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HomeWhere East Meets West
Posted by Larry Doyle on February 18th, 2009 6:00 AM |
In the late ’80s, an international banking crisis in Latin America and South America led to massive losses for many money center banks here in the United States. In the late ’90s, the collapse of the Thai bhat and Russian ruble were the precursors to global economic turmoil and significant dislocations in the capital markets. Fast forward to the current economic turmoil and the bulk of the problems have emanated in the developed markets. From the United States to the U.K. to Japan there are major destructive forces at work. Emerging markets have been following the developed markets with signs of stress present but not overwhelming…..until today.
As if western European banks did not already have enough to worry about, a major factor in Tuesday’s selloff in global equities was the expectation of truly massive unrealized losses due to exposure to the emerging economies of eastern Europe.
With capital flowing into eastern Europe truly drying up (effectively financial protectionism), the pace of delinquencies and defaults on loan payments is expected to skyrocket. European banks are not well positioned to deal with these losses. I would expect this situaiton will lead to the formal nationalization of many European banks. Does that create a wave of nationalization around the globe? At the very least it will put added pressure on the Euro and increase the sovereign credit risk of many European nations.
Banks Reel On Eastern Europe’s Bad News . . .
The Wall Street Journal; February 18, 2009
By Marc Champion, Joanna Slater and Carrick Mollenkamp
Behind the Numbers…
Posted by Larry Doyle on February 17th, 2009 1:43 PM |
While the equity markets globally are down 3-4% today and are within a few per cent of the lows seen on November 20th, let’s take a look “behind the numbers” so we can most effectively “navigate the economic landscape.”
1. While the United States has lost 2 million jobs over the last three months, China has reportedly lost 20 million jobs in that same time period.
2. Japan’s 4th quarter GDP came in at -3.3%!! This retraction equates to an annual decline of approximately 13%!!
Comment….those numbers are not indicative of economies that are weathering the storm or ready to generate domestic consumption. No wonder why both Japan and China are so concerned about protectionist policies here in the United States. (more…)
The Market Speaks . . . Investors Rush for the Exits
Posted by Larry Doyle on February 17th, 2009 8:12 AM |
Equity markets around the world are sufferring significant pullbacks overnight and this morning in the United States. What are the issues? Hope is a lousy hedge!! What does that mean? If we are relying on hope, rather than well defined plans to turn our economy and banking system, then investors are headed for the exits!
Let me highlight specific situations:
1. Banks around the world facing imminent downgrades in their credit rating due to continued pressures on their earnings capabilities and expectations of increasing defaults in their loan books.
2. Auto companies in the United States were supposed to deliver restructuring plans today. The market believes this situation is likely headed to a government backed bankruptcy.
3. Hedge funds are receiving notification that Wall Street banks are significantly pulling in, if not totally reneging on, credit lines. What does this mean? Many funds will have to find financing elsewhere or liquidate the business which means selling assets which will put further downward pressure on many sectors of the market. (more…)
Legalized Bribery
Posted by Larry Doyle on February 16th, 2009 6:57 PM |
Quality business relationships are always mutually beneficial. If they are not mutually beneficial, then they will not thrive or perhaps even last at all. A strong business relationship, like any personal relationship, needs a foundation of honesty and
integrity. As in any relationship, there will be plenty of instances in which the parties have disagreements and misunderstandings. If the relationship is strong enough, it can not only endure through these times but often grow stronger as a result of them.
The challenge in any relationship is when one party is conflicted and attempts to serve two masters. These conflicted relationships – whether personal, political, social, or business – must change in order to grow or are doomed to languish and underperform if not die completely. On Wall Street, a business that so grossly prioritizes short term profits versus long term customer relationships will not grow. Perhaps for a period of time the excess profits will be addicting and mesmerize management, but over time that model will not work. Bear Stearns is a classic example of this principle. From having worked there for 7 years in the 90s, I evidenced it firsthand. (more…)
Larry Doyle’s “Dollars and Sense” on No Quarter Radio
Posted by Larry Doyle on February 15th, 2009 1:23 PM |
Please join me this evening from 8-9pm on No Quarter Radio for LD’s Dollars and Sense. These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere!
What did we learn this week in the markets? Equities, bonds, currencies, hedge funds, commodities. There is a lot going on across all these sectors. What do the week’s moves indicate about the economy as well as about Washington?
What does the market think about the stimulus plan? What does it mean for the economy?
How about Secretary Geithner? What does the market think about his newly designated Financial Stabilty Plan? What does the market think about him and the Obama administration’s first few weeks? (more…)
One MASSIVE Margin Call
Posted by Larry Doyle on February 10th, 2009 3:46 PM |
In light of the serious economic crisis facing our country and the world today, there is understandably heightened interest and anticipation towards both the proposed Stimulus Plan and the newly designated Financial Stability Plan. Clearly every individual in our country is impacted by this turmoil and we are hopeful that our leaders in both the private and public sectors can display the real leadership necessary to “right the ship.” Let’s provide a concise review of the newly designated Financial Stability Plan proposed today by Secretary Geithner. I’ll then move toward a further review of our economy and what it means for us going forward.
Financial Stability Plan
Secretary Geithner prefaced his remarks by highlighting that this process will “take time to resolve.” He offered that there is plenty of blame to go around to the public and private sectors, including the regulatory and rating agencies. He acknowledged that public distrust has heightened in the process. While he believes the government is being appropriately aggressive with this plan, I do not share that opinion. I commend him for emphatically stating that there will be total transparency in the process, along with strong contingencies for any entities that borrow public funds. All details will be posted on www.financialstability.gov.
While Geithner did lay out the overview of the plan, he did not extensively provide details. The market has sold off 3% in the process. I believe the market also sold off given the realization that this plan is going to take a LONG time to make a real impact. Let’s get to the meat of the plan: (more…)
An $800 Billion Mistake
Posted by Larry Doyle on February 7th, 2009 4:40 PM |
The American populace knows that the primary architects in the formulation of the Stimulus Plan working its way through Congress are Rahm Emanuel, Nancy Pelosi, and Harry Reid. This contingent, along with President Obama, have not been bashful in stating they view the November election results as effectively a mandate to change policies emanating from Washington. Against that backdrop, the initially proposed Stimulus Plan was so loaded with pork that the Republicans and the American population at large slammed it as more a promotion of the Democratic agenda than a true stimulus plan.
I will give President Obama credit for formulating a Panel to Advise Obama on Economy. This panel will be known as the White House Economic Recovery Advisory Board. The Board will be headed by former Fed chair Paul Volcker. He will be joined by Jeff Immelt of GE, James Owens of Caterpillar, William Donaldson, former SEC chair, Roger Ferguson Jr. of TIAA-CREF, Richard Trumka of AFL-CIO, Anna Burger of SEIU, and Martin Feldstein, renowned Harvard economist. The group will be guided by Austan Goolsbee, an economic adviser to the White House.
Do you think President Obama and his economic team would listen to Mr. Feldstein or is that a “mere courtesy” having him on the board. Let’s review what Mr. Feldstein said about the Stimulus Plan just last week.
Markopolos vs. SEC: Red Flags All Over The Field
Posted by Larry Doyle on February 6th, 2009 5:30 AM |
The world of professional sports has adapted to the wonders of modern technology over the course of the last ten to fifteen years. Professional hockey and basketball have used video reviews for a while. 
Professional and college football have more recently utilized video reviews to “get the calls right.” Major league baseball only last year accepted the fact that it is a better game when certain key plays are ruled properly. Few if any lovers of the games do not fully appreciate the benefits of this review process. If our country were only so fortunate that the powers that be at the Securities and Exchange Commission had an equal appreciation for a series of red flags requesting a similar review.
On November 7, 2005 Harry Markopolos threw 29 red flags on the field for the purposes of reviewing Bernard Madoff Investment Securities. The fact that the SEC did not more fully investigate given this OVERWHELMING body of evidence leaves any individual of sound mind and body speechless and dumbfounded. The questions that need to be answered are whether “the reviewers in the box along with the referees on the field” at both the SEC and FINRA were in some way conflicted. Did they have a stake in the game being played? Were there other kinds of action going on away from the field of play that need equal review?
The MSM has given Mr. Markopolos’ tireless work and pursuit of the truth in this fraud a less than thorough review. To be perfectly frank, I am shocked and appalled that we have not seen greater focus on this story. I was sent a copy of Mr. Markopolos’ November 7, 2005 Submission to the SEC and reviewed it today. This submisson is a matter of public record. While I could write at length on the evidence presented, I will do my best to summarize and highlight items that may not have received as much public disclosure as others.
Midday Market Update
Posted by Larry Doyle on February 5th, 2009 3:01 PM |
After the Initial Jobless Claims report this morning came in decidely weaker than expected, the equity markets sold off and bonds rallied.
As the day has worn on, those moves have reversed. Let’s provide an update and some commentary:
Stocks
Most sectors of the stock market are now up 1.5-2% on the day. I am honestly not reading anything into these moves. I believe this move upward is nothing more than a squaring of positions in front of tomorrow’s highly anticipated January Employment Report.
Bonds
This sector of the market is facing enormous supply next week so any move upward will likely bring in sellers to set up for that supply. Currently, the 10yr treasury yields 2.9%. That rate is up significantly over the last month, but close to unchanged on the day.
Currencies
The dollar is doing a touch better versus the Japanese Yen and is marking time versus the Euro. Again, I view this movement as more a squaring of positions than a key turnaround in dollar weakness versuss yen strength.
Industry Groups
Much like the overall sectors, specific groups which have underperformed (consumer finance, life insurance, retailers) are doing better today, while precious metals are underperforming.
The price action across all sectors is consistent. Traders are squaring positions and mitigating risk in front of the employment report tomorrow.
LD
Reason for Optimism . . . Not So Fast!
Posted by Larry Doyle on February 5th, 2009 12:53 PM |
Last week I wrote the prospects for the implementation of a “bad” bank (I designated it Bank Transition) seemed to be increasingly likely. My post, Reason For Optimism, highlighted the fact that a Bank Transition would facilitate the clearing of toxic assets from bank balance sheets. In so doing, the “transitioning” process should promote an environment in which banks can feel more comfortable lending to qualified borrowers. An update on this “Bad Bank” concept started to break yesterday. Regrettably, the government and banks can not seem to agree conceptually on the necessary steps to launch this bank.
In lieu of a bad bank, the main initiative now being proposed is the concept of the government “guaranteeing” the losses on these assets from a certain point. I view this approach in a less positive light. I believe strongly that this insurance approach is the equivalent to the Japanese style approach used in their banking crisis of the early 90s. Instead of recognizing losses to a certain point and then transferring them, the insurance approach puts a much greater emphasis on “buying time” to generate revenues as a means of increasing capital within the system.
Buying time strikes me as prolonging the period of lower growth and lessened opportunities.
We will see what comes out of Washington on these topics, but if in fact this is the primary approach for addressing toxic assets, I no longer have that “reason for optimism.”
LD
