Bloomberg Quote of the Day: “All men of action are dreamers.” – James G. Huneker…dream on!
…according to the gospel preached by Larry Kudlow and his disciples such as Brian Wesbury and Stephen Moore…what we have just experienced is all good…it is capitalism at work. This is akin to Donald Rumsfeld’s inane comment as the Iraqi Central Bank and Museum of Antiquities (the most important museum in the world to civilization) were being looted as US soldiers stood idly by. Not only that but if Kudlow had been there no doubt he would have been saying as some soldiers did: take it, it’s yours…is that capitalism at work?
Is Capitalism, which is by definition built on a sound financial system and which US history has taught us requires a strong central bank as well as strong commercial banks, best served by being unrestrained or does it need some mild regulation to insure that it is not smothered with legislation in panics like we are now in? If Kudlow knew his history of which he claims…quoting the classic economists…he would realize that it was the central bank followed by collapse of banks, companies and municipal governments which created the Great Depression…and was the strongest selling point to Communism…as witnessed by the violent and explosive growth of labor unions in this country.
We have now virtually eradicated labor unions…through both outsourcing and bankruptcies of major companies. The lone exception is in state and local government which has the majority share. Rather than use this wisely, our corporations, to the detriment of their own shareholders have accomplished a major transfer of wealth to the union of the boards of directors which are virtually inter-locking and the top executives. All serve without their own capital being at risk and benefit hugely on their successes while being compensated generously when they fail while the shareholders and employees pick up the tab. For several years TB has questioned the record stock buybacks of companies and look how that has served you, the shareholder. It has cost you even more money! This is the capitalism of which Mr. Kudlow is so very proud. Hopefully, we now see how he and the other neo-cons including both Cheney and Rumsfeld could care less about the people or the democracy they are sworn to protect and merely about making money for their companies and of course themselves…Dubya is no neo-con and if anybody has a clue what he really is please let TB know.
Lest this be another round of Bush bashing, although it is definitely earned, the entire GOP and the Dems are guilty of selling out for their own personal gain…they are bought and paid for by lobbyists and do their bidding accordingly. This is why TB want change…but neither Obama or McCain seems capable of providing any. The strongest point with Obama would be that even if he fails to bring change it will break up the cabal that has run this country for the past seven years…the best to be said for McCain is that nothing will change.
TB heard both the McCain and Obama financial advisors on CNBC this morning and was thoroughly disgusted at their understanding of the GSE’s (FNM/FRE). Obama’s man: he wants to ensure home ownership and that is why we need to defend the GSE’s…of course while making sure the shareholders or management do not get enriched (then it was pointed out that Franklin Raines is a consultant to the Obama team…of course not on the GSE’s). McCain’s man: sounded like Sen. Bunting…let them swing…we cannot risk the taxpayers money on this…really? Well take a look at US treasury bonds if they fail to act and governments and pension funds around the world lose money…and confidence in the US. Meanwhile, poor old Paulson is out stumping to save them and says his plan has a good chance of enactment.
In his lifetime and 36 years of professional banking/investment experience TB has seen the Collapse of Continental Illinois/Penn Square, the S&L crisis, and other small failures…even State Savings which prior to Indymac was the largest bank failure in history did not produce a run on the banks. The FDIC is in control yet depositors have no confidence in them…so much for a sound banking system. TB believes this is directly linked to the GSE problem…as to a depositor they are not different they are all government entities!
Still Kudlow continues to rail against the GSE as any good neo-con…yet he offers no alternative that would allow the mortgage market to function efficiently…especially with banks being capital starved and under increased scrutiny…remember the banks own bonds of those GSE’s too! In fact, they hold more than they legally can of any other debt except US treasuries since they are viewed as US government obligations…be careful or the banks will be forced to divest of them and spreads are already at record levels.What is with all the ideologues??? They offer no solution, they did not help as the stock market, particularly financials, the backbone of capitalism were brutally attacked.
Make no mistake, TB is thrilled by the shortcovering rally yesterday…and that, at this point is all it was and there are still an incredible number of shorts out there. While the Dow was up 277, that is just 2.5%. Look at the financials which as a group were up 8.1%: KBW Bank Index +17.3%; Nasdaq Banks +10%…these are both far and away records for a single day of trading; Brokers were up 13%, REITS +6.6%, while the less damaged Insurers were up a mere 4.3%. Just as the hedge funds struck fear in the hearts of long term investors, the fear struck back at the hedge funds yesterday! Once the SEC gets the rules on naked shorts and the uptick rule reinacted…the very ones they rescinded a year ago…we might even get real…legitimate buyers back…until then TB will not put another dime in any financial stock…fool me once…
This brings us once again to Chris Cox…a total failure as SEC Chairman…one who went before the Senate Tuesday knowing what he would be asked and then saying nothing about naked shorts except that they were going to impose rules for shorting the GSE’s…hello? Aren’t banks and brokers part of the financial system too? He blew an opportunity to say we are implementing right now rules preventing naked shorting of any stock…and it would take a move of at least 12 cents to create an uptick for further shorting…no sir…he was unprepared yet he looked so good in his $1,000 suit. So confident but shy of being smug…perhaps. Meanwhile, the President’s man, Hank Paulson…nearly a billionaire in his own right was tripping over his own words with no support except from Ben Bernanke.
While Bernanke did not cause the current crisis, he was there while Alan Greenspan…who has fallen from grace like a stone…failed to protect investors. TB studied margin debt history back in 1999 and then followed it until 2001 as it ballooned then tumbled. The reason for this of course was making all Nasdaq listed stocks…from the day they were listed marginable! This included new IPO’s and due to the growth of day traders and electronic trading margin debt grew by 62% that year to a record $228.5 billion…declining by 30% over the next two years following the crash. Between March 1968 when margin requirements were 70%, there were 5 changes which ultimately ended at 50% in June 2004…since then they have not been changed! The highest during this period was 80% and the lowest 55% before the last move. Rather than stand idly by in the rout from last August…why didn’t he raise margin requirements, at least after the selloff by yearend…it certainly wouldn’t' have hurt anyone who bought on margin…they were already toast! That is why the Fed has Regulation T…to control margin borrowing! Why didn’t you use it, Ben?
Michael Steinhardt and Paul Roth…two hedge fund experts have been discussing naked shorts and shorting in general on CNBC this morning. Steinhardt says there is nothing wrong with shorting financial institutions and in most cases the shorts were right…Roth said that it is not illegal to have naked shorts…it is illegal to tell your broker you have lined up the shares to borrow when you haven’t. Now get this: he says that the poor hedgies arranged to borrow them but when the went to do so the stocks were already lent out….aw…gee. Talk about a loophole you can drive a truck thru. Under the new regs which only apply to the financial institutions and GSE’s…again if its good for one…why not the likes of Cal-Maine with more than 100% of the float shorted?…you must have the shares borrowed when you short…of course the Cox SEC enacted this for just 30 days…why didn’t they say “until further notice”…more lunacy!
What we need is a level playing field…table stakes only…not no limit. How can Steinhardt honestly believe that shorts…when it is an entire sector…are good for the market…much the same as George Soros’ breaking the Bank of England was a good thing. Should an entire economy…or in this case a global economy be allowed to be destroyed for the benefit of a few hedge fund managers? Larry Kudlow says yes! That thinking folks, is exactly why consumer confidence is so low! In 1987, we squeezed out a lot of individual investors who then came back in 1998-99 only to lose again then came back in 2007 and have a negative return for the past 8 years! Some deal stocks!
So now TB’s wrath has extended to Cox and even Bernanke to some extent, and poor Paulson trying to put the pieces of a puzzle together with little assistance but a lot of interference.
TB is thrilled by the rally yesterday…too bad it was just shortcovering but with Globex strong this morning we can expect follow thru short covering. Too bad also if you listened to the ‘eggspurts’ on CNBC who have been saying for the past two weeks…avoid financials…buy energy…congrats if you listened to them as you just compounded your losses!
It is no coincidence that the Senate hearing caused a drop in energy prices…crude is now down more than 10% from the peak and $12 just since Tuesday! Fear is the great motivator…and fear of discovery and perhaps prosecution is an even greater motivator. People are going to go to jail…probably…but hopefully no more Bear Stearns, Lehman or Indymac type events (Indymac now being investigated for fraud). How about TPG Group who as recently as April 8 injected $7 billion into plagued WaMu? Until yesterday that investment was wiped out…hanging on by a thread due to the shortcovering yesterday. If commodities prices keep dropping and TB believes they will that will ease the burden on the Fed…TB believes the 5% CPI number will be a cycle peak…easy if food and energy, the culprits decline…so Kudlow…shut up about the Fed needing to tighten…let them focus on the broad economy…and remember inflation in the US is far different from Europe…ours is cost push due to commodities…while Europe’s is due to weak productivity, especially in ECB President Trichet’s home country…vive la France!
We have problems here yes, but hopefully our ‘asleep at the switch’ regulators are now more attentive. A total failure of responsibility…TB thinks that in most countries several of them would be in jail now!
We can either fix this mess or let it destroy us…TB is not being overly dramatic…it will take years to repair what 25 years of spending beyond our means has created…and it will be painful…but the alternative is worse. So far we can’t even come up with an energy policy other than to drill for more oil! How about the Rep. yesterday who asked Bernanke if he thought they should repeal the excise tax on imported Brazilian ethanol? Why ask him? Just do it! Free up our corn for FOOD and let the efficiently produced ethanol be used. What is incredible is what we are doing to ourselves:
*public pension funds investing billions in alternative investments which are frequently shorting the very stocks they own (and that they are lending them for 0.25%), and in commodities index funds which are in turn creating perceived inflation and further driving down their stock prices…same consultants same ideas!
*trying to bail out the GSE’s while we destroy the banks…how did it get to the entire banking system when it was only a few banks that held subprime mortgage loans/investments? Thus, banks are tightening lending requirements…and the Fed is piling more on them…without the GSE’s there is not even a viable mortgage market…further worsening the housing crisis.
TB is not an alarmist but a realist…and he is disgusted with CNBC…especially Kudlow and Ratigan whose carnival like shouting match of loudmouths…just keeps babbling despite being wrong. How about their self-serving hyping of parent GE whenever possible…or the endorsement of business leaders who say they get their news from CNBC…including former GE CEO Jack Welch? How can they do that? You get what you pay for and their advice is free…note TB is not offering advice…he merely wants you to think for yourselves.
As pessimistic as TB may sound today for the first time in 11 months we are finally addressing the problem! That alone is good…how we deal with that problem(s) will determine the outcome. But once again…where are the leaders??? Where are they?
Hope you all feel better having seen your investments rise in value yesterday…thankfully. Now think what you need to do to hold those gains (reduced losses).
TB
