Sense on Cents

Don’t Worry Be Happy

Posted by Larry Doyle on November 13th, 2009 11:40 AM |

Happy Friday!!

I have to admit, virtually every major story I review today would seem to indicate further challenges for the American economy. In the perverse world of the Uncle Sam economy circa 2009, those challenges seemingly do not present hurdles for our markets but rather greater comfort for those who would want to add to positions via the dollar carry trade. Is that bizarre? No, that’s the market. While many may not believe what the market is saying, please recall I always maintain the market is never right nor wrong, per se. It is merely the market.

What stories represent increasingly high hurdles on our domestic front?

1. The Federal Housing Administration, which now plays an ever larger role in our domestic housing market, is poised for a bailout by Uncle Sam. You didn’t actually believe the FHA leadership when it stated a mere few weeks ago that it would not need a bailout. Do not believe that man behind the curtain. Whether it is Freddie or Fannie, or now the FHA, the American taxpayer will most likely continue to pour multiple billions into the sinkholes of these three organizations. Let’s be honest. Our housing sector, to a very large extent, is nothing more than a social experiment.

Don’t worry, be happy!!

2. Our trade deficit unexpectedly widened. All other things being equal, that report would serve as a drag on our GDP, hit our greenback, likely push interest rates higher and equities lower. Discounting the actual economic reasons that impacted this increase in the trade deficit, the market is comforted by the fact that the dollar should remain under pressure based on this report. A lower dollar comforts the leveraged positions across wide swaths of our markets.

Don’t worry, be happy!!

3. The University of Michigan Consumer Confidence reading plummets to a devilish level of 66 from 70.6. The market was expecting a bounce in this report to as high as 72. Reason to worry? Holiday sales might be a problem?

Come on, it’s Friday, don’t be a downer.

Don’t worry, be happy!!

What a world.

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Can One Earn an Honest Living on Wall Street?

Posted by Larry Doyle on November 13th, 2009 8:29 AM |

You have the reputation you deserve.

While there are certainly instances where individuals are misunderstood or situations that are construed differently, a reputation is neither determined nor changed based upon one event. A reputation is ultimately a compilation of data points. That data does not belie what some individuals and industries may like to project.

That said, an industry’s reputation can often be largely determined by the high profile and influential behaviors of a small subset, especially if that minority is not properly regulated. Such is the world of Wall Street.

Does the fact that Wall Street has an awful reputation implicate a majority or even a significant percentage of individuals in this industry as being morally bankrupt? That is not the Wall Street on which I worked for 23 years. To that end, I take serious exception to an article written by Bloomberg’s Alice Schroeder, Wall Street Makes It Hard to Earn a Legal Living. Ms. Schroeder writes:

A group of university students I spoke to recently asked if it was possible to make a living on Wall Street without compromising your values. I had to tell them no.

How uncanny. I spoke to a group of college students last evening at my alma mater, College of the Holy Cross, and I shared with them the exact opposite. I highlighted that embracing core values and spreading them was both necessary and possible for developing a long-term, successful career.

I will readily admit that questionable trade practices – if not outright fraud – have grown on Wall Street over the years. There was certainly plenty of this activity when I went to Wall Street in the early ’80s and there will be thirty years from now.

The problem is not and never has been the industry. The problem is and always will be the individual.

I would maintain that people who seemingly forsake values and principles for profit most likely never had many values or principles in the first place. Do people go bad? Of course. Can people be reformed? Of course. Do people rationalize behaviors in terms of ‘everybody else is doing it?’ All the time. Does this mean that one can’t earn an honest and legal living on Wall Street? Please, anything but.

There will always be bad seeds in every pot. To deal with those, it is imperative that the regulatory crowd is beyond reproach and aggressive. On that front, I will readily admit that Wall Street regulation has been exceptionally deficient.

In light of all this, can one earn a legal living on Wall Street? The overwhelming population on Wall Street is doing it everyday . . . and that message comes from one who is willing to call Wall Street out for all its shortcomings.

High five to RG for bringing this article to my attention. Now you want to talk about principled and upstanding, RG and all the Gs are exactly that.

Comments, questions, constructive criticism always appreciated.

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What Do CA, AZ, FL, IL, MI, NV, NJ, OR, RI, and WI Have in Common?

Posted by Larry Doyle on November 12th, 2009 2:25 PM |

No, these states are not holding a Powerball Lottery . . . although the states themselves could use the winnings.

These states, amongst others, are barreling toward economic disaster. Don’t take my word for it. None other than the Pew Center on the States produced a report entitled Beyond California: States in Fiscal Peril:

(High five to MC for bringing this to our attention)

California’s financial problems are in a league of their own. But the same pressures that drove the Golden State toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the entire country. Read the rest »

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“You Can’t Make a Weak Man Strong by Making a Strong Man Weak”

Posted by Larry Doyle on November 12th, 2009 11:42 AM |

Barack Obama would like to think he represents the second coming of Abraham Lincoln. During his campaign and inauguration and now also during his Presidency, Obama and his minions are working to overtake and fundamentally change the structure and fabric of large parts of our economy and nation. He is the President and he has every right and obligation to perform. That said, the American population also has the right and obligation to speak its mind. In regard to the Lincoln comparisons, let’s revisit that later in this commentary.

Those in Washington pushing health care reform would seemingly like to present this situation as being so complex and so convoluted that the American public neither appreciates nor has a choice in the eventual passage of this legislation. I hear time and time again that the government must institute real change and that the government must be the driving force in bringing about that change. Is the American public being prepped to have the largest single government overhaul of a sector representing approximately 18% of 2009 GDP literally rammed down our throats?

While the wizards in Washington pushing this so-called reform seem to believe they know what is in the American public’s best interests, in my opinion they are tone deaf to large segments of the American population.

As I touched upon the other day, proposed health care reform is merely another in the myriad of government redistribution programs. Who gets this? Mike Rogers, Congressman from Michigan (R-MI). He spoke earlier this year about this exceptionally important topic from a macro standpoint. Let’s revisit his comments. Please listen closely. His references to information emantating from the U.K and Canada are chilling to those who have worked hard to take care of themselves and their loved ones.

This video clip runs less than four minutes. The message lasts a lifetime.

Please share the clip and your comments.

“You can’t make a weak man strong by making a strong man weak”
— Abraham Lincoln

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“Nobody Has Ever Seen This Market”

Posted by Larry Doyle on November 12th, 2009 8:22 AM |

“I’ve seen this market before” is a very commonly used phrase by Wall Street professionals to compare and contrast different periods.

For example, when the Treasury yield curve is steepening or flattening, many market pros will project what will happen in different segments of the market based on discounting cash flows under the steepening or flattening scenario. Similarly, when credit spreads are in a widening or tightening trend, market pros will project how higher or lower rated investments will typically behave.

These projections are all based upon prior experience. The pros are utilizing a combination of market fundamentals along with investor sentiment to make forecasts. They will overlay their current forecasts against similar trends during prior cycles. Not that markets are ever perfectly symmetrical, but ‘having seen a market before’ is often a strong indicator of current and future price action.

Against this backdrop and given the challenging nature of the current market price action, I would challenge any market analyst or pundit who would utilize a similar approach today.

The simple fact is, ‘nobody has ever seen this market before.’ Why? Because this market has never transpired previously. Certainly, we have seen bull markets. We have seen low interest rate markets. We have seen accomodative Fed policy. We have seen bubbles. All that said, we have never seen a market in which global cross currents combined with ongoing fiscal stimulus have impacted markets to this extent.

In fact, I think one could make the case that the market is doing better as large parts of our domestic economy and the global economy are actually doing worse. While traditional schools of thought would view that correlation as perverse, the economic strains are compelling global governments to keep stimulus programs in place.

What is the result? A rallying market with increasing potential that the market develops into a blowoff. The irrationally positive nature of a blowoff is akin to a wholesale dumping of securities in a selloff.

Keep your head and stick to disciplined investing. Respect the price action, but do not get overly enamored with those analysts telling you what will happen . . . because ‘nobody has ever seen this market.’

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Obama Administration Won’t Release Mortgage Modification Figures; Sense on Cents Already Did

Posted by Larry Doyle on November 11th, 2009 2:50 PM |

No news is good news, right?

Well, that may work in raising teenagers but when it comes to public policy in general and housing policy specifically the American public deserves to know what is going on. Why? American taxpayers are picking up the tab, that’s why.

Regrettably, our wizards in Washington are often reluctant to provide the transparency the American public deserves.

I witness this dynamic again today in reviewing a story on the mortgage modification program. The Wall Street Journal puts a positive spin on developments in the mortgage modification process by writing, Mortgage Program Gathers Steam After Slow Start:

The Obama administration said Tuesday that its mortgage-modification program has enrolled one in five eligible homeowners, a sign the effort is gathering momentum after a slow start. But so far few of those trial modifications are turning into permanent fixes.

The Making Home Affordable program has begun trial modifications for more than 650,000 borrowers since it was launched in February, according to data released Tuesday by the Treasury Department. That amounts to 20% of those eligible for the program. More than 217,000 trial modifications, or roughly one-third, were under way in just two states: California and Florida.

The program provides financial incentives to mortgage companies and investors to reduce loan payments to affordable levels. The Treasury Department said the program was on track to meet its goal of offering help to between 3 million and 4 million borrowers over the next several years. Those who are 60 days or more delinquent on their mortgages or at risk of imminent default are eligible.

Whether the program will ultimately be judged a success will depend upon how many trial modifications become permanent. To receive a permanent fix, borrowers must be current on their payments in the trial program after three months and submit a hardship affidavit and other documents.

The administration won’t release figures on completed modifications until December…

Won’t release figures on completed modifications until December? Why not? What’s up with that? Read the rest »

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My Thoughts on the Bear Stearns Hedge Fund Case

Posted by Larry Doyle on November 11th, 2009 10:26 AM |

Ralph Cioffi and Matthew Tannin

Does yesterday’s verdict in the Bear Stearns hedge fund case establish a precedent that precludes likely guilty verdicts in other financial fraud cases? Let’s hope not.

I did not sit in on this trial, so I am not about to weigh in on the verdict. Consensus opinion from those who did sit in on the trial seems to agree that the prosecution presented a very weak case. Additionally, the prosecution was challenged from the standpoint of not being able to admit selected and seemingly incriminating e-mails as evidence.

The not guilty verdict in this specific case does not preclude Cioffi and Tannin from facing other charges. What was the key to this case? The Wall Street Journal sheds light on this case and verdict in writing, U.S. Loses Bear Fraud Case:

The acquittals are a setback for the U.S. attorney’s office in Brooklyn, N.Y., which along with several other offices is investigating Wall Street for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. and American International Group Inc. In Tuesday’s case, the question boiled down to this: Were the two men misleading investors, or simply putting a positive spin on sagging returns? Read the rest »

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Chris Dodd Has an Epiphany

Posted by Larry Doyle on November 11th, 2009 8:58 AM |

Senator Chris Dodd (D-CT)

Senator Chris Dodd (D-CT) is in a fight for his political life. Dodd continues to trail his primary Republican opponent Rob Simmons in recent polls. More disturbing than the actual polls versus his competition is the fact that fully 51% of those polled do not consider Dodd honest and trustworthy.

What happens to individuals faced with a potential death sentence? Come to Jesus. Faced with the prospect of death, literally or professionally, individuals often will undertake drastic changes in appearance and demeanor in an attempt to stave off that deep, dark descent. In that light, I am never amazed by actions, statements, and positions put forth by politicians.

What is Chris Dodd’s epiphany? Dodd clearly smells the wrath of the American populace toward Washington and Wall Street. Few politicians have been more closely linked with these two worlds than Senator Chris Dodd. After a year’s worth of debate and discussion on financial regulatory reform, Dodd is now proposing the most sweeping and all encompassing overhaul across the entire financial industry. Is this a Hail Mary pass in an attempt to pull victory from the jaws of political defeat? The American Banker provides a wide angled view of Dodd’s desperation pass in writing, Dodd Goes for Broke with Tough Reform Bill:

A draft version of his bill introduced on Tuesday was so far-reaching it would pick a fight with virtually every entrenched interest involved in the debate, including community banks, large financial institutions, the Obama administration, House Democrats, the Federal Deposit Insurance Corp. and the Federal Reserve Board.

Read the rest »

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Sleepless in Seattle . . . FHLB-Seattle, That Is

Posted by Larry Doyle on November 10th, 2009 4:28 PM |

Having broached expectant difficulties in the Federal Home Loan Bank system last spring, I try to keep a close eye out for news of note on this largely unknown – but critically important – system of banks. To a large extent, the FHLBs have been flying under the radar despite some serious problems within their investment portfolios and loan books.

High five to KD for pointing out that the folks at FHLB-Seattle probably are not getting much sleep these days. Why is that? Insufficient capital will do it to you every time. As the American Banker offers, FHLB Seattle Still “Undercapitalized,” Regulator Says:

The Federal Housing Finance Agency said late Friday that the Federal Home Loan Bank of Seattle remains “undercapitalized” and will not be allowed to redeem or repurchase stock or pay dividends.

At the end of 2004, as the bank struggled with the size of its mortgage purchase program, it said members who wish to redeem their stock must wait five years before receiving their money.

But with that time period almost up, the Finance Agency said it would not allow the bank to begin redeeming stock, fearing it could lower its capital base. Read the rest »

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Goldman Sachs Doing God’s Work?

Posted by Larry Doyle on November 10th, 2009 12:20 PM |

Do you get the sense that Wall Street in general and Goldman Sachs in particular are getting overly miffed at the disdain heaped upon it by the American public? I do.

In a spirited defense put forth by Goldman Sachs CEO, Lloyd Blankfein invokes the Lord’s name in promoting the virtues of Goldman Sachs’ work. Aggressive move by Mr. Blankfein. The Wall Street Journal highlights this story in writing, Goldman Sachs’ Blankfein on Banking: ‘Doing God’s Work’:

The Times of London’s mammoth 6,900-word piece on Goldman Sachs over the weekend contains plenty of fodder for those that see the investment bank as Wall Street’s top dog, as well as those that see it as a creepy, conspiratorial vampire squid of finance.

But the key quote that’s getting attention comes in Goldman Chief Executive Lloyd Blankfein’s exchange with a reporter after a question on whether there should be limits to compensation:

Is it possible to make too much money? “Is it possible to have too much ambition? Is it possible to be too successful?” Blankfein shoots back. “I don’t want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I’d like them to continue to do what they are doing. I don’t want to put a cap on their ambition. It’s hard for me to argue for a cap on their compensation.”

So, it’s business as usual, then, regardless of whether it makes most people howl at the moon with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe will go on raking it in, getting richer than God? An impish grin spreads across Blankfein’s face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker “doing God’s work”

Wow!! Let’s navigate. Read the rest »

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