Sense on Cents

House Rich but Cash Poor Now Leading to Increased Bankruptcies

Posted by Larry Doyle on September 9th, 2009 3:42 PM |

In the midst of speaking with a wide array of people over the course of the last 6 months, I continue to hear of more and more individuals who fall into the category of “house rich but cash poor.” This phenomena clearly developed over the last 8-10 years given the skyrocketing of home values. As people continued to take equity out of their homes, the home itself was viewed as a provider of wealth rather than a store of wealth. Well, now that the piggy bank that was the home has plummeted in value, many supposed well-to-do Americans are facing bankruptcy.

This unwind has happened so quickly as to leave these ‘successful’ and ‘savvy’ people bewildered. The fact is, a bear market in any segment of the market takes no prisoners.

Bloomberg highlights the explosion in bankruptcies that many high income but overleveraged individuals are facing in writing, Wealthy Families Face Bankruptcy on Real Estate Crash:

Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.

More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Joseph Baldi, a Chicago bankruptcy attorney.

How is this playing out for banks and other credit providers? An ongoing increase in delinquencies, defaults, and foreclosures. Moreover, this segment of the population consumed more high priced items and took more extravagant vacations. The pullback and impact on companies servicing this clientele will continue to be deep and meaningful. Read the rest »

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UN Calls for New Global Currency in Place of Greenback

Posted by Larry Doyle on September 9th, 2009 11:04 AM |

What drove the U.S. dollar dramatically lower yesterday? How about a communique from none other than the United Nations Conference on Trade and Development. UNCTAD recently released a statement in which it proclaims:

Given the prevailing major shortcomings in the international financial and monetary system, UNCTAD draws attention to some elements of reform of the international financial architecture, which is long overdue. These include effective capital account management, strengthening the role of special drawing rights (LD’s highlight), and a multilaterally agreed framework for exchange rate management. These reforms imply a fundamental rethinking of global financial governance to stabilize trade and financial relations by reducing the potential for gains from speculative capital flows. This will reduce the likelihood of similar crises in the future and help create a stable macroeconomic environment conducive to growth and smooth structural change in developing countries.

I purposely highlight the UN’s desire to strengthen the role of special drawing rights. In layman’s terms, that means the UN wants to promote the currency of the IMF at the expense of the U.S. dollar.

When BRIC nations promote a move away from the U.S. dollar, one may view it as the competitive nature of international trade. When an entity such as the United Nations is also promoting a move away from the U.S. dollar as the international reserve currency, we are embarking on an entirely new slope along our economic landscape.

The fact that we have heard little to nothing from our power base in Washington leads me to believe that Obama, Geithner, Bernanke, Summers, et al are comfortable with a decline in the value of our currency.

In my opinion, that comfort can be a very dangerous long term maneuver. How so? Economic growth requires capital. If investors deem our currency to be weakening, the capital will flow elsewhere . . . and elements of our quality of life may go right along with it.

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TARP Transparency Is a Joke as Uncle Sam’s $81 Billion Investment in Automakers Unlikely to be Recovered

Posted by Larry Doyle on September 9th, 2009 7:52 AM |

Do the ends justify the means? Is the American taxpayer better off not knowing how his money is being spent when rescuing private corporations? Is the Obama administration’s claim of transparency a mere facade? I believe a strong case could be made that all of these assertions are true in reviewing the likelihood of the American taxpayer recouping taxpayer funds injected into GM and Chrysler.

While government pundits and market analysts will crow about positive returns on TARP funds injected into banks that never truly wanted the money in the first place (Goldman Sachs and JP Morgan amongst others), they have little to say about the TARP money which will not likely be coming back from the automotive industry.

I highlighted this point on June 30th in writing “The TARP Has a $159 Billion Loss”:

Of the $699 billion in total capital, $142 billion has yet to be committed. Of the funds already allocated, Uncle Sam has incurred a total cost of $159 billion. What does that mean?

Recall the number of times that government officials told taxpayers that we would make money on investments in AIG and the like. Well, so far we’ve lost $159 billion dollars across all our TARP investments. The loss is calculated as the difference in funds committed and allocated to securities and the market value of those securities. That loss represents 36% of the funds committed and actually allocated.

Where do a large percentage of the funds unlikely to be recovered reside? Detroit, as in GM and Chrysler.

Bloomberg sheds further light on losses embedded in the TARP in writing U.S. Taxpayers Unlikely to Recover Auto Investment, Panel Says:

U.S. taxpayers are unlikely to recover their $81 billion investment in General Motors Co. and Chrysler Group LLC and were “left in the dark” on specifics of a decision to aid automakers, a congressional panel said.

The report didn’t estimate how much of taxpayers’ aid to the auto industry will be recovered. The panel said GM stock would need “highly optimistic” returns in order for the full investment to be repaid.

The report of the panel, which oversees the Troubled Asset Relief Program, raises questions about the Obama administration’s transparency in aiding automakers and challenges the Treasury Department to make more disclosures about company decisions and the government’s future role.

“Congress and ultimately the American taxpayer have been left in the dark concerning details of Treasury’s review process and its methodology and metrics at a time when Treasury committed additional TARP funds to these companies,” the panel said.

“The Treasury auto team failed to disclose to the public both the factors and criteria it used in its viability assessments, the scope of outside involvement in its evaluations, and its basis and reasoning for selecting particular benchmarks,” according to the report. “Simply, its disclosures did not go far enough.”

As these companies try to recover, taxpayers should not expect a return of any of these $81 billion. Taxpayers should also not expect transparency from Washington. Being truthful and transparent are not exactly consistent with the ‘Washington way.’

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The U.S Dollar is Diving

Posted by Larry Doyle on September 8th, 2009 4:32 PM |

Is the U.S. dollar losing its luster as the world’s international reserve currency? If today’s price action is any indication, the greenback is chugging along like a tired old caboose.

The U.S. dollar index is down a full 1% on the day and making multi-year lows against a wide array of other currencies. Our friendly Wall Street Journal Market Data Currency page provides a useful snapshot of our tired old greenback (click on image for larger chart):

Why is the dollar giving so much ground?

1. perception that the U.S. economy is in tougher shape than other economies around the world.

2. perception that these other economies will be forced to raise rates sooner than the Federal Reserve will raise rates here in the U.S.

3. traders are borrowing U.S. dollars at 0-.25% and using them to invest elsewhere in what is known as the ‘carry trade’ otherwise known as utilizing leverage.

4. continued concern about the viability of the U.S. dollar as the world’s international reserve currency.

The Wall Street Journal offers an interesting perspective on this development in writing, Dollar in a Funk as Traders Bet on Slow Rebound:

Currency analysts say the dollar’s slide has room to run now that it has broken free of recent trading ranges. Several are predicting the euro will test $1.50 by the end of the year. Mr. Mackel also sees continued strength, in particular, for the Australian dollar, which is backed by a healthy economy and exposure to a rebounding China. He says the Aussie currency could reach near parity with the U.S. dollar by the end of 2010. Early afternoon Tuesday it was trading at US$0.8641, up from US$0.8560.

Friday’s U.S. jobs report was a significant factor in the dollar’s fall. The U.S. unemployment rate hit 9.7% in August, and that means the Federal Reserve will likely keep interest rates low for the foreseeable future.

I maintain that our leaders in Washington are not unhappy with a weaker dollar. Why? A weaker currency will help promote greater exports as our products appear cheaper. Additionally, it is a means toward generating inflation and effectively monetizing our growing deficit. That said, how do the wizards in Washington stop the slide of the dollar and generate only a whiff of inflation?

The simple fact is a decline in the dollar is a global statement of lessened confidence in the American economy as the driver of global growth.

That is reality.

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The Greenback is Getting Some Chinese Competition

Posted by Larry Doyle on September 8th, 2009 12:57 PM |

The BRIC nations (Brazil, Russia, India, China) have certainly not been bashful in promoting the need for some competition in the greenback as the international reserve currency. Is that competition going to escalate as China issues yuan-denominated bonds for the first time? Major high five to MC of Investor Rebellion for bringing this developing story to my attention.

The Business Insider writes, Dollar Threat: China Selling Yuan Bonds for the First Time:

In yet another step to internationalize the yuan as a global currency, China will be selling yuan-denominated bonds on the international market for the first time.

This could be a new option for fixed-income investors, including central banks, who want to diversify away from the dollar.

AP: The 6 billion yuan ($876 million) bond sale is slated for Sept. 28, the ministry said. Hong Kong is Chinese territory but has its own currency and regulatory system and often is used by Chinese companies to deal with foreign investors.

The yuan, also known as the renminbi, or people’s money, does not trade on global markets despite China’s huge foreign trade, but Beijing is gradually expanding its use abroad.

It will be interesting to see what yield these bonds end up offering, and if central banks bite.

Given the consensus view that the yuan is artificially undervalued versus the dollar, longer-term Chinese bonds are likely to be appealing for their currency appreciation potential, in addition to their interest income. We expect a strong a response.

This development is very meaningful and bears watching. Questions and concerns I would have for investors include: Read the rest »

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Wall Street Meets Main Street at the Courthouse

Posted by Larry Doyle on September 8th, 2009 8:50 AM |

With the gap between Wall Street and Main Street never wider, the American public is left wondering who truly is looking out for their interests. The Wall Street lobbying machine is working overtime to dilute real regulatory reform. The financial regulators themselves are increasingly exposed as overmatched and incompetent, if not worse. Where can the American public turn to get some relief? Slowly but surely the courts are taking action to address the gross injustices that the American public has had to bear at the behest of Wall Street and with the protection of Washington.

Make no mistake, the slope of the mountain of injustice is quite steep. Furthermore, we are just starting the trek. Little doubt there should be many stops along the way. You can rest assured that the Wall Street lawyers and financial lobbyists are working diligently to put out the smoldering ruins of fires and campsites which wreaked havoc upon our economic landscape. There appears, however, to be mounting evidence that the Wall Street fires were fed by Washington and financial regulators looking the other way.

Bloomberg highlights some initial progress made on behalf of the American public in the fight for truth, transparency and integrity on our financial and economic landscape. This morning Bloomberg writes, Judges Punish Wall Street as Regulators Just Talk About Reform:

As the White House and Congress debate how to regulate financial firms to avoid another economic crisis, judges have assumed the point position in punishing Wall Street for causing the worst recession since the 1930s.

The executive and legislative branches have been discussing reforms such as more regulation of hedge funds and transparency for derivatives as a response to the financial crisis that began a year ago. As that battle with a reluctant Wall Street inches forward about how to prevent another disaster, judges are taking the first steps toward the same goal, punishing executives and issuing rulings with national impact.

I can only hope the momentum in the courtroom accelerates given the slow and painstaking rope-a-dope game being played out between Wall Street and Washington. Wall Street clearly wants a ‘mulligan’ from the excessive improprieties that led to our current economic crisis. The courts are starting to get wise and adjudicating otherwise. Bloomberg highlights some recent rulings for the public and against the Wall Street-Washington cabal including: Read the rest »

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Did the SEC Have Any Experienced People Looking at Madoff? You Betcha!!

Posted by Larry Doyle on September 7th, 2009 11:24 AM |

While the SEC Inspector General David Kotz would have the American public believe the SEC fell down in its oversight of Bernie Madoff largely due to inexperienced investigators, this claim is very shallow.

Former SEC lawyer Genevievette Walker-Lightfoot was investigating Madoff in 2004 but was reassigned when she started to ask the hard questions. The Wall Street Journal highlights Ms. Walker-Lightfoot’s time working for the SEC in writing, Ex-SEC Lawyer: Madoff Report Misses Point:

A former Securities and Exchange Commission lawyer who investigated Bernard Madoff in 2004 says the new report on how the agency failed to uncover his massive fraud places too much blame on staff examiners and overly generalizes about their “inexperience.”

Genevievette Walker-Lightfoot told Dow Jones Newswires on Thursday the SEC inspector general should have focused more of his attention on how supervisors, rather than the staff examiners and investigators, handled the agency’s many stillborn probes of Mr. Madoff.

SEC inspector general, H. David Kotz, reached by telephone, said he considered it premature for Ms. Walker-Lightfoot to criticize the summary before the full response was released. He described himself as “befuddled” by her remarks. Mr. Kotz noted the decision to release the summary was made by SEC Chairman Mary Schapiro, not by his office.

An executive summary of the report, released on Wednesday, repeatedly emphasized what it described as the inexperience, confusion and limited expertise of staff assigned to at least six investigations involving Madoff since 1992.

Ms. Walker-Lightfoot — who recommended more action in a 2004 investigation that was shelved — said those descriptions were overly simple, and the summary generalized too much.

“My experience is a key example,” she said. “Here was someone who raised red flags and said “We need to look into these things.” But I wasn’t senior management, so it wasn’t my call.”

The full report is expected on Friday, and she said she would reserve final judgment on it until then.

Ms. Walker-Lightfoot, who is now a lawyer for the Federal Reserve Board, was part of a four-person team in the SEC’s Office of Compliance Inspections and Examinations, or OCIE, who investigated Mr. Madoff’s firm in 2004. She informed a supervisor of inconsistencies she learned of during her review and suggested following up.

Instead, her team was ultimately diverted to another case.

Who made this decision? Why? Read the rest »

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Rick Johnson Weighs in on NASD and FINRA

Posted by Larry Doyle on September 6th, 2009 2:50 PM |

Rick Johnson of First Coast Planning was my guest on NoQuarter Radio’s Sense on Cents with Larry Doyle last spring. It just so happened that Rick was watching America’s Nightly Scoreboard on Fox Business News last Thursday evening when I was interviewed along with former SEC Chair Harvey Pitt, the head of the Madoff Victim’s Coalition Ronnie Sue Ambrosino, and Attorney Richard Greenfield representing Amerivet Securities in its complaint vs. FINRA.

Rick Johnson has had experience with the NASD and FINRA reviewing his own practice. He shares that and more in a recent blog post. Thank you Rick for the shout-out for Sense on Cents. Rick wrote this past Friday at his site, Keep Your Assets, Take My Advice:

Harvey Pitt Former SEC Commission is an Apologist for FINRA?

I was stunned last night watching Fox Business with David Asman. He had on his show two Madoff victims, Sue and Dominic Ambrosino, Larry Doyle of senseoncents.com and former SEC Commissioner Harvey Pitt.

The tide is beginning to turn against FINRA. Larry Doyle has long spoken out against FINRA on his blog at www.senseoncents.com. Last night on Fox Business, LD mentioned the fact that FINRA had money in Auction Rate Securities in 2007, but inexplicably got their own money out before the Auction Rate Securities collapse. I guess they are an investor watchdog, but not when it comes to saving their own bacon.

Sue and Dominic Ambrosino are wise to FINRA and their culpability in the Madoff Scandal. They pointed out that FINRA has not been too transparent about whether they too lost money with Madoff. The latest FINRA Annual Report does not disclose whether they did or did not lose money with Madoff or one of his feeder funds. Word on the street is that they did lose money as a result of Madoff.

Former SEC Commissioner Harvey Pitt, not one of the best SEC Commissioners we ever had by the way, seemed to me to have been given talking points. He kept trying to hide the fact that FINRA and its predecessor organization was responsible for the Madoff mess. Pitt kept trying to keep the blame squarely on the SEC. This was stunning to witness from my perspective.

David Asman pointed out that Mary Shapiro was the former head of FINRA and now she is the head of the SEC. I have nothing against Ms. Shapiro, but it seems like they got someone at the helm of the SEC who can probably keep FINRA out of it. However, time will tell. FINRA is guilty as sin in my opinion. You cannot convince me that FINRA did not look the other way when it came to Bernie Madoff.

As a former NASD Registered Principal, I had my office gone through with a fine tooth comb by an ex-NASD Examiner for several years. Of course, I always had good exams. I can guarantee you, the guy that examined my office would have easily discovered the Ponzi scheme Madoff was running.

There is something amiss with regard to FINRA being able to dodge the Madoff scandal up until now. Hopefully, with Fox Business getting a little nosy, the truth will come out about FINRA and their cosy little relationship with Bernie Madoff.

Stay tuned.

Interesting insights from an individual who has had first hand experience with the NASD. Although Harvey Pitt and others would like to give FINRA and its parent a pass in regard to the Madoff situation, do not forget that Madoff did not register as an investment adviser until 2006. To that point, the SEC and NASD (FINRA’s parent) had regulatory oversight responsibilities over Madoff.

Thanks Rick for sharing your perspectives.

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No Quarter Radio’s Sense on Cents with Larry Doyle Will Return Next Sunday, September 13th

Posted by Larry Doyle on September 6th, 2009 8:03 AM |

In light of the Labor Day holiday, I will not be hosting my weekly radio show this evening. I hope people are able to enjoy the holiday weekend with family and friends.

Rest assured the show will return next Sunday evening September 13th. I have a fabulous guest for next week’s show. Bruce Carton will join me to discuss a wide range of securities litigation and enforcement issues which currently occupy center stage on our economic landscape. Bruce is uniquely qualified to discuss these topics. How so?

Bruce Carton is the editor of Securities Docket and the author of the SD Insider Column. Bruce is a former Senior Counsel with the SEC’s Division of Enforcement, as well as a former securities litigation partner with one of the world’s largest law firms. He is a featured columnist for Compliance Week on securities enforcement and litigation issues, and the author of Compliance Week’s “Enforcement Action” blog.

As we collectively navigate the economic landscape, and wonder where we can turn to receive a rationale outlook and view of the world of finance, keep reading Sense on Cents.

Enjoy the Labor Day Weekend.

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September Month to Date Review of Markets

Posted by Larry Doyle on September 5th, 2009 7:32 AM |

Although our financial industry and media have worked diligently to have people focus on daily market swings, in my opinion markets are best monitored on a monthly, quarterly, and annual basis. Why? It takes out the noise, of which there is plenty.

In this spirit, I plan on providing a month-to-date review of market stats along with appropriate commentary on news of note from the prior week. I hope readers find this review beneficial. Feedback always welcome.

Equities (Friday 9/04/09 close, month-to-date return)

DJIA: 9441, -.6%
Nasdaq: 2019, +.5%
S&P 500: 1016, -.4%
MSCI Emerging Mkt Index: 844, 0.0%
DJ Global ex U.S.: 184, +3.3%

>> Commentary: after an initial selloff early in the week, the markets rallied on Thursday and Friday, primarily after the employment report. I place a heavy discount on this week’s trading activity given the very heavy vacation calendar and long holiday weekend. I remain in the camp that the equity markets will correct 5 to 7% from current levels.

Bonds/Interest Rates

2yr Treasury: .93%, down 5 basis points (1 basis point is .01%)
10yr Treasury: 3.44%, up 3 basis points

COY (High Yield ETF): 6.14, +1.5%
FMY (Mortgage ETF): 17.31, -.5%
ITE (Government ETF): 57.18, -1.0%
NXR (Municipal ETF): 14.09, 0.0%

>> Commentary: while interest rates gyrated during the week, the biggest development was the yield curve steepening. Why? What is going on? Two things. There is definitely an increased nervousness about the economic recovery. This anxiety is causing more investors to seek the safety of short maturity U.S. Treasuries. Additionally, the market has its regular 3yr, 10yr, and 30yr auctions next week. In the face of that supply, the street is trying to back up rates on the longer maturity paper (10yr and 30yr) to take it down at a more attractive rate.

U.S. Dollar

$/Yen: 93.02 vs 93.11 at August month end
Euro/Dollar: 1.4304 vs 1.4338 at August month end
U.S. Dollar Index: 78.20 vs 78.14

>> Commentary: minor moves up and down

Commodities

Oil: $67.79/barrel vs $69.93 at August month end
Gold: $996.1/oz. vs $952.4 at August month end
DJ-UBS Commodity Index: 122.93 vs 125.73 at month end

>> Commentary: in my opinion, the moves in commodities represent the strongest indication of global economic activity. The continued downtrend in oil specifically and commodities in general signifies to me a slowing in the global economy. Where is the money going? Gold. Why? Investors are getting nervous and gold is a safe haven.

I hope readers enjoy these insights as much as I enjoy providing them. Please share your thoughts and comments, especially those who may share differing opinions. Honest debate is good for all.

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