Traderbill's Financial Markets Weblog

Bloomberg Quote of the Day: “Life is a risk.” Diane Von Furstenberg – that says it all!

…rewind to two days ago. When compiling the overnight commentary, global stocks were in a major rally, including Globex futures on all three U.S. indices with the Dow +150. When the market opened, stocks had ‘gapped up’ encouraged by Wells Fargo’s normally horrid earnings report. All major indices closed up. The reason for this was the outlook for a U.S. ‘good bank, bad bank’ plan was looking promising. Financial stocks rallied 9.3% and the KBW Bank Stock Index was up13.1%. But not only did U.S. banks rally, so did all major banks. It was as if the U.S. was going to bail them out too. Energy stocks also rallied bolstering the shortcovering argument since crude and other components are so weak and likely to move lower.

The rally lasted all of a day and was most likely shortcovering, nothing more. True, major rallies begin with shortcovering but if they are real they elicit an investor response that keeps them going. That did not happen yesterday as  from the opening it was down and downer. The two Nasdaq indices which had gapped up sharply on Wednesday closed that gap yesterday with the Composite blasting through the 40 day m/a and the 100 closing just 3 points above it. The Philly Semiconductor Index which has been strong yesterday even gapped down slightly on the open, and the Russell 2000 which closed just above the 40 day on Wednesday blasted back down. These are not good signs!

William Seidman, former Chairman of FDIC and the first Chairman of Resolution Trust Corporation in 1985, has been promoting the good bank-bad bank concept saying it worked then and it will work again. All the government has to do is take over the troubled banks and sell off their assets then take the bank public again. Yesterday, he waffled on that position. Meanwhile, TB had been thinking that Seidman has not considered the enormity of the situation. At that time the S&L’s were nothing compared to the size of the banks and now the size of the banks thanks to incredible leverage is off the charts. But the question is: will this solve the problem…or take us down with them?

TB ran across this piece on Dealscape from a speech Seidman delivered to a joint meeting of the SIA and FSA in November, 2008 (TB’s emphasis in bold):

“These things do go by,” he said, he has repeatedly said this but look what follows), “but that’s not to take away from the fact that this is the worst financial crisis since the Great Depression. In one sense it’s worse than the Great Depression, since it’s far more complicated for governments to handle.”

Seidman then went on to list the main reasons (in no particular order) for the crisis:

• The Securities and Exchange Commission for loosening capital requirements
• Fannie Mae for entering into subprime lending
• Rating agencies for rating paper that they had no experience with
• Robert Rubin and Alan Greenspan, who went to bat to prevent the commodities exchange from regulating derivatives
• The Federal Reserve for increasing the money in the system and refusing to regulate  mortgage brokers
• Securitization and himself

TB has no idea what he meant by himself unless he was thinking that all of us were culpable for our outsized spending in relation to income. But even if we can get consensus on good bank-bad bank the size will make it unfeasible.

Bank analyst Meredith Whitney is calling the good bank-bad bank concept the Bank Asset Recovery Plan…acronym? BARF!

Did you know that Warren Buffett’s Berkshire Hathaway is almost at a four year low. Poor Buffett, the Disciple of Benjamin Graham and diversification didn’t seem to notice that at the end of the day his is a ‘financial’ company. Since October 3 it has plunged by 37.6%, and is down    from the 12/11/07 high it is down 41%…hope you didn’t get pulled into that false rally…see it would be nice to have those dividends, Warren. This is another strike for him, the first being his foray into currencies shorting the dollar which cost shareholders (including himself) $15 billion…another principle violated: don’t invest in what you don’t understand. In fairness, he is open about his mistakes and has over 95% of his own net worth invested in the company…not many can say that, right?

Bond Market Volatility: Why are bonds so volatile? How does one invest in them when you can lose 3 or 4 points in a single day? Also, have you noticed that while the front end is still well below 0.5% it is starting to climb so watch it…is the money being reallocated to stocks? Commercial Paper? Who knows but despite huge issuance of corporate bonds including high yield this month the risk/reward looks atrocious. Also, as treasuries sell off be careful as the spreads are still coming in which could precipitate a big rally and a selloff in spread product. Also, after digesting a record $30 billion 5 year notes as well as a 2 yr issue the February refunding will be announced next Wednesday, this could cause further weakness but perhaps set the stage for another major rally…watch closely. TB believes it is way too early to become enamored with inflation protected bonds (TIPS).

GDP: In case you don’t get that far down here is the summary. Note that it would have been worse wre it not for negative prices and a 1.3% inventory build which has to be viewed as involuntary:

GDP contracted at a 3.8% annual pace, the most since 1982 in Q4 vs consensus for a 5.5% decline. But that is misleading as Inventories grew 1.3% and of course inflation was virtually nil. The GDP Price Index fell 0.1% the most since 1954…that is what kept it up. Here is the bad news: Consumer Spending fell 3.5% vs -3.8% in Q3 and Spending on Equipment and Software plunged 27.8%, the most since 1958! Also the Employment Cost Index rose 0.5% in Q4.

Commodities: remain weak. Gold is attempting to hold above $900 for the second time in a week and is $923 up $19 on GDP but way short of $938 resistance. Crude continues to skid along the bottom and looks ready to go lower although it is up $1.40 this morning. Not a good place to play.

The Recovery Act: How did Congress lose sight that this was supposed to be an economic stimulus package? Instead, while containing pork, the major flaw is that is won’t stimulate anything. As a result, in less than a month President Obama is losing a big piece of his political capital. Rather than being bipartisan both parties are running amuck and at a time we can least afford it. TB doesn’t claim to know the answers but he knows this is not the answer. Did you see Rush Limbaugh’s op-ed in the WSJ yesterday. Gosh, Rush is advocating reaching out…something he never dreamed of with the conservative GOP in power…what a fraud he is and it should be no surprise that the centerpiece of his plan is tax cuts…to those of you who don’t know, like Larry Kudlow he started out a liberal but found he had a better audience as a conservative…and then there was the similarity in his drug problems…let ye who has not sinned cast the first….

Bonuses: there are bonuses and there are bonuses and TB is having trouble not only reconciling the difference but measuring the economic impact. Yesterday, NY State Treasurer DiNapoli said that while bonuses paid in 2008 were down 46% they were still the sixth largest on record. Much is being made of Merrill paying those bonuses and as a former institutional bond salesman he knows that other than retail brokers who are paid commissions, most are paid a salary that isn’t huge with most of their compensation coming from bonuses which are based on sales credit earned thus what Thane may have been doing is insuring that BofA didn’t cut these people off. Next you have to define risk vs. non-risk trades. Most institutional sales are non-risk…especially since mid-2007! If you don’t pay bonuses on the non-risk trades you will not only lose salesmen but you negatively impact the economy. This is especially true in New York. Just what did BofA buy in Merrill? Certainly not bricks and mortar like it got with Countrywide and whose employees were replaceable. The assets of any financial firm go down the elevator every night. So while we want to punish them for the sins of their risk-taking counterparts we need to consider the ramifications. The risk-takers…with the firms money which is really shareholder money were the ones who reaped the big rewards…and those were and always have been excessive as they are competing with other firms…kind of like professional athletes who earn (sic) those gargantuan salaries. This is not unlike CEO’s who are compensated as if they are the entire firm and nobody else is responsible. TB expects that to change too. New Yorkers better worry about what might happen to real estate if those bonuses are ‘clawed back’…as well as those in other financial cities. Thus far the housing market in the $1 – $1.5 million sector has held up pretty well…that could easily change…and then consider the impact on other businesses. Nothing is easy!

CEO Compensation: Wake up America…especially shareholders! The other night on the news CBS had an interview with the CEO of Japan Air Lines. He has no limo, takes a bus to work, no private jet, flies coach on his own airline and while flying asks passengers how they like the airline and tells them if they have a complaint to write to him directly! Also, he has lunch every day in the employee cafeteria…not at his own table but with the employees. His salary is not mega millions and in one year he cut it to $90,000 because they were cutting employees pay and laying off and he wanted to set an example. That folks, is real leadership. Morgan Stanley’s John Mack like Lee Iacoca show that leadership. John Fuld of Lehman, and John Thain do not. A pity!

CFA’s: Chartered Financial Analyst was the brainchild of Fischer Black part creator, along with Myron Scholes (who later self-destructed with LTCM), of the Black-Scholes Options Pricing Model while editor of the Journal of Finance pushed the concept. In theory it was good: you had to have three years experience before you could begin the program. When TB started his investment career in 1972 there were few CFA’s and most had been grandfathered in with now examination. Even though he was managing portfolios he was told he would have to wait which was absurd (now the rules have been changed so that anyone can take the series of three exams, given annually but not be able to use the designation until after you have three years experience…TB eventually took Level I and Level II but failing to pass that he withdrew as it was far too time consuming while managing money. Then the exams were relatively easy but have become increasingly harder until they are downright difficult But the problem is they should be called Chartered Stock Analysts as that is what it is all about. Now consider the growth of bonds and derivatives and you see the problem What TB believes should be done is have a Investment Professional designation after one comprehensive exam. THEN, have separate tests for bonds, stocks, options, futures equity securities analysis, bond securities analysis (they are very different), etc. This would force continuing education…currently attending the annual meeting counts as continuing education. The other thing they need to do is consider other options to the Random Walk Hypothesis which has been proven invalid except in normal markets…the concept is good but assumptions are very flawed. There should be a disclaimer also like past performance is no guarantee of future performance along the lines of: a CFA designation means you know the fundamentals, not that you apply them, or perform better with it. The point is it needs to be changed so that it is not a barrier to entry but it has become a huge business now. Normally the pass rate on level I is around 60% but last year was a record low of about a third passing! The reason is probably due to brokers trying to get the designation and not realizing how hard even the entry level exam is if you aren’t right out of school…over the past few years there has also been an increase in the number of applicants due to recent college grads and even students sitting for it which is given around the world. Aside from proving you have the knowledge…but not the ability…to manage money the best thing is the Code of Conduct which at least puts ethics front and center. Note that you normally don’t see CFA’s being indicted like Bernie Madoff…they are professionals and most sincerely care about their clients. How many of our analysts are CFA’s? Virtually all, so how come they didn’t see how overpriced financial assets were…save for Meredith Whitney and Gimme Credit! See What TB means?

A rather lengthy diatribe today but hope you gleaned something from it.

All the best and have a great weekend!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC January 30, 2009.

Bloomberg Quote of the Day: “Age is mind over matter. If you don’t mind, it doesn’t matter.” – Satchel Paige (for those of you too young he was a Negro League baseball pitcher who finally got to the majors after they ended segregation in baseball. TB.

…yesterday’s rant elicited nearly a dozen comments from readers. With the exception of a friend who said just turn CNBC off the rest were in agreement with TB. All of the responses were from people who have know TB personally and most were more than one liners which is rare (usually someone says ‘good job’ or ‘take a hike’, but a lot was said that CNBC should be thinking about but they don’t care, as most said: it’s entertainment. Now that would be fine except this cable network owned by General Electric (the Mother Ship) as they refer to it, ad nauseum, under the NBC umbrella. So to those of you who can, turn it off (or at least mute it and only turn it on when you see a sane face), or switch to Bloomberg…unfortunately, Bloomie is not available in all areas and TB is having problems getting it even though it is on his cable list…have to fix that. So you see, like the all-night DJ, TB never knows if anyone is reading…or what will get them going. You can’t imagine how surprised TB was at all the responses and that he wasn’t blasted.

One last comment on CNBC is that former GE CEO, Jack Welch (the house that Jack built), was on and Joe Kernan, who has now tried to take the government bashing lead from Kudlow, said that government should not be intervening in business adding “government has never added one dollar” to earnings. Welch immediately jumped him saying he was ‘over-reacting’…but hey it was good theater, right? With all the screaming about socialization, nationalizing the banks, etc., have they forgotten that it was capitalist greed that brought this on and the pendulum always swings too far. As TB has frequently said, the strongest advocates of ‘free market capitalism’ are its biggest enemies. Didn’t any of these people ever take Economics, or did they skip the lectures on oligopoly, and monopoly…the same way that lawyers seem to skip the conflict of interest sessions? How can we solve the problems facing us when people are still bickering over this?

Nowhere else in the world have CEO’s been paid as much as here in the U.S. of A. Furthermore, it was based on value added to stock price in most cases….if that should be the criterion shouldn’t they all be paid zero now? That was rhetorical but one has to wonder why the upside is limitless and the downside is they still earn their salaries while getting their perks or get fired with a golden parachute that most would kill for. Is this better than socialism or nationalizing banks? That is what happens when people who have little or no vested interest are in charge or those that are (think Sandy Weill), are so greedy that they are willing to destroy their own companies for personal gain.

The system is broken…but it is because of greed and short run thinking…and a lack of government oversight that it happened. Yet the reason for the lack of supervision was everyone in government being on the take just so they can get the funds to be re-elected.

TB does not like the new recovery relief bill…it does not inject enough money immediately and is already politicized and Obama is already making the second mistake of his term by not being more forceful. He needs to stick his neck out and tell them what he wants not just be a cheerleader…a cheerleader of what? His first was the China policy statement made by Geithner calling China ‘currency manipulators’ and worse which is foolish when we are dependent on them to buy our debt…everyone knows what they are so don’t state the obvious to make Congress happy.

Yesterday, Kudlow had to chirp in on relief to states…it is their fault for spending too much…let them cut their budgets. Well they already are and in case nobody noticed when they do that it cuts even more jobs…especially in the private sector where providers can’t be paid, a situation that has been going on for months! Kudlow even cited New Jersey…now recall that it was Republican Christie Todd Whitman, who as governor borrowed billions to fund the pension fund by issuing bonds and then investing it in the stock market…shortly before the 2000 crash. You can’t have it both ways!

Notes on this morning’s headlines: The Treasury is now injecting $1 billion to shore up confidence in credit unions…when will we run out of credit. We may find out today by the results of the record $30 billion 5 year note auction today. Meanwhile, Nouriel Roubini who along with Robert Schiller sounded the alarm on the financial crisis who says self-regulation must end or their will be more ‘disastrous’ bubbles. TB disagrees because if it doesn’t end there won’t be any confidence left to create bubbles. As for the recovery act…we are just at Act I so it is quite possible the end product, after the Senate is done with it where the Dems are tenuously in control, and then the compromise between the two versions. Look, this is about keeping constituents happy…just like some said they voted against Geithner’s confirmation due to angry constituents…the voter is in charge…for now. Then there is Ford which had its worst year ever and now took up the government on $5.5 billion of their offer…but says they won’t need any more…just a few weeks ago they said they wouldn’t need any…unless things worsened…and they did!

Now the U.S. is considering banning all credit default swaps unless you own the underlying bonds…now think about this: what would the commodities markets be like if you could only play if you owned the underlying commodity? There would be no market! Instead, they need to go on with creating a national…global?…exchange for CDS. Like commodities, capital and margins would be reviewed daily…had this been in effect we wouldn’t have had the piling up of long/short contracts which created a situation where the failure of just one participant…think Bear Stearns or Lehman…or even JPM…would create a domino effect…and did! See how important modest regulation is and how no regulation leads to excessive regulation…again and again throughout history. Yawn.

Now for a summary of the markets:

Commodities: with the dollar strong again, just breaking a streak that began on 12/18/08 due to weakness over the past few days, one would not have expected Gold to do much…but it rallied steadily from January 15 (+14% before peaking on Monday), but is now down for the third straight session…it needs to hold at the 200 day $860…soon the 40 and 200 will merge just above $850…that could be the buying opportunity. Energy is weak with Crude sliding along the bottom and while gas pump prices are up sharply, reformulated gasoline futures have been going sideways for three weeks since it is just refining spreads that are widening out. There is little consistency to anything else, merely speculators.

Bonds: Volatility in bonds has replaced that in stocks…treasuries that is! How does one invest in bonds when the long bond can be up 2 points or down 4 points within hours? Bonds did not protect us from the stock market decline but then rallied into yearend reducing losses significantly on TB’s portfolios but now they are declining along with the financial stocks again…does this make sense? It does if investors lack confidence. Watch the 5 year note auction results today as closely as you watched for Wells’ earnings.

Stocks: We continue to struggle with the 40 day moving averages, which even if taken out are well below the more significant 28.6% Fibonacci retracements from the cycle lows! What is interesting though is that the Russell 2000 small cap and the SOX (semiconductors) broke above the 40 day earlier this week but how does one explain energy stocks, the NYSE Energy Index closed above the 40 day m/a yesterday. This despite energy prices weak due to a glut. XOM is the one to watch here as it yo-yo’s on a daily basis driven by speculators…but beware while it is trading above the 40 day moving average the 200 day is falling rapidly! Also, after rallying along with the U.S. yesterday following Wells’ earnings report foreign banks are being hit hard again today and U.S. banks will likely retrench. What to do? Another question: is the government pumping more money into banks a sound reason to rally? 

The point is: we are still deep in a major and worsening crisis…don’t be sucked in!

If you are concerned over illegal immigrants, note that last year was the first on record with a decline in remittances to Mexico. Not only that but many Mexican’s are applying for Mexican citizenship for their children born here. We are no longer seen as the land of opportunity…so build that wall on the border it will only keep them from going back. But remember that most are doing jobs that Americans won’t even think of doing…at least now. Here is some more fallout: hospital ER docs here have filed suit against the State of California having lost millions by not being able to refuse treatment to anyone. Now with the economy suffering even more people will defer seeking medical attention until it is an emergency…still opposed to federal healthcare…TB knows of several people paying more than $1,000 a month each…while the retirement savings are shrinking. Then there is another industry you wouldn’t think would be affected: scrapyards. First, the inflow of trash and waste from construction is shrinking while demand for scrap iron, etc. is almost non-existent…is there any sector that won’t be hit and hit hard eventually? No!

Happy trading!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC January 29, 2009.

…having followed Mr. Kudlow during much of TB’s career and hearing his forecasts while he was Chief Economist at Bear Stearns (despite not being a schooled economist), TB has often thought how much one would have lost listening to his ‘sage’ advice. He left there for a stint as Economic Advisor to Reagan and then upon his return to Bear, flew too close to the sun. He proudly calls himself ‘born again’ and in that sense he is, except he, like many others forgot to learn Christian values. He starts with his political and supply-sider bias and then formulates a policy based on that…a bad idea.

Consider this man who said that the subprime lending crisis was overblown while continuing to preach his ‘goldilocks’ theory on the economy even as things were crumbling. He finally conceded we ‘might’ see a mild recession but it would be over quickly…how wrong he was and how lucky nobody listens to him anymore…only a fool refuses to alter his thinking when the situation changes…another bad idea.

As always he thinks tax cuts are the answer here…and TB agrees that the corporate tax rate should be cut to zero replaced by a return of the dividend tax to ordinary income since they produce similar revenues and 95% of stockholders don’t pay dividend tax anyway (more if you include pension funds…which then become ordinary income when paid out). Kudlow of course, does not not subscribe to the latter part of the equation, despite it being originally proposed by the late Nobel Laureate Franco Modigliani who knew volumes more than Kudlow. If the corporate tax rate had been zero it would have caused many of those record stock buybacks (5 years running) to be paid out as dividends since the activist hedge funds would lose their leverage, and make U.S. companies more competitive abroad. But as a stimulus, considering the losses here, it would not entice companies to hire…they think just like you and TB do, meaning they must have confidence that investing for future earnings must be justifiable. That is not the case now… Also consider the tax loss carryback is being extended to five years from three but with the magnitude of the losses it will not be as stimulative as it appears.

There are three main reasons for attacking Kudlow here. First, aside from his politically based theories, he epitomizes the attitude of angst at CNBC. Listen to his bio that they now have for everyone there and listen to the ego and hubris…as for the others while some are interesting it promotes their own self-image as the ‘all-stars.’…of what? Not reporting, as the thrust is editorializing, not reporting and being apologists for business and  highly critical of everything governmental…especially Dems, although today Joe Kernan blamed the GOP for creating this mess while saying that in four years the GOP will be back stronger than ever…unbiased? The second reason is that while he has some enlightened guests on his show he degrades them causing TB to wonder why they, such as Robert Reich continue to participate in his bloodsport…think of it like Hannity and Combes. Lastly, he repeats his thoughts over and over while shouting over anyone else…and his comments as usual are highly biased. He has come to exemplify CNBC while the younger anchors, drink his Kool-Aid…hence, Sir Lawrence of Kudlow by TB.

As for the civility issue, yesterday he began by talking about William Dudley, a former partner and government securities economist for Goldman Sach who joined the Fed in January 2007, and prior to his appointment as President of the New York Fed , EVP and head of the Global Markets Group. Kudlow started out praising him for his character and professionalism…then proceeded to scream that he is just one more in a string of Phillips Curve believers running the Fed and that is why we have problems…repeatedly he referred to Dudley as his friend…then bashed him…to the point that some of the others said he probably wasn’t a friend anymore.  TB knows Bill Dudley and believes he is a great market economist…with a lot more accuracy than Mr. Kudlow. Furthermore…or Abbey Joseph Cohen for that matter. Dudley even tried to convince Greenspan to slow the real estate bubble …unfortunately like the late Edward Gramlich , a governor, he could not get Greenie to budge. Yet, Kudlow ranted for five minutes, over the comments of Steve Liesman and others that he was simply wrong in his assessment.

Not content to stop here, Kudlow continued on his theme that government has no business running banks…after all why did unregulated hedge funds do so well while the highly regulated banks failed? This is selective rationalization in its worst form. With a record number of hedge funds failing last year or closing down, and having record losses of $350 billion, with $450 billion forecast for 2009, Mr. Kudlow seems to have stopped counting at the end of 2006. This is similar to his praising the Bush Administration for growing the economy from 2002-2007…with just the final year bad, as if it wasn’t the lax, if any, supervision of banks and brokers that has created a global financial crisis. Welcome to the world of supply-side economics where if people just go back to their own ways and consume more than they earn all will be well…they can’t, and won’t!

Follow the money…it’s always about the money! When TB came into investments in 1972, the average CEO earned about 10-15 times that of their average employee. It peaked at 400-500 times and that doesn’t include the perks like $1.2 million offices and personal corporate jets. This could not have been accomplished without interlocking boards, other CEO’s chairing the compensation committee, and willing executive search firms who, since their profit increased accordingly, pushed executive salaries to the moon…and just what did we get for all that? The mess we are in…managing for short term gains on long term liabilities…and they had better do the same stupid things as the others like leverage yourself 40 times or you will be out on your golden parachute.

New York State Comptroller, DiNapoli, says today that Wall Street bonuses declined by 44% last year…still it is the sixth highest on record…but the state will lose $1 billion in tax revenues. Gosh, that 44% is just about the difference between stocks down 56% and 100 isn’t it? This is also the other side of not paying brokers anything for their efforts. There is no easy way out! But isn’t it amazing with all those losses, the big five brokers reduced to two and they have abandoned the broker model and become banks! If there is a bright spot here it is that students, influenced by wages may do something that has a value-added to society rather than sit around creating flawed derivatives.

A tale of two companies: Jeffrey Immelt, despite a huge earnings decline…not to mention selling their soul to Warren Buffett and the government, pledged to maintain the dividend AND the AAA rating. What was he thinking? Moody’s now says they may cut the rating…not to worry if you are bondholder as they already trade like A-rated bonds. TB has felt for months that the dividend (common) must go while the preferred must be maintained.

The other side of the coin is Wells Fargo which just released their earnings. Unlike, Jamie Dimon’s JPMorgan…but perhaps because of the lashing he got for not taking enough writedowns…Wells hit it hard! Still, for 2009, they earned 41 cents a share vs. consensus 33 cents and is making loans…and that is excluding things like tax credits! The 4^th quarter loss was 79 cents a share which included a $37.2 billion writedown abd $7.2 billion writeoff on Wachovia. They have also reduced staffing by 17%, and added $8.1 billion to loans loss reserves and maintained the dividend at 34 cents while declaring that they don’t need any more TARP funds. Tier 1 capital now stands at 7.9%! As a result the stock is trading up…it should also help banks like USBancorp which have done nothing wrong…even Citi is trading up if you can believe that!…why is beyond comprehension…it is toast.  

Bloomberg Quote of the Day: “Blame someone else and get on with your life.” – Alan Woods. That’s the ticket! TB

TB had already planned to write this last week…then he heard Larry Kudlow on Friday and was further angered. Finally the 60 Minutes story on Wilmington, Delaware and how it is being impacted by the departure of DHL completed the sequence. Here goes:

…listening last week to the reaction to Obama and the Democratic Congress asking for accountability over the use of TARP funds and supervision of the banks as they dole out the money caused TB to do some serious thinking. He offers the thoughts for you, but is not trying to convince you but merely have you do the same thing he did.

1. The government thinks they can run the banks better than professional bankers.

You have to be joking? We are in the greatest financial crisis in history because of these professional bankers. Bankers who thought that 40 times leverage or more was sound banking? Kudlow and friend Art Laffer pounced on the issue citing how government can do nothing right so leave running businesses to the capitalists…you know the ones who are begging for handouts from we, the people.

2. Government can’t get qualified people for the SEC, IRS or other agencies because they don’t pay enough money.

People tend to act as their leaders act. Why can’t we recall JFK and the swarm of people who wanted to make a change. Now that Bush (my people are the haves and have mores), and the wheelchair bound Dick Cheney (bet that ended the day after he left D.C.). Obama is setting an example…hopefully he can live up to it. With an ailing economy and at least some people who made money on Wall Street feeling guilt, isn’t it just possible that those seeking jobs with the SEC might be more knowledgeable and with the help of some whistleblowers who know where the bodies are we might be surprised. With hedge funds having lost a record $350 billion last year and a loss of $450 billion estimated this year, the fallout is just beginning and we might be surprised. One can hope that we are not all as greedy as those who made the millions and billions over the past eight years who are now finding out just how painful it is to make the money, pay the taxes and then watch the value of your investments evaporate…they can use that so they can begin to feel what the average American is feeling. A little humility is required here.

3. Kudlow and Laffer said that every year of the Bush Administration produced positive growth, and they only failed last year due to the financial crisis.

Laffer has repeatedly said, as has Kudlow that we have nothing to fear. Subprime loans were a fraction of total loans and 95% of all loans were paying on time…they have since lowered that percentage but still see no problem. What they won’t say is why was growth so positive. TB sees three reasons:

1. The economy was declining as evidenced by the stock market before 9/11…it was not a result of it. From the 2002 lows it was easy to show solid growth…but what were the components?

2. For the economy it was the housing boom which then created mortgage equity withdrawals and purchases of all goods from cars, to lumber, to furniture, to vacations. This was not due to income growth as that has been stagnant since 1998 or longer but primarily due to a willingness to take on more debt thanks to excessively available credit, often unsolicited. For stocks it was five years of massive stock buybacks which inflated earnings per share and had they instead paid out dividends at least shareholders would have something to show for their investment.  

4. Rep. Boehner (R) says that much of the money the Obama Administration is asking for will be used for Democratic ideals.

Boehner and others who apparently have little interest in education had better do some thinking. Culture and education are incredibly important to civilization especially a democracy. Take the case of DHL closing their shipping operation in Wilmington, Delaware…it shows that there is a multiplier effect of lost jobs not just government spending. Here are some of the details and other unforeseen impacts:

*DHL is totally shutting down the Delaware facility. 10,000 people are losing their jobs. Those people own homes…will have to move in hopes of finding work but how do they sell their homes? How do they make their mortgage and credit card payments? What about the stores they bought from…the mayor said he thinks that 1 in 5 small businesses there will close down. How about this: already the Delaware state unemployment insurance fund is broke….that is not welfare…that is money that was paid in by employees and employers…yet Boehner objected to giving the states the money they need to keep government running. Boehner also objected to using federal funds for education. How many people are being forced to take their kids out of college…weren’t we just pushing to have more engineers instead of a plethora of MBA’s? What will the impact be five or ten years ago with even fewer college graduates capable of producing something besides fat paychecks?

*California is an extreme case. Prop. 13 limited property taxes which is the staple for the cities and counties. Last year for the first time since it’s passage in 1978 property taxes declined…and are expected to turn negative this year. Then there are declining sales taxes which most affect the state along with income taxes…no need to comment on which direction that is headed. Is California, the eighth biggest economy in the world to be allowed to fail? They don’t even have the banks to borrow from any more.

*The Neocons and others point to the relatively low unemployment rate (ignoring Michigan which has a 14% unemployment rate). Well that 6.2% rate is actually more than 13% when you add in the ‘underemployed (part time for economic reasons)’, and you had better consider that when most families have both people working to make ends meet and are still strapped with heavy debt. Worst since the Depression? Much higher than the Depression when you consider that at that time married women did not work and that only changed with World War II. Also, debt was pretty much restricted to a mortgage, if that, and there was no credit card debt. The possibility of further damage is much worse than it was then…and the financial crisis is worse now than it was then due to leverage at the banks and the federal government.

TB could go on but you get the picture and once you start to think about it, you can add so many other situations and scenarios. Obama and we, the people, have our work cut out for us…but can we do it with the same people in Congress…on both sides of the aisle who responded to the lobbyists, not their constituents, and created the problems, or at least the opportunity for ‘free market’ capitalists to exploit them through their greed, first with derivatives which leveraged balance sheets much more than they appeared and then by running up commodities prices which dragged the global economy into a recession. One of these would have been manageable…with both it becomes doubtful.  

…that is how Geithner’s tax lapse sounded yesterday but even after that one doubtful Senator said, “you will be approved.” Actually, the questions asked were pretty good and while TB doubts the answer he did pay his income taxes…just didn’t pay the payroll tax but there were questions about why it took so long to pay the entire amount owed…especially when that was done when he was being vetted for the job. Still, we must hold her collective noses and give him the job…have anyone better in mind? One reader suggested Paul Volcker but due to his age he doesn’t want it AND he testified supporting Geithner’s appointment. Once again we find Congress debating while Rome burns…didn’t they see what happened to the stock market on Tuesday?…one of the worst days TB has seen…especially for the financials led by the banks (yesterday’s rally in all sectors and indices was 60-80% of that decline and that after several indices put in double bottoms from Tuesday…that is not convincing without a major rally!).

The ousting yesterday of Citi’s Victor Pandit raises even more questions as former AOL Chairman Richard Parsons was selected to replace him. Parsons must be the most Teflon covered man alive as he succeeds when all the businesses he is associated with fail. But the troubling fact is that not only has he been on the board and the Compensation Committee for years, testified with former CEO Chuck Prince and, like former colleague Robert Rubin was an advisor to the Clinton Transition Team…add in that he is black and the suggestion made by some is that they are trying to curry favor with the government. This is typical of Citi…a corrupt bank that goes from scandal to scandal and while Merrill did this thru ineptness they are just trying to continually extricate themselves from one scandal after another, Sandy Weill created and then systematically destroyed it.

Obama promised us change and TB believes he will do it but the problem is that the corruptness in the business/political arena is pervasive as the number of issues already raised shows. At any other time Tim Geithner would have been rejected on the spot, now we need him and he will have the IRS reporting directly to him…what a world.

Lest TB be accused of not being supportive of our new President, he was impressed by the press conference yesterday where he froze all salaries above $100,000 for his administration and placed severe restrictions on contact with lobbyists, former lobbyists and that no member may become a lobbyist until two years after he leaves office…take it or leave it…TB thinks they will take it as the mood has changed and there are still good people out there. Bill Clinton tried something similar but let it slide and the revolving door was back in play…it hit a crescendo under the Bush Administration. The naysayers are screaming that lobbyists provide good information…that they do as we all know. So good that it is written verbatim into law…that is help we do not need. Let our elected officials do their own homework instead of relying on those who donated to their campaigns. As TB said, if he had a choice he would throw out the entire Congress and start anew…especially the Senate.

How about this comment from one of the pundits: under the new rules we won’t get the best and brightest as they take the low paying jobs as a stepping stone to the private sector in the areas they work in…this is the most visible quid pro quo and why we got where we are today!

Several others have questioned the sanity of telling the banks how to use the TARP funds. Well, TB for one doesn’t believe they could do worse than these self-serving ‘eggpurts’…after all Chuck Prince and now Richard Parsons had no banking experience nor did Victor Pandit…he was a former investment banker and hedge fund manager of a fund bought by Citi and subsequently had to be shut down due to losses. TB worked for ten years with bankers who were not competent to run a bank…so don’t use that excuse.

TB cannot believe the Senator that is calling for more debate on Hillary Clinton…she is backed by key Republicans including John McCain…the guy doesn’t like her…deal with it and get on with the people’s business…sheesh!

A word about TB’s nemesis, Sir Lawrence of Kudlow. Yesterday, when Geithner was asked what specific plans he had, Geithner deferred as he should, saying that plans would be announced soon…as he should…that was not the venue or his position to announce those plans…just because Paulsen had to do it alone doesn’t mean that should become policy…and look what we have to show for it. Kudlow vehemently blasted him for not having a plan…beware of when Kudlow speaks well of you as he will stab you in the back moments after. Just last week after having dinner with Obama he spoke of what a great guy he is…we do not need Larry Kudlow or any of his acolytes…there are many.

This country is in “the mother of all crises” as Paul Volcker put it…that to TB means worse than the Depression…as bad as the financial system was then TB doubts that there was less confidence in our banks…yet it is only the big banks and some small banks that got enamored with mortgages that have fallen from grace…most of the good banks are not insolvent by any means. TB seriously doubts that US Bancorp, State Street Bank, or even  Bank of New York Mellon are going out of business…yet their stocks are plunging with the likes of Citi and BofA. Fear of the unknown is the worst fear…and if things are so bad how come treasury bonds are plunging while corporate bonds and even junk bonds are rallying??? That does not compute!

There is a fear of socialization…including nationalizing the banks…but would you prefer the alternative? No…ask yourself why there is no confidence in the banking system…is it due to this possibility?…only of late. Iceland has collapsed, Ireland is on the brink and the U.K. may be next…that is how deep this crisis is…how many countries imploded during the Depression?

The French nationalized the banks after World War II yet there were private investors as there are today as they spun more and more of them off…but are now being forced to take on more again. The same goes for the UK which is as close to nationalizing as you can get…but note they are converting their preferred shares to common to enhance their equity position. Question: why would they do this if they thought the banks would fail anyway? At least they would receive the dividends, instead they are foregoing the dividends since the income would be a pittance if the banks subsequently fail.

The two worst mistakes so far (ignoring the TARP and AIG fiasco) have been not preventing Lehman from failing which we are all still suffering from and suspending the dividends on FNM/FRE preferred which further hurt the banks who held the stock not as an investment but to support the financing conduit and got a double whammy: loss of dividend income ($64 million for Wells Fargo alone), and were then forced to writedown the investment to zero…just when they didn’t need more writedowns!

So if you are a free market capitalist…give it a rest…free markets are not free! Greed is!

…how can we not be optimistic on the day of an historic event…one that attention to detail (such as using the Bible Lincoln was sworn in with for Obama’s swearing in)? Pundits keep saying that everyone is hoping the new President will succeed in solving the economic problems which face us…unless they have a deathwish they had better!

But that brings us from optimism to realism…the sad truth is we have not even begun to solve the problem: 25 years of overuse and misuse of credit and more than  a decade of poor legislation of the capital markets (one has to say this of the IPO markets in the dotcom bubble), and then deregulation of the financial services industry at the expense of the ordinary Joe…Six-pack not the Plumber! Yet, nobody casts a single stone at the Congress, regulators (save Cox), Wall Street (except blaming derivatives as if they did it themselves without any human input), or hedge funds, private equity…again with the lone exception of Bernie Madoff who took scam to an artform….and even he is out on bail, protected by the laws…you can’t even say guilty although he admitted it and his sons turned him in…after all he hasn’t been convicted or even charged for anything, yet!

The very cures proposed by Treasury Secretary Paulsen  .which changed by the moment did not address the disease…no sir, only the symptoms and worse, one at a time. It was impressive to watch Team Obama show their concern and readiness to take charge without stepping on the feet of the lame president…oops, duck that is…but not AFLAC!

You cannot cure a disease by treating one symptom at a time…there could be ten or a hundred diseases with similar symptoms and by treating them one at a time you might actually make the disease worse…and that is just what we have done! Investment guru, George Soros said today that the TARP legislation was misused and that the Obama proposals are not significant enough to make a difference…he is definitely right on the first charge and probably right on the second.

The problem is that we optimistic, but not realistic, Americans believe…listen to the representatives of the business community repeatedly say that we must convince investors that companies are safe to restore confidence and once that happens they will begin to consume again…with what? More credit cards? Home equity withdrawals? One source that we know won’t produce results is higher earnings…that is not and cannot happen. Meanwhile the Bush favorites, the wealthy (“my supports the haves and the have mores”), are suffering too…it is no fun to be a millionaire when you were once a billionaire…brother can you spare a million? Assuming this prescription could work…it cannot…is like putting on a bandage when you need an amputation…it works for now but the eventual outcome will be fatal. While optimism is good…unrealistic thinking is not…yet that is just what we are doing.

Obama is inheriting Bush’s problems…as he said I didn’t bring this on (Dubya kept saying “bring it on”), but nine months from now the people will hold Obama accountable…just as they do a CEO (even though the board doesn’t). If he fails, it will not be his fault…how can it be? We are asking a Herculean feat of him and there are no guidebooks, no rules, only hope. We had better pray that hope is enough…it’s all we have, as we have spent the rest.

On Thursday, TB stumbled in to Schwarzenegger’s State of the State speech…it was unlike any other before…instead of praising their accomplishments he said we are in a state of crisis…Obama advisor David Axelrod said the same yesterday…does it mean anything that Axelrod, David Gregory and Rahm Emanuel all were wearing gray ties?

It is ironic that the Bush Administration, which prided itself on a laissez faire approach to business…big business that is, and bent over backwards to accommodate them while they totally ignored small business which is the lifeblood of America…and in the end placed us right on the doorstep of socialism…take a good look at the U.K. today…they are doing an experiment with Royal Bank of Scotland that is one step short of nationalizing the banks…and calling it ‘creeping nationalism’…just another word for socialism.

So whether or not you voted for Obama, this is a historic day, and you had better put aside any negative thoughts about him and hope…pray…that he can solve this. If not, it won’t matter what anyone thinks…America as we know it will be toast.

Just like the failure to place blame on anyone for putting America in this mess, it is interesting to hear people try to compare these times to the past…worst since 1945…almost but not as bad as the Depression, etc. Let’s be honest: the world has never faced a crisis of this proportion…ever! Why? Because never in history were people so indebted and surrounded by derivatives that made it all possible…honk if you agree.

Now go off and put the markets out of your mind…if you can with the long bond off nearly four points due to the fact that the treasury market was closed yesterday and stock futures are down over 80 points…the same as they were yesterday…and live history!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC January 20, 2009.

…if you are a money manager you should register yourself with the IRS as a professional gambler because that is what the game has become. True, as TB’s wife would say it is gambling…’you pay your money you takes your chances’, but thanks to the lax regulatory policies of the last eight years there is simply no investor protection that at least the statements made by officials of a company will be truthful…even after Sarbanes-Oxley with its massive penalties for falsifying information…and there is scant evidence that anything is being done about it even as this is written.

Consider Bank of America’s Ken Lewis: despite a solid move to separate the Chairman and the CEO positions, he retains both! We lulled ourselves into allowing companies to do this when the board…and especially the Chairman should represent the shareholders and that is hard to do when you are both…at least objectively. Lewis jumped in to buy ailing Countrywide paying way too much for it…and although professing that they thoroughly examined the loans, which was impossible in the brief time they took…he went on to make not one but two investments in China

Listen to these statements by Lewis today:

”net interest income will be down in Q1, then improve”

”he feels good about the competition”???

”wishes he knew when bank will be free of U.S. investment” but it will be  “as soon as possible”

“it was in best interest of shareholders and U.S. (???) to complete (Merrill) deal”

“renegotiated Merrill deal would have been disruptive”

“bank will generated huge profits in normal economy”???

“we did the right thing for the country”???

“times are increasingly difficult on all of us”…awwww…then leave!

If you believe one thing this man says you are a fool! Remember he was interviewed on 60 Minutes about the TARP funds and protested being forced to take them…then they issued TARP bonds…but what a guy…he and the other execs gave up their bonuses!

BofA and Merrill are a match made in heaven…both have a terrific track record for turning gold to dross. Lewis also said they paid too much for Merrill because of ‘goodwill’. How many times have heard from the other blithering idiots – Citigroup – that now they have what they need? Is there collusion here? …was there a wink and a nod to ‘come back next year’?

But the point is that Lewis went to the government in December and told them of the problem…yet said nothing publicly…even when he had an entre from JPM’s Jamie Dimon when he warned of earnings problems. In fact, JPM’s earnings declined by 76% but they still had positive earnings (if you can trust them on that), while BoA had a fourth quarter loss of $1.79 billion. So the government bought $20 billion of preferred at 8% and after BoA takes the first $10 billion in new losses agreed to cover 90% of subsequent losses. They are going right down the path taken by Citi…who has had even more Fed backstopping. Meanwhile Citi has announced they are splitting the company in two (good bank/bad bank)…will BofA be the next one?

Yesterday, Jamie Dimon was interviewed and defended their use of TARP funds. He said they bid on an Illinois bond issue and bought it when there were no other bids due to the governor’s scandal…hello, the underwrote it, they did not BUY it! He also pointed to millions of new credit cards they have issued since the TARP went into play…TB rests his case that we are trying to solve the problem by creating more of debt…meanwhile a Chinese central bank criticized Paulson for being critical of the high savings rate in China which is reminiscent of the Japanese boom when we chided them for not consuming enough…had they done so they might have gone a few more years and imploded even more! Do you feel confident that we are on the right track? TB bets you do not!

We deserve honesty from our CEO’s…and they are sorely lacking. Even Apple’s Steven Jobs was more concerned about share price when he ‘lied’ that his weight loss was not a problem and then came back to say he is taking a medical leave till June as it was more serious than he thought at the time…and then went on to blame a nosey press for causing him to make the decision…which one is it Steve?…while TB respects his desire for privacy he has a vested interest in holding up the share price but investors have an invested interest in knowing what is happening at the company! What if he suddenly died? Wouldn’t that be material? He has survived pancreatic cancer and will now have to have it totally removed. Aren’t investors in the same position as a life insurer? You bet  they are…after all Jobs promoted himself as the very essence of Apple and fought to stop anyone else in the company from receiving attention…especially a Wall Street Journal article on Cook…even though favorable as he demanded to be the center of attention…a logo if you will.

Honesty has been sorely lacking for years and we…and the SEC despite beefed up rules…have let it slide and now we, and the rest of the world are paying for it while they keep the spoils. Have you heard…even once…Hank Paulson or anyone else for that matter in government specifically name an individual at one of these financial institutions or call for their removal? This is a far cry from the Congressional hearings where they vilified Prince, O’Neal, and Mozillo…not that they didn’t deserve it (Prince was honorable but he never was qualified to be CEO in the first place…he was still Sandy Weill’s boy…as was Robert Rubin). TB read an article yesterday by Robert Scheer who questioned the wisdom of Obama…having Rubin as a close advisor, then choosing Larry Summers as chairman of the President’s Economic Council when he was the sitting Treasury Secretary when Glass-Steagall was repealed…the point being that he listened to Rubin who had gone on to Citi and had convinced Clinton to back the rule change. Also mentioned is Timothy Geithner who will, if confirmed, head Treasury even though he had two ‘lapses’ on paying taxes and only paid the first after the IRS discovered it and the second just before his appointment… and he will have the IRS reporting to him?

TB has no idea where Obama should have turned for council but we can only hope that he is as wise as we have been led to believe…who, unlike Clinton and Bush who surrounded themselves with likeminded individuals, enjoys wading through the differing opinions and making the right decision…the country’s future…and indeed the global economy need him to get it right…we cannot have another Dubya running the country. TB still believes that Obama has a much better chance of success than McCain would have…but that isn’t saying much. Will Dubya be the Herbert Hoover of the 21^st century? Will Obama be an FDR or something better?…or worse? One can only hope…and pray!  

Yesterday, TB went to SF for lunch with a former boss and two colleagues. He left the office with the Dow down about 150 points…stopped at Schwab 45 minutes later and it had turned positive…especially the Nasdaq which along with the Transports and the Russell 2000 (small cap) was the best performer of the day. He asked what happened and got nothing…from anyone. It was later billed on the basis that the government would step up for BofA…now of all the cockamamie reasons for a rally this takes the cake. One might think that it would be bonds that would rally…and one would be wrong! Overnight, the announced additional bailout gave strength to the global markets and they are roaring…and this is ahead of a three day weekend! Bonds are being trashed overnight with a 1-1/2 point loss in the 10 year treasury and almost 2 points on the long bond. Additionally, Consumer Prices fell by 0.7% in December and inflation rose by just 0.1% for the entire year!…yet the ‘bond king‘, PIMCO’s Bill Gross says TIPS are cheap???

You can bet on the stock market if you like…TB will defer to you, and remain sidelined!