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HomeShake Hands With Uncle Sam
Posted by Larry Doyle on February 27th, 2009 5:30 AM |
When trading bonds on Wall Street, I always wanted to know what the largest accounts were doing. A handful of these accounts were so massive that in order to make a meaningful change in their portfolio they had to execute trades of monstrous size. In executing trades with these clients, there was enormous risk. That said, if I did not provide enough liquidity to the accounts then we would stop seeing their inquiry. Information is everything, so not seeing their business was even more dangerous than printing some of it. Given this balancing act, I would try to pick and choose my spots. Amongst these clients is the largest bond manager in the country, Pacific Investment Management Company, otherwise known as Pimco, headed by the legendary Bill Gross (one of our Economic All-Stars highlighted in the lower left sidebar).
Bill offers his thoughts on a monthly basis. Anybody with even passing interest in the markets should read his remarks. I will offer an overview: (more…)
Ceteris Paribus
Posted by Larry Doyle on February 26th, 2009 2:01 PM |
Economic and budgetary analysis by their very nature often employ a “ceteris paribus” approach or similarly base line assumptions. Ceteris paribus, translated as “all other things being equal,” or base line assumptions are necessary given the fact that economic analysis has so many variables. Well, let me share with you that ceteris are NEVER paribus and base line assumptions are almost always skewed to bias the results in a desired direction.
***UPDATE: I was not aware at the time of my writing but it is reported that the Obama administration is projecting the economy will grow at a 3.2% GDP in 2010. That assumption is wildly optimistic. No respected economist would project that figure. Consensus has it in the 1.5-2% range. What does this mean? Well, lower growth means lower revenues, means higher deficits, means greater funding needs, means more borrowing, means higher government interest rates, means more “crowding out”, means slower growth for the economy going forward!!
There was little doubt about President Obama’s social agenda and economic platform during his campaign. While markets will somewhat discount campaign rhetoric, they do not discount economic reality. The markets are sending a strong signal that Obama’s economic proposals and proposed budget are anything but pro-growth. Obama Delivers $3.6 Trillion Budget Blueprint runs the risk of raising taxes at a time of economic distress. Raising taxes was a prime factor that increased the economic malaise in the 1930s. Obama is willing to take that risk as he sticks to his campaign plan and is pressured by the liberal wing of the Democratic Party. (more…)
Is The Market Oversold?
Posted by Larry Doyle on February 25th, 2009 2:40 PM |
The valuation of any asset is determined by three factors:
1. Fundamentals: measures items such as cash flow analysis, cost-benefit analysis, earnings before interest, taxes and depreciation (EBITDA)
2. Technicals: measured by regression of price movements to determine overbought and oversold conditions
3. Psychology: measured by unscientific surveys of market participants
I have never seen such divergent views on expected future earnings which directly impacts any reasonable fundamental analysis. (more…)
Put Your Brokers and Bankers in Competition
Posted by Larry Doyle on February 25th, 2009 12:00 PM |
Every global financial enterprise has been hard pressed to maintain, let alone grow, revenues given the economic turmoil. With assets held in portfolio experiencing increasing levels of delinquencies and defaults, these institutions are all forced to set aside more reserves. How do businesses respond? Cut expenses and increase fees wherever and however possible. Who pays? You!!
I regularly see a sleight of hand at work on behalf of banks, insurance companies, money managers and other financial intermediaries to generate greater fees. While you will regularly be solicited with new and improved product offerings, how often are you getting the call that a fee is being increased and you may want to shop around for a better rate.
In an attempt to help you navigate this landscape, I strongly encourage you to approach your brokers and bankers and request a grid-like structure highlighting the basic products on one axis and the fee structure on the other axis. While more structured products and specialized services can be worthy of higher fees, a whole host of basic products fall into the plain vanilla category. (more…)
Caveat Emptor
Posted by Larry Doyle on February 25th, 2009 8:49 AM |
The equity markets across all sectors have gotten off to a very rocky start for 2009 (down 15% on average). In the midst of that, a lot of institutions and individuals have fled to the safety of short term government funds, money market funds that now benefit from a government backstop, and other cash alternatives. On average, these investments pay Wall Street and fund managers perhaps anywhere from .1% to .3% of the assets being managed. Those fees will not make the managers rich anytime soon. How do they respond? Welcome to the world of “principal protected notes.”
These structured notes are marketed to track an underlying index (say the S&P 500) while guaranteeing no loss of principal. Wow. Sounds like a great product. Where do I sign? Well, hold on just a second. I am not stating that structured notes do not have some degree of merit, but one needs to be very cautious in fully understanding how these notes work before purchasing. (more…)
Looking Back and Looking Forward
Posted by Larry Doyle on February 24th, 2009 2:41 PM |
John Mauldin, one of our Economic All-Stars (see sidebar on left), provides personal insights and perspectives that are truly cutting edge. Additionally, John has relationships that provide real clarity.
John Mauldin recently published commentary from Paul McCulley of Pimco and former Fed chairman Paul Volker. I had the good fortune of working with Mr. McCulley in the late ’90s at Union Bank of Switzerland. He is a true gem. Mr. Volker, like him or not, is regarded as one of the world’s leading central bankers. Their comments are both comprehensive and understandable as we look to navigate the economic landscape!
Mr. McCulley looks backward and reviews the following:
— the basics of our banking system
— a review of the “unregulated” shadow banking system
— the deleveraging process
— questions on the implementation of the government backstops, including the Term Asset-Backed Lending Facility to restart the consumer lending markets, and the public-private partnership. (more…)
How Does One Lose $125 Billion?
Posted by Larry Doyle on February 24th, 2009 6:00 AM |
It’s as easy as A-I-G…
While the government has pumped billions of dollars into Freddie, Fannie, the banks, the auto companies, and on and on it goes, the largest single government intervention into a private company centers on AIG. How are our investment dollars doing? Bloomberg.com reported:
“While I anticipated AIG would come back to the government begging for additional taxpayer dollars, I am disturbed that it has happened so soon,” said U.S. Representative Elijah Cummings, the Maryland Democrat who has criticized the insurer’s retention pay program, in a statement today.
The government saved AIG from collapse to prevent losses at banks that did business with the insurer.
“Counterparties around the world continue to have significant exposure to AIG, and market conditions continue to be fragile and sensitive to the potential disorderly failure of AIG,” the Fed said in a report in November.
(more…)
Breaking News…Citi “National Bank??”
Posted by Larry Doyle on February 22nd, 2009 10:24 PM |
UPDATED from late last night . . .
I just proposed on LD’s Dollars and Sense the idea that the markets would force Citigroup into the government’s hands. I thought it would occur within a month. In just checking the WSJ newswire it appears that executives from Citi are negotiating with the government as I write this. The fact that Citi is looking to broker a transaction currently is effectively an admisson on their part that they are technically insolvent. While the U.S. Eyes Large Stake in Citi, the common shareholders in Citi would be seriously diluted. How would creditors be treated? At this stage I would guess that creditors will be untouched. I would imagine that if this transaction occurs, other banking shares will trade down in sympathy.
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Tune In to Larry Doyle’s “Dollars and Sense” on No Quarter Radio
Posted by Larry Doyle on February 22nd, 2009 5:22 PM |
Please join us this evening from 8:00 to 9:00 p.m. ET 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!
We have two very interesting guests joining us. Lynn Marshall has one of the most unique backgrounds in the world of finance today. How does one develop a background that includes senior level experience in investment banking, agriculture, and community banking? Think Lynn has some amazing perspectives on the economy and markets? Don’t miss him.
Additionally, in light of the developments at Stanford Financial, we are very happy to have John Moynihan return to our show to discuss the dynamics in the world of offshore banking. Find out more than you could ever imagine by talking to these enlightened experts on LD’s Dollars and Sense, starting at 8 p.m. ET.
What are your questions and comments for me? 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!
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Leading Wall Street Analyst Speaks
Posted by Larry Doyle on February 22nd, 2009 4:29 PM |
I worked in the mortgage business on Wall Street for 23 years. During that time period I had the good fortune of developing relationships with some of the finest minds in this sector. While I do not know Laurie Goodman personally, I can tell you that there is no one individual in the market today whom investors follow more closely when it comes to developments in this space. While Ms. Goodman does work in a business that is actively engaged with investors, I have always appreciated her perspectives as being untainted by bias and merely reflecting an extremely professional and honest outlook.
What does Ms. Goodman think about President Obama’s plans for housing? It would appear that there may be all sorts of unintended consequences and misaligned incentives in this proposal. Regrettably plans that are well intended often do not necessarily achieve their desired results. I strongly recommend you read Mortgage Plan Aids Liars About Income to gain a fuller appreciation of this proposal.
LD
