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HomeUncle Sam:Geppetto as Citi and BofA:Pinocchio
Posted by Larry Doyle on July 16th, 2009 1:32 PM |
If you did not think we are entering into a Brave New World of an Uncle Sam economy, then today is a day which should help change your mind.
Independent Wall Street firms, such as Goldman Sachs and JP Morgan, would like a return to business as usual. Their outsized profits are nothing more than “to the victors go the spoils.” They will fight and lobby to make sure they get to take home these 
profits in the form of compensation.
Meanwhile back in the toy shop, Geppetto (in the form of Uncle Sam) is pulling the strings and watching Pinocchio (in the form of Citigroup and Bank of America) dance along. While Geppetto has been exceptionally busy, the taxpaying public has been kept very much in the dark. We see evidence of Geppetto’s ‘dark workroom‘ on three fronts today.
1. The Wall Street Journal offers Lawmakers Spread Blame on Merrill Deal:
House lawmakers lambasted former Treasury Secretary Henry Paulson and Bank of America Corp. Chief Executive Kenneth Lewis on Thursday, suggesting officials looked the other way as major mistakes at the bank required a $20 billion bailout of the firm at the expense of taxpayers.
“While all of this was going on, the American people, investors and the Congress were kept in the dark,”(LD’s highlight) said Rep. Edolphus Towns (D., N.Y.), suggesting negotiations over the bank completing its deal for Merrill Lynch & Co. was a “good, old-fashioned Brooklyn shakedown.”
Rep. Dennis Kucinich (D., Ohio), citing internal Federal Reserve documents obtained by the committee, said Mr. Paulson and Fed Chairman Ben Bernanke ignored evidence that bank management had withheld material information from shareholders, as well as indications that Mr. Lewis’s management of Bank of America “was seriously deficient.”
While Paulson is being grilled, there is little doubt that he believes he did what was in the best interest of the country and the economy – – if not necessarily the interests of Bank of America shareholders. Paulson offered that he was not qualified to provide a legal opinion on his engagement with Lewis.
2. If there were ever any doubt about Geppetto’s lack of confidence in Ken Lewis (aka Pinocchio), it is brought to bear today by news of a ‘secret regulatory sanction’ imposed upon him and the BofA board. The WSJ highlights U.S. Regulators to BofA: Obey or Else:
Bank of America Corp. is operating under a secret regulatory sanction that requires it to overhaul its board and address perceived problems with risk and liquidity management, according to people familiar with the situation.
Rarely disclosed publicly, the so-called memorandum of understanding gives banks a chance to work out their problems without the glare of outside attention. Financial institutions that fail to address deficiencies can be slapped with harsher penalties that include a publicly announced cease-and-desist order.
The order was imposed in early May, shortly after shareholders of the Charlotte, N.C., bank stripped Chief Executive Kenneth Lewis of his duties as chairman. Bank of America faces a series of deadlines, some at the end of July and others in August, these people said.
3. In the final act of today’s puppet show, we also learn from the Financial Times Citi Close to Secret Deal with Regulator:
Citigroup is close to a secret agreement with one of its main regulators that will increase scrutiny of the US bank and force it to fix financial, managerial and governance issues.
The proposed agreement requires, among other things, that Citi strengthens its board and governance, improves asset quality, better manages expenses and provides more information to regulators on its capital and liquidity, these people added.
The regulator’s action highlights concern over Citi’s financial health, governance and the strength of its management team, led by Vikram Pandit, chief executive. The FDIC is known to be frustrated with the slow pace of Citi’s “toxic” assets sales, its losses and the lack of commercial banking experience at the top.
What are we to learn from all of these developments? Very simply, do not accept anything at face value at this stage in our new economy. There is a reason why Geppetto is working in the dark. That is, the embedded losses in these institutions would sink these firms if not the entire economy.
Historical measures of value and economic behavior need to be looked at in the context of how Geppetto is pulling the strings!!
Enjoy the show!!
LD
A Sunday Morning Review
Posted by Larry Doyle on July 12th, 2009 7:36 AM |
I always enjoy reading the thoughts and opinions of John Mauldin, an economic All-Star here at Sense on Cents. Mauldin himself provides insightful perspectives, but he has a number of relationships who weigh in with probing analysis from around the globe.
Mauldin’s recent ‘Outside the Box’ article, “A Tale of Two Depressions,” provides a wealth of information and analysis on the global economy. I personally found this piece beneficial in juxtaposition to yesterday’s Recommended Weekend Reading, “Aftermath of Financial Crises” by Carmen Reinhart and Kenneth Rogoff.
I feel strongly that we need to focus on the current not the waves, the forest not the trees. On that note, I hope you find this commentary and all other work here at Sense on Cents to be helpful as you navigate the economic landscape!
Please join me this evening at 8PM to address these topics and others on my Sunday night radio show, NoQuarter Radio’s Sense on Cents with Larry Doyle.
LD
GDP Projections from IMF, CBO, OMB
Posted by Larry Doyle on July 8th, 2009 12:05 PM |
For those not familiar with the acronyms of the organizations referenced in the title of this post:
IMF: International Monetary Fund
CBO: Congressional Budget Office
OMB: Office of Management and Budget, which operates within the White House
This morning the IMF released their updated Global Economic Prospects.
I will share with you the projected growth rates for the United States against those provided by the CBO and OMB. I will then provide some comparative analysis.
United States
IMF -2.6% (2009) .8% (2010)
CBO -3.0% (2009) 2.9% (2010)
OMB -1.2% (2009) 3.2% (2010)
The figures provided by CBO and OMB were projections from the 1st quarter 2009. As you can see, the White House projections forecasted by the OMB are wildly optimistic both for this year and next relative to the IMF and CBO.
Those projections play directly into projected tax revenues and then, in turn, to the level of the federal deficit. If the IMF’s current projections are anywhere close to being accurate, our deficit will be significantly worse than previously forecast. What does that mean?
HIGHER TAXES ACROSS THE BOARD!!! What happens then?
SLOWER GROWTH GOING FORWARD!!!
In regard to the rest of the globe, the IMF’s projected numbers speak volumes:
China 7.5% (2009) 8.5% (2010)
Euro Area -4.8% (2009) -.3% (2010)
Japan -6.0% (2009) 1.7% (2010)
India 5.4% (2009) 6.5% (2010)
Emerging/Developing 1.5% (2009) 4.7% (2010)
Economies
Advanced Economies -3.8% (2009) .6% (2010)
Global -1.4% (2009) 2.5% (2010)
Bloomberg provides a review of the IMF report, IMF Sees Stronger Global Rebound From ’09 Recession. I would question the accuracy of Bloomberg’s title. I see a wide divergence between growth prospects in the BRIC nations and emerging markets from those of the advanced economies, especially with Europe and the United States. Bloomberg reports:
Still, risks to the outlook, which have “diminished noticeably,” are still “tilted to the downside,” the fund said, citing a possible downward pressure on asset prices resulting from rising unemployment, pressure on bond yields from concerns on public debt, and emerging economies’ vulnerability to financial stress.
A larger-than-expected drop in risk aversion and stronger demand in emerging economies could offer “some upside risk” that boosts growth, according to the fund.
In a separate report today on the state of the global financial system, the IMF said that while financial markets and confidence in an economic recovery have improved since April, risks remain and policy makers must remain vigilant until a sustained recovery is under way. Credit risks are high, bank lending to the private sector is slowing and the recovery so far has been dependent primarily on public funds, the fund said in an update to its Global Financial Stability Report.
Can the emerging economies of the world pull the developed countries out of the ditch? Will the global economies decouple? Is there any surprise why countries are pursuing protectionist measures?
In regard to the United States, President Obama may want to have the members of his economic team, including Secretary Geithner, Larry Summers, and Peter Orszag, call John Lipsky at the IMF and ask him what he sees.
Risks remain extraordinarily high.
LD
Wall Street Plays Washington
Posted by Larry Doyle on July 7th, 2009 5:15 PM |
Is the charade played out on Wall Street and in Washington anything more than the equivalent of a dinnertime show at a casino complex?
Politicians and bankers work the stage while the media maitre’d pretends to care how you really feel. Ultimately, the curtain goes down, the lights go on and you’re stuck with a bill that leaves you aghast.
Welcome to the Brave New World of the Uncle Sam economy 2009.
Today Bloomberg releases news that Delinquencies on U.S. Home-Equity Loans Reach Record:
Late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported.
The ABA is not exactly timely with this news in regard to home equity lines of credit; Sense on Cents shared similar color on May 20th in “Bank Stress Tests: Vigorous or Sham? Let’s Review HELOC Losses”:
For those not aware, Turbo-Tim Geithner’s Bank Stress Test utilized an assumed cumulative loss on this product of 6-8% in the base case. The most adverse scenario assumed cumulative losses on HELOCs of 8-11%.
What did our 12th Street Capital friends learn in their analysis? KD writes:
What I find very interesting here is comparing the Cumulative Loss numbers on these deals versus the Government’s assumption of losses in the stress test. As a reminder, our friends in D.C. assumed in a More Adverse Scenario that Helocs on bank balance sheets would generate losses of 8% to 11%. Now I know their numbers represent the projections going forward for the next two years, but when you take a look at numerous ‘06 and ‘07 deals already ringing up losses north of 20% I find it hard to reconcile. I think the Treasury has a very rosy picture of the loss curve going forward.
This brings us to the topic of losses within the banking system and the integrity of the Bank Stress Tests. The Wall Street banks were more than happy to “put on a show” with Secretary Geithner leading the orchestra and the FASB in a supporting role given their relaxation of the mark-to-market. Now we get to revisit the fact that banks are still sitting on hundreds of billions in embedded losses. (more…)
How Sound is Joe Biden’s Judgment?
Posted by Larry Doyle on July 6th, 2009 12:27 PM |
With all due respect to the office of the Vice Presidency, have we ever had an individual occupying that office who blows more hot air than Joe Biden? Does Joe have any appreciation when he makes ridiculous comments that he cheapens the office and simultaneously lessens any remaining credibility he may possess?
Over the weekend, Biden spoke on the economy in an attempt to deflect increasing criticism of the Obama administration and the Democratic Congress. As the Wall Street Journal highlights in writing Calls Grow to Increase Stimulus Spending, Biden aggressively put forth that the Obama administration:
“misread how bad the economy was” and didn’t foresee unemployment levels nearing double digits.
Is Joe for real? How does Joe reconcile this statement with his comments last December when the Democrats were lobbying heavily for their initial $700+ billion Stimulus Bill?
As ABC News reported at that time, Biden: U.S. Economy in Danger of ‘Absolutely Tanking’:
Vice President-Elect Joe Biden said the U.S. economy is in danger of “absolutely tanking” and will need a second stimulus package in the $600-billion to $700-billion range.
“The economy is in much worse shape than we thought it was in,” Biden told me during an exclusive interview– his first since becoming vice president-elect– to air this Sunday on “This Week with George Stephanopoulos.”
“There is no short run other than keeping the economy from absolutely tanking. That’s the only short run,” Biden told me.
So is Joe acknowledging that he and Barack misread the economy even after promoting that it was ‘absolutely tanking’ last December?
I think Joe has taken political pandering to a whole new level with his comments over the weeknd and, once again, raised real questions as to his sense of judgment. Well, Joe did offer us all an opportunity to question his judgment this past March. As Yahoo Finance reported, Biden: This Is ‘Life’ and ‘Death’:
He at once bleached the politics out discussion of the president’s agenda, while linking it directly to the Democrats’ political futures.
“Folks this is the real deal, this ain’t politics. This is life and death for a lot of people,” he said, referring to programs in the stimulus package and the budget proposal.
Minutes later he said getting the president’s agenda passed would “change the political climate.”
“It will have every single pundit out there, even the ones who are covering this today, saying, ‘You know, these guys not only came up with an idea, whether we like it or not, they moved and they passed it,’” Biden said. “And we are willing to win or lose – win or lose – upon the soundness of our judgment.”
While we may never fully appreciate which way the wind blows with Joe, we assuredly know that it will likely be hot.
I do appreciate Joe offering us all the opportunity to question the soundness of his judgment. His ‘misreading’ of the economy is serious reason to question his judgment across a whole host of issues.
LD
Is Uncle Sam Manipulating the Equity Markets?
Part II
Posted by Larry Doyle on July 6th, 2009 7:47 AM |
Who does not like a good summer read? Well, combine money with espionage and we have all the makings of a fascinating story.
The other day I wrote a post, “Is Uncle Sam Manipulating the Equity Markets?”, highlighting allegations by Joe Saluzzi of Themis Trading of highly suspect trading activities on the NYSE. Another chapter in this fast moving intrigue unfolded over the weekend. Thanks to kbdabear for sharing a Reuters news release, “A Goldman Trading Scandal?”, which adds significant fuel to the fire. Let’s review in a rational fashion. Reuters reports:
Did someone try to steal Goldman Sachs’ secret sauce?
While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.
The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.
Who is this individual, Aleynikov? (more…)
NoQuarter Radio’s Sense on Cents with Larry Doyle
Posted by Larry Doyle on July 4th, 2009 7:15 PM |
UPDATE: The show has concluded, but you can listen to a recording in its entirety by clicking 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.
*****************************
There is no doubt in my mind that we are in the early stages of significant structural changes throughout our economy and our country. How will our nation adapt to these structural changes? How long will it take for various sectors of our economy to fully appreciate this reality? The landscape on Wall Street has dramatically changed. While many financial executives would tell us it is “business as usual” and are fighting tooth and nail to pick up the pieces and return to that reality, the world of Wall Street is forever changed.
Please join me Sunday evening from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. I am honored to have Shawn Matthews, the CEO of Cantor, Fitzgerald and Co. to discuss the past, the present, and the future for Wall Street. Cantor, Fitzgerald has a storied history on Wall Street and this firm is aggressively redefining the Wall Street landscape. Bloomberg recently wrote Cantor Plans to Hire Up to 100 for European Fixed-Income Unit:
Cantor Fitzgerald plans to hire as many as 100 staff in fixed income in Europe in the coming year as it builds high-yield and distressed-debt businesses, said Chief Executive Officer Shawn Matthews.
The closely held New York-based securities firm will approach the business “from a trading perspective,” Matthews said in an interview today. As a “longer-term goal,” Cantor plans to build a “small merchant-banking operation,” he said.
Cantor, which is organized as a partnership, is seeking to take advantage of the “disarray” that has struck larger rivals such as Morgan Stanley, Citigroup Inc. and UBS AG amid losses and writedowns by lenders worldwide of almost $1.5 trillion, Matthews said.
What does Shaun Matthews see on the global financial landscape and why is Cantor moving so aggressively to increase its footprint?
“Our clients say they are looking for more-relevant counterparties now that the big investment banks have reduced the level of capital and their commitment to trading,” Matthews said.
Cantor, which expects to hire at least 50 people in Europe the next 12 months, is also seeking to add 25 to 30 staff in Asia, he said. The company also plans to build structured-debt, investment-grade and rates businesses outside the U.S., Matthews said.
The default rate may go as high as 25 percent “by the time the crisis is over,” Matthews said. “The world is in a bad place.”
As we move along into the Brave New World of the Uncle Sam Economy, please join me Sunday evening for what promises to be a riveting discussion with Shawn Matthews. 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
June 2009 Market Review
Posted by Larry Doyle on July 1st, 2009 8:52 AM |
A cursory review of market returns for June indicates no dramatic shifts, so let’s go to the sports pages, right? No, don’t do that! In the Brave New World of the Uncle Sam economy, every day, week, and month provides historic developments both above and below the surface. How does one possibly navigate the hills and valleys of the markets and economic landscape? Welcome to Sense on Cents!
I had forecasted in the Sense on Cents May 2009 Market Review:
Add it all up and I think the following will occur:
– equity markets will now move sideways in range bound fashion;
– the bond market will move lower in price, higher in rates;
– the dollar will gradually decline;
– our economy will be filled with more stops than starts.
Let’s review the stat sheet, assess our May calls, and forecast what we see on the horizon. As we move along, let’s continually remember the largest player in our markets – both literally and figuratively – is none other than Uncle Sam himself.
Pimco’s Bill Gross said a few month’s back, “you should keep the big uncle in clear sight and without back turned.” The Wall Street Journal reported just yesterday in Inflation Fears Seem to Be, Well, Inflated:
Given the Fed’s heavy and unpredictable hand in the market lately…
Yes, Uncle Sam is casting an ever larger shadow across our economy and markets. Let’s navigate . . .
Market Returns:
Equities: the major market averages (the DJIA and S&P 500 especially) ended the month largely unchanged. In fact, the S&P 500 ended the month exactly unchanged. That said, the markets had an overall range of approximately 6%-7%. Why so volatile? Primarily a continuation of technical flows of funds, while the economic fundamentals remain decidedly mixed.
The tech heavy Nasdaq continued to outperform given some positive earnings developments (e.g Oracle) and lessened debt burdens. Given the Nasdaq’s dramatic outperformance, I would be reluctant to add exposure to this sector.
Sense on Cents’ self-assessment of May call: very solid
Bonds: while the 10yr Treasury ended largely unchanged on the month, it experienced a major selloff and actually broke above the 4% level for a short stretch mid-month. The upward pressure in rates, about which Sense on Cents wrote extensively, raised major concerns about potential inflation, economic recovery, and the equity markets.
Rates came back down over the last week. Cooler heads prevailed, right? Or did that “heavy and unpredictable hand of the Fed” go to work? Sense on Cents feels strongly that the Fed managed to move rates lower via quantitative easing and working with Treasury which had redefined indirect buying in Treasury auctions (“Turbo-Tim Takes ‘Indirect’ to a Whole New Level”).
While the government bond sector did post slightly negative returns for the month, the credit sensitive sectors of the bond market (corporates, high yield, municipals, and mortgages) did post low single digit returns. What is driving cash into these sectors? The fact that the Fed and banking system at large are holding short term rates (including savings rates and CDs) at near zero or marginally above is literally compelling both consumers and investors to seek some degree of return elsewhere. That money is flowing into these bond funds as investors remain extremely concerned about the economy and equity markets.
Are investors being lured into a potential trap by investing in bonds? I believe they are. I do not see the pressure of global government deficits along with refinancing pressures throughout the economy abating anytime soon.
Sense on Cents’ self-assessment of May call: fair (more…)
Reviewing the Current, Not the Waves
Posted by Larry Doyle on June 29th, 2009 8:33 AM |
Are we so focused on the beauty of the rolling surf that we have become blinded by the dangers of the shifting currents? No doubt!! Washington and Wall Street would have it no other way.
My wife and I attended a friend’s wedding on the outer part of Cape Cod this weekend. We had a few hours between the church service and reception. While enjoying a refreshment at a local waterside inn, we soaked in the beauty of the seaside setting. Little did I know, but along that very coastline the day before, two substantial homes had literally washed away as their foundations had been totally eroded by shifting tides.
In analogous fashion, haven’t Wall Street and Washington focused investors’ and taxpayers’ attention on short term goals and developments for their own profit while the public is stuck with an ever increasing bill? Sense on Cents strongly believes this to be true. The media is compliant in allowing the financial and political machines to define the ‘game’ and the ‘rules.’
The mission of Sense on Cents in navigating the economic landscape is to redefine the ‘game’ and the ‘rules’ so people can truly enjoy the beauty of the waves while fully appreciating the dangers of the shifting currents.
At this point, Wall Street is looking to return to ‘business as usual.’ Meanwhile, the programs and policies of the Obama administration are not only going with the ‘current’ that severely damaged our economic foundation, but are also strengthening that current. What do I mean?
Recall that after the market crash of 1929, the two driving forces that pushed our economy and country into The Great Depression were higher taxes and increased protectionism.
While Obama campaigned on targeted tax increases for the highest income earners, there is no doubt in my mind that our entire economy will be hit with higher taxes. These tax increases will come via formal tax legislation and also via increased costs passed along by industries impacted by new legislation.
The formal tax increases for every wage earner in our country paying taxes will result from anemic economic growth. Obama as much admitted last week in a Bloomberg interview that higher taxes across the board may be a necessity. I highlighted this prospect in writing, “The Taxman Cometh”.
Jack Welch stated the other day, “we’re going to have huge tax increases” given the enormous spending programs being launched by the Obama administration, in conjunction with little to no economic growth.
Over the weekend, I read 15 state insurance funds which pay unemployment benefits are now empty. How will these states address this issue? First stop, Washington. Second stop, higher taxes. (more…)
Economic and Market Commentary July 14, 2009
Posted by Larry Doyle on July 14th, 2009 11:47 AM |
We have had a cross current of market moving news and developments this morning. Let’s navigate while bringing our own independent set of tools to cut through any excessive salesmanship or pandering on the part of market experts. Using Bloomberg as a conduit, they report Treasuries Fall as Rally in Global Stocks Damp Demand:
Bloomberg is better than this reporting. The reporters should more specifically highlight that across virtually every sector aside from gasoline and autos, retail sales declined. A rise in gasoline sales is simply a function of higher gasoline costs. That bit of news is not exactly a positive. Automobile sales are a long way from robust and are measured against prior month’s sales which had plunged.
I am not trying to be overly pessimistic, but merely looking for a full and honest analysis of the data. Moving right along, I strongly believe that Treasury rates increased (and thus Treasury prices declined) because of concerns about rising producer prices. As Bloomberg reports:
I also believe Treasury rates increased today on news that our annual federal deficit just crossed the $1 TRILLION level and is likely headed toward $2.0 TRILLION. No surprise why Secretary Geithner is in the Middle East for what amounts to a Wall Street roadshow in hopes that some of our largest creditors continue to finance our country.
On the earnings front, Bloomberg offers:
With all due respect to Mr. Di Galoma, America cares MUCH more about earnings in the heartland than merely the casino-style earnings generated by the inhabitants of 85 Broad Street in lower Manahttan, that being the home of Goldman Sachs. Earnings from Johnson and Johnson, CSX, Dell, Philips, Heartland, and Posco are decidedly mixed, and honestly generally weak.
Against those numbers, the fact that the equity market is merely unchanged on the day is a good performance.
In regard to upcoming earnings reports from our financial firms, please refer to my report this morning “How Will Banks ‘Manage’ Earnings?”
Bloomberg offers:
Put that $1.47 trillion figure in the context that the IMF projects TOTAL writedowns and credit losses at banks will be $4 trillion with $2.8 trillion of those here in the United States. To date, our banks have not taken half those writedowns and losses.
What do I see looking through all of this data and material? An increasing likelihood of a very sluggish economy with a whiff of inflation, otherwise known as stagflation!!
Remain defensive.
LD
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