Tuesday, June 30, 2009

Street to Log Best Quarter Since Crisis

According to the WSJ, securities firms are set to log their most lucrative financial performance since the credit crisis erupted. The article mentions that the usual suspects such as JP Morgan, Goldman Sachs, Morgan Stanley and Bank of America are banking huge profits. The best part is, the article says that "instead of relying on risk and leverage to drive profits," they are deriving profits from trading and underwriting. Apparently, whoever wrote the article doesn't seem to know that the definition of trading is "taking risk." Sure, you can call it market making, but you're still risking capital to make money from buying, selling, and hedging financial instruments, particularly if we're talking about derivatives trading. Furthermore, the article goes on to say that the record underwriting fees that the banks collected in the quarter were mostly from underwriting shares for banks (i.e. themselves) that were forced to raise capital to replenish their beaten down coffers. The article doesn't even mention all of the cheap financing that the government has thrown at them to keep their financing costs down, a huge oversight, in my opinion. If you could borrow money at zero percent from the government, you'd be having a banner quarter too. Too bad your bank just raised your credit card fees, jacked up your rates, cut off your credit and won't let you refi your house. So thoughtful of those banks to pass all those savings along to the consumer right?

If banks think that continuing to underwrite their own equity and debt offerings ad infinitum is a sustainable business model, then they are sadly mistaken. Eventually, investors are going to figure out that whole dilution business and not participate in the 50th capital raising plan that Bank of America or Citi, for example, try to shove down investor's throat. The article cautioned about one time accounting issues that are likely to obscure the results, but as usual, I'll be waiting for the actual earnings announcement and the 10-Q release before I make any judgements about the financial health of our financial institutions.

Monday, June 29, 2009

Madoff Sentenced to 150 Years

Bernie Madoff was sentenced to 150 years in prison today for orchestrating the largest Ponzi scheme in the history of Ponzi schemes. Although Mr. Madoff's attorney pled for leniency and a mere 12 years, the judge seems to have aimed for the maximum sentence, and that just short of what Mr. Madoff's victims wanted; public stoning or perhaps a more humane burning at the stake.

In honor of Bernie Madoff's sentencing today, the WSJ devoted the entire front page of the Money & Investing section to discussing a.) Where all the money went (Irving Picard has only scraped together $1.2 billion so far) and b.) How some of the hardest hit victims have adjusted their lifestyles to face their new financial reality. As for where all the money went, Jeffrey Picower and Stanley Chais may have some idea, as they collectively withdrew over $6.1 billion above and beyond their initial investment, despite claiming that they were victims. I'm sure the rest of Madoff's victims would have a few choice words to describe Mr. Picower and Mr. Chais, and none of them resemble "victim". Certainly Ms. Brown, the 60 year old profiled in the WSJ article who had to take in her 91 year-old mother and look for a job because both lost money, probably isn't particularly sympathetic to anyone skimming $6.1 billion off of the ponzi scheme that robbed them of their life savings. It seems that nobody has been immune to Mr. Madoff's inverse Midas touch. His wife Ruth, who enjoyed the high life for many many years, has just handed over all of her assets, including furs, jewelry and lush properties in Manhattan and Mantauk, is being forced to live off of a mere $2.5 million for the rest of her life. Anyone who lives in Manhattan will tell you that living the high life off of $2.5 million is preposterous. But then maybe she can go buy back her furs at half price in an auction.

Friday, June 26, 2009

UBS Still a Mess, AIG Ditto

UBS, Europe's poster-child for the most egregious financial and ethical performance during the credit crisis, has announced that it will raise $3.5 billion in a share sale and post yet another loss. The bank sold shares to a "small number of institutional investors" that somehow still think that this pig is a good investment. I'm not sure how many more billions the bank has to punt in order to finally discourage supposedly savvy investors from throwing good money after bad, but some folks just never give up. Even the recently highly optimistic Bloomberg can't think of anything more positive to say than "UBS decided to raise the funds to bolster confidence in the bank following record losses, client defections and a US probe into possible tax evasion by wealthy clients." Given that the noose has been pulled around UBS's tax evading neck, it's hard to imagine more clients aren't going to flee. I mean if you can't get a good tax shelter out of these guys anymore, what good is their money management advice? If they really know how to make money, don't you think their investment bank would stop pissing it away?

AIG will hold its annual meeting on Tuesday, its first with the US government as the controlling shareholder, and it should be a doozy or more likely a snoozefest. Among those expected to be in attendance are the three trustees who are overseeing the 80% government ownership of AIG and their six handpicked candidates who will form the majority on the new 11-member board. If you plan to attend, make sure to bring extra coffee. Meanwhile, the Fed announced a deal yesterday with AIG where it would swap $25 billion in debt for stakes in two of AIG's foreign life insurance units, leaving the beleaguered insurance firm with only $18 billion in debt with the Fed, chump change compared to the $84 billion the Treasury has plowed into the firm. Once again, the company is finagling out of paying interest on debt and swapping it into an equity stake in units whose values are ambiguous. If they were really worth $25 billion, or even more, than the company should just sell them to a private investor or hold an IPO to repay the Fed directly. AIG claims that it plans to IPO the units and that the Fed will get the first dollars from those sales, but it could take a significant amount of time before the Fed gets its money back, if it ever gets its money back. How we keep getting roped into giving AIG better and better deals I'll never understand. But then I've had a very hard time swallowing the leniency the government has shown to our financial institutions that were largely responsible for the financial meltdown.

Thursday, June 25, 2009

Fed Holds Steady As Economic Data Remains Weak

Yesterday's Fed meeting yielded no surprises. The Fed said it would keep interest rates near zero "for an extended period" and would proceed with its previously announced plans to buy up to $300 billion in long-term US Treasuries by autumn and up to $1.25 trillion in MBS. Meanwhile, over the pond, the ECB injected an unprecedented $622 billion in one-year liquidity to boost its sagging economy. The world's economic problems are highlighted in the FT's nifty graph with OECD forecasts for growth, or rather lack thereof, for 2009. Japan's GDP is expected to decline by 6.8%, Europe by 4.8%, the US by 2.8% (revised up from a -4.0%), and China's GDP should rise by 7.7%.

The recent spate of economic data has finally begun to discourage all the "green shoots" believers that had bought into the idea that we were headed for a nice second-half recovery. The number of Americans filing for unemployment benefits unexpectedly rose by 15,000 to 627,000 with continuing claims climbing by 29,000 to 6.74 million. First quarter GDP was revised to a negative 5.5% from 5.7%, which was spurred by a slightly smaller trade deficit. According to the Moody's Credit Card Index, losses on credit cards rose beyond 10% of total loans outstanding in May, a new 20-year high and the sixth consecutive monthly record. Moody's expects charge-offs to peak at around 12% in the second quarter of 2010. Calculated Risk notes that Chase increased its monthly minimum payments from 2% to 5%, thus squeezing consumers further and ensuring that charge-offs continue to rise. Rising unemployment + negative home equity = zero ability to pay off credit cards.

Not to be outdone by the poor,working (now unemployed) sods that rely on credit card debt to stay afloat, the FT reports that even the ranks of the super-rich and merely rich have thinned considerably in the past year. According to the latest World Wealth Report produced by Merrill Lynch, who should know this stuff well as it had certainly contributed mightily to the shrinking of wealth last year, those with $30 million or more to invest collectively lost 24% or their wealth and saw roughly 25% of their super-rich friends leave the list. The population of those worth $1 million or more shrunk by 15% and suffered a 19.5% decline in their wealth. Last year's decimation took rich people back to wealth levels last seen since 2005, which actually is not such a bad outcome in the grand scheme of things. Still, it seems few have escaped the brutal economic downturn unscathed.

Wednesday, June 24, 2009

New Home Sales Vs. Durable Goods

A rosy durable goods report got the equity market off to a strong start this morning. Durable-goods rose 1.8% in May, with non-defense capital goods excluding aircraft rising 4.8%. This report is notoriously volatile (April durable goods were down 2.9%) and nearly impossible to predict, yet economists try and everyone gets excited when the number exceeds expectations.

In a more sobering report of the state of the economy, new home sales were down 0.6% in May to a seasonally adjusted annualized rate of 342,000. Economists were expecting May sales to climb by 2.3% to 360,000. Year-over-year, new home sales were 32.8% lower than the level in May 2008. The median price also fell in May to $221,600, down from $229,300 in May 2008, but higher than April's $212,600. Inventories declined to an estimated 292,000 homes for sale, but this still represents 10.2 months worth of new home inventory.

The bum new home sales report is unlikely to deter the ever-chipper homebuilders, who are busy snapping up land on the cheap. The WSJ reports that homebuilders are buying "cheap" land from banks and other lenders that are unwittingly finding themselves with too much dirt on their hands due to foreclosures. A reasonable person would ask why buy more land when it's already coming out of the homebuilders' ears? Apparently, most of the land that the homebuilders purchased at boom-time prices were unfinished lots in locations far far away from where anyone wants to live or work for the next 30 years or so. Most of the land they are purchasing now for pennies on the dollar are finished lots in relatively decent locations. Can't blame them for dollar-cost averaging. It works in the stock market. Well, maybe not...

Tuesday, June 23, 2009

Existing Home Sales Up 2.4%

The NAR reports that existing home sales rose a paltry 2.4% to a a seasonally adjusted annual rate of 4.77 million units in May from a downwardly revised level of 4.66 million units in April. Sales are 3.6% below the 4.95 million-unit pace of May 2008. NAR's chief mouthpiece, I mean economist, Lawrence Yun was optimistic, as he is paid to be, citing that he expected an improvement due to historically low mortgage rates, affordability, and the $8,000 first-time buyer tax credit. He made no mention of the effects that the leap in rates for the 30-year to well over 5%, from their 4.86% average in May might have on the June numbers. Total housing inventory at the end of May fell 3.5% to 3.8 million, which represents a 9.6 month supply at the current pace, down from a 10.1 month supply the prior month. The decrease in inventory is the best part of this report, although 9.6 months is still on the high side. So if everyone could just do their patriotic duty and go out and buy a house this Fourth of July, we'd be out of this mess in no time. Oh, and don't forget to buy a car too, preferably GM. And an office building if you can afford it. They're running a half price sale, I hear...

Monday, June 22, 2009

Who Financed Goldman's Record Bonuses?

The Guardian published a much-ballyhooed article this weekend about a Goldman Sachs staff meeting in London where employees were told that they could look forward to record bonuses if the company registers its most profitable year ever. The bank, which repaid its TARP funds last week is rumored to have had a record first half, although it has yet to complete its second quarter and report results. Before everybody gets out their pitchforks, a moment of rational reflection is in order. First of all, whatever boob in attendance at the staff meeting that actually leaked this news to the press, amidst a worldwide recession where the finance industry's excesses have launched a political firestorm, should be canned. Once that's out of the way, we can talk about what exactly is wrong with the picture.

First of all, it helps to analyze how it is exactly that Goldman Sachs has managed to make so much money. The folks at GS are savvy traders, no doubt. But the real answer is that a host of government subsidies kept the investment bank alive during some of the most nauseating turbulence in the credit market's history. The $10 billion in TARP funds was chump change compared to the trillions in liquidity for illiquid assets that the Fed added to the market last year via its new lending facilities (TSLF, TAF, PDCF etc etc.) By taking over the roll of financing illiquid assets, when the Fed lowered interest rates to zero, it essentially reduced the cost of funds on ALL collateral to zero, not just treasuries, thus boosting profits substantially for the banking system. Meanwhile, spreads on illiquid products continued to trade at historical wides, which, as long as I've been in the market, has been unprecedented during an easing cycle. Furthermore, the Fed bailed out AIG, which meant that GS actually got to collect on its margin calls directly from the Fed. Although GS has made repeated claims that it was properly hedged and would not have had material exposure had AIG failed, I'm not buying that claim. Sure, Goldman might have hedged, but where did it get its hedges? Would those counterparties have survived a failure of AIG and would GS have been able to collect from them without a government guarantee? Last, but not least, GS was allowed to issue billions in FDIC-guaranteed debt at a greatly reduced cost from where its debt was trading at the time. One thing's for sure, if GS is paying record bonuses, that means at least our deposit insurance fund is safe for another year or so.

The Goldman record-bonus story illustrates precisely the flawed thinking behind Paulson and Bernanke's notion that if you bailout the financial sector, you bailout the economy. The economy is still struggling mightily. If it weren't for Fannie and Freddie, that are now direct wards of the government, it would be impossible for consumers to get a loan of any kind. As it is, the financial press is filled with reports of consumers and businesses getting cut off from credit. Yet Goldman Sachs made boatloads of money trading commodities, currencies, and fixed income. What the government did instead of boosting lending to the economy, was subsidize Goldman's, and in fairness, the other banks' trading operations, so they could go on to pay bankers a bunch of money. When populist furor initially erupted, those "in the know" kept saying that the average American didn't understand how finance really works and that they were too stupid to get why it was important to bailout the banks. But couple the Guardian article with the one in today's FT entitled "Bankers' pay soars as struggling groups aim to halt talent exodus," maybe the American public understood the picture after all.

Friday, June 19, 2009

Richard Scrushy Hit With $2.88 Billion Civil Judgement

Richard Scrushy, former CEO of HealthSouth, was hit with a $2.88 billion civil judgement, the largest financial penalty ever leveled against a single executive.  Mr. Scrushy was accused of inflating HealthSouth's earnings for more than six years and enjoying $40 million paydays for all of his hard work building the company.  While Mr. Scrushy doesn't appear to have billions of dollars, hopefully the size of the judgement will ultimately bankrupt the man who pilfered money from shareholders so he could host parties on his 92-foot yacht and arrange to pay for breast augmentation for a member of the company-sponsored singing group.

The fraud was originally uncovered in 2003 but Mr. Scrushy was miraculously acquitted in a five-month jury trial in 2005, despite the fact that five former CFOs who had all pleaded guilty, testified against him in the trial.  I don't use the term miraculous lightly.  Before the criminal trial began, Mr. Scrushy left the church he'd been attending in his affluent suburb and began attending services and donating heavily to a predominantly Africa American church, which was more representative of the 70% pool of African Americans in the city of Birmingham from which the jury would be plucked.  Then Mr. Scrushy paid to have his own bible show on local TV, that conveniently lasted the length of the trial, which more than likely swayed the god-fearing Christian jurors into believing his version of the story.  Ladies and gentleman, this is how to get acquitted of accounting fraud in the Bible Belt.  

Mr. Scrushy's luck ran out the following year when he was found guilty of bribery charges for paying half a million dollars to former governor Dan Siegelman in exchange for a seat on a state healthcare board.  He is currently in his second year of a seven year sentence for the bribery case.  Although Mr. Scrushy has spent much of his estimated $300 million fortune over the years in legal fees, fines, and paid television air time, he still owns a few houses and the aforementioned yacht.  HealthSouth shareholders might not be left with much after the liquidations, but rest assured, they'll be happy with every penny they retrieve from this huckster.

In more recent huckster news, Alan Stanford, who actually may be a billionaire, was indicted and charged with orchestrating a fraud through his Caribbean-based financial firm and has surrendered to federal agents.  Let's hope the Justice Department nails this guy the first time around and doesn't need to dig up bribery charges in the future to land him in jail.     

Thursday, June 18, 2009

Sweeping Regulatory Overhall? Or Just Sweeping It Under the Rug?

Obama announced what many are calling landmark regulatory reform for the financial services industry.  Others are just shrugging their shoulders, wondering why shuffling some responsibilities around to the same group of regulatory bodies that completely missed the financial crisis is going to somehow avert the next crisis.  After all, Sarbanes Oxley, enacted after the off-balance sheet partnership shenanigans at Enron caused the implosion of the firm, did absolutely nothing to stop all of the off-balance sheet partnership shenanigans by Wall Street investment banks this time around.  Notice how the investment banks are somehow always in the mix?  They found the way around the last regulatory overhaul and they will find their way around the next.  There's just too much money at stake and they have no problem paying the fines AFTER the money has been made.

Here's a quick summary of some of the new powers granted to the various regulatory agencies recommended in the proposal:
  •  The Treasury Secretary (the position that provided such consistent leadership decisions in the past year as bailing out Bear, letting Lehman fail, giving AIG multiple billions so it could give the money to Goldman Sachs, bailing out Citigroup 2x? 3x?, then trying to get Sheila Bair canned for the audacity of attempting to stem foreclosures) will gain authority to seize systemically important non-bank institutions.  Mr. Geithner will also chair the "financial services oversight council."  A new "national bank supervisor" will regulate federally chartered depository institutions and sit within the Treasury.
  • The Fed (the esteemed institution that created not one but two financial bubbles not even ten years apart, that invented a host of new financing facilities which gave investment banks a huge subsidy allowing them to finance any kind of collateral, regardless of whether anyone can price it at interest rates far below market rates, reduced interest rates to zero, then started buying Treasuries from the Treasury department which is likely to cause yet another bubble at some point in the next few years) will gain new powers to identify risks in the financial system.  You know, risks like bubbles, and since the Fed usually causes them, they should definitely see the next one coming.
  • The SEC (allowed investment banks to increase leverage to 30-1, failed to notice the risks on the balance sheets of most major banks and investment banks which they were in charge of regulating, has yet to discipline any bank or investment bank for accounting fraud, blamed the financial crisis on short-sellers, missed a boatload of ponzi schemes, in particular a $65 billion one which whistle blowers repeatedly tried to warn about) is still tasked with protecting investors.  
  • The Comptroller of the Currency is out, but the former head, John Dugan, is now going to become the head of the new bank regulator that reports to the Treasury.  I have no idea what the Comptroller of the Currency was supposed to do during the financial crisis but I'm assuming Mr. Dugan will continue to do it at his new post within the Treasury.
  • The FDIC (which even I must admit has so far done a fairly decent job of winding down all of the failed banks and protecting depositors without causing a panic, although Ms. Bair likes to give a few more guarantees than I am comfortable with) will help unwind systemically important institutions when they fail but will only execute on orders from the Treasury.
  • The Office of Thrift Supervision is also kaput.  

Wednesday, June 17, 2009

You Too Can Live Like a Ponzi Schemer

If you're not doing anything today at around 1:00 PM ET and happen to be in the Hamptons, you should mosey on down to the bankruptcy auction being conducted by Maltz Auctions of Marc S. Dreier's former property.  Mr. Dreier, for those who have a hard time keeping up with all of the recent spate of con artists, was a well-respected lawyer who made off (pun intended) with around $380 million of his clients' money.  Why would anyone bother with running a complicated ponzi scheme when the stress is bound to get to you eventually?  Just click on the link and check out the properties that Mr. Dreier had the fortune to live in before the scheme was discovered.  First there is the 7,000 square foot ocean front 8 bedroom, 8 bath mansion on 2.4 acres.  But, of course, 8 bedrooms is never enough, so why not buy the 3,000 square foot ocean view home next door for guests that aren't good enough to stay in the main house?  To bid on the main house, you need a certified check of $400,000 made out to the trustee.  But for the smaller house, a shack really, a check for $100,000 will do.  Chump change.    

FHA Working Hard to Sell Some Condos

What to do about the glut of new condo developments around the country sitting half-empty, waiting for buyers to save them from the inevitability of foreclosure proceedings?  Rest assured that some sort of government bailout is the answer.  If a developer can get a building approved by FHA, then potential buyers can get a mortgage from an FHA-approved lender with only 3.5% down.  Tack on the $8,000 first time homebuyer credit and you can practically get a condo for free.  For a building to be approved by FHA, it must be 51% sold, so the developers have to do a bit of work to get to the threshold, but then, the condos should practically sell themselves.  Congress helped the cause by boosting FHA loan limits from $417,000 to $729,750, making virtually all condos eligible for FHA loan guarantees, except for all of the luxury buildings in Manhattan that are attempting to sell buildings full of units for $5 million a pop (I wish them luck.)  With Fannie and Freddie both tightening condo lending standards by requiring 70% of the units in the building to be sold, FHA is actually considering LOWERING its standards for approval, out of concern that the condo market is going to implode if somebody doesn't stop the madness.  I mean, really, how are developers supposed to sell all of this condo inventory that was conceived and built during an unsustainable condo-flipping frenzy at prices that nobody can or is willing to pay if the government isn't going to offer to insure no down-payment loans?  

The good news is that 93,000 condo units are scheduled for completion in 2009, a 28% increase over last year, according to Reis Inc.  So that should really help clear up the inventory problem.  Even better news is that nearly one-third of all first mortgages are now being originated through FHA, up from about 2% in 2006, when all of those highly successful subprime lenders, none of whom remain, were the leaders in the no down-payment mortgage game.  Best news of all, of course, is that delinquencies on FHA-backed loans rose to 7.5% in February from 6.2% a year earlier.  With unemployment rising and housing prices falling, delinquency rates will no doubt surge higher.

To be honest, at least FHA-backed loans are simple, fixed-rate mortgages that most people can comprehend.  They might not understand the math, but they can handle having to pay the same amount of money every month for the next 30 years.  We won't see the same leap in defaults once borrower's payments triple when their negative-am loans recast, because the payments won't change over time.  So hopefully the FHA program will help some who otherwise wouldn't have been able to purchase a home.  But let's hope that when the next housing bubble rolls around they don't screw it up with a cash-out refi.   

Tuesday, June 16, 2009

Fed Takes a Hit in Extended Stay Hotel Chain Bankruptcy

Chalk this bankruptcy filing up to yet another really leveraged commercial real estate deal crafted at the peak of the market, based on unrealistic expectations for future growth.  Extended Stay Hotels filed for bankruptcy on Monday.  Who were the crack real estate lenders who facilitated this transaction?  Why Bear Stearns and Wachovia.  Hmmm, those names sound sort of familiar.  Extended Stay Hotels is one of the many, many reasons why we don't hear the names Bear Stearns and Wachovia much anymore.  

Lightstone Group led the buyout, but only contributed $200 million in equity to the $8 billion deal, most of which was apparently borrowed.  Lightstone's Chief, Mr. Lichtenstein, has apparently learned a thing or two from past real estate meltdowns.  It's always best not to put too much skin in the game, just in case your overly ambitious growth assumptions turn out to be wide of the mark.  Apparently, investors didn't think Extended Stay would be able to file for bankruptcy because of a provision in the CMBS structure that would make Mr. Lichtenstein personally liable for $100 million if the company filed for bankruptcy.  Somehow Mr. Lichtenstein managed to weasel out of the $100 million personal liability by helping the secured lenders wrest control of the hotel chain.  So much for that theory.

The hotel chain is now valued at $3.3 billion, which isn't even 41% of the original buyout price and even lower than the amount of the first mortgage, $4.1 billion.  So clearly the junior lenders are getting wiped out, and the senior lenders will be taking it on the chin as well.  The really awesome part of this particular commercial real estate blow-out is that the Fed actually owns $744 million in face value of various junior classes of the debt on Extended Stay and also held $153 million of the senior debt that was packaged and sold as bonds.  That is courtesy of the Bear Stearns collateral that the Fed guaranteed so it could coerce JP Morgan into buying the now defunct broker dealer back in March of 2008, when "the worst was over."  Maybe those that believed that the hits the Fed had taken on that portfolio so far were just mark-t0-market losses but this one is for real.  We don't get to make it back on this one.  

Comercial real estate deals like these are one of the many reasons why I have never wanted the Fed involved in collateralized lending versus any collateral other than Treasuries.  Too many stupid deals crafted at the high that are going to go bust, one a a time.  Let the lenders and the equity investors eat the losses.  No bailouts for real estate developers and investors please.  I'm OK with Sheila Bair liquidating what she seizes from defunct institutions.  We can eat the losses then, last, like we're supposed to.     

Monday, June 15, 2009

Market Takes a Breather From Recent Relentless Rally

We're not off to a very good start this morning, as equity markets are down on the heels of some disappointing manufacturing news out of New York (seriously, why is anyone surprised that manufacturing is still shrinking?)  Also, international purchases of US assets slowed in April as our trade partners trimmed their holdings of US Treasuries.  Total net purchases of long-term equities, notes, and bond rose a net $11.2 billion, compared with $55.4 billion in March.  We rely on our friends in Asia to finance our massively exploding deficits so they need to be picking up the pace instead of pulling back.  If you include short-term securities, foreigners were actually net sellers to the tune of $53.2 billion, compared with net buyers of $25 billion the previous month.  Not the kind of help our nation needs right now.

The WSJ has an article today that poses the question of whether the current powerful stock market rally is a cyclical or secular bull market rally.  This seems to be the current debate among investors and regular readers should know where I stand on this issue.  In general I roll my eyes when commentators come on CNBC to pump the market and talk about how we're clearly in a new bull market.  I still maintain that if you're going to be on CNBC spouting your opinion, last year's returns for whatever fund you manage need to be stamped on your forehead so I can decide whether I care about your opinion about the market.  Because if you missed the top, you have no business commenting on the bottom.  FT's Alphaville posts a few interesting market datapoints courtesy of the chief investment strategist at Diapason Securities.  He picks a few examples of how markets behaved in the past such as the Dow in 1929 which fell 48%, rallied 48%, then fell 78% and Nasdaq 2000 which fell 40%, rallied 40%, then fell 81% and offers examples of a few of more recent market movement such as the Shanghai Comp '08 which fell 73%, then rallied 70% and the NDX '08 which fell 50% then rallied 48% with the future direction still up in the air.  Since the debate rages on, I'll let you draw your own conclusions. 

Friday, June 12, 2009

Fed Unlikely to Boost Bond Purchases

According to the WSJ, Fed officials have become more confident recently that they have stabilized the economy and set the stage for recovery.  However, divisions within the Fed remain over what to do going forward.  Should the Fed continue aggressively buying bonds?  Or step back to avoid fanning inflationary fears?  Right now, it appears as if the Fed will step back for the moment.  The problem is that nobody knows what to do.  If the Fed were any good at the Treasury trading game, it wouldn't have punted all that money buying 10-year notes with a 2% yield, if yields were just going to shoot up to 4%.  The jury is still out on whether Mr. Bernanke is a good Fed Chairman, but with his recent track record, he'd never get a job trading bonds.  Sure, the Fed isn't doing this to make money, but to boost lending in the mortgage market, but still...  Mr. Bernanke has been played by those clever traders on the Street, who don't take kindly to having their livelihoods threatened by the government.    

In his defense, Mr. Bernanke has a very difficult job.  First he had to save the economy from being demolished by the unraveling of years of unsupervised (yes, he was supposed to supervise) and reckless lending by the financial services industry.  The effects of the massive deleveraging are still being felt, as yesterday's Fed release of the Flow of Funds report revealed.  Household net worth declined by another $1.3 trillion in the first quarter, bringing the total decline from the peak to $14 trillion.   So if you're feeling less rich than you were a year ago, you're in good company.  Add this on top of back-to-back quarters of annualized GDP declines of 6% and the severity of the situation becomes clear.  

The Federal Reserve has enacted an extraordinary amount of monetary stimulus by lowering interest rates to zero, loaning trillions to the Street versus any type of collateral no matter how shoddy, and then buying mortgages and Treasuries to drive long term interest rates down as well.  But still, $14 trillion is a big number, and given the excesses in housing that still need to be flushed from the system, it's not coming back anytime soon.  The ultimate question is: will all of this cause inflation that the Fed cannot contain?  The Fed seems to think it can pull back the spigot in time to avoid runaway inflation, but given how late the Fed was to the credit crisis party, and how quickly it had to invent schemes and acronyms to combat the collapse in lending, I'm not so sure I trust the Fed.  The only thing certain is that we are in uncharted waters and nobody really knows how this is going to end.    

Thursday, June 11, 2009

Loads of Economic Data

Several pieces of economic data have hit the tape this morning worth mentioning, most of them pointing to a slowdown in the rate of deterioration in the economy, but none of them particularly green shooty:
  • Retail sales rose 0.5% in May, posting the third increase in five months.  The increase was less than the 0.6% expected by economists and mostly due to increases in gas prices.  Excluding gas, retail sales were up 0.2%.  
  • Jobless claims fell by 24,000 to 601,000 for the week ended June 6th.  However, the number of people collecting benefits rose to a record 6.82 million.
  • Foreclosure activity decreased by 6% in May according to RealtyTrac.  Still, May was the third highest month on record and marked the third straight month when the number of properties with foreclosure filings exceeded 300,000.  Nevada, California, and Florida still the top foreclosure states.  Defaults and scheduled foreclosure auctions were both down from the previous month, bank repossessions were up 2%.  RealtyTrak expects REO activity to spike in the coming months as foreclosure moratoria expire across the country.
  • Yesterday's beige book released by the Federal Reserve showed that economic conditions "remained weak or deteriorated further" in all the Fed's districts.  The report offered a few glimmers of hope such as an increase in the hiring of temp workers, which typically precedes an improvement in the overall labor market.  Technology companies said that business was picking up, and real-estate agents in eight of the Fed's 12 districts "reported an uptick in sales."  The report didn't specify whether this could be accounted for by seasonality or jut the perennially chipper nature of real estate agents.  
All signs point to a possible stabilization of economic activity to much lower levels than what we are accustomed to.  Sure retail sales are up slightly, but how is it positive that the increase is due to higher gas prices?  Or that we are still running roughly 10% below last year's level of retail sales.  Seems highly unlikely that we will return to the era of reckless spending again, particularly since nobody can do cash out refis anymore to pay off their credit cards or buy a new car.  Speaking of refis, the recent high level of refinancing activity spurred by artificially low interest rates has dropped dramatically since treasury yields have started spiking.  The 10-year note hit 4% this morning, which historically is still very low, but clearly the Fed is not in control of this runaway train.  So much for quantitative easing...  

Wednesday, June 10, 2009

Financial Headlines 6/10/2009

  • In a big head fake, the Supreme Court lifted the one-day stay on Chrysler's proposed sale to Fiat, disappointing those in Indiana that were hoping their pensions wouldn't get nailed by losses on investments in Chrysler's senior secured debt.  The sale can go ahead, and we can all get back to the business of worrying about hiccups in GM's bankruptcy proceedings.
  • The Treasury will allow 10 banks to repay $68 billion in Tarp funds.  The banks include JP Morgan, Goldman Sachs, Morgan Stanley, US Bancorp, Capital One, American Express, BB&T, Bank of New York Mellon, State Street, and Northern Trust.  Anyone care to wager which bank will blow out first and go back to begging for more TARP funds?  My money would go on Capital One.  
  • The Obama administration is dropping its plan to cap salaries at firms receiving government bailout money, which is good for you if you work at a bank that still has TARP funds.  However, it is leaving the firms subject to congressionally imposed limits on bonuses, which is bad for you if you work at a bank that still has TARP funds.  Instead the administration will push for broader changes in compensation across the industry and appoint that crucial position of Pay Czar that we spoke of the other day.  No doubt banks will work around the restrictions as they don't seem to think they can function if they aren't throwing large sums of money at employees, sometimes for good reason, but often for naught (please see Citigroup's $100 million severance package to 5 employees that left a year ago or Merrill's $50 million signing bonus to Thomas Montag before he ever stepped foot in the building.) 
  • The US trade deficit widened to $29.16 billion in April from a revised $28.3 billion in March.  Exports in April fell to $121.11 billion, the lowest level since July 2006.  Imports also fell to $150.28 billion the lowest level since September 2004.  Crude oil imports rose as the price of crude climbed from $41.36 a barrel in March to $46.60 a barrel in April.  Since crude is now sitting at $70 a barrel, it's not looking good for the future of the May and June deficit figures.  The narrowing trade deficit added 2.18% to GDP in the first quarter, despite the 5.7% contraction in the overall economy.  A widening deficit is bound to do the opposite for GDP growth which is not great for all of those enthusiasts looking for that V-shaped recovery in the second half.
  • The former head of AT&T was tapped to become Chairman of GM if and when it exits bankruptcy.  What does running a huge telecom firm have in common with selling cars?  Really, I have no idea.  But I certainly hope it doesn't mean that I will have to spend two hours on the phone angrily pushing buttons the next time I want to buy or service a car.  

Tuesday, June 9, 2009

Supreme Court Delays Chrysler Sale to Fiat

The quick and tidy sale of Chrysler to Fiat has been delayed by at least one day while the Supreme Court decides whether to hear an appeal of the deal.  Secured creditors were understandably pissed off at the raw deal they were handed during the government-led restructuring plan.  I'm no legal expert, but the whole idea of changing the order of priority in bankruptcy by handing unsecured creditors a big piece of the pie before secured creditors are paid out is not just wrong, but is a threat to the integrity of our financial markets.  Markets have rules for a reason.  If you interfere and change the rules too much, at some point nobody is going to want to show up to play anymore.  No telling what the Supreme Court does next.  They could just allow the stay to expire, in which case, Chrysler's sale to Fiat goes through.  Or alternatively, the Supreme could hear the appeal, Fiat could walk away, which would lead to a Chapter 7 style liquidation.  I don't know about you, but I'm sitting on pins and needles.     

Monday, June 8, 2009

Government Hires a Pay Czar

JP Morgan and Goldman Sachs are anxiously drumming on their desks, checking their watches, waiting to be given the all clear to pay back all that government money they never wanted (or needed, mind you) in the first place.  They don't like it when government officials, with their lowly six figure salaries, tell them they can't pay their 25 year-old traders $6 million dollars if they feel like it.  They figure, if they can just get out from under this albatross, they can get back to business as usual (parties, chicks, private jets, golf boondoggles.)  The only problem is, even if they pay all the TARP funds back, it appears as if they're going to be subject to tighter compensation scrutiny anyway.  The Obama administration will be issuing broad principles and standards on compensation that the government would like the financial industry to observe.  The details are murky at this point, but there is little doubt that the government's take on financial industry comp will be interesting to say the least.  Those institutions receiving at least two federal bailouts will be required to submit any major executive pay changes for approval by the new Pay Czar.  I wonder what will happen to all of the recent announcements by banks that they will be doubling and tripling salaries?  Wonder how the Pay Czar is going to feel about that maneuver?  If I were the Pay Czar, my first move would be to ban the use of compensation consultants by boards as I believe they have been instrumental in jacking up the absurd executive compensation packages linked to no performance that we've seen in corporate America in recent years.  Because seriously, why can't boards figure out how to compensate their companies' employees without having to pay someone to tell them?  It seems like corporate boards have done little to root out fraud, or notice that management was taking too much risk, is it too much to ask that they get a spine and get involved in appropriately compensating executives?  Apparently, which is why we now have a Pay Czar.

The most curious part of the New York Tines article is the following sentence: "Banks that received money from the relief program must also curb outsize severance packages, and pull back bonuses that were based on fraudulent or misstated results."  Now, I'm sure that part of this is in reference to the Wall Street Journal report a few days ago about Citibank halting severance payments to five former employees to whom it had promised over $100 million when they left a year ago.  But, does it mean that the government can go after bonuses that were paid in 2007 that were based on unrealized profits that turned negative in 2008?  Can the government then clawback any money it paid to the AIG financial products unit where the "earnings" were a complete mirage for years?  If so, things are about to get really interesting. 

Thursday, June 4, 2009

Jobless Claims Show Slight Improvement

Initial jobless claims dropped by 4,000 to 621,000 in the week ended May 30th from a revised 625,000 the prior week. The number of people collecting unemployment actually fell, yes fell, for the first time in five months to 6.735 million from 6.75 million. Admittedly, this is an improvement, but it is what I would call a slight improvement, hence the headline above. What it does not warrant is the headline Bloomberg has stating the decline followed by the phrase “signal worst of slump ending.” This seems to be Bloomberg’s new phrase that they must be required to tack on to the end of every single economic data point released since the March low. Although in a strange oversight, they forgot to change the headline about Latvia to: “Latvia Central Bank Vows to Defend Currency Peg As Investors Flee, Signaling Worst of the Eastern European Crisis is Over.” Since I’ve pointed it out, they’ll probably change it.

I don’t know who gave the directive (Mr. Geithner doesn’t seem to be as much of a heavy as his predecessor, so I can’t point the finger at him), but it’s become somewhat comical how much the mainstream press has been cheerleading the latest rally by pumping the somewhat anemic economic data as definitive that we’ve seen the worst, and are moving on to a V-shaped recovery. I’m still skeptical of a recovery that will be anything more than a flatline, as I have no idea where the next spurt of growth is going to come from. We’re still wringing out the excesses from a ridiculous boom, and all of the government intervention so far has done nothing more than stabilize the downward spiral. Retail sales numbers are still to come, as is tomorrow’s payroll report. Both will provide further clarity about the economic outlook.

Wednesday, June 3, 2009

Some Thoughts on the Latest Economic Data

So many green shoots, so little time. At the beginning of the week, the market got excited about the “better than expected” ISM report that merely showed that manufacturing is still shrinking but maybe not falling off a cliff. Then the pending home sales index was up 6.7%, which some interpreted as a sign that this whole housing bubble thing was overblown and everything is going back to 2007 levels soon. Pay no attention to mounting foreclosures, Alt-A and option ARMs that are set to blow in the next year or so, or rising unemployment data. Yesterday’s car sales data elicited many an enthusiastic headline about the recovery even though car sales were down 34% year-over-year at an annual pace of 9.9 million, which is just shy of the amount of sales needed for the already bankrupt industry to break even. As a side note, the car with the biggest year-over-year decline in sales was the Honda Civic, for which sales were down a whopping 61%. What did the innocuous Honda Civic do to insult everybody? Also, trucks are still enormously popular, despite everyone’s vow to become more “green” and stop guzzling gas. Today’s news release included the sobering private sector employment report referred to as the ADP. According to the ADP report, 532,000 jobs were shed in the month of May and April’s jobs were revised down by an additional 54,000 jobs. As Calculated Risk points out, the ADP is not necessarily a reliable indicator of this month’s nonfarm payroll report, but it does track the report over time. Nevertheless, the “green shoots” folks will likely ignore this grim report and wait for Friday’s big number. I’ll be traveling on Friday so I won’t be able to comment on the BLS employment report. But sometimes, numbers just speak for themselves and require no interpretation.

Tuesday, June 2, 2009

Bank Capital Raising Frenzy Continues

On the heels of its $8 billion capital raise last month, Morgan Stanley, perhaps stunned by how high its stock price has remained, is raising another $2.2 billion in equity. Gotta pay back that TARP so it can return to paying bonuses at the expense of shareholders. Interesting that shareholders are still willing to buy into that philosophy. Yesterday afternoon, JP Morgan and American Express both announced plans to raise more capital. This is the first time to the trough for JP Morgan, which is raising $5 billion. Meanwhile, AmEx raised a more modest $500 million yesterday.

If you don’t believe that paying back the TARP is primarily a compensation issue, then just check out Citi’s announcement today. The beleaguered bank is halting severance payments to five former executives that left last year. According to the WSJ article, Citi had promised roughly $100 million in payouts to these executives, and has already made roughly half of the payments but is halting the rest. The bank is betting that the executives will be too embarrassed to file lawsuits, as evidenced by the outrage caused by the AIG payouts. For evidence that Wall Street’s ideas about paying “talent” ridiculous sums of money for seemingly no reason, I present you with exhibit A: Michael Klein. Mr. Klein, a 23 year veteran of Citigroup, was the head of investment banking. He RESIGNED in last July. Funny thing is, I have resigned from a few jobs in my time, and I’ve never been granted severance. Severance is for people who are laid off, not those who resign. Despite this, Citi offered to pay Mr. Klein a “severance” of $42 million in return for not poaching any of the bank’s investment bankers. I know that Citi is on a huge cost cutting scheme, reducing the amount of money it spends on paper clips and copies, etc. But $42 million buys a lot of paper clips. Why on earth the bank, which is suffering from some serious financial problems, felt obligated to pay someone this kind of money when he was leaving the firm and would no longer contribute one iota of value to Citi, shows a complete and total lack of economic prioritizing. Citi knows that this kind of wanton flushing of money down the toilet no longer flies as it has no shot in paying back the government any time soon. The rest of the 19 banks don’t want to be subject to the same constraints next time they feel like paying someone $42 million for no good reason.

As I’ve noted before, I want the banks to pay back the TARP. I don’t think taxpayer money should be funding risk-taking. I don’t care what banks pay their employees, but I don’t think the government should subsidize outrageous Wall Street style compensation, especially when the unemployment rate is 9%. But my conditions for TARP repayment are the following: You pay back the TARP, and this whole government-backing-the -banks scheme is over. Going forward, no more TARP, no more FDIC guarantees, and no more pledging any collateral other than treasuries to the Fed for loans. No more Too Big To Fail. The government shouldn’t be bailing out risk takers.

Monday, June 1, 2009

GM Set to File Chapter 11, Chrysler Set to Exit

In the most predictable event in bankruptcy history, GM is finally filing for Chapter 11 this morning. Uncle Sam will wind up owning a majority of the company with plans to inject another $30 billion in order to keep operations going while the creditors hammer out the details during the bankruptcy process. The US government will receive a 60% stake for its investment, while the Canadian government will inject $9.5 billion in return for a 12% stake. GM plans to eliminate all of its debt, halve its brands, shutter 2600 dealerships (out of 3600) and rewrite its labor contracts with its 56,000 employees. The bankruptcy process is expected to be swift, although complications may arise.

In a nice demonstration of tag-team, Chrysler is scheduled to emerge from bankruptcy as early as today, just one month after its filing. The administration managed to show all the naysayers that a quick bankruptcy for Chrysler was possible. Who knew that a little political jockeying, and the liberal sprinkling of TARP funds among lenders, would convince secured creditors to accept less than unsecured creditors in a bankruptcy? But it seems like the rules are rewritten every day when the government has a hand in the capital markets.

Although the long run consequences of the downsizing of the US auto industry are unknown, there is no doubt that having a streamlined, yet financially viable auto industry is preferable to the bloated uncompetitive mess we had before. The only problem is that the adjustment period is bound to be very difficult for the many whose livelihoods depended on a huge, bloated, inefficient auto industry. It’s not just the dealerships that have been forced to close, or the employees whose compensation and benefits will be slashed, not to mention those who will surely lose their jobs. What about the auto parts makers (some of whom are filing for bankruptcy too?) The advertising industry that relied on copious purchases of air time on TV and radio? Or the local economies that will suffer greatly as factories are shuttered and the tax base is eroded? Sure the easy part, (i.e. drafting the financial plan), might be behind us. But the hard part, that of filling the huge hole in the economy that the slimmer auto industry leaves in its wake, well that part lays ahead. That’s the part that concerns me the most.