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HomeSense on Cents Central Station
Posted by Larry Doyle on April 16th, 2009 3:15 PM |
Join me this evening beginning at 8:30 p.m. ET for Sense on Cents Central Station. This endeavor is a few hours of written Q/A and live chat with your resident host, Larry Doyle. I like to utilize the theme of a ride on the rails, so please allow me to elaborate.
With so many cross currents at play in the markets, economy, and world of global finance, where can one go to develop a framework of understanding, enjoy the company of friends, and make sense of the madness? Welcome to Sense on Cents Central Station. Our ride departs at 8:30 p.m. with an expected return at 10:30 p.m. (I’m hoping this time frame allows our West Coast friends to join in). While we traverse the curves along our track, we can address a wide range of issues, including: transparency and quality of earnings, Goldman’s initiative to pay back TARP, the April 15th Tea Parties, market performance this week, month, and year to date, developments overseas, the outlook for our financial regulatory structure, issues of personal finance, career planning, or anything else on your mind.
Our ride is most productive with as many people participating as possible. Please bring not only your questions, but also your views. Invite friends, neighbors, and colleagues along for the ride as well. Together we can collectively navigate the economic landscape.
I look forward to chatting with you beginning at 8:30 p.m. All Aboard!!
LD
The Scarlet Letter
Posted by Larry Doyle on April 16th, 2009 12:44 PM |
Competitive people by their very nature like to win. There is nothing wrong with that. In fact, our country was built upon risk taking entrepreneurs who blazed trails and opened markets in the pursuit of profit.
Clearly, we have experienced enormous abuses in many parts of our economy over the last decade. The fact that rating agencies and regulatory authorities have been negligent – if not complicit – in the process has only added to the turmoil. In my opinion, our legislators have been as much a part of the problem as the solution.
For many of those who have either mismanaged their business or abused business ethics along the way, the government has stepped in with billions in support. Our markets have suffered as a result.
Against this backdrop, the major rub in the world of finance is distinguishing between the strong banks and the weak banks. Well, Jamie Dimon issued as aggressive an assessment as I have ever seen on this specific topic. In a Bloomberg report on JP Morgan’s earnings,
Chief Executive Officer Jamie Dimon, who today reported first-quarter profit that beat analysts’ expectations, said his firm could repay U.S. government rescue funds “tomorrow.”
Dimon, called money received through the Troubled Asset Relief Program “a scarlet letter.”
Company News: The Good, the Bad, and the Ugly
Posted by Larry Doyle on April 16th, 2009 8:04 AM |
We have had a stream of earnings results from banks this week. The earnings from Wells Fargo, Goldman Sachs, and JP Morgan have all surprised to the upside. Interestingly, though, the degree of transparency and “quality” of earnings has been decidedly different with each of these institutions.
JP Morgan just released earnings this morning. Earnings per share came in at .40 versus an expectation of .32. The quick snapsot of the numbers reveals broad based positive results across retail banking, equity trading, and fixed income trading. JPM significantly increased loan loss reserves and CEO Jamie Dimon cautioned that the bank may have to further increase reserves given the challenging economic environment. The bank also took significant markdowns in private equity investments.
The lifeblood for any bank is the deposit base, the ultimate source of relative cheap funds. JPM’s deposit base has grown 62% year over year with the acquisition of Washington Mutual.
Dimon and JPM distinguish themselves as the true leader in U.S. banking.
Goldman’s earnings gamed the calendar as they did not make an apples to apples comaprison versus a year ago. What does that mean? Goldman changed its reporting calendar from a December-November reporting period to January-December reporting. In doing so, Goldman did not fully highlight the disastrous numbers in December 2008. While Goldman’s franchise and risk management are superb, the headline report was not totally forthcoming.
Let’s revisit the Wells Fargo report. Many analysts initially questioned the lack of transparency and overall quality of earnings reported by Wells. Jonathan Weil of Bloomberg again stands out by the depth of his analysis. He reports Wells Fargo Profit Looks Too Good To Be True. Weil highlights 4 gimmicks: (more…)
Let’s Meet Chris Lowney
Posted by Larry Doyle on April 15th, 2009 7:08 PM |
I am thrilled to have Chris Lowney join me this Sunday evening on NoQuarter Radio’s Sense on Cents with Larry Doyle. I learned about Chris from my daughter who heard him speak at her college. My daughter had the good fortune of receiving 
a complimentary copy of Chris’ book, Heroic Leadership.
Upon reading Chris’ bio, I knew I had to have him on Sense on Cents. Chris possesses qualities we need not only in our private enterprises, but truly throughout our society.
Chris Lowney, formerly a Jesuit, was named a Managing Director of J.P. Morgan & Co. while still in his thirties and held senior positions in New York, Tokyo, Singapore and London until leaving the firm in 2001. He served successively on Morgan’s Asia-Pacific, Europe, and Investment Banking Management Committees, accumulating extensive multinational experience at a company regularly ranked one of “America’s Most Admired Companies” by Fortune magazine.
Prior to joining J.P. Morgan, Lowney was a Jesuit seminarian for seven years. He is a summa cum laude graduate of Fordham University, where he also received his M.A. and was elected to Phi Beta Kappa. He is holder of honorary Doctoral degrees from St Louis University, Marymount Manhattan University, and from the University of Great Falls.
His first book, Heroic Leadership: Best Practices from a 450-Year-Old Company that Changed the World was the #1 ranked bestseller of the CBPA (Catholic Book Publishers Association) and was named a finalist for a 2003 Book of the Year Award from ForeWord magazine. It has been translated into ten languages.
In writing Heroic Leadership, Lowney displays how the Jesuits eschewed a “flashy” leadership style in favor of a holistic approach focusing on four unique values: self-awareness, ingenuity, love and heroism. Lowney explores the four principles in detail, illustrating each with anecdotes from Jesuit history. He examines the Jesuit success formula of attacking real-world opportunities with real-world leadership strategies, showing how their formula can be used today to practice effective, whole-person leadership.
“Entertaining and well researched, Heroic Leadership is a must-read for any business leader, and an inspirational read for anybody who wants to be a better human being.”
— Walter Gubert, Chairman Investment Bank, JP Morgan
I look forward to my conversation with Chris Lowney this coming Sunday evening on NQR’s Sense on Cents with Larry Doyle.
LD
Where’s Harry When We Really Need Him?!
Posted by Larry Doyle on April 15th, 2009 2:39 PM |
The ratings process for the securities industry has been an absolute joke. With all due respect to those who work at the rating agencies, the business model and massive conflicts of interest have been an unmitigated disaster.
Where were the authorities with the vision to throw on the flashing yellow light in the midst of the storm? Well, we can all take comfort that the SEC has been working on reviewing the rating agencies model since late 2006 and has made 5 rulings. Over and above that, Ms. Schapiro shares with us that the SEC has undertaken further studies over the last ten months. 2006? Ten months? When the need for dynamic movements is never greater, our government continues to move at a snail’s pace.
Let’s listen to Ms. Mary Schapiro, current head of the SEC. It’s a long clip (approximately 55 minutes), but you can fast forward along the way at any time. CSPAN did not provide an embed code for this clip, but by clicking on the image below you will be brought directly to the CSPAN site and the video will begin playing.
As I listen to Ms. Schapiro pontificate about the concepts of aligning interests, business models, users of ratings, conflicts, multiple ratings, and ending reliance on ratings agencies, I have one very clear cut image piercing through my mind.
That image is of Harry Markopolos providing chilling Congressional testimony this past January on the failures of the SEC in handling the Madoff scam. I learned more about the SEC in Harry’s testimony than I had over the course of my entire career on Wall Street.
Couldn’t we use a guy like Harry running the SEC right now?
LD
Increased Foreclosures: An Equal and Opposite Reaction
Posted by Larry Doyle on April 15th, 2009 11:53 AM |
There are tremendous cross currents in residential housing. Over the course of the last few months we have seen the following:
-an uptick in housing starts
-an uptick in new home sales
-a decline in home prices as indicated by the S&P/Case-Shiller Index
Do not forget, though, that Uncle Sam had Freddie Mac and Fannie Mae postpone the foreclosure process over the course of the last few months. Additionally, Congress compelled certain of the larger mortgage originators, such as JP Morgan Chase, Citi, and Wells Fargo, to also postpone foreclosures.
While the postponing of foreclosures allows for a delay in that process, regrettably it does not negate it. As the WSJ reports today, Banks Ramp Up Foreclosures.
The Federal Reserve knows that increased supply in housing in the face of rising unemployment will further depress home prices. In fact, just yesterday the Fed made a statement indicating it believes housing prices may overshoot to the downside much as they overshot to the upside earlier this decade. That scenario seems to be the equivalent of a physics principle – for every action, there is an equal and opposite reaction.
The subsequent impact of this increased foreclosure activity is an increase in chargeoffs by banks holding the mortgages. While certain banks, such as Wells Fargo, reported surprisingly strong 1st quarter earnings, be mindful that many analysts criticized Wells for not reserving more against future chargeoffs.
Over and above this impact on bank earnings, do not forget that the model used for the Bank Stress Tests incorporated an unemployment rate of 10.3% as the absolute worst case scenario.
That rate is now commonly accepted as a very strong likelihood.
LD
“I Want the Truth!”
Posted by Larry Doyle on April 15th, 2009 6:44 AM |
Recall how Hank Paulson compelled every major money center bank to accept government funds via the TARP last Fall. Paulson was concerned that if every institution did not participate in the TARP that the market would punish those institutions receiving funds.
The lack of delineation then and still now is creating stress for individual institutions and the market as a whole. Why? Markets thrive on two factors: capital and information. We have witnessed over the last year what a lack of capital in the form of credit has meant for the economy. We are also experiencing what a lack of information means.
Whether it is industrial and tech companies not providing guidance about their future earnings (GE, Intel just yesterday), banks utilizing relaxed mark-to-market accounting, or now banks being lumped together on Bank Stress Test results, the markets are sufferring as a result.
Are we seeing a version of the classic scene in a A Few Good Men? Who can ever forget this exchange?
Jessep: You want answers?
Kaffee (Tom Cruise): I think I’m entitled to them.
Jessep: You want answers?
Kaffee: I want the truth!
Jessep: You can’t handle the truth! Son, we live in a world that has walls. And those walls have to be guarded by men with guns. Who’s gonna do it? You? You, Lt. Weinberg? I have a greater responsibility than you can possibly fathom. You weep for Santiago and you curse the Marines. You have that luxury. You have the luxury of not knowing what I know: that Santiago’s death, while tragic, probably saved lives. And my existence, while grotesque and incomprehensible to you, saves lives…You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want me on that wall. You need me on that wall.
We use words like honor, code, loyalty…we use these words as the backbone to a life spent defending something. You use ’em as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom I provide, then questions the manner in which I provide it! I’d rather you just said thank you and went on your way. Otherwise, I suggest you pick up a weapon and stand a post. Either way, I don’t give a damn what you think you’re entitled to!
Kaffee: Did you order the code red?
Jessep: (quietly) I did the job you sent me to do.
Kaffee: Did you order the code red?
Jessep: You’re goddamn right I did!!
Good News and Bad News: The Plot Thickens
Posted by Larry Doyle on April 13th, 2009 6:39 PM |
It seems as if Wall Street banks are releasing “surprisingly positive” earnings in stealth fashion these days. Goldman Sachs was expected to release 1st quarter 2009 earnings tomorrow. Well, Goldman just released that they “blew the doors off” the building in a very explosive and positive fashion. Bloomberg reports Goldman Sachs to Sell $5 Billion in Stock, Repay TARP:
The New York-based bank earned $1.81 billion, or $3.39 a share, in the first quarter as a surge in trading revenue outweighed asset writedowns. The results beat the $1.64 a share estimate of 16 analysts surveyed by Bloomberg.
The earnings were driven by a sizable increase in trading activity which reads as a major gain in market share. With Bear, Lehman, and Merrill all gone and Citi and BofA in the hospital, the crowd at Goldman is sowing while the sun shines. What does that mean? For those who want or need to “play,” Goldman is now one of the few shops truly open for biz. The price to “get in the game” just went up and Goldman’s franchise is clearly benefiting:
Goldman Sachs benefited as the gap between what banks pay to buy fixed-income securities and the price at which they sell, the so-called bid-ask spread, almost doubled to 19 basis points in six months, according to data compiled by Bloomberg.
Over and above the earnings, Goldman has sent a clear signal to Uncle Sam requesting him to leave the Goldman “casino.” With Goldman’s earnings power clearly defined, the firm has announced its intention to raise more equity capital and pay back the TARP money it received last Fall. It will make that equity raise after the release of the Bank Stress Tests at the end of the month. Uncle Sam’s intentions to oversee compensation, business practices, and the like is the antithesis of how Goldman operates. While the actual cost of the government TARP money is cheap, the unknown costs are enormous. Goldman has no interest in maintaining those risks. (more…)
Board of Health Condemns Due to Moral Hazards
Posted by Larry Doyle on April 13th, 2009 11:05 AM |
The best organizations are managed not only for today but for tomorrow. What do I mean by that? Great organizations assess risks, develop talent, diversify products, and grow market share. Aside from those basic business tenets, the best organizations respond well in times of crisis.
Every business and organization is ultimately a reflection of its people. To that end, the depth and quality of the people are the single greatest factors in the long term success of the organization.
Any individual or organization would relish developing a system that generates untold success and then automates the process. Neither business nor life works that way. Change is constant. How organizations proactively stay ahead of change and respond to change is paramount in succeeding in business and life.
The best sports organizations have developed a deep bench of talent both on and off the field. When players or executives leave – as they always do – the general manager moves another body in and the team does not miss a beat. The same scenario occurs in the best companies. This transition process is part of the culture of the organization. (more…)
