Friday, January 29, 2010

Strong GDP Report Fails to Inspire Equities

Equities were only marginally higher Friday morning on a better-than-expected 5.7% fourth quarter GDP growth rate. To add insult to injury, stocks failed to snap back sharply following yesterday's reconfirmation of Ben Bernanke to another term as Fed Chairman. Mr. Bernanke's reappointment guarantees more of the same bank-loving easy monetary policy which should have given financials a boost. Even great earnings reports from tech bellwethers like Microsoft and Amazon have done little to reverse the dour mood that has stricken stocks in the past week.

So what exactly is going on? Despite preposterous headlines such as "Strong Fourth Quarter Growth May Give Reason to Bid Up Beaten Down Stocks," only the inmates at the asylum would label stocks that have ripped 70% and then dropped 5% "beaten down." The truth is that a market that has rallied as relentlessly and vertically over the past nine months was bound to eventually grab a cigarette, take a break and say to itself "Whoa! Just hold on for one minute! Why the hell have we rallied so hard and so fast in such a dismal economy where most of the growth comes from inventory restocking?" Funny I've been asking myself the same question.

Thursday, January 28, 2010

What the Future Holds After Fed MBS Purchases End

Other than how to deal with the AIG backlash, the largest conundrum facing the Fed is how and when to pull back on its massively expansive monetary stimulus. Certainly Bernanke maintains that he will know what to do and when to do it. You know, just like he saw the housing bubble from a mile away and prevented the whole thing from happening. Right. Moving along, the Fed made it relatively clear in its announcement on interest rate policy yesterday, that it would be ending its massive Agency and MBS purchases as originally scheduled. So that's been settled. Hope everybody's ready.

Most folks are anticipating an increase in mortgage interest rates when the Fed's purchase program is over. With the Fed purchasing roughly 80% of all GSE issuance from last year, it seems the most logical conclusion. However, the WSJ did manage to find that the ranks of "mortgage bulls" are growing. These folks argue that investors who are "reaching for yield" in this great new bull market of ours will step in to purchase MBS because it is a lower risk investment than other corporates that are not explicitly backed by the US government. We saw how well that "reaching for yield" argument worked in early 2007 too, when bubble investors were trying to convince themselves to continue to purchase all sorts of crap at ridiculous prices.

So who are these fools that are about to dive into the market when the largest and currently only buyer is about to step out? Sadly, it might be your pension fund. A very interesting, yet widely ignored, article in the WSJ yesterday mentioned that pension funds were considering leveraged fixed income investments as a way to make up for all the money they have lost in the credit crisis. The pension managers were really unhappy about the fact that they had piled into stocks in the late 90's, only to get smoked. Then they followed that shrewd move by piling into private equity and hedge funds in the '00's, then got smoked. So now they are going to make up for all of it by using that low-risk strategy of purchasing high- rated fixed income products and levering up to juice returns. Because leveraged fixed income investing never blows up in your face, particularly when you dive in when rates are at historical lows and the Fed is considering pulling back on its easy monetary policy. I mean look at how well Orange County did with this strategy in 1994, and Long Term Capital in 1998. It's bound to be a big winner.

Naturally, this idea is the brainchild of pension consultants who are just looking for more and better ways to blow-out pensions so they continue to lose money so they need to hire more consultants. Because frankly, I can't think of a single reason why anyone would advise this strategy right now. Furthermore, if you wanted to give a pension fund some good advice on how to meet its 8% a year earnings target, you could've told them to pile into fixed income, without any leverage, in 2008-2009 when high quality corporates were yielding double digits. But most consultants were probably too busy cowering in the corner while their customers were yelling at them because they couldn't get their money out of that hedge fund the consultant had recommended. Not to mention the private equity fund. Or the money market fund. Oh yeah, and why the hell were their stocks all trading back at 1997 levels?

Wednesday, January 27, 2010

The AIG Soap Opera Continues

Tune in today for some fairly dramatic daytime television programming: the House Oversight and Government Reform Committee's hearing on AIG. The interrogations are unlikely to reveal any new information that points to a conspiracy among bankers and the Fed to siphon money out of taxpayer pockets into fat cat bankers' wallets. The truth is likely closer to the WSJ's description of emails between Fed officials in late 2008: "the emails paint a picture of confusion, uncertainty and fatigue among a small army of Fed staffers, lawyers and bankers on the rescue." So the bad news is, rather than finding a real villain in the AIG mess, the House is likely to be met with revelations of incompetence instead. I'm sure those Fed staffers were doing their best to stop the financial meltdown that was a "certainty" if the banks weren't paid 100 cents on the dollar on their CDS contracts. The real question remains: why on earth did nobody at the Fed see this coming until that fateful week in September 2008? It was widely known that AIG had a huge short CDS position, much of it tied to subprime. This became abundantly clear when its own auditor found accounting irregularities at the firm in early 2008, and the stock began its nosedive.

In any event, if we're really looking for a good conspiracy, perhaps Larry Fink from BlackRock should testify before the House and explain why his firm put out a 44-page analysis in November 2008 to the Fed that stated that the banks had significant bargaining power with AIG and had little incentive to cancel the contracts unless they received par, or 100 cents, on the dollar. But then again, if you are depending on a fund manager with very strong ties to Wall Street to tell you how much bargaining power you have with Wall Street, then you're bound to be in the noodle in negotiations.

Monday, January 25, 2010

Tishman Speyer's Stuyvesant Pain Over As Ownership Handed Over to Creditors

Tishman Speyer finally mailed in the keys to creditors of its massive Peter Cooper Village and Stuyvesant Town apartment buildings in Manhattan. In what is likely to be known for some time as both the biggest and dumbest residential deal (until the next bubble,) the drawn-out and painful saga of Stuyvesant Town will be sorely missed by those who have chronicled the tale. First, came the shock and awe when the deal was actually done in 2006 ("they paid how much at what cap rate???), followed by a period of intense speculation over how long it would take for the deal to burn through its interest reserve, followed by the lawsuits from furious tenants who did not want their below-market rents to rise, followed by the collapse of the economy, and the actual depletion of the interest rate reserve. Now, in what is largely a ceremonial move, Tishman will cede ownership to creditors. No doubt the folks at Tishman won't be shedding a tear as they put in only $112 million into the deal, leaving a trail of other equity investors holding the bag. The creditors will not be left unscathed either, as the properties are currently valued at $1.8 billion, with roughly $4.4 billion in debt piled on top. Who will take the reigns next? Stay tuned for Stuyvesant the Sequel.

Friday, January 22, 2010

V is for Volcker, and Also Vendetta

In what is being coined "The Volcker Rule," President Obama introduced a sweeping agenda yesterday aimed at limiting the size and scope of activities of the nation's largest banks. With former Federal Reserve Chairman Paul Volcker at his side, the President railed against the banks and promised the American taxpayer that we would no longer be held hostage by banks that are too big to fail. Although the specifics of the plan have yet to be outlined, the basic premise is that that banks would no longer be able to own hedge funds and private equity funds nor engage in prop trading. As many analysts have already pointed out, it will be extremely difficult to differentiate between customer-driven trading and proprietary trading. Take Goldman Sachs for example. The investment bank claims that only 10% of its trading profits come from prop trading. But then take a look at its balance sheet, which carries $882 billion in assets. If Goldman was strictly buying on the bid and selling on the offer, then it would carry no inventory. Clearly that is not the case, as the bank carries a tremendous inventory of financial assets. How much of it is related to customer trading? Is it hedged? (Obviously not all of it, as it wouldn't be making so much money) What about all the carry it is making holding that inventory while lending it out at zero percent? That is considered taking interest rate risk, so does that count as prop trading or customer trading? Making a distinction will be extremely difficult and banks will figure out ways to get around it.

The really big question is the following: What was the true significance of Paul Volcker's presence behind Mr. Obama as the President delivered his speech? Sure Mr. Volcker has been wandering the press circuit, calling for the repeal of Glass Steagall. But that might not be the whole story. For those who aren't familiar with Mr. Volcker, he served as Fed Chairman from 1979 to 1987. He is widely credited with stamping out the runaway inflation of the late 70's and early 80's by hiking short term interest rates to a peak of 20%. Politically, this was an extremely unpopular move, and he reportedly received death threats while in office. So you've got to hand it to the guy, he sticks to his guns, and isn't afraid to piss people off and ruin presidencies if it means doing the right thing with monetary policy.

Meanwhile, Bernanke's confirmation hearing in the Senate has been postponed and the Senate Democrats are not sure they can get enough votes to reconfirm him. Who would be a likely nominee in the event that Mr. Bernanke is not reconfirmed? Paul Volcker. Having proven himself to be perhaps one of the greatest inflation hawks of all time who doesn't bow to political influence, Mr. Volcker's possible nomination could tank the bond market. And if the bond market tanks, the stock market will follow, particularly financials. All of this is pure rampant speculation and probably unlikely, but worth considering. Next week could get interesting...

Thursday, January 21, 2010

Goldman Sachs Posts Profit of $4.95 Billion, Still Not Good Enough

In what is bound to anger a bunch of people for a variety of reasons, Goldman posted one heck of a profitable quarter. First of all, the investment bank's profit of $4.95 billion, or $8.20 per share makes the guys at Morgan Stanley look like a bunch of losers (of money, as well as sissies who wouldn't understand a steep yield curve if it hit them in the head.) Then, of course, there are all of those folks in government (the few that never worked for Goldman) who have to fire up better versions of their "evil bankers who steal from the poor and uninsured" speeches before the next election or face the fate of Martha Coakley. Let's not forget the hapless employees of Goldman Sachs, some of whom have been rumored in the press to be unhappy with having to accept compensation in any form that is not their well-deserved cold hard unrestricted cash. I don't even have to mention what Rolling Stone readers must be thinking...

I will give the guys at Goldman a big gold star because investors so far are not that impressed (the stock is only up 1% currently.) That bank knows how to make money. Government subsidies, zero interest rates, once-in-a-lifetime opportunities in fixed income trading, raging commodities bull markets, massive volatility in equities, WHATEVER. The bank is not afraid to take those opportunities, pile on the risk (which Mr. Blankfein will tell you they are masters at managing) and knocking the ball out of the park. Sure it was bailed out last year, but so was Morgan Stanley and it still lost money in 2009. That preposterous sounding vampire squid analogy appears more apt with every passing day.

Wednesday, January 20, 2010

Bank Earnings Fail To Impress Market

  • Bank of America managed to only lose $194 million in the fourth quarter. Oh, wait a minute, that's only if you exclude the $5 billion or so it cost the largest US lender to repay the government. But a $194 million loss just sounds better, doesn't it? So let's just pretend that BAC never had to hit up the Treasury for a bailout and forget that silly "non-recurring" expense. What's really important is that the bank can return to paying its employees whatever it wants and paying out dividends without any consideration as to whether it can afford to or not.
  • Wells Fargo posted a profit of $2.8 billion, or 8 cents a share, beating expectations of a small loss. Revenues also rose by 1% to $22.7 billion.
  • Meanwhile, Morgan Stanley, the former investment banking powerhouse that is currently a cowering and meek Goldman Sachs wanna-be, missed earnings estimates. Frankly, it's hard to figure out exactly what MS did this quarter given the confusing media reports. The Financial Times claims that the investment bank recorded net income of $1.1 billion but a loss of 93 cents a share including the TARP payment. I like how the earnings are in hard dollars but the loss is in earnings per share. Sounds better that way right? The folks at the WSJ report that MS posted a profit of $617 million or 29 cents a share, but earnings from continuing operations were 14 cents a share. The WSJ conveniently excludes the loss including the TARP repayment (I guess they're bullish?). Meanwhile, Bloomberg gives the only information you need to know, that MS will pay out a whopping 62% of revenues in compensation. What I want to know is this: If you are going to pretend like you are Goldman Sachs and pay GS-style bonuses, shouldn't you at least make money like GS does?

Tuesday, January 19, 2010

Citi's Investors Never Sleep Either

In comparison to the multiple billions in earnings and market cap that Citi has parted ways with in the disastrous last couple of years, a $7.6 billion loss is chump change. But still, with all of the bravado coming from the banking industry, you'd think Citi could rub together a bit more than a loss of 33 cents a share. Yes, most of the loss was related to paying back the government, but then maybe that's just a sign that it should've waited to be profitable before rushing to pay the government back just because it had to pay its employees "competitively?" (i.e. so they wouldn't all run away to work for Goldman. As if Goldman would ever stoop so low. I mean, the folks at Goldman only hire "real talent.")

But no worries, Citi plans to earn its way out of the hole it dug for itself when it decided to pile full throttle into the booming CDO market (as well as every other over-priced asset in the credit boom.) Maybe one of those bullish analysts can explain how you earn your way out of a hole by continuing to post losses.

Tuesday, January 12, 2010

White House Proposes New Bank Fees, Bankers Yawn

While yesterday's front page financial market headlines warned of the escalating furor over bank bonus payments, today's news hits back with the administration's threat to impose new banking fees. The intention of the administration is to punish the banks for their evil misdeeds in causing the crisis, and to make average Americans feel better about the fact that they are unemployed while many in the financial sector expect to take home multi-million bonus packages and are somehow still complaining because it won't come in an all-cash payout.

Somehow, someway, those greedy bankers are going to learn their lesson, right? I mean, if you hit them up with a really harsh penalty filled with bracing specifics, they are bound to wise up and become far more contrite. According to the WSJ, "The administration is wrestling with who should pay, when it should be implemented and what would happen if banks pay more than the government-bailout program ultimately loses...Even though the proposal is still under discussion, it is expected to be included in the White House's budget, due next month, if only conceptually." Sounds terrifying. The administration has no idea what it is going to do, but it's going to do something, something really big. So big that it needs to be leaked to the press, put on the front page, and then included in the budget as a revenue item to help with the deficit.

I suspect that this fee, much like the financial regulation, and bonus restrictions, will be watered down until it too becomes completely meaningless. The problem is that once we bailed out the financial institutions, we crossed a line from which there is no return. No amount of fees, restrictions or regulations are going to make a difference in how these institutions operate now. It's just too late. The opportunity to extract concessions passed us by when our leaders at the Fed and Treasury had the banks by the balls in the fall of 2008, and chose instead to throw unrestricted gobs of money at them. Oh there is one former Wall Street high flyer that is contrite and demoralized and would've agreed to any concessions in September 2008. No bonus for five years? No problem. Pay the government 50% of all of our profits for the next ten years? Sure. Anything, I'll do anything, just don't let my company fail. He goes by the name of Dick Fuld.

Monday, January 4, 2010

Administrative Note

Mock the Market will need to take a brief hiatus to resolve some scheduling conflicts (i.e. one-week-old baby keeping me up at night, causing lack of motivation to blog at the crack of dawn.) I will make a sincere effort to blog sporadically about issues that are key to understanding the markets, the economy, or just plain worthy of mockery. But if I wake up in the morning and the front page headline of the day is "Bernanke says low rates [which he controlled] didn't cause the housing bubble, lax regulation did [which he was also responsible for]," then I'm going back to bed. Happy New Year everyone!