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Archive for April, 2009

Is Uncle Sam Getting in the Automotive Business?

Posted by Larry Doyle on April 27th, 2009 4:17 PM |

The proposal made by General Motors to its bondholders today for a debt to equity swap, in my opinion, virtually guarantees a bankruptcy proceeding.

Based on the proposal put forth by GM (and you know they are working in lock step with the government task force headed by Steve Rattner), Uncle Sam and the UAW will have an 89% equity stake in the company while the bondholders would be paid 38 cents on the dollar for an 11% stake in the company. The bonds of GM have been trading in the vicinity of 15 cents on the dollar so the bondholders are receiving a premium, but for a heavily diluted equity stake.

In addition to the financial proposal, GM is putting forth plans for more layoffs, plant closings, and discontinuing the Pontiac brand.

While various constituencies within General Motors along with creditors and the UAW may debate the relative merits of the proposal, ultimately this company will be a government owned and managed enterprise. The FT provides clear analysis, U.S. To Take Majority GM Stake.

The automotive situation again highlights the predicament of measuring government intentions for those looking to invest in the markets. That predicament rests in the conundrum of standard return on capital versus promoting an administration’s social program.

While the FT may report,

“The Treasury has not demonstrated any interest in actually running the company. They want to make sure the company runs well for the shareholders and various constituencies”.

The fact remains, it is highly likely that Uncle Sam will in fact be the largest shareholder and will influence the manner in which GM operates.

LD

How Would You Like to Earn -5% On Cash Deposits?

Posted by Larry Doyle on April 27th, 2009 1:12 PM |

Can you imagine putting money into a bank and agreeing to accept a minus 5% rate of interest? Well, the Federal Reserve believes the appropriate rate of interest for this economy is in fact -5%. The FT reports, “Fed Study Puts Ideal U.S. Interest Rate at -5%.”

The world is awash in a sea of debt. The debt is piled highest in Europe on a relative basis while in actual terms the debt in the United States outpaces all other parts of the world. As the deleveraging process continues, the demand for new money to spur growth is anemic. The paradox of thrift (excessive savings inhibits growth) is keeping our economy in a state of stagnation. The Fed and U.S. Treasury are utilizing all tools in their box to restructure debt and promote lending without risking default. Ultimately, all the Fed and Treasury programs will devalue the debt via inflation. Inflation, in which future dollars are worth less than current dollars, is akin to paying a negative rate of interest on money. (more…)

Summers and Jarrett Provide Hints of What Is To Come

Posted by Larry Doyle on April 27th, 2009 8:57 AM |

Larry Summers threw some cold water on the economy yesterday morning in stating his belief the economy will continue to decline for some time to come. Specifically,

“I expect the economy will continue to decline,” with “sharp declines in employment for quite some time this year,” Summers said today on “Fox News Sunday.”

Is Summers positioning the administration for a forecast more in line with IMF projections than the Congressional Budget Office? Recall that the IMF believes the U.S. economy will have flat to only slightly positive growth in 2010 with a double digit unemployment rate. Those projections are decidedly weaker than projections previously employed by the administration.

Is Summers starting to manage expectations downward given what he sees on the horizon? I believe so.

Furthermore, Valerie Jarrett, senior economic advisor, offered hints of administration plans for our banking system this weekend, in stating:

“Whether management changes occur, whether banks are asked to raise more capital, all of that’s going to come forth in the coming week,” Jarrett said on CNN’s “State of the Union” program today.

My instincts tell me that an advisor in Jarrett’s position releases that statement in preparation for exactly those moves. Will this be Vikram Pandit’s last week at Citigroup? Will Ken Lewis be forced out at Bank of America? I think the odds for either of those moves – if not both – just increased.

Management of any organization, including the White House, needs to maintain credibility by providing a reasonably accurate flow of information. The Sunday morning talk shows provide a forum and I think Summers and Jarrett provided solid hints at what is to come from the White House in the days and months ahead. Bloomberg provides a full summary of these points and others, Summers Says U.S. Economy to Decline ‘For Some Time.’

LD

Tune in Sunday Evening to NoQuarter Radio’s Sense on Cents with Larry Doyle

Posted by Larry Doyle on April 26th, 2009 9:25 PM |

UPDATE: The show has concluded, but you can listen to it in its entirety by clicking on the Play button on the audio player below. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar.

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Please join me Sunday evening from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. The developments in the markets, economy, global finance, Wall Street, and Washington are occurring at breakneck speed. I will try to slow things down a bit and provide a sense of perspective. What did we learn in the markets over the last week and what does that mean for the weeks and months ahead? We will address a wide range of issues, including: Hank Paulson blindsiding Ken Lewis, 1st quarter earnings (their transparency and quality), market performance this week, month, and year to date, the outlook for our financial regulatory structure, and upcoming bank stress test results.

These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere! What is on your mind? What would you like to address? Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins.

Many thanks to Larry Johnson and the rest of the team at NoQuarterUSA blog for providing such a vibrant vehicle as NoQuarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!

LD

Don’t Be Downwind From Barney Frank

Posted by Larry Doyle on April 26th, 2009 9:04 AM |

Barney Frank may try to rewrite his Congressional record on housing finance, but he will forever be linked to supporting the activities of Freddie Mac and Fannie Mae which drove irresponsible sub-prime lending. A review of a WSJ article, What They Said About Fan and Fred, is truly damning. I strongly recommend your reading it. Who can ever forget back in 2003 Barney Frank stating in Congressional testimony addressing Freddie and Fannie specifically and housing finance:

House Financial Services Committee hearing, Sept. 10, 2003:

Rep. Barney Frank (D., Mass.): I worry, frankly, that there’s a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .

Tension? Threat of safety and soundness? Financial losses? Fundamentally sound? Disaster scenarios? With a “watchdog” like Barney is there really any surprise how and why Freddie and Fannie were plundered by their own executives and the sub-prime lending industry? It is not a stretch in stating that Barney had the welcome mat out and held the door open.

I am not stating that Barney was directly complicit in the fraudulent sub-prime lending, but he certainly defines naivete and incompetence on this front. His Democratic sidekicks – Dodd, Schumer, and Waters -were complicit and also drinking from the same punch bowl.

What about Barney’s comment regarding oversight of Freddie and Fannie:

House Financial Services Committee hearing, Sept. 25, 2003:

Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .

Again in 2005, Barney continued to stand his ground on the housing front despite rampant signs at that point of irresponsible lending and incipient fraud:

Well now that Barney and our entire country have “crapped out” on his roll of the dice, Barney decides homeownership may not be the best thing for all concerned. In a height of pandering well beyond the Washington norm, Barney offers the following in this excerpt from an interview on the Tavis Smiley show on PBS on April 20, 2009:

Is there any doubt that the burgeoning wind power industry in our country should engage Barney as their spokesperson? In so doing, Barney’s hot air may actually become a source of revenue for our great country rather than such an enormous expense.

Barney’s hot air should come with a warning, though, “Don’t Be Downwind!!”

LD

Which Way Is the Wind Blowing?

Posted by Larry Doyle on April 25th, 2009 1:24 PM |

Barack Obama strikes me as an individual who views popularity as necessary while principles are convenient. I see this in his engagement with the American public, the international audience, and political constituencies. While the strong liberal Democratic leadership is not only setting policy and writing legislation, Obama and team are working to appease a large percentage of the audience at home and abroad.

If one is trying to be all things to many people, ultimately an individual risks being measured as lacking depth. I believe that Obama runs a very high risk of being painted as a lightweight for this very reason. Let’s touch upon a few examples of Obama’s waffling while simultaneously working on growing his popularity:

1. Stimulus Package: rammed through Congress by Pelosi and Reid without a fair and full reading of the bill. We are now paying for the shortcomings in the bill. Obama “sold” this package via his Town Hall “concerts.”

2. On the “torture” front, Obama initially declared he was moving forward without reviewing and potentially prosecuting Bush officials. In the face of massive pressure from a hard core liberal element of the Democratic Party, Obama quickly reversed course and indicated he may pursue investigations and prosecutions of Bush officials. Getting pushed around by “friends” does not exactly send a message of character and strength to the world.

3. Budget: Obama will run over a number of Blue Dog Democrats specifically on the health care front via a process known as reconciliation which disallows filibustering. The use of the reconciliation process has never been used for major legislation. The overall budget is a MASSIVE spending proposition which dramatically escalates the federal deficit.

4. Budget Deficit: under pressure from the same Blue Dog Democrats and after putting forth the largest budget ever, Obama is now recommending a “pay as you go” bill which would instill higher taxes or spending cuts after this budget.

Why do we need to wait? Why shouldn’t we impose this “pay as you go” before the budget? Very simply, Obama would not be able to hold to his promise of not raising taxes on the middle class.

Bloomberg provides insight on the pay-as-you-go approach, Obama Urges Congress to Pass Law Enforcing Fiscal Discipline.

The timing of Obama’s newly found fiscal discipline is very interesting. Why? Earlier this week, Obama came out with a “bold” approach to imposing real discipline within his cabinet. Bloomberg shed light on Obama’s boldness,

Obama was criticized as doing too little to confront the deficit when he ordered his Cabinet to cut $100 million out of the budget in the next 90 days, which would cut this year’s projected deficit by about 0.006 percent.

Yep, this newfound discipline is starting with an aggressive move of cutting 6 thousandths of 1 per cent from this year’s budget. Such a “draconian” (NOT) level of cuts hints at how large Obama’s budget is while seriously questioning his integrity and that of the Democratic leadership on this topic.

A President who has an agenda a mile long but six inches deep risks being exposed when the wind kicks up. Speaking of wind and Obama, which way is it blowing today?

LD

What Are Insiders Doing?

Posted by Larry Doyle on April 25th, 2009 9:12 AM |

Who knows a business better than the executive in charge? Well, given the performance of many companies over the last few years many investors may wonder just how well the CEOs and board of directors know their own companies. That said, tracking “insider” activity is always prudent.

One should NEVER buy or sell a company stock based merely on “insider” activity. An individual executive may have personal financial reasons outside of his opinion on the company’s future to buy or sell the company stock. I have heard people make investment decisions based purely on insider activity and it is a mistake.  Even so, one should be aware of insider activity within a specific company as a potential indication of executive sentiment. How does it go? Money talks…..

While insider activity for a specific company can be subject to particular individual circumstances, it defies logic to think that insider activity taken in totality is not an indication of overall executive sentiment on the future of the economy and market. (more…)

Bank Stress Tests? Take Home Exams and Partially Self-Graded

Posted by Larry Doyle on April 24th, 2009 3:10 PM |

The Treasury just released the methodology used in assessing the vitality of the 19 largest banks via the Bank Stress Tests. The market took the release of this methodology as a big yawn. Treasury offered that the capital at some banks has been “substantially reduced.”  Please tell us something we don’t know.

The worst case scenario used by Treasury still falls into the camp of what most analysts view as the expected scenario.

In reading deeper into some of the reviews of the methodology, I am struck by the leeway provided to the banks in measuring the credit quality of loans on the banks’ books and the likelihood of deterioration on those loans. I view that as the wiggle room described by Meredith Whitney earlier this week.

As Bloomberg reports, Fed Says Capital at Some Major Banks Is Substantially Reduced:

“Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate,” the study said.

Regulators used the market shocks of the second half of 2008, when Lehman Brothers Holdings Inc. declared bankruptcy, as the model for testing banks with trading portfolios of $100 billion or more.

As they pored over banks’ loan and securities portfolios and off-balance-sheet liabilities, examiners increasingly focused on the quality of credits. They were concerned about wide variations in underwriting standards, a regulatory official said this week.

Supervisors concluded that banks’ lending practices need to be given as much weight as macroeconomic scenarios in determining the health of each bank, the official said.

The goal of the reviews is to keep the major financial institutions lending over the next two years, and to determine how much capital they may need if the economic slump worsens.

Supervisors will weigh how much capital each company holds, its ability to retain earnings over the next few years, future access to private capital and the extent any asset writedowns.

The Bank Stress Tests are not only largely a take home exam, but now we discover they are partially self-graded.

Call me suspicious.

In speaking with friends on Wall Street, I have heard from a number of individuals that there is still a large short base in a number of the financials. The short base is providing a strong cushion to that sector specifically and the market in general.

LD

What Do People Think About Waterboarding Bernie Madoff?

Posted by Larry Doyle on April 24th, 2009 12:56 PM |

Where’s the money? What did Bernie Madoff do with the money?

Fortune Magazine reports that Madoff’s sidekick, Frank DiPascali, is starting to “sing.”  However, what does Bernie know that Frank may not? With thousands of victims of the Madoff scandal personally bankrupted and emotionally crushed, how would people feel if the government “waterboarded” Bernie Madoff ?

What do you think?

LD

The Red Sea

Posted by Larry Doyle on April 24th, 2009 11:26 AM |

While there is tremendous focus on the Bank Stress Tests, there remains limited focus overall on the centerpieces of our domestic housing finance industry. I am talking about Freddie Mac, Fannie Mae, and the Federal Home Loan Banks. Some have categorized these institutions as “black holes.” I believe a more appropriate designation would be The Red Sea as these institutions are awash in losses and continue to bleed money.

We may never know the circumstances surrounding the death of acting Freddie Mac CFO, David Kellerman, but there is a lot of focus by government officials on these institutions. There has been much less focus by private analysts. To that end, I am most grateful to Bloomberg’s David Reilly for reporting on Fannie Mae Creates Housing Mirage With Bum Loans.

Effectively, Fannie Mae is giving funds away to very high credit risk individuals who would have otherwise most likely already defaulted on their mortgages. As Reilly reports:

Give money away. That was a solution to the housing crisis mortgage giant Fannie Mae hit on last year.

Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.

The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.

Make no mistake, this Fannie Mae program was also being utilized by Freddie Mac. Reports have come out that Freddie Mac’s Kellerman was pressured by Freddie’s accountants to improperly report their financials. In a similar vein, Fannie is playing another version of the “shell game” in order to buy time and forestall losses. (more…)






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