank. Once again, it was dominated by the financials. Now that BofA stock has already been clobbered, one of the small Wall Street firms' analysts pointed out that it may need $80 B of add'l capital. With a then-market cap of thirty-something billion dollars, to raise that amount of equity would perforce have brought the stock price down by two-thirds. The gods of the market were merciful. The stock was only down by 29%. It is allegedly still worth $25 B.
With that introduction, which we hope is appropriately grateful, we would like to refer readers to a piece written by a Brit about British banks, but which is almost completely apropos here in the former Colonies. Dr. Buiter writes in "Can the UK government stop the UK banking system going down the snyrting without risking a sovereign debt crisis?" (Ed. "Snyrting" is Icelandic for bathroom, or in context, apparently also a toilet.) The post is quite long, but the recommendations are so on point, I am copying them here:
"So here is my proposal:
(1) Take into complete state ownership all UK high street banks. This has to be mandatory, even for the banks that still like to think of themselves as solvent.
(2) Fire the existing top management and boards, without golden or even leaden parachutes, except those hired/appointed since September 2007.
(3) Don’t issue any more guarantees on or insurance for existing assets - regardless of whether they are toxic, dodgy or merely doubtful. Issue guarantees/insurance only on new lending, new securities issues etc. A simple rule: guarantee the new flows, not the old stocks. This will reduce the exposure of the government to credit risk without affecting the incentives for new lending.
(4) Transfer all toxic assets and dodgy assets from the balance sheets of the now state-owned banks (or from wherever they may have been parked by these banks) to a new ‘bad bank’. If possible, pay nothing for these toxic and dodgy assets. Since the state owns both the high-street banks (I won’t call them ‘good’ banks) and the bad bank, the valuation does not matter. If the gratis transfer of the toxic or dodgy assets to the bad bank would violate laws, regulations or market norms, let an independent party organise open, competitive auctions for these assets - auctions in which the bad bank, funded by the government, would be one of the bidders. Whatever price is realised in these auctions is paid by the new bad bank to the old banks.
Capitalize the bad bank with the minimum amount of capital required to meet regulatory norms. Fund the rest of the assets through a loan from the state to the bad bank or through a bond issued by the bad bank and bought by the state.
As regards the bad bank, that’s effectively it. With toxic and dodgy securities on the asset side of its balance sheet and with the state owning all the equity and as the only creditor, the assets can either be sold off, if a market develops again, or held to maturity, earning whatever cash flows they may yield.
(5) As a special case of (4), take the high street banks into full public ownership and treat these existing banks in their entirety as bad banks. Close the existing banks for all new business. Transfer the deposits of the high street banks (now the bad banks) to new (state-owned) ‘good’ banks (or perhaps rather, not yet bad banks). Replace the deposits on the books of the bad banks with loans from the state to the bad banks or with bond issues by the bad banks purchased by the state. Let the new banks (New Lloyds, New RBS, New Barclays and New HSBC) acquire, in a competitive bidding process also open to other market participants, any of the assets of the old banks. Run the new banks as competing publicly owned, profit maximising banks until they can be privatised again, when a sensible regulatory regime for banks is in place and the market for bank shares recovers. Don’t guarantee or insure any items on the balance sheet of the old banks. Use guarantees/insurance exclusively for new lending and new investments by the new banks. Gradually run down the old banks as their assets mature, as under (4).
The miracle of limited liability applies also when the state is the owner. As long as the state-owned bad banks (which could be merged into a single super bad bank) don’t obtain sovereign guarantees for their obligations, the financial exposure of the sovereign is limited to its equity stake and the existing guarantees and insurance it has provided in the past.
It is key that there be no further injections of funds by the state into the bad banks until there are no longer any private creditors. If a bad bank becomes balance-sheet insolvent or liquidity insolvent and it still has private creditors (as it would, in general, under the model of item (5)), the bad bank should be put into administration and its debt to parties other than the British state should be converted into equity. That equity would be then be purchased by the UK state. With the bad bank now not just 100 percent state-owned but also without private creditors of any kind, the assets can be managed as the state sees fit - one hopes in such as way as to maximise the present discounted value of their held-to-maturity cash flows.
The balance sheets of the British banks are too large and the quality of the assets they hold too uncertain/dodgy, for the British government to be able to continue its current policy of extending its guarantees to ever-growing shares of the banks’ liabilities and assets, without this impairing the solvency of the sovereign. Britain risks becoming a victim of the new inconsistent quartet: (1) a small open economy with (2) a large internationally exposed banking sector, (3) a currency that is not a serious global reserve currency and (4) limited fiscal capacity. It risks a triple crisis and a threefold run: on its banks, on its currency and on its sovereign debt.
Limiting the exposure of the sovereign to what is fiscally sustainable may imply giving up on saving (all of) the banks. If my proposal for institutionally and legally separating existing stocks of assets and liabilities from new flows of credit and lending is acted upon, the flow of new lending and the supply of new credit need not require the survival of all (or indeed any) banks hitherto deemed systemically important.
I look forward to the time when I will be blogging on the best way of privatising the banks again, under new regulatory and governance regimes."
As discussed in my recent post, "UK and US Play Leapfrog in Making New Mistakes", it appears that the head of the Bank of England and the Fed head, Mervyn King and Ben Bernanke respectively, keep teaching each other how to take ever more drastic steps in the wrong direction. Sort of a "Simon Says", one to the other.
Willem Buiter for King! (That was a pun. Hope you got it.)
Copyright (C) Long Lake LLC
With that introduction, which we hope is appropriately grateful, we would like to refer readers to a piece written by a Brit about British banks, but which is almost completely apropos here in the former Colonies. Dr. Buiter writes in "Can the UK government stop the UK banking system going down the snyrting without risking a sovereign debt crisis?" (Ed. "Snyrting" is Icelandic for bathroom, or in context, apparently also a toilet.) The post is quite long, but the recommendations are so on point, I am copying them here:
"So here is my proposal:
(1) Take into complete state ownership all UK high street banks. This has to be mandatory, even for the banks that still like to think of themselves as solvent.
(2) Fire the existing top management and boards, without golden or even leaden parachutes, except those hired/appointed since September 2007.
(3) Don’t issue any more guarantees on or insurance for existing assets - regardless of whether they are toxic, dodgy or merely doubtful. Issue guarantees/insurance only on new lending, new securities issues etc. A simple rule: guarantee the new flows, not the old stocks. This will reduce the exposure of the government to credit risk without affecting the incentives for new lending.
(4) Transfer all toxic assets and dodgy assets from the balance sheets of the now state-owned banks (or from wherever they may have been parked by these banks) to a new ‘bad bank’. If possible, pay nothing for these toxic and dodgy assets. Since the state owns both the high-street banks (I won’t call them ‘good’ banks) and the bad bank, the valuation does not matter. If the gratis transfer of the toxic or dodgy assets to the bad bank would violate laws, regulations or market norms, let an independent party organise open, competitive auctions for these assets - auctions in which the bad bank, funded by the government, would be one of the bidders. Whatever price is realised in these auctions is paid by the new bad bank to the old banks.
Capitalize the bad bank with the minimum amount of capital required to meet regulatory norms. Fund the rest of the assets through a loan from the state to the bad bank or through a bond issued by the bad bank and bought by the state.
As regards the bad bank, that’s effectively it. With toxic and dodgy securities on the asset side of its balance sheet and with the state owning all the equity and as the only creditor, the assets can either be sold off, if a market develops again, or held to maturity, earning whatever cash flows they may yield.
(5) As a special case of (4), take the high street banks into full public ownership and treat these existing banks in their entirety as bad banks. Close the existing banks for all new business. Transfer the deposits of the high street banks (now the bad banks) to new (state-owned) ‘good’ banks (or perhaps rather, not yet bad banks). Replace the deposits on the books of the bad banks with loans from the state to the bad banks or with bond issues by the bad banks purchased by the state. Let the new banks (New Lloyds, New RBS, New Barclays and New HSBC) acquire, in a competitive bidding process also open to other market participants, any of the assets of the old banks. Run the new banks as competing publicly owned, profit maximising banks until they can be privatised again, when a sensible regulatory regime for banks is in place and the market for bank shares recovers. Don’t guarantee or insure any items on the balance sheet of the old banks. Use guarantees/insurance exclusively for new lending and new investments by the new banks. Gradually run down the old banks as their assets mature, as under (4).
The miracle of limited liability applies also when the state is the owner. As long as the state-owned bad banks (which could be merged into a single super bad bank) don’t obtain sovereign guarantees for their obligations, the financial exposure of the sovereign is limited to its equity stake and the existing guarantees and insurance it has provided in the past.
It is key that there be no further injections of funds by the state into the bad banks until there are no longer any private creditors. If a bad bank becomes balance-sheet insolvent or liquidity insolvent and it still has private creditors (as it would, in general, under the model of item (5)), the bad bank should be put into administration and its debt to parties other than the British state should be converted into equity. That equity would be then be purchased by the UK state. With the bad bank now not just 100 percent state-owned but also without private creditors of any kind, the assets can be managed as the state sees fit - one hopes in such as way as to maximise the present discounted value of their held-to-maturity cash flows.
The balance sheets of the British banks are too large and the quality of the assets they hold too uncertain/dodgy, for the British government to be able to continue its current policy of extending its guarantees to ever-growing shares of the banks’ liabilities and assets, without this impairing the solvency of the sovereign. Britain risks becoming a victim of the new inconsistent quartet: (1) a small open economy with (2) a large internationally exposed banking sector, (3) a currency that is not a serious global reserve currency and (4) limited fiscal capacity. It risks a triple crisis and a threefold run: on its banks, on its currency and on its sovereign debt.
Limiting the exposure of the sovereign to what is fiscally sustainable may imply giving up on saving (all of) the banks. If my proposal for institutionally and legally separating existing stocks of assets and liabilities from new flows of credit and lending is acted upon, the flow of new lending and the supply of new credit need not require the survival of all (or indeed any) banks hitherto deemed systemically important.
I look forward to the time when I will be blogging on the best way of privatising the banks again, under new regulatory and governance regimes."
As discussed in my recent post, "UK and US Play Leapfrog in Making New Mistakes", it appears that the head of the Bank of England and the Fed head, Mervyn King and Ben Bernanke respectively, keep teaching each other how to take ever more drastic steps in the wrong direction. Sort of a "Simon Says", one to the other.
Willem Buiter for King! (That was a pun. Hope you got it.)
Copyright (C) Long Lake LLC
Monday, January 19, 2009
Voodoo Krugman?
In my post earlier today, "Krugman v. Obama", I referred to his column in the Time today, "Wall Street Voodoo". My point was his not very veiled criticism of almost-President Obama, who has consistently supported tax cuts, including in his economic stimulus/recovery proposal.
As we know, many on the political left have argued for more Gov spending and less tax cutting (if any), on economic grounds. In my post, I did not argue the point and in fact believe that others better qualified than I am should duke that one out. Well, look who is duking: none other than Mr. Obama's incoming head of the Council of Economic Advisers, Christina Romer. The blog is by Simeon Djankov and was published today at a World Bank site, "Crisis Talk: Emerging markets and the financial crisis".
"How Useful is Fiscal Spending Really?
If you hire your neighbor for $100 to dig a hole in your backyard and then fill it up, and he hires you to do the same in his yard, the government statisticians report that things are improving. The economy has created two jobs, and the GDP rises by $200. But it is unlikely that, having wasted all that time digging and filling, either of you is better off."
"This is an example from a fun Gregory Mankiw article in the New York Times. Mankiw's main argument is that expanded government spending is less useful in crises than usually thought. The multiplier for government spending is not very large. The best evidence comes from a recent study by Valerie A. Ramey, an economist at the University of California, San Diego. Based on the United States' historical record, Professor Ramey estimates that each dollar of government spending increases GDP by only 1.4 dollars. So, by doing the math, we find that when the GDP expands, less than a third of the increase takes the form of private consumption and investment."
"In contrast, a recent study by Christina D. Romer (the Obama appointee to head the Council of Economic Advisors) and David H. Romer, then economists at the University of California, Berkeley, finds that a dollar of tax cuts raises the GDP by about $3. According to the Romers, the multiplier for tax cuts is more than twice what Professor Ramey finds for spending increases."
"This is why tax stimulus is starting to be discussed more and more as a good crisis response. To see a recent calculation of how it can work, see my paper Tax Incentives as Crisis Response with Georgi Angelov."
DoctoRx here. Here is what Dr. Krugman wrote in "Wall Street Voodoo".
"Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans."
If Dr. Romer believes in a 3:1 multiplier from tax cuts, that sure sounds perilously close to being a classic supply-sider. Perhaps it is those such as Dr. Krugman who are advocating for massive government spending not on its own merits but to save us from the Great Recession (or worse) who are practicing a version of voodoo economics?
Copyright (C) Long Lake LLC
As we know, many on the political left have argued for more Gov spending and less tax cutting (if any), on economic grounds. In my post, I did not argue the point and in fact believe that others better qualified than I am should duke that one out. Well, look who is duking: none other than Mr. Obama's incoming head of the Council of Economic Advisers, Christina Romer. The blog is by Simeon Djankov and was published today at a World Bank site, "Crisis Talk: Emerging markets and the financial crisis".
"How Useful is Fiscal Spending Really?
If you hire your neighbor for $100 to dig a hole in your backyard and then fill it up, and he hires you to do the same in his yard, the government statisticians report that things are improving. The economy has created two jobs, and the GDP rises by $200. But it is unlikely that, having wasted all that time digging and filling, either of you is better off."
"This is an example from a fun Gregory Mankiw article in the New York Times. Mankiw's main argument is that expanded government spending is less useful in crises than usually thought. The multiplier for government spending is not very large. The best evidence comes from a recent study by Valerie A. Ramey, an economist at the University of California, San Diego. Based on the United States' historical record, Professor Ramey estimates that each dollar of government spending increases GDP by only 1.4 dollars. So, by doing the math, we find that when the GDP expands, less than a third of the increase takes the form of private consumption and investment."
"In contrast, a recent study by Christina D. Romer (the Obama appointee to head the Council of Economic Advisors) and David H. Romer, then economists at the University of California, Berkeley, finds that a dollar of tax cuts raises the GDP by about $3. According to the Romers, the multiplier for tax cuts is more than twice what Professor Ramey finds for spending increases."
"This is why tax stimulus is starting to be discussed more and more as a good crisis response. To see a recent calculation of how it can work, see my paper Tax Incentives as Crisis Response with Georgi Angelov."
DoctoRx here. Here is what Dr. Krugman wrote in "Wall Street Voodoo".
"Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans."
If Dr. Romer believes in a 3:1 multiplier from tax cuts, that sure sounds perilously close to being a classic supply-sider. Perhaps it is those such as Dr. Krugman who are advocating for massive government spending not on its own merits but to save us from the Great Recession (or worse) who are practicing a version of voodoo economics?
Copyright (C) Long Lake LLC
Procter & Gambling
This blog is devoted to matters of equity, in both the moral and financial senses of the word. We are not interested in providing stock analysis, except where such is relevant to broader economic, financial and related policy considerations. That said, we live in a world where stocks are major actors in our economic system, one which is unbalanced. It is no longer news that our large financial companies are troubled. It is also not news that General Electric is at least half a financial company, and that that half is troubled. What may be news is the extent to which a prototypical consumer non-durable company is an emperor that also has no clothes.
Consider Procter & Gamble. The company has been around longer than you or me. It seems as secure as the Royal Bank of Scotland seemed not long ago. It raises its dividend yearly. Yet what we have learned in the past year and a half is to ignore dividends (yes, they can lie) and restrain our enthusiam for the value of profit and loss statements. What we need to really focus on is a company's balance sheet. It will surprise many that Procter & Gamble basically reports that it is in a sense running on fumes. This writeup relies on P&G's SEC filing of its September 2008 quarter, as reported on Yahoo's Finance site.
Consider:
Total current assets: $25 B
Total current liabilities: $38 B
Therefore net working capital is negative $13 B. (Ed.: This is real money, even for a bank!)
Worse, cash plus receivables are $4 B less than payables.
Surely, a rich old company such as P&G must have lots of long-term assets. Well, not exactly.
Property, plant and equipment plus "other assets" are $24 B.
Long-term liabilities are $38 B.
Excluding intangible and good-will assets, the Company has a long-term asset balance sheet that is valued at negative $14 B.
The tangible net worth of "PG" is negative 26.7 billion dollars.
Now, what are its business prospects? I have no idea, neither do you, and really neither does the company. The U.S. and the other parts of the world where P&G makes the bulk of its profits are slow-growth/no-growth sectors at best, but are currently experiencing a new era of frugality. In the current environment, people will buy store brands like crazy. I hear that local dentists are laying off receptionists and struggling to pay their bills, people are deferring getting their teeth cleaned, etc. In that environment, people will definitely save a buck or two buying cheaper toothpaste (which doesn't do much for you other than lubricating a toothbrush when it removes stuff from your teeth, anyway, I am told by my dentist), cheaper toothbrushes, cheaper household goods . . . and thus P&G is, you can be certain, either experiencing margin pressure and/or sales volume pressure.
I have no idea whether the stock market has discounted all this and for purposes of this blog I have no interest in whether PG is a good investment or not. The point here is that there is really less "there" there in the company beyond its current turnover than one would think. PG is yet another example of financial engineering; it has a stock market value of $172 B against its -$27 B of tangible net worth. If economic times stay bad and business goes downhill, there is little obvious asset base behind this company. Contrast that with Apple Computer, which in a down-cycle for its business prospects several years ago was a financial fortress, with massive amounts of cash and no debt.
As long as Apple got a mention and some praise (and it remains debt-free), consider also the venerable AT&T, which markets Apple's IPhone. "T" is a twin to P&G financially: negative $23 B in tangible net worth (much of which may be overstated due to technologic innovation) against a stock market value of $149 B.
When we look hard at these behemoths, there's less "there" there than we think. That's a trend that goes on and on, in differing degrees, to IBM, GE, the Dow Transports, most NASDAQ stocks (check out Oracle's $4 B negative tangible net worth), etc. We all want to hope for the best, but Dr. Taleb of the Black Swan keeps pointing out that we have to look out below.
To change metaphors, we may be in a sort of eye of the storm. We know we've been battered, but we see stability and help from low money rates and other central bank maneuvers, and know (or think) we can repair the damage to date. As a Floridian, I know to fear the winds that come from the other direction after the eye passes at least as much as the first blow. And I fear that the next blow will be from an unexpected direction. It may be that the P&G's and AT&T's of the world will blow up next.
Not a prediction, certainly not a hope, but definitely a caution.
Copyright (C) Long Lake LLC
Consider Procter & Gamble. The company has been around longer than you or me. It seems as secure as the Royal Bank of Scotland seemed not long ago. It raises its dividend yearly. Yet what we have learned in the past year and a half is to ignore dividends (yes, they can lie) and restrain our enthusiam for the value of profit and loss statements. What we need to really focus on is a company's balance sheet. It will surprise many that Procter & Gamble basically reports that it is in a sense running on fumes. This writeup relies on P&G's SEC filing of its September 2008 quarter, as reported on Yahoo's Finance site.
Consider:
Total current assets: $25 B
Total current liabilities: $38 B
Therefore net working capital is negative $13 B. (Ed.: This is real money, even for a bank!)
Worse, cash plus receivables are $4 B less than payables.
Surely, a rich old company such as P&G must have lots of long-term assets. Well, not exactly.
Property, plant and equipment plus "other assets" are $24 B.
Long-term liabilities are $38 B.
Excluding intangible and good-will assets, the Company has a long-term asset balance sheet that is valued at negative $14 B.
The tangible net worth of "PG" is negative 26.7 billion dollars.
Now, what are its business prospects? I have no idea, neither do you, and really neither does the company. The U.S. and the other parts of the world where P&G makes the bulk of its profits are slow-growth/no-growth sectors at best, but are currently experiencing a new era of frugality. In the current environment, people will buy store brands like crazy. I hear that local dentists are laying off receptionists and struggling to pay their bills, people are deferring getting their teeth cleaned, etc. In that environment, people will definitely save a buck or two buying cheaper toothpaste (which doesn't do much for you other than lubricating a toothbrush when it removes stuff from your teeth, anyway, I am told by my dentist), cheaper toothbrushes, cheaper household goods . . . and thus P&G is, you can be certain, either experiencing margin pressure and/or sales volume pressure.
I have no idea whether the stock market has discounted all this and for purposes of this blog I have no interest in whether PG is a good investment or not. The point here is that there is really less "there" there in the company beyond its current turnover than one would think. PG is yet another example of financial engineering; it has a stock market value of $172 B against its -$27 B of tangible net worth. If economic times stay bad and business goes downhill, there is little obvious asset base behind this company. Contrast that with Apple Computer, which in a down-cycle for its business prospects several years ago was a financial fortress, with massive amounts of cash and no debt.
As long as Apple got a mention and some praise (and it remains debt-free), consider also the venerable AT&T, which markets Apple's IPhone. "T" is a twin to P&G financially: negative $23 B in tangible net worth (much of which may be overstated due to technologic innovation) against a stock market value of $149 B.
When we look hard at these behemoths, there's less "there" there than we think. That's a trend that goes on and on, in differing degrees, to IBM, GE, the Dow Transports, most NASDAQ stocks (check out Oracle's $4 B negative tangible net worth), etc. We all want to hope for the best, but Dr. Taleb of the Black Swan keeps pointing out that we have to look out below.
To change metaphors, we may be in a sort of eye of the storm. We know we've been battered, but we see stability and help from low money rates and other central bank maneuvers, and know (or think) we can repair the damage to date. As a Floridian, I know to fear the winds that come from the other direction after the eye passes at least as much as the first blow. And I fear that the next blow will be from an unexpected direction. It may be that the P&G's and AT&T's of the world will blow up next.
Not a prediction, certainly not a hope, but definitely a caution.
Copyright (C) Long Lake LLC
Krugman v. Obama
I started this blog last year with writeups criticizing some fuzzy thinking by Dr. Paul Krugman, the noted economist-pit bull-lion (take your pick) of the left (see Krugman Loses It). His op-ed today at the New York Times, "Wall Street Voodoo", is of real importance because it reveals two major criticisms of Barack Obama himself. This criticisms may be missed by a quick read, so I wanted to post this rather than devote myself to my second cup of the day.
A. Consider paragraph 1, which appears to be a typical partisan snipe by Dr. Krugman:
"Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans."
DoctoRx here. Who campaigned on a platform of a tax cut for 95% of Americans? And who has put almost half of the proposed stimulus package into tax cuts rather than Government spending? Well, the correct answer is: Barack Obama. Since he is not a Republican, then he must be either a crank or a charlatan, in Dr. Krugman's view.
B. After the body of the argument, the piece ends in a pessimistic note:
"Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job."
DoctoRx here. Who will be the President who Dr. Krugman fears will provide taxpayers a raw deal, and another failed rescue plan (and who as Senator voted for the prior failed rescue plan and last year's failed stimulus plan (remember that one, with the useless rebates?)): It's the O-man, that's who!
This split amongst the Democratic faithful is big news.
And for what little it is worth in the scheme of things, I agree with most of Dr. Krugman's points, though I disagree with his use of the N-word ("Nationalization" of the banks), both on policy grounds and on tastelessness grounds (especially given the ethnic heritage of Mr. Obama; let's not even mention an "N" word even in the service of a joke). Instead of nationalizing the failed banks, I say let 'em go. Even their names are toxic at this point. I'm going to die. So are you. So can failed companies, whether they make machine tools, sell consumer electronics or off-price women's clothing . . . or whether they happen to deal in financial matters.
Copyright (C) Long Lake LLC
A. Consider paragraph 1, which appears to be a typical partisan snipe by Dr. Krugman:
"Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans."
DoctoRx here. Who campaigned on a platform of a tax cut for 95% of Americans? And who has put almost half of the proposed stimulus package into tax cuts rather than Government spending? Well, the correct answer is: Barack Obama. Since he is not a Republican, then he must be either a crank or a charlatan, in Dr. Krugman's view.
B. After the body of the argument, the piece ends in a pessimistic note:
"Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job."
DoctoRx here. Who will be the President who Dr. Krugman fears will provide taxpayers a raw deal, and another failed rescue plan (and who as Senator voted for the prior failed rescue plan and last year's failed stimulus plan (remember that one, with the useless rebates?)): It's the O-man, that's who!
This split amongst the Democratic faithful is big news.
And for what little it is worth in the scheme of things, I agree with most of Dr. Krugman's points, though I disagree with his use of the N-word ("Nationalization" of the banks), both on policy grounds and on tastelessness grounds (especially given the ethnic heritage of Mr. Obama; let's not even mention an "N" word even in the service of a joke). Instead of nationalizing the failed banks, I say let 'em go. Even their names are toxic at this point. I'm going to die. So are you. So can failed companies, whether they make machine tools, sell consumer electronics or off-price women's clothing . . . or whether they happen to deal in financial matters.
Copyright (C) Long Lake LLC
Obama Implores: Be a Debtor Nation
I thought I heard that one wrong. I thought we should be a better nation. Well, maybe Mr. Obama means both things. But the Bloomberg.com headline reads:
"Obama Advisers Say They Will Aim TARP Funds at Widening Credit"
Quotes from the article make it crystal clear that the Obama team is following the scenario laid out in Econblog Review that it there are to be no fundamental changes that the financial system of the U.S. should remain based on debt.
"Top advisers to President-elect Barack Obama signaled they will emphasize getting credit to consumers and businesses rather than helping banks as the new administration deploys the second half of the $700 billion rescue fund."
"'The focus isn’t going to be on the needs of banks; it’s going to be on the needs of the economy for credit,” Lawrence Summers, the president-elect’s top economic adviser, said on CBS’s “Face the Nation” program yesterday."
“'The point is to get credit flowing again to businesses and families across the country -- that hasn’t happened with the expenditure of the first $350 billion,” Axelrod said."
The view here and at many other places is that too much credit was extended to too many people, businesses, and governmental entities for too long. The view is further that this should represent the end of a supercycle in credit expansion and more broadly in the "financialization" of the economy of the U.S. and its allies. This ended badly in the 1920's credit boom and has gone bad now. Last year's "solutions" failed because the financial institutions were broke.
What's happened is a mess and a disgrace, as we see with AIG (allegedly still worth almost $4 Billion in stock market value!) and Fannie Mae and Freddie Mac (each still "worth" significant sums in the stock market). Here is another mess from Britain:
"RBS May Post 28 Billion-Pound Loss as Crisis Deepens"
This is about a 42 billion dollar loss. How can a bank lose 42 billion dollars making loans? It can't! Bloomberg goes on to report that the company spent almost $90 B (ninety billion dollars) on takeovers since the start of this millenium.
These giant financial institutions have proven they are too greedy to succeed. The Royal Bank of Scotland is 282 years old. When I started in the financial field about 30 years ago, RBS boasted of its stinginess and of its prudence. Another almost as ancient bank, Barings (1762-1995) was allowed to fail when, allegedly, a rogue trader named Leeson lost vast amounts of money.
Why are Fannie Mae, Freddie Mac, American International Group, Royal Bank of Scotland and many other companies that are broke still in business and still with significant stock values? They should be allowed to fail. Failure means the Lehman Brothers bankruptcy solution, but an orderly bankruptcy this time.
The answer goes back to the lack of change between the new Administration and the old one here in the U.S. The Remocrats and the Depublicans are united as an Establishment that built up and is sustained by the same financial companies that have grown so fast and were so fat that like Icarus, they fell to earth with a thud. The over-stuffing of American "homeowners" (often renters in disguise) with first, second and third mortgages was only part of the problem. The problem goes beyond bad and excessive lending. It includes the systemic overpricing of public stocks for years in the 1990s and most of this millenium by all prior criteria.
Right now, though, the stock market is no longer the dog but rather at best the tail that the dog wags. The main problem is the folly of policy-makers in the U.S. and the U.K. to revive the credit-based economy rather than foster one of decreased debt. The U.S. and the U.K have become addicted to "credit" just as they have become addicted to empty calories. The results are in and they are bad. The average 13-year old in America is over 30 pounds heavier than 30 years ago. The same is more or less true in Britain. And the debt loads of the people are similarly gargantuan.
It makes no difference in the scheme of things if the Obama administration forces more credit directly onto consumers and postures that the Bush Administration was too friendly to the big banks. It's two sides of the same counterfeit coin.
The American people have already begun to do the right things. The savings rate has risen. It should continue to rise. If that means that "production" will be a little slow for a little longer, so be it.
Unfortunately, when easy credit is again pushed by the Merchants of Debt, much of the public will be unable to resist even if knows it is making a mistake, just as dieters as a class cannot resist being around sweet, good-looking food, or alcoholics are at risk just from seeing liquor ads. The lure of having and spending is simply that powerful.
Knowing that enablers of the rise of the finance-based economy remain in power in Washington will lead to huzzahs for Mr. Obama from Wall Street. Unfortunately, the tide is going out for this trend. Everyone knows, or knows of, people who are in financial trouble because of too much credit card use, over-aggressive borrowing against their home, etc. They see that the downside of living beyond one's means can be severe. With the 1990s Perot movement and the consistent popular support for a balanced Federal budget (well, sort of balanced- entitlements were excluded from the Gov's books), the public showed the same good sense it is showing now in rebuilding savings. The public is in fact willing to sacrifice and will support a President Obama who leads them to the path of sound financial practices and away from overindebtedness.
Barack Obama is not even President, yet it is time for him to change course.
Copyright (C) Long Lake LLC
"Obama Advisers Say They Will Aim TARP Funds at Widening Credit"
Quotes from the article make it crystal clear that the Obama team is following the scenario laid out in Econblog Review that it there are to be no fundamental changes that the financial system of the U.S. should remain based on debt.
"Top advisers to President-elect Barack Obama signaled they will emphasize getting credit to consumers and businesses rather than helping banks as the new administration deploys the second half of the $700 billion rescue fund."
"'The focus isn’t going to be on the needs of banks; it’s going to be on the needs of the economy for credit,” Lawrence Summers, the president-elect’s top economic adviser, said on CBS’s “Face the Nation” program yesterday."
“'The point is to get credit flowing again to businesses and families across the country -- that hasn’t happened with the expenditure of the first $350 billion,” Axelrod said."
The view here and at many other places is that too much credit was extended to too many people, businesses, and governmental entities for too long. The view is further that this should represent the end of a supercycle in credit expansion and more broadly in the "financialization" of the economy of the U.S. and its allies. This ended badly in the 1920's credit boom and has gone bad now. Last year's "solutions" failed because the financial institutions were broke.
What's happened is a mess and a disgrace, as we see with AIG (allegedly still worth almost $4 Billion in stock market value!) and Fannie Mae and Freddie Mac (each still "worth" significant sums in the stock market). Here is another mess from Britain:
"RBS May Post 28 Billion-Pound Loss as Crisis Deepens"
This is about a 42 billion dollar loss. How can a bank lose 42 billion dollars making loans? It can't! Bloomberg goes on to report that the company spent almost $90 B (ninety billion dollars) on takeovers since the start of this millenium.
These giant financial institutions have proven they are too greedy to succeed. The Royal Bank of Scotland is 282 years old. When I started in the financial field about 30 years ago, RBS boasted of its stinginess and of its prudence. Another almost as ancient bank, Barings (1762-1995) was allowed to fail when, allegedly, a rogue trader named Leeson lost vast amounts of money.
Why are Fannie Mae, Freddie Mac, American International Group, Royal Bank of Scotland and many other companies that are broke still in business and still with significant stock values? They should be allowed to fail. Failure means the Lehman Brothers bankruptcy solution, but an orderly bankruptcy this time.
The answer goes back to the lack of change between the new Administration and the old one here in the U.S. The Remocrats and the Depublicans are united as an Establishment that built up and is sustained by the same financial companies that have grown so fast and were so fat that like Icarus, they fell to earth with a thud. The over-stuffing of American "homeowners" (often renters in disguise) with first, second and third mortgages was only part of the problem. The problem goes beyond bad and excessive lending. It includes the systemic overpricing of public stocks for years in the 1990s and most of this millenium by all prior criteria.
Right now, though, the stock market is no longer the dog but rather at best the tail that the dog wags. The main problem is the folly of policy-makers in the U.S. and the U.K. to revive the credit-based economy rather than foster one of decreased debt. The U.S. and the U.K have become addicted to "credit" just as they have become addicted to empty calories. The results are in and they are bad. The average 13-year old in America is over 30 pounds heavier than 30 years ago. The same is more or less true in Britain. And the debt loads of the people are similarly gargantuan.
It makes no difference in the scheme of things if the Obama administration forces more credit directly onto consumers and postures that the Bush Administration was too friendly to the big banks. It's two sides of the same counterfeit coin.
The American people have already begun to do the right things. The savings rate has risen. It should continue to rise. If that means that "production" will be a little slow for a little longer, so be it.
Unfortunately, when easy credit is again pushed by the Merchants of Debt, much of the public will be unable to resist even if knows it is making a mistake, just as dieters as a class cannot resist being around sweet, good-looking food, or alcoholics are at risk just from seeing liquor ads. The lure of having and spending is simply that powerful.
Knowing that enablers of the rise of the finance-based economy remain in power in Washington will lead to huzzahs for Mr. Obama from Wall Street. Unfortunately, the tide is going out for this trend. Everyone knows, or knows of, people who are in financial trouble because of too much credit card use, over-aggressive borrowing against their home, etc. They see that the downside of living beyond one's means can be severe. With the 1990s Perot movement and the consistent popular support for a balanced Federal budget (well, sort of balanced- entitlements were excluded from the Gov's books), the public showed the same good sense it is showing now in rebuilding savings. The public is in fact willing to sacrifice and will support a President Obama who leads them to the path of sound financial practices and away from overindebtedness.
Barack Obama is not even President, yet it is time for him to change course.
Copyright (C) Long Lake LLC
Sunday, January 18, 2009
UK and US Play Leapfrog in Making New Mistakes
Per Bloomberg.com:
U.K. to Announce Mortgage, Loan Guarantees to Encourage Lending
" . . . the government will offer to swap its preference shares for ordinary shares to give the banks more cash, according to the Sunday Telegraph. This may lead to the government increasing its holding to 70 percent in Royal Bank of Scotland Group Plc and 50 percent in Lloyds Banking Group, the newspaper said."
DoctoRx here: If you were a British financial institution, how would you like to depend on a fair playing field when you are competing with giant institutions in which your Government owned a controlling interest not just in preference stock but the common stock?
"The Treasury is offering to ditch its preference shares because it is concerned they are choking banks preventing them from lending. Royal Bank of Scotland Group, Lloyds and HBOS Plc agreed to pay a dividend of about 12 percent as part of the government bailout, eight times the Bank of England’s benchmark lending rate."
DoctoRx again. The banks can't lend because they are insolvent. Also, the economy is imploding. Those who are safe to lend to don't need to borrow, because they are also hoarding cash.
I would also note that unlike in the U.S., at least the Brits extracted a punitive lending rate for saving the banks (as prescribed many years ago by Mr. Bagehot).
The Brits appear to be leapfrogging the U.S. by going to common stock ownership. All this is for the wrong cause. The cause should be to discourage borrowing and encouraging true ownership.
An ownership society is a good thing. These Governmental contortions, extortions, and distortions are not only unseemly but miss the mark.
Copyright (C) Long Lake LLC
U.K. to Announce Mortgage, Loan Guarantees to Encourage Lending
" . . . the government will offer to swap its preference shares for ordinary shares to give the banks more cash, according to the Sunday Telegraph. This may lead to the government increasing its holding to 70 percent in Royal Bank of Scotland Group Plc and 50 percent in Lloyds Banking Group, the newspaper said."
DoctoRx here: If you were a British financial institution, how would you like to depend on a fair playing field when you are competing with giant institutions in which your Government owned a controlling interest not just in preference stock but the common stock?
"The Treasury is offering to ditch its preference shares because it is concerned they are choking banks preventing them from lending. Royal Bank of Scotland Group, Lloyds and HBOS Plc agreed to pay a dividend of about 12 percent as part of the government bailout, eight times the Bank of England’s benchmark lending rate."
DoctoRx again. The banks can't lend because they are insolvent. Also, the economy is imploding. Those who are safe to lend to don't need to borrow, because they are also hoarding cash.
I would also note that unlike in the U.S., at least the Brits extracted a punitive lending rate for saving the banks (as prescribed many years ago by Mr. Bagehot).
The Brits appear to be leapfrogging the U.S. by going to common stock ownership. All this is for the wrong cause. The cause should be to discourage borrowing and encouraging true ownership.
An ownership society is a good thing. These Governmental contortions, extortions, and distortions are not only unseemly but miss the mark.
Copyright (C) Long Lake LLC
"It May Be Distasteful"
Banking remains at the epicenter of the economic news, unfortunately. The Establishment has been executing its plan over the last year to massively transfer national wealth to the financial giants. This transfer of wealth in this sort of quantity has never been overtly done to any other industry in my memory. (The closest one can come is to blame wars such as Iraq, Viet Nam and World War I on a desire to enrich the captains of industry, if one has that sort of belief. And even if such were the case, at least the companies actually provided goods and services in support of the war(s).) Here, the companies being aided are keeping the funds rather than producing anything with them (because they are more or less insolvent).
To keep things positive, before reading me beat up on a Bloomberg.com article, please consider reading two articles by the noted economist Willem Buiter (both published by the Financial Times.com:
No change, no hope: Obama’s Transition Economic Advisory Board
November 10, 2008 (this is actually an entertaining, witty writeup)
To keep things positive, before reading me beat up on a Bloomberg.com article, please consider reading two articles by the noted economist Willem Buiter (both published by the Financial Times.com:
No change, no hope: Obama’s Transition Economic Advisory Board
November 10, 2008 (this is actually an entertaining, witty writeup)
and
Time to take the banks into full public ownership
January 16, 2009 (more important and sober).
Dr. Buiter has impeccable academic, governmental and regulatory credentials (listed by his writeups) and is famous for having "spoken truth to power" last summer, as reported by Naked Capitalism: "Buiter Provokes Wrath at Jackson Hole, Says Fed Too Close to Wall Street".
In any case, the Establishment continues to keep up a pathetic but in the aggregate effective drumbeat of concealed advertising in favor of the bailouts. To wit, from today's Bloomberg.com:
"Obama Bank Rescue May Make New Effort to Resolve Toxic Assets"
"President-elect Barack Obama is likely to back a financial-rescue effort that channels capital to banks and deals with troubled assets clogging balance sheets, according to people familiar with the matter."
“We have a deteriorating real economy and deteriorating financial sector feeding on each other,” said Raghuram Rajan, a former chief economist for the International Monetary Fund who’s now a professor of finance at the University of Chicago. “It may be distasteful but we need to put more money in the banks.”
DoctoRx here: No we don't. We should follow the lead of Sweden about 15 years ago and let the failed ones fail, no matter how big, but in an organized way. This will save the "system", and let taxpayers reap the profits from "Newco" banks that we will finance, grow, and privatize later on.
Another snippet from the article:
"Obama is set to take office on Jan. 20 and his advisers have been working to craft a comprehensive blueprint for overhauling the bailout."
The bailout bill was written entirely by Congress, under control by the Democrats, the party that has been led by Barack Obama since summer 2008. Mr. Obama voted for the bill; I recall that he expressed no reservations with the Reid-Pelosi-Frank etc. legislation at the time. Now Bloomberg is reporting without saying so that the bill, passed merely 3 months ago, has failed and needs an "overhaul". What Bloomberg should have been reporting is what I just wrote, not what it wrote. I have been writing consistently in my posts that Congress held no hearings of any substance in putting together this bail-out turkey. Oh, it was an "emergency" (such an emergency that the smart money starting exiting the financial stocks at least as far back as 2006 and the housing stocks in Q2 2005). Bush and Paulson are going, going, gone. They were good pinatas for putting the left-wing side of the Establishment in total control of the Federal Government. I have also been writing that the Obama Administration was going to continue the Bush-Paulson-Bernanke-Reid-Pelosi consensus policies on finance. These policies are to use all necessary efforts to continue the failing and flailing policies that support the Merchants of Debt.
I said yesterday in On "Financial Reform" that I would have more to report on the RiskMetrics/Volcker etc. G30 report and recommendations on Financial Reform. I have reformed my thinking. Please read that post and Dr. Buiter's posts referenced above. 'Nuff said.
What is going on now is momentous. Because the stakes are so high, the Establishment media such as the New York Times and Bloomberg.com are virtually ignoring the core issues. The same NYT that put Abu Graibh abuses on its front page for daily for well over one month should be doing the same with this issue.
Will society get back to where we once belonged, where people actually owned things free and clear and adjured debt? The profitability of selling debt can be seen in the unbelievable number of credit card solicitations sent out yearly even now and in the hysterical Establishment reaction to "save" the banks, "distasteful" though it is.
It is looking more and more as if the Obama Administration is going to simply re-market the same debt-based system that brought us to the most severe economic downturn since the Great Depression, but with more regulators sucking more money from you and me to support them. Mr. Obama now has the bully pulpit. If he were to issue a clarion call for greater personal responsibility, restraint in purchasing material goods until personal savings were available to properly pay for them or conservatively finance them, and took on the Merchants of Debt as Teddy Roosevelt took on the "malefactors of great wealth", his popularity would soar and he could become as transformative a President as was TR. He needs to decisively set the tone and put forth policies that guide the country from a finance-based economy to a 21st Century one. The outlines of a 21st Century economy are clear: medical technologies, information technologies, cost-effective energy-generating and energy-transmitting technologies: knowledge-based stuff. Stuff with real products such as life-saving drugs. No more creating "wealth" that is simply a financial construct.
To do this, he needs to clean house. Force the "too-big-to-fail" failing "banks" - which are really giant holding companies with no real interest in the boring job of taking insured consumer deposits and doing prudent (i.e. low-profit) things with them, to disclose all details of their "Tier 3" and even "Tier 2" assets. Don't have the Federal Government buy them. They should sell them for what they are worth. Then all institutions that have Government guarantees should be banned from holding illiquid assets such as those.
Who will buy these "assets"? I don't care and neither should you. A modest proposal: over the last decade, individuals working for financial firms have snarfed up hundreds of billions of dollars of personal income, perhaps trillions, from bonuses and capital gains made by building up this system that has now suffered a heart attack/stroke/short-circuit/disaster. Let these gentlemen, huge numbers of whom are rich beyond Croesus' imagination, buy them at the same price at which the former IMF official expects the Federal Government to buy them at. Let Bill Gates and Warren Buffett, who are so generous to so many non-Americans (and on occasion to Americans as well, to be fair), help us out and spend a portion their tens of billions of net worth on paying generous sums to these financial institutions for their troublesome assets. That would be an act of real charity to a suffering populace and to their country. Unlike Haim Salomon, who helped save the Revolution, and who died a pauper, they need not go quite so far!
It would be nice to believe that after a disaster of the current magnitude, there would be real hearings in Congress as well as an independent commission (not the G30), a la the "Pecora Commission" (see my Jan. 7 post, Where Is Jurassic Park When You Need It?) about the root causes of how matters came to the current sorry state.
Don't hold your breath. But please contact your Congressional representatives to let them know that you need your money, the Federal Government needs its money, and you find it "distasteful" and more than that for our money to keep being thrown down a rathole.
After taking the oath of office, President Obama will give a great speech Tuesday. Will that be associated with an Obama stock market rally? I don't know and I don't care. Because he has already signaled that in the fields of economics and finance, the candidate of change is not going to make any fundamental changes.
Copyright (C) Long Lake LLC
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