Traderbill's Financial Markets Weblog

Quotes of the Day from Will Rogers:

“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”

“The Income tax has made more liars out of Americans than golf has.”

“There are three types of lies: lies, damned lies, and statistics.” – Variously attributed to Benjamin Disraeli, Mark Twain and others…

…the title is of the utmost importance here as they are three distinctly different things and the tax increases announced yesterday make the point. Some of you will say what does this have to do with investing…it has everything to do with it…investing in the future and how we have little or no interest in doing it. Obama is trying to do that but is being criticized for growing government by the same ‘Rovian’ Republicans who through a total lack of regulatory control allowed this mess to occur while enriching Halliburton, and themselves. What you read here may restore your confidence or it may make you angry. It is merely a point of view and designed to make you think. In writing it, TB sure did.

Some years ago TB attended a Schwab investment seminar with Barr Rosenberg as keynote speaker. Rosenberg is an anachronism: a Buddhist teacher; founded of BARRA, a financial research firm in 1974; and Rosenberg Capital Management in 1985. Rather than offer some insights on investing, he spoke on philanthropy and how you don’t have to be rich to do this but you do have to discipline yourself to setting a percentage of your income aside for charitable giving. TB walked away thinking heavily about this.

The problem is that just like the televangelists, giving does not assure you of becoming rich, it merely makes you feel better about yourself and that in turn allows you to work harder as you aren’t just thinking about yourself…the trick is to do it morally.

Most of us have never thought about the difference between the three terms. Philanthropy comes from the Greek philanthropia, meaning brotherly love (oddly that is what Philadelphia is supposed to mean but few living there would understand the connection.)

The greatest philanthropist of all time is said to be Andrew Carnegie, and many of the robber barrons eventually delved into it but we can never be sure of the reason they did. Since the income tax wasn’t enacted yet, perhaps it was to see those pearly gates? Lately, there are the charitable foundations of Warren Buffett, Bill and Melinda Gates, Gordon and Betty Moore, the Hewlett and Packard families, and countless others.

But philanthropy is not just giving money. It is defined as giving goods, services, or just practicing random acts of kindness…at least we are all capable of doing this should we choose to…some do, more don’t. That is charitable giving.

Since the baby boomer generation was the first to not teach its children how to save it is understandable that they are the first to not care about charitable giving. We have learned to satisfy our physical needs and desires without waiting for the wealth to attain them. Now we are getting to the point: if you only care about now and not the future what reason is there to save, or give, or build for the future. As one person remarked, “it isn’t that they are egocentric, they just think the world revolves around them.”

But what is hard to imagine is that baby boomers…TB is on the cusp of it by days as he was born December 26, 1944…were the offspring of what Tom Brokaw labeled ‘the greatest generation’, one born of sacrifice and making life better and safer for those who follow? If that book didn’t humble you, you just don’t get it. Try watching a movie about the Normandy invasion on D-Day, June 6, 1944, or think about their sacrifices on Veteran’s Day…talk about a lesson in futility. Why should I die so someone else and democracy might live? After Viet Nam we abolished the draft rather than reform it so one could choose not to be a combatant but to work in a hospital, or school, or do other civic work (TB would have proposed that it be a minimum of 100 miles from your home…200 if you live in Los Angeles.), even if you have a physical liability. Look at the Swiss, who can call up any man in the country until age 65 (but they don’t do it over and over as we did in Iraq…even LBJ said no one would be required to be in Nam for one day more than a year), or the Israeli’s who demand service in a kibbutz and military service for all men and women. That is the sacrifice we need to make to restore our pride in America and ourselves.

How did we get from JFK’s “ask not what your country can do for you but what you can do for your country” in just 41 years to Dubya’s “just go on as you always or the terrorists win”? Are we nuts. Where might we, and the world be today, had he instead asked for some sacrifice…do something for America to show the world that we aren’t just materialistic fools? Why do the best and brightest vie for Wall Street jobs and become financial engineers who build nothing, and in the end nearly destroyed the global financial system, rather than doctors, engineers, and others who produce things of value?

Why do so many of us have to get rich before deciding to teach or devote their lives to public service? Just asking. But why have we not demanded fair treatment for our soldiers serving long terms in Iraq and when the are wounded or maimed or killed are we not outraged at what little the government does for them and their families? Just so it isn’t us…that has to be the answer. Iraq was as senseless and futile as Viet Nam…so what!

Now we come to the third prong: charitable contributions. This came to the fore yesterday when the Obama budget was presented. The screaming, most notably by Dennis  Neale on CNBC along with his rant on rising taxes on incomes above $250,000 “they won’t want to work anymore.” Oh, please Dennis cut the histrionics. We have a graduated income tax…the most positive thing that can be said about it (yet there is a push for a flat sales tax which is the most regressive of taxes), that means that the additional tax, as anyone who has ever done their own taxes knows, is that the higher tax is at the margin not on the entire sum! Why do we fight for the millionaires and billionaires in this country who continuously cheat us, have access to tax schemes (some legal and some as with UBS not) such as generation skipping and others propped to them by highly paid tax attorneys, yet we barely object and get nothing on the upward mobility limiting alternative minimum tax? Also, why do we perceive restoring a tax cut that was made to ‘stimulate’ the economy yet only benefitted these same people, as a ‘tax hike’? IF it was to say 50%…or 70%…or 90% as it has been here in the past and is still in effect in most of Europe today, that would cause people to earn less…but to tax hedge fund operators and private equity at just 15%…that is the outrage! They who earn 2% of client assets no matter what and when times were good took 20% or more of the profit yet don’t share in the losses…where it the outrage over that inequity?

Also, we keep hearing that American business won’t bring money home because it is taxed at a lower rate abroad. True, and why is it true? Because that increases profitablilty so people can be paid more in salaries and dividends! The same proposal the late Franco Modigliani made and might have flown were it not for the antics at Enron: zero the corporate tax rate and tax dividends as ordinary income. Currently, who benefits? The top taxpayers while most of the people who hold stock have it in pension funds, IRA/401k)’s, or other tax deferred accounts where it will be taxed as ordinary income when withdrawn! You are being subjected to misinformation/disinformation, aka propaganda.

Charitable contributions do not equate to charitable giving. The deduction was designed to encourage charitable giving, instead it is to come up with something that looks like charitable giving: a $5,000 a plate or more ball where most goes for an entertainer…at the peak there was at least one of those a week in New York City! So if you were giving just for the tax deduction, shame on you.

Oh and New York City Mayor Michael Bloomberg’s recent comment that 1% (about 40,000) of  City taxpayers pay 50% of the taxes makes sense doesn’t it? Because if you back them out the average income plunges. He says they will leave the city…a city that saw condo prices hold even as the rest of the country plunged…in fact Wall Streeters were eager buyers. When NYC went bankrupt in 1974, they were going to leave, in 1998 after LTCM, after 9/11, yet, as in London, they just keep coming back for more. New York residents are triple taxed, more than anywhere else in the country….but restoring a tax cut will kill them. Have we all forgotten how stupid, and greedy, Blackstone CEO, Stephen Schwarzman sounded about a year ago passionately pleading for continuing the 15% ‘carry’ tax or nobody would engage in private equity?

Contrast this to Leonard Abess who Obama featured in the SOTU address. TB is sure the only reason Abess came was in hopes of encouraging other wealthy people to do the same. Obama had it wrong…Abess did NOT get a $60 million bonus, he sold 83% of his bank to a Spanish bank…he remains as Chairman…nobody is losing their jobs…the $60 million is about 10% of what he reecieved after tax. He didn’t think he was being generous, he thought he was doing the right thing. How many tax accountants and Wall Streeters would do the same? ZIP!

To those of you who think TB has gone ‘round the bend’ on this, please don’t have Thanksgiving or Christmas dinner with your kids in 2010, when the federal estate tax is zero…not if the economy stays weak. Why mention this? Because in 2011 if not abolished it returns to the old rate. The reason is precisely the same as the budget proposals Obama is making: to produce revenue in the ‘out’ years. The Rovians are billing this as an immediate tax hike but without showing it…as the GOP did with the estate tax, revenues come up even shorter…that is the only ‘truth’ in government: there is no truth…no black and white…only varying shades of gray. Deal with it.

Let’s make America and by so doing the world a better place by doing the right thing.

Have a great…reflectful…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, February 27, 2009

TB isn’t asking you to agree with him…but for the sake of America and making it a better place to live in the future…cut the crap! Let’s talk facts and if you believe that the answer is cutting taxes on the wealthiest Americans, TB has a beautiful bridge for you!

…that was yesterday, today is now! TB isn’t putting on the rose colored glasses but it is always a good sign when the market starts ignoring bad news. It is just possible…that we have put in an interim bottom since they couldn’t take stocks down further after four days of serious testing. That means that those two back to back inside or close to inside days on all major indices may act as ‘bottoming’ but time will tell. Assuming it is there will be fits and starts as the domestic and global economy (they are one now) is still a mess and if the populace starts to save again, as they should, rather than consume, it is possible we could be on a long, slow ascent….the operative word being possible, not probable or even likely.  

So what happened? First, Treasury Secretary Geithner stopped being a Grinch and finally gave some positive talk as Fed Chairman Bernanke has for the last two days. Speaking positively by government officials, and even President Obama in Tuesday’s SOTU address, does incredible things for investor confidence, if nothing more than to dispel the gloom and doom mentality. Remember though what TB said yesterday about those 20% rallies the CNBC collective heads love to brag about…when it is a $2 stock that can be the difference between the bid and ask, right?

The financial stress tests are underway and they should come out favorably since they are not designed to punish but to determine whether nationalization will be required and both Bernanke and finally Geithner have said it is not an option…if there is, it will be partial in the form of government equity of less than 50%. The bar has been lowered so most will be able to step over it. That is not a bad thing here as it will instill confidence. In order to be credible however, all banks cannot pass…most talked of for failure is Citi, followed by BofA…TB would opt for just the first one! Split it up and let Sandy Weill lament on his bad behavior…oops, we aren’t supposed to place blame, are we?

What is befuddling is that experienced regulators including William Seidman who did a masterful job of running the Resolution Trust Company (RTC), to liquidate assets in the S&L bailout, and the one who handled the Continental Illinois crisis agree that the government has got to step in and take the toxic assets of the books…finally that is being seriously discussed…what took so long is the mystery. That along with suspending market to market for banks and replacing with fair market value – which is a straw man but would reflect somewhere between the throwaway bids and the ‘estimated’ value. Those two measures would restore confidence in the banking system overnight!

TB has heard there is somewhere between $3 and $6 trillion in money market accounts waiting to be invested…not sure if that is the case but even if $1 trillion comes back that will make a huge impact on stocks with market caps so low…that is not the same as ‘cheap’ when earnings are declining. Therefore, to make money here you can’t just buy and hold but need a series of ‘surgical strikes’ to take profits like the big boys have been doing…problem is just WHEN do you sell? One never knows.

Watch bonds closely…TB has warned of two things: unheard of volatility and the risks of owning TIPS in an environment where inflation could be deferred for months or even a year or more. Yesterday and again overnight we saw treasury bill yields and Libor rise, albeit minimally but big trees from little acorns grow (please do not confuse this with Kudlow’s little grains of mustard…ugh). Even more significantly in the past 24 hours the 2 year note has gone from 0.97% to 1.10%, the 5 year note from 1.88% to 2.07% and the rest of the curve is nearly 20 basis points higher. As for the 30 yr TIP it has gone from 1.98% to 2.13% a loss of nearly 4 points! Since February 10 the iShares TIP ETF (TIP), which is an index of the entire TIPs curve has declined by 2.6%…TB previously warned that the dividend has been suspended for four months due to the negative inflation accrual more than offsetting the interest accrual! If you are a buyer of corporates or muni’s where spreads have collapsed sharply, they will start to look expensive if rates continue to rise.

TB also warned about Gold…that IF you are going to be a buyer here you need to be hedged. The volatility is being caused by a combination of the StreetTracks Gold ETF (GLD) and how when gold prices are rising it keeps feeding on itself as the fund is forced to buy gold to match the inflows…that very day. On the way down it is reversed driving gold even lower…and then there is GLL – the Powershares UltraShort Gold ETF which is leveraged two to one and if buying picks up could really drive prices down. On 2/17 gold gapped up by almost $3 dollars and rallied further until peaking on 2/20 at $98.99 and closed yesterday at $93.15 for a decline of 9.4% in just THREE days. While Gold peaked above $1,000, and GLD represents 1/10 of an ounce less expenses it is a sign of it peaking that the ETF never even got to $100. Downside is $90, then $88.29, the 40 day m/a. As for the ‘miners’ the Philly Gold/Silver Index is down 11% over the same period.

Crude finally got above $40 yesterday and took out the 40 day moving average of the lead contract at $40.53 and is currently $43.49 with heavy resistance from $48.50 to $50.50, so beware of oil stocks…especially drillers…not that they couldn’t break out, but TB is just sayin’…note that First Solar (FSLR) took a huge hit in earnings yesterday too and was the leading mover on both the Nasdaq Composite and the 100!

At least things aren’t looking as gloomy as they were on Monday…perhaps there is light at the end of the tunnel…pray that it isn’t an oncoming train…listen for the roar!

Besides buying TIPS, and Gold, the experts are saying to buy China. If there is an investment in China it is on the Hang Seng which declined 0.9% overnight while the unregulated Shanghai, and Shenzhen fell 3.9% and 6.1% respectively! TB has made much of the wealth gap here and the only other developing countries that eclipse us are China and India…but those problems are improving…or were so long as the economy was expanding. It is not and quietly the Chinese government is moving people out of the cities and back to the rural areas as job growth slows and layoffs begin. Worse yet, they have also ‘quietly’ been arresting billionaires and holding them for manipulating the price of their shares…watch and learn.

…so much is being made of nationalization of the banks by the free market capitalists. Every day we hear “do you want Chris Dodd or Barney Frank running the banks?” This is absurdity and denial. The same people who preached ‘unbridled’ capitalism and have seen it fail when even a modicum of regulatory restraint could and would have prevented us from getting into this mess. If you watched ‘House of Cards’ on CNBC (and if you didn’t look for it), you heard one universal answer to the question: were you to blame for what happened.” Most looked away or down, some hesitated, but to a man they said ‘no’, or ‘there is a lot of blame to go around’, or TB’s favorite: if we didn’t do it someone else would have. Think about this: it is immoral but it is perfectly acceptable capitalist greed and is precisely why markets and financial institutions have to be regulated. How can this not be obvious to every man, woman, child, and small dog on the planet? This is the apogee of denial.

In defense, the most honest statement was ‘if we didn’t do it someone else would.’ Because it is true. Take the case of real estate after prices had already soared:

*Appraisers were afraid to not come up with the ‘number’, and were frequently told by realtors what was needed for the loan and knew that if they didn’t come up with it, they would not be used again. For this reason, virtually all experienced and reputable appraisers left the business but only after writing en masse to Congress and state regulators, leaving those desperate to earn a living…if they didn’t do it someone else would have.

*Realtors put their experience behind them and told people not to submit lower bids and in fact overbid to get the home. Those who told buyers it was priced too high lost the client who then went elsewhere and bought it…TB knows realtors who had this happen.

*Buyers put their budgets behind them in the feeding frenzy and were determined to buy

 this home.

*Lenders did whatever it took creating exotic option ARM’s etc. so everyone could buy. If it didn’t meet a banks standards they were often referred to a mortgage banker and often at a lower rate than the bank would charge. Banks who adhered to higher standards had mortgage subsidiaries that didn’t. TB knows of ‘fudging’ data since as income by Citi and BofA, so think what less scrupulous mortgage bankers were doing.

*Congress deemed that everyone should have a home…blamed on the Dems but the GOP was not only in charge but when the Bush Administration saw what it was doing for the economy the GOP also endorsed this

*Greenspan and other regulators said they could do nothing because it was ‘what Congress wanted.’ Isn’t this the point of an independent Federal Reserve, one which is supposed to protect the sanctity of the financial markets? One would think.

*Buyers have been maligned as knowing they were not qualified. True there is personal responsibility but not when the facts are misrepresented, the contracts indecipherable, and even applications were intentionally falsified by unscrupulous lenders. We are not the brightest people in the world when it comes to our finances. If we were, we would not have stopped saving and instead consuming now and paying later. Yet we have been told by the ‘experts’, people like Larry Kudlow and others that the savings rate was understated as it didn’t reflect capital gains. With the stock market now at 12 year low that argument is ridiculous. What about the credit card companies (most owned by banks now in trouble) who sent out unsolicited cards…TB’s son, while unemployed and a full-time student had $50,000 in cards thrust at him!

*Last there is the speculator, which has become a dirty word lately. Speculators are required in any market that is to grow and so long as they aren’t unscrupulous (spreading malicious rumors about companies), or are regulated (uptick rule, naked shorting prohibitions, and in commodities, position limits) they are an essential to market growth. Consider there would have been no Suez Canal, Panama Canal, Chunnel, without speculators, the vast majority of whom lost their investment. Thanks to the rant of Rick Santelli in the commodities pit shown on CNBC and later YouTube, we are told let them fail…we don’t want a bailout and don’t want to pay for anyone else to be bailed out. As stupid as this sounds, is it worse than the southern GOP representatives, Senators and even governors who don’t want to help the big states who have been providing funds to them from income taxes forever? After all the relief Louisiana got in the wake of Katrina, how can Governor Jindal (a GOP presidential hopeful no less), be critical…because he wants the support of the Rove wing of the GOP which destroyed the party in the last election and if allowed to operate will keep them out of office for another 25 years. Must we assume that a speculator buys a house or apartment and then lets it sit? No, he rents it out until he sells it and if he fails, every tenant of those buildings, who have been paying their rent on time, is evicted. So the answer is to not to shut them off and create more pain but to exact a price for assistance…but that folks is politically unpalatable.   

Thus the buck was passed…and the greenback may become a derogatory term one of these days. All because of greed…capitalist greed. We have also forgotten that under capitalism it is supposed to work because businesses are supposed to have goals of long term profitability, but we have reduced that to the current year or quarter! Just give me my bonus! TB did not leave out the SEC but is saving a very special place for them. With the dissolution of Glass-Steagall it was important that the bank regulators and the SEC monitor and regulate to insure that investors are protected. Not only did they fail to do this but the Donaldson Fed removed all capital constraints on the top five brokers (too big to fail), since they cried they could not compete with European bankers. Worse still the Cox Fed failed to audit any of those firms even once and was reportedly told by Cheney to not enforce shareholder initiatives, or regulatory issues, hence Bernie Madoff and Allen Stanford and as one former regulator said, “we have just scratched the surface.”

But what we have to fear now is over-regulation as we did with  Sarbanes-Oxley after Enron and others blew up. There is not enough incentive in a smaller company to do things that are detrimental to shareholders and the economy. They could have stopped at the top 500 companies. Instead, they applied it to all publicly held companies raising the bar for going public and raising costs incredibly due to not being able to use an auditor as a consultant. By splitting these two functions in a small company the costs of each are much higher and combined may double the costs. We know how poorly this has worked.

Finally, TB asks, rather than Dodd or Frank or someone else, are there no qualified people out there, honest retired CEO’s, etc. that can’t run these banks? After all, when they were before Congress they said they didn’t know what was happening, from Chuck Prince, to Stan O’Neal, to of all people, Angelo Mozilla. But Congress also has no business determining CEO compensation…or Obama who thinks $500,000 is plenty. We do not need CEO’s who are struggling with their own finances running our financial institutions…instead have income proposals approved by shareholders. Do you think GE’s Jeff Immelt would be paid $3.3 million if it was put to the shareholders? No!    

Bloomberg Quote of the Day: “I’d rather be a failure at something I love than a success at something I hate.” – George Burns

It’s good, isn’t it grand, isn’t it great
Isn’t it swell, isn’t it fun, isn’t it nowadays
There’s men, everywhere jazz, everywhere booze
Everywhere life, everywhere joy, everywhere nowadays

You can like the life you’re living
You can live the life your like…

 - “Nowadays” from Chicago

…not much joy out there, least of all yesterday. While the Dow essentially closed unchanged that was following the 297 point decline on Tuesday…BUT it did not put in a new low so it might be forming a bottom (or not) and we still have not had a new low close…albeit avoiding doing so by a fraction both days…still that is technically significant, right? Also, volatility declined taking back a portion of the big jump on Tuesday, but we are in a Scared New World, right?

Contrast to October and November 2008 when we had it shoot to 90 which was unthinkable and held above 60 for two months…still we are just below 50 which is still well above the previous high of 40. But note that we are getting all this volatility (risk) on relatively low volumes of 1.5 billion shares on the NYSE and generally less. But the advent of electronic trading distorts this measure as now only a fraction of trades are being done on the NYSE…thank you for your help John Thane…actually without his help there might not be an NYSE as it would be redundant. Another factor is the growing use of options as hedges which has expanded from speculators to hedge funds and now has permeated down to a few innovative money managers. Most however are still buying just stocks, lacking the ability, desire, or whatever to do so. That seems to be a losing proposition as without options to buy a stock here without an offsetting put option, provides no downside protection, none. The new strategy is akin to trailing stops but in a market as volatile as ours, trailing stops are of little value as we plunge right thru them.

Now catch this exchange yesterday on CNBC between an exuberant money manager who shall remain nameless and PIMCO’s Paul McCulley. Said money manager was on the verge of a heart attack bellowing how there has never been such an incredible time to be buying stocks and they are grabbing everything they can (the reason he is nameless is that he is the strongest example of the bull case TB has seen to date). He supported this belief in history since the stock market rallies six to nine months before the economy so get ‘em while they’re hot…in poker terms he is ‘all in’ (or is it all done?). When asked for his opinion a thoughtful McCulley replied that historically speaking that is correct but only when actions have been taken to turn the economy around…we are still foundering. This is the best explanation TB has seen yet for why it is different this time.

Speaking of time, President Obama is running out of it. His combination of hope while telling us just how bad things are is losing value. On Tuesday, he signed with great fanfare the stimulus bill and we know what happened to stocks which were already down at the time of the press conference by most of the decline (250/297). Then, yesterday, he announced the plan to use $75 billion to keep people in their homes by renegotiating their mortgages…but no specs, people who can afford their mortgage, etc. The market didn’t even yawn and in fact they attacked the banks yet again.

Ah, the banks! We are seeing the most convoluted paradox in Congress…if TB may be allowed to be paradoxical. The free market capitalists of the GOP including Lindsay Graham are talking about nationalizing the banks as the ultimate solution, while the bank hating (usually) Dems are saying that probably won’t be necessary…you can’t tell the players without a program! What gives? It’s as if they all went out for drinks (booze per the song above), and decided the best defense was a juxtaposition of philosophies. Now nobody knows where the banks stand and which ones, if any, might be nationalized. The obvious choice is Citi…or else break it up if you can find a buyer (or they could do like MBIA did and just hand out shares in the bank, the credit card company, and Smith Barnery pro rata to shareholders). The next question is what about BofA? That is a question TB is being asked lately by friends who worked for BofA…not to mention a few who work for Merrill Lynch. It is all too confusing and people are now panicking and this is not a good time to panic. Remember: there is no gain until you take it and there is no loss until you take it…after you do there is finality. If we all had 20/20 hindsight we would have sold everything and gone to cash long ago…yes, near zero is not so bad…but we would have had to pay TAXES on those capital gains…which we now all wish we COULD do and have helped the government. Funny, how nobody is adding capital gains into the savings rate any longer…savings are back to being just what the government always said they are…savings!…that is unless you put your money on Stanford’s online bank…which is now impacting Latin America (overnight Hugo Chavez said he is boosting oil production by 12%…did he have money with Stanford?).    

Is your money safe? What have you got in your wallet? So much for the bad news…now the good: TB saved $300 on his auto insurance!

TB has been asked to be more upbeat and a friend sent him a story yesterday that fills the bill. Here it is from www.bnd.com:

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MIAMI — Lots of bosses say they value their employees. Some even mean it.

And then there’s Leonard Abess Jr.

Lots of bosses say they value their employees. Some even mean it.

 And then there’s Leonard Abess Jr.

 After selling a majority stake in Miami-based City National Bancshares last November, all he did was take $60 million of the proceeds – $60 million out of his own pocket – and hand it to his tellers, bookkeepers, clerks, everyone on the payroll. All 399 workers on the staff received bonuses, and he even tracked down 72 former employees so they could share in the windfall.

 For longtime employees, the bonus – based on years of service – amounted to tens of thousands of dollars, and in some cases, more than $100,000.

 At a time when financial titans are being paraded before Congress to explain how they blew billions on executives’ bonuses even as they received a taxpayer bailout, the big-hearted banker’s selfless deed stands out.

 ”I retired seven years ago, and all of a sudden I get this wonderful letter and phone call,” said Evelyn J. Budde, who spent 43 years at City National Bank of Florida, rising to vice president.

 ”I was shocked,” said William Perry. In 43{ years at City National, he climbed from janitor to vice president. Like many longtime City National employees, he forged an unbreakable bond with the bank that continued into retirement. Perry returns regularly for the annual employees’ dinner.

 Abess didn’t publicize what he had done. He didn’t even show up at the bank to bask in his employees’ gratitude on the day the bonus envelopes were distributed. He was inundated with letters soon afterward.

 Asked later what motivated him, Abess said he had long dreamed of a way to reward employees. He had been thinking of creating an employee stock option plan before he decided to sell the bank.

 ”Those people who joined me and stayed with me at the bank with no promise of equity – I always thought someday I’m going to surprise them,” he said. “I sure as heck don’t need (the money).”

 In exchange for an 83 percent stake in the business, the Spanish bank Caja Madrid paid $927 million in November. Abess retained a minority share and is still the board chairman and chief executive officer at City National.

 Even before the sale, Abess wasn’t hurting for money. He bought his 11.8-acre, $23 million estate in Miami’s Cliff Hammocks neighborhood from actor Sylvester Stallone in 1999.

 Abess’ father, Leonard L. Abess, founded City National in 1946 with Baron de Hirsch Meyer as one of the first postwar commercial banks in the region. Abess Jr. started his career in the bank’s print shop, which made forms and documents. Working his way up the ladder gave him an appreciation for the role that employees play in the success of an enterprise.

 ”I saw that if the president doesn’t come to work, it’s not a big deal,” he said. “But if the tellers don’t show up, it’s a serious problem.”

It would be nice if Thane, Dimon, Lewis, Pandit and others…not to mention the Dick Fuld’s of the world would think like that lat comment!. We wouldn’t have a huge wealth gap.

The last time and only time TB heard of someone doing this was Gordon Cain who in 1987 formed Cain Chemical and bought two ethelyne plants. When the Iran/Iraq war obliterated the only ones in operation, he sold out and got rich…but he too distributed money with the lowest paid employees receiving $10,000 and some receiving millions.

Note that Cain came from Wall Street and Abess a career banker. See there are some good people on Wall Street and good people everywhere, you just have to kiss a lot of frogs before you find them…ptui!

Hope that cheers you up somewhat!

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, February 19, 2009.

Bloomberg Quote of the Day: “The two most common elements in the universe are Hydrogen and Stupidity.” Harlan Ellison

…that is what it felt like yesterday and it was gut-wrenching. The Dow was down almost 250 when Obama began the bill signing. It improved slightly then began to tank again. With all due respect to someone who is trying to do a good job, bipartisanship is dead, the campaign is over and he is not running for office so the platitudes of campaigning won’t do the trick. He has to show not only leadership ability but control…that is what he was elected to do. There is nothing in the bill that will create immediate stimulus and worse, no roadmap to the financials which were hit the worst yesterday (-8.8%, while the KBW Bank Index plunged 10%). The people are mad at Wall Street and Congress, financial services employees are mad at their bosses and the derivatives traders who enriched themselves while destroying their firms. They don’t trust their banks and their bankers don’t trust them…can you blame anyone? After all, we are all to blame.

Obama needs to stop seeing things in terms of black and white…and that is not meant to be the obvious interpretation. It means that screaming at Wall Street and imposing arbitrary salary caps of $500,000 while eliminating bonuses for everyone is not going to do anything but further weaken the firms we are bailing out…rightly or wrongly. TB bets Jeff Immelt, who pledged to protect the dividend and the AAA rating, is holding his breath. While he was not awarded a bonus, he is keeping his salary of $3.3 million. While he has done so to this point Moody’s has the firm on credit watch for a downgrade. Why hasn’t he shown leadership and taken a cut to $1 million? The dividend yield as of Tuesday’s close is 11.5% with a payout ratio of 11.5%??? Does this make sense?

Yesterday, TB suggested that Obama who made a great move initially by capping all of his staffs salaries above $100,000, take a pay cut and challenge Congress to do the same. It was Congress who allowed lobbyists to run amok…to rewrite the bankruptcy act which resulted in a substantial amount of the foreclosures we are now experiencing, and while he was away campaigning much of the time he served in the Senate, he too should take some responsibility, right? Look, his living expenses have plummeted so it wouldn’t be that hard for him to do and would show true leadership…that is why people embraced Lee Iacocca isn’t it? Go for it, Barack!

Now let’s talk about what happened to stocks and bonds yesterday and while we are at it commodities which were thoroughly crushed…except precious metals!

First, Friday is options expiration and yesterday followed a three day weekend which was preceded by position squaring…nothing more on Friday and so all that pent up energy burst out. Easy to do after the rest of the world had three straight down sessions, each one worse than the other and that mood continued overnight but at least in a diminished form.

So we had a lot of catching up to do and we did it with vigor. But catch up is all we did, despite the carnage. Virtually every index tested the November lows but only the Dow Transports put in a new low and a new low close. That is not a capitulation and we desperately need one, even for a countertrend…relief…rally, but where is the relief?

There was only one significant upside mover yesterday: TEVA Pharmaceuticals (TEVA)

Which rallied 4% …the bad news? This is an Israeli company that is involved in human embryo’s and rallied on their earnings and the news that the Administration is looking at

Allowing more embryo research. Estimates were raised, buy recommendations implemented, yet the price target is just 13% above yesterday’s close…still

Also, Breadth, Advance/Declines and New 52 Week Lows were all ugly and that was accomplished on just average volume of 1.57 billion shares. Even those screaming ‘buy’, who were few and far between were saying don’t bet the farm and if you do buy, insure the position with options…some endorsement!

Then we learned after the close that Warren Buffett…the consummate stock maven not only reduced his positions in J&J and Procter & Gamble (both of which were picked as outstanding buys for dividends on Jan. 22, by Motley Fool who must love them even more now, right?). He doesn’t dislike them but sees BONDS as a better investment! Wow, that sure made me want to go out and buy! Note though that both companies dividend payout ratio is over 50%! This morning we learned that Deere’s (DE) earnings plunged on Latin American credit problems among other things. Enough!

Bonds…the sector everyone loves to hate except when the become ridiculously rich. First, how do you invest in a sector with limited upside when the yields are least attractive? Second, why do you buy spread product (i.e. corporate bonds, muni’s and high yield) after the spread has narrowed sharply IF you expect treasury yields to rise sharply? Last, if you are buying issues in the secondary market, chances are you will pay a huge premium due to the big coupons…and if you are then right and yields stay low you will be investing the income at a lower rate, meaning you won’t even earn the paltry yield you bargained for and part of that income will actually be a return of principal! Some deal! But the biggest concern TB has in bonds is the volatility which has morphed from stocks to the fixed income sector (additionally, how the GM bond swap progresses should be of concern to any holder of high yield debt). Yesterday not only did all bonds rally and on settlement day for that record refunding last week, but the long bond was up about 3-1/2%! The 10 year over 2% and even the new five year over 1%…contrast this to the past couple of weeks when in a single session the 30 year was off over 4% and in one case then closed up…that is too much volatility for an individual investor to try to game!

TIPS are enjoying a resurgence after being pounded. You can participate in them easily with the TIP ETF (TIP) but why do so now…after they have rallied from $90 to $100.52. TB keeps hearing the cry to buy them as inflation is on the way? What inflation? There can be no inflation so long as we are deleveraging and we are somewhere in the lower half of that deleveraging…so why buy inflation protection now…not even for a trade when not only is there none but the inflation accrual which is negative now is more than offsetting the interest income. What the bulls don’t tell you is that the monthly dividend on TIP has been omitted for FOUR straight months now…and it won’t be catch up. Also, if you wanted to make money on TIPS you had your chance on Dec. 18 after it rallied nearly three points on just three sessions…TB sold out all of his positions at $101! and with the 200 day moving average now at $102 and declining rapidly it doesn’t look good (the 40 day is at $99.48 and pretty stable so that is the first place for a spec trade.

Now on to Commodities…and Gold…or more accurately gold and other commodities. TB won’t discuss silver here as it’s main use is as an industrial metal but it was up 3.2% while Gold was up 3%. Since an interim bottom on Feb. 9 at $892.80, it has rallied 8.6% to just under $970…that’s $77 in just five sessions plus the overnight trade. A friend asked TB if he should buy gold on Sunday…TB said to wait since it was looking weak and IF he were to buy only by the gold ETF (GLD). But waiting would be best since it could easily fall back to near $900 and based on Thursday and Friday that is where it looked to be headed. Bad advice? First, it opened up only slightly and actually turned negative in a couple of hours then in less than an hour it exploded by $8 and most likely you would have bought at or near the high and be down slightly this morning. Gold has struggled to hold above $900 and this is the closest we have come to $989.60, resistance and the July 15, 2008 high. The price is being driven by Asian investors but mainly buy spec investors in the ETF…TB would buy it but only on a pullback. Why? While he is not a gold bug with money market rates so low buying it on a dip opens the possibility for some quick gains (note with physical gold or the ETF there is no capital gain, only ordinary s you are not saddled by tax issues messing with your investment strategy). This is one of the few opportunities for gold so TB could be too conservative and he was ready to buy it on a further dip just a week ago.

As for the rest of commodities, especially Energy which fell 7.8% yesterday, they look ugly. Why shouldn’t they with a global recession or worse? Industrial metals are plunging while China who has patience and seemingly unlimited amounts of dollars is buying up stock in the companies…but remember: you are not China…neither are the Saudi’s, Kuwaiti’s, Indian’s, or even the UAE, as epitomized by the metropolis of Dubai.  

The point is that little is safe and this will take a long time to play out…we are in the third inning if that, nothing more. Keep calm and above all think!

TB hopes this help you understand what is happening in the markets…as he sees it…it is not intended for a roadmap but only a reference point for you to do your own research.

There are a million theories in the Naked City…this is just one of them.

Happy Hunting.

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, February 18, 2009.

TB’s Quote of the Day: “If a nation expects to be ignorant and free…it expects what never was and never will be.” – Thomas Jefferson…as opposed to ‘no child left behind.’

…Newton’s Third Law states “to every action there is an equal and opposite reaction.” TB’s corollary: “in capitalism, when there is regulatory inaction, that will force an adverse action by market participants, which will eventually lead to a reaction by the government in the form of excess stifling regulation.”

TB watched and taped the entire two-hour House of Cards over the weekend and if you missed it, it being replayed daily on CNBC…it all becomes crystal clear if you watch it. Then he saw the segment on 60 Minutes Sunday on Golden West Savings & Loan and how they were originating ‘option arm’ mortgages. It set TB back in his chair. Here’s why:

Herb and Marion Sandler purchased Golden West from the founder in the 1980’s. Both were securities analysts and ruled the company with an iron fist. They hired a solid investment staff…with searches often lasting months or more than a year. They prided themselves on their financial acumen and held themselves out as champions for the home owner. In 2006, they sold the company to Wachovia for $24 billion (they owned 10% of the company at the time). The Sandler’s created the ‘Option ARM’ mortgage…dubbed ‘Pick-A-Pay’, which Herb Sandler defended vociferously, as he did the quality of the option ARM’s they underwrote in contrast to the ‘risky’ ones others were writing. Due to their prior financial prowess and concern for the homebuyer, TB felt while there were risks that they were controlled risks. In fact, when Wachovia’s Ken Thompson blamed these loans for their problems, TB balked, thinking it was more likely that they had other problems, including grossly overpaying for the Golden West. Sandler vociferously defended the loans. In retrospect, it was more reminiscent of Orange County Treasurer Bob Citron’s defense of his investment portfolio, and showed that they were either downright stupid or greedy (to his credit, greed was not a factor for Citron, merely ego).

The above is recited to show exactly what happens when regulation is lax, and the worst offender was Alan Greenspan for not using his ‘pulpit’ as Fed Chairman, the most powerful man in the world, to rein in mortgage lending practices. Yet he stubbornly defends free market capitalism despite saying it will happen again. Mr. Greenspan, then why not just abandon our entire criminal code and trust people to do the right thing? Life, from the time we are children is ‘carrot and stick’ and we only get desired results by making and enforcing rules (laws), yet this educated man with a staff of trained PhD’s didn’t see fit to take away the punchbowl…in fact kept refilling it with no regrets.

Capitalism is built on greed because other than that we would all get comfortable and not strive to attain more wealth. This is the fallacy in the neo-cons argument that we must keep lowering taxes…to them the ideal rate is zero…because as long as one can make more from a dollar than he pays out in taxes there is an incentive to work harder and today’s 35% maximum rate can hardly be called confiscatory. Furthermore, the lower the rate is, the less incremental value to rate cuts (i.e. cutting from 90% to 50% produces huge capital investment while cutting from 35% to 30% would produce much less) while creating either bigger budget deficits or causing dramatic cuts in services. In other words, they believe that you would have maximum investment with a zero tax rate and revenues would also be at the maximum…that is one extrapolation too far.

The Bush administration was in charge in the biggest transfer of wealth in U.S. history. It was during this period that the top 2% grew incredibly richer while the bottom 90% stagnated. In fairness, this began much earlier but the difference was that innovation was the driving force, not lower tax rates. Also, we morphed from a manufacturing economy to a service economy but during the Bush years…specifically from 2004 on, we became a financial services economy. For the first time in our history financial stocks were the biggest sector in the stock market and now we are paying the price as they, who dwarfed the industrials, suddenly became the dwarfs…much as tech did in the prior bubble.

TB is not digressing but leading up to the incredible wealth gap we have today which is shrinking rapidly…especially for retirees and those soon to retire…and TB is not talking about the top 2% but upper middle class Americans who are a major force in consumption. The futility now being experienced by the bottom 50-60% became apparent when the six financial CEO’s testified before Congress last week. A congressman does not humiliate unless he has something to back him up and so you can see just how the letters and calls are shaping up…and it isn’t pretty. We can fix this…or it will destroy us.

President Obama has made some strong positive statements, not to mention serving as a tough love cheerleader. He froze the pay on those making more than $100,000 in his administration, he vowed no lobbyists, and he has been embarrassed by his appointees.

Not only did Geithner have tax problems that would not have gotten him confirmed if they came in the wake of Daschle, but he asked for and got a waiver to hire a lobbyist. The public won’t have much patience with this and Obama’s credibility is on the line.

TB has a suggestion: take a significant cut in his pay…say 20% and then use his bully pulpit to demand that Congress do likewise. They had no problem criticizing CEO pay, not to mention the use of private jets, yet we now find out that Congress is jetting all over the world and often with their families. Perhaps then they could more closely align their interests with their constituents rather than overpaid lobbyists…who they did not choose to malign even though many were doing the work of those ‘greedy’ banks and investment bankers. One reader said TB was wrong that we need the best…does working for money bring in the best? If so, we wouldn’t be having a problem with our financial markets, would we?

TB is still torn over bonuses for commissioned salesmen. As John Mack testified, when Wall Street was partnerships, traders and the sales force were paid a draw or minimum salary and then compensated on the basis of their contribution but sometimes it was way less than they thought it should be in lean years. TB’s first boss and mentor, worked for a firm and they used to spend on furniture and equipment in big years then use that as an argument for why the bonuses were smaller. But the problem came when the went public. Many of those companies are mere memories, E.F. Hutton comes to mind, and L.F. Rothschild where TB witnessed first hand the demise of solid partnership once they began playing with OPM…‘other people’s money.’

The argument is that IF they aren’t paid their bonuses they will leave for other firms who will offer them high salaries, especially foreign firms not subject to the bonus rule. Yet, it was the highest compensated who created the problems since beginning in 2004, it was derivatives traders that overtook bond traders as the highest sought and paid. Through sheer lunacy they were compensated for their profitability in the year they did the trade while the liability might rest with the firm for 5, 10 or more years. In fact, some of those bonuses must have been paid on failed trades. In normal times, TB would see the logic in wanting to retain them but not when so many firms are imploding or at least suffering huge financial losses that only the best can be hired and if memory serves, an increase in supply results in lower not higher wages. TB has to wonder what the market for a quant who created some of those failed CDO’s is worth? Furthermore, and more worrisome to the CEO’s of the big investment banks is that smaller firms might be able to replace the big firms…and to TB that would be a good thing. Name one regional (smaller) firm that has gone bust…none…or has had to request TARP funds. You can’t because there hasn’t been one. They ran their firms the old fashioned way and did not over lever…in fact, many lost business because they did not do CDO’s. They are also hiring the best, and like Goldman, replacing the weaker traders and salesmen with the disgruntled or displaced employees. Tb believes that just like in the depression, it will be these small companies that will replace the powerhouses of late…the big five…and that will be a good thing in the end.

Incidentally, Maxine Waters (who for some reason George Stepanopolous selected along with Chuck Schumer to represent the Dems against Lindsay Graham and Peter King), was actually correct that they were charging the government to issue their own bonds. Furthermore, according to Bloomberg, they were charging three times what Fannie and Freddie are charging. Not only did these federally guaranteed bonds ‘blow out’ (an Avon lady could have sold them), but frequently they sold them to hedge funds which merely ‘flipped’ them back for a huge profit. Floating rate issues which came as cheap as 3 month LIBOR plus 80 basis points are trading at plus 15 or less. This is sick! Now if only Congresswoman Waters, who represents one of the poorest areas of any major city could merely ask a question clearly and concisely, she might accomplish something.

“Let them fail” has been the war cry of the GOP right. Let’s wait six months and see what happens. True, it would have been better to let them fail but not like we allowed Lehman to fail. In the same manner as the FDIC, the government should have immediately seized control when they failed…just as they failed and immediately incur a reorganization writing off the debt and shareholders equity. Why should this work for industrial companies as the private equity firms can attest, but not to the financial sector which exists on credibility, yet has none, zip? Instead, we are pumping billions into them, especially Citigroup, the most corrupt of them all, and the automakers who are coming to Washington again this week, hat in hand…presumably by commercial transportation but most certainly not by hybrid again…what fools they looked like then.

As TB writes this the Dow futures in Globex trading are off 200 points…this on the very day that Obama will sign the stimulus plan (sic) into law. The urgency is upon us, yet TB doesn’t see many taking it seriously. Worse, it is impacting the global equity markets which are down from 1.4% (Nikkei) to Korea (-4.1%) and China, down nearly 4%, the others down 2.4% or more…and while we were closed for President’s Day Monday, they declined almost as badly…without exception! What a world we have created…and we are worried about these people…from Congress to investment bankers not sticking around? It would be a better world without them…perhaps much better.

Bloomberg Quote of the Day: “The truth is rarely pure and never simple.“ – Oscar Wilde

…let’s hope it isn’t one but the announcement after the close that Sen. Judd Gregg was withdrawing his name for consideration for Commerce Secretary may have a bad impact on the market given how hard it has been to get a fiscal stimulus package thru and the lack of transparency to Treasury Secretary Geithner’s ‘plan’ (sic). That plus the weakness most of the session in stocks that only reversed on optimism over the stimulus plan, but that seems utterly unrealistic. No matter who is in charge, this is a complex problem and one that will have many missteps before it is solved. This was written last night. Then…

Senator Gregg was interviewed on CNBC this morning and sounded sincere and spoke positively of not only President Obama but Harry Reid and Nancy Pelosi without whom he said the TARP talks last year would have gone nowhere. He also stated that he supported those actions and feels there will be more needed to boost the banks capital. Quite a different statement than TB imagined after the original announcement. What transpired was that he honestly felt he could not support the agenda…and while dissenters are welcomed by this Administration, unlike the previous one, he felt that he could not wholeheartedly endorse the decisions that might be made. Interestingly, Gregg fully endorsed the Geithner proposal and said that it was grossly misinterpreted. Note too that Treasury is operating very shorthanded due to the approval process for new hires.

Not only is there class warfare in the U.S. but it is brewing in the U.K. too. Taxpayers there are also outraged at bonuses paid to bankers who were bailed out. Yet this morning TB heard more talk about how trickle down is better…those that have just don’t get it. They have enriched themselves, some honestly, some not, thanks to the tax breaks given by the prior administration…but there has only been a drip, not a trickle and now it is time to pay the piper. As TB said yesterday, the ire of the Congressmen reflected the message they were getting from their constituents and is scary as well as a strong warning  to the bankers. TB thinks they got that judging for their demeanor with the questioners after the hearing…were it otherwise they would not even have spoken. Message delivered!

Yesterday’s headline that New Jersey Governor and former Senator John Corzine who advocates competition doesn’t feel that applies to the municipal bond market. He bases this on the ‘decreased number’ of players in the market. What decreased number? Bear is now part of JPMorgan and Merrill part of BofA so the only one missing in action is Lehman Brothers! Governor Corzine should take a look around the country at the regional dealers none of whom has reported any problems (the closest being Legg Mason who lost a lot of their managed assets). Is he saying that they are incapable of underwriting issues? More importantly, after all the bribery (at least undue influence), etc. of municipalities by employees of Bear Stearns, JPMorgan, Citi, and Lehman why is he worried. He says he thinks negotiated issues may be necessary despite evidence compiled by the MSRB which regulates municipal bond dealers that the average cost of going with a negotiated deal is 18 to 44 basis points higher than in competition. TB has discussed this point with several institutional bond salesmen and they have expressed the same concerns. Also, in a negotiated deal it is not a sale but a best efforts basis where the dealer(s) try offering bonds at levels then reprice them subject to an award by the issuer. Does that provide any more protection? Governor Corzine, get your facts straight, OK?

Also, yesterday TB heard that the Fed was considering adding two more primary dealers to its stable. TB has been involved with primary dealers over much of his career (United California Bank, Merrill Lynch, L.F.Rothschild (which failed shortly after being named a primary dealer), and Bank of America. The advantage is clearly to the Fed not to the dealer who wants the prestige…TB says PASS!