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Economic/Market Highlights 11/17/08

Posted by Larry Doyle on November 17, 2008 10:20 PM |

I am going to save all the readers here extensive verbiage so as not to be overly morose about the ongoing challenging economic environment. I will offer my thoughts and comments on a few of the higher profile stories as indicators of what is going on, broadly speaking.

1. G-20 Summit….I had high hopes that commitments to global coordinated tax cuts would emanate from this summit. Talk about a major “whiff” on behalf of the global leaders. All I see is that leaders expressed a “promise” to work together on the critical issues. Wow, how gracious of them. Over and above this promise, I sensed that global leaders want to wait until the Obama administration takes charge and work with them. Believe me, with all due respect to Barack and team, if anybody thinks they have a magic bullet and will “inspire” a heightened level of confidence in the markets and economy, well….don’t hold your breath.

Read more on how “G-20 leaders Tighten Grips on Banks”

2. The Bush administration indicates that it will not allocate any of the remaining $350bln that Congress approved under the TARP (Troubled Asset Repurchase Program). I read this as the administration (specifically Paulson) is aware that the money is not flowing through the credit channels to consumers. I also read it as putting the political pressure and onus on the Democrats.

Let Barack sign the checks so that he and the Dems will have their signatures on whatever bailouts and further socialization occur, especially in the auto industry!! Markets read this as a further indication that losses are so deeply embedded in the system that only time and “private money” can truly bring needed change. But how does “private money” receive incentive to enter the market? Let that private money have a greater slice of the returns via a decrease in the capital gains tax rate.

Read more about how “Paulson Unlikely to Launch New Rescue Programs”

3. Citigroup announces layoffs of 50,000, representing app 15% of their global workforce. Reviews by many indicate that “the model” is broken. We wrote extensively about this “originate to distribute” model last week and highlighted how it is broken. Worth a review if you have not read it. “Wall St. Model is Broken….and Won’t Soon Be Fixed”.

Read more about “Citi Lays out Plan for Cuts”

3. We are also seeing more and more indications that banks are increasing rates on credit cards knowing full well that they will have to put the loans written on those cards right into their portfolios.

4. Freddie Mac and Fannie Mae are only able to finance themselves via the short term debt market. Lenders will not buy longer term debt from these entities because of the fear that Uncle Sam will realize that you can’t have a socialized housing finance system in perpetuity. Given F/F’s inability to place long term debt, I think that there is a very strong chance that F/F will significantly slow their purchase of newly originated home mortgages and that those mortgage rates will likely move higher to a level where private money is willing to purchase them. In my opinion, if you are looking to take out a mortgage, I would do it sooner rather than later.

5. A number of major insurance companies saw their stocks fall 20%+ today as the market realizes that these entities are also sitting on a significant level of embedded losses in their investment portfolios along with likely losses in variable annuities written that guarantee a fixed payout (Hartford, Met Life, Prudential).

6. Goldman Sachs senior executives announce that they will forego bonuses in 2008. Well, with their stock down 70% on the year that is mighty gracious of them.

In summary, today’s news and market price action indicates to me that both the governments and market participants are coming to the realization that there truly is only so much that can be done. Ultimately, a market will find its own level where buyers (private money) enter and purchase assets from sellers. While sellers of assets certainly want government intervention to maintain a “false” sense of market equilibrium, the unintended consequence of that is that the buyers stay on the sidelines that much longer.

The other subtle story that I see in today’s news is the sense that Bush and team are very clearly telling the Dems and Obama, “if you’re so smart, then be our guest and figure it out”. As an American, I wish Obama and team all the best, but the market is the market and it is neither easily fooled nor appreciative of policies that punish private capital at the behest of promoting social good. The market is very supportive of policies that support private capital that generate social good. Make no mistake; the housing policy for the last 5 yrs has been one based on “socialized finance”. If we make the same mistakes with the auto industry and others, our collective pain will last that much longer. (Seeing a breaking story that Senator Reid is unveiling a bill to aid the auto industry)

We are seeing this lesson every day; whether we are learning from it is an entirely different matter. Given that policy makers who brought us the socialized housing finance system are also now working on auto policy makes me and other private investors nervous about committing capital into this market.


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