Sense on Cents

Barack Obama’s Arrogance vs. Honest Debate

Posted by Larry Doyle on August 8th, 2009 11:24 AM |

There is no doubt that of all the items on Barack Obama’s agenda, his desire to revolutionize our system of health care is of highest priority. His problem right now is the fact that he is losing the debate across all public opinion polls. He knows it and his Democratic colleagues know it.

Obama and his Democratic constituents are faced with the political predicament of whether they want to risk their political futures by ramming health care legislation against the will of the American people.

Prior to making that decision, Obama and the Democratic leadership are trying to reframe the debate in an attempt to sway public opinion. They are entitled to elevate the debate in any manner which they choose. Debate is the essence of democracy.

The public is also entitled to their voice. The public is sending strong and vocal messages to Washington on this topic.

Against this backdrop, I was more than a little surprised to view a vdeo clip of President Obama at a recent rally in Mclean, VA.

Not that Barack Obama needs my advice, but his tact in this forum will not resonate with those currently unsupportive of his health care proposition. In short, I know arrogance when I see it. Our President displays tremendous arrogance in his demeanor and delivery at this rally. In fact, he is not very Presidential. Please review President Obama stating, “Don’t Want The Folks Who Created the Mess to Do a Lot of Talking.”

Leaders welcome debate. They don’t shy away from it. In fact, if we were to silence those who created messes in our political and economic system, Washington would be a very quiet town.

Thoughts, comments welcome and appreciated.

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Wall Street Wisdom: Andrew Lanyi

Posted by Larry Doyle on August 7th, 2009 4:23 PM |

Wall Street as an industry is very easily vilified. I panned it myself the other day. That said, there are a lot of great people on Wall Street just as there are great people in every industry.

On that note, I was moved by a story in this morning’s Wall Street Journal: A Survivor of Nazi Brutality Who Ascended Wall Street.

The individual profiled, Andrew Lanyi, clearly had a unique outlook on life and Wall Street. I am particularly impressed by his discipline, mentoring, and wisdom.

Do yourself the favor of reading this piece. Savor Mr. Lanyi’s life story like a fine wine. There are rich lessons here for all of us.

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Which Way’s the Beach?

Posted by Larry Doyle on August 7th, 2009 2:38 PM |

musclebeachparty2 2:30pm, Friday afternoon August 7th, Midtown Manhattan.

Stocks are up close to 2%. Wall Street is back. Meet me on the bar car. Which way’s the beach?

I can picture those lucky enough to get off the trading desks early, sprinting to the train to head to ‘the shore’ (don’t say ‘the beach’ in Jersey) or ‘the Hamptons.’

Living for the moment when appropriate is not necessarily a bad thing as long as one never loses sight of the scope and length of the overall landscape. In so many words, I guess I am saying enjoy the view when you have it but never forget that life is a journey, not a destination.

Imputing this thought process into an investing style, one needs to be nimble enough to detect short term trends while never losing sight of the long term fundamentals. I understand the long term is nothing but a series of consecutive short terms; however, so much of our country seems to have a tough time looking beyond the very short term. I believe that mentality is the foundation of our economic problems. Where am I going with this?

Enjoy the up market while it lasts, but be mindful that our economy has massive debt burdens and structural issues that will require real attention to truly regain its footing.

These debt burdens and structural issues are embodied in a report put out yesterday by Comstock Partners entitled Deleveraging the U.S. Economy.

I STRONGLY recommend this report to those looking for a macro-perspective on our economic landscape. It encompasses a wide array of economic data and perspectives. Throw it in your ‘Save’ file. Suffice it to say . . . the road is long!!

For now, though, the train is leaving the station. Which way’s the beach?

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How Charitable is ‘Cash for Clunkers’?

Posted by Larry Doyle on August 7th, 2009 11:09 AM |

With the Senate’s approval of another $2 billion in funding for the ‘Cash for Clunkers’ program, the automotive industry will breathe a sigh of relief. I have nothing against the automotive industry, but there are aspects of this program that I find disconcerting both in style and substance.

While economists purport that this program will add measurably to next quarter’s GDP report, I would question the true integrity of that assessment. Why? GDP measures:

the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

Others have already put forth that the Clunkers program is merely accelerating demand. I concur, but will grant that a spark within the automotive sector may help generate benefits across other parts of our economy.

Are consumers increasing debt and redirecting purchasing power that may have gone elsewhere given the presence of this program? I guess we could make that case with a purchase made on credit at any point in the economic cycle.

My main issues with this program revolve around the requirement that cars being swapped are required to be destroyed. Certainly not all of those cars are worthless. Shouldn’t the implicit value of cars being destroyed be subtracted from GDP if we want to have real integrity in our economic measurements? Why? If goods being produced, in this case autos, are predicated on others being destroyed then it only makes sense to net the values of the autos.

My biggest issue with this program, however, centers on the fact that there is real value being destroyed via this program. Why couldn’t or shouldn’t the cars being swapped be provided to worthy charities? I saw this point raised early this morning and it hit me: how many charities would love to have these vehicles in order to do their work? In fact, how many of these vehicles would have gone to these charities if not for this program?

Not sure if it was divine intervention, but I received an e-mail later this morning from the Charity Assistance team at Donate Car USA addressing this topic.

I would strongly encourage anybody who may be interested in the ‘Cash for Clunkers’ program to review the costs and benefits of donating your vehicle. ‘Cash for Clunkers’ may very well have an immediate negative impact on charities who depend on car donations. Ultimately, I hope this program will actually raise the awareness of donating vehicles versus destroying them.

Let’s not forget those in need.

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Unemployment Report: August 7, 2009

Posted by Larry Doyle on August 7th, 2009 9:02 AM |

The widely anticipated August Unemployment Report covering the month of July was just released. Let’s dive right in and take a look at the numbers . . .

Unemployment Rate
May 8.9%
June: 9.4%
July: 9.5%
August: 9.4%

>>LD’s comments: This number is surprising on its face, as expectations were for the rate to move to 9.6% or 9.7%. What happened? Overall, this report does certainly reflect a growing sense of stability in employment BUT this figure also reflects the fact that 422k people have left the labor force, meaning they have given up looking for work. Long term unemployed rose by 584k and now exceeds 5 million people. As time goes by, more and more of these people will stop receiving unemployment benefits.

Non-Farm Payroll (click here for definition of this term)
May: loss of 519k
June: loss of 322k
July: loss of 467k
August: loss of 247k

>>LD’s comments: This number, along with a positive revision of a net 43k jobs to prior months, is another indication of growing stability. Construction lost 76k jobs. Manufacturing lost 52k jobs. Before the economy can do better, it has to stop doing worse. This report plays into that. However, I would ask the question if the economy will merely adapt to overall lessened employment for a protracted period.

Average Hourly Earnings
May : +.1
June: +.1%
July: 0.0%
August: +.2%

>>LD’s comments: Another positive sign, although it is muted by the fact that last month’s hourly earnings was surprisingly weak. Over the two month period, an average of .1% per month is to be expected. Will this support a sudden pickup in consumer demand? I doubt it.

Average Hourly Workweek
May: 33.2 hours
June: 33.1 hours
July: 33.0 hours
August: 33.1 hours

>>LD’s comments: Again, this piece of data is consistent with the other parts of this report. For perspective, though, be mindful that last month’s reading was the lowest figure for this data since 1964.

Further Color: While many economists will spin this report as a clear sign of an improving economy, I maintain it is a sign of an adapting economy. I am surprised and disheartened by the fact that so many people have actually left the labor force. That level of discouraged workers, along with the level of long-term unemployed, plays into a real structural problem and long term drag on our economy.

Market Reaction: Equity futures have spiked by approximately .7%, but the biggest market reaction is in the bond market as interest rates have moved higher by approximately 12 basis points across the curve. What is going on there? The market is going to price in an expected increase in rates by the Federal Reserve sooner than Ben Bernanke would otherwise prefer. Recall how Bernanke at his recent Congressional testimony emphatically stated he would leave rates unchanged for an extended period. The market reaction is stating that he may not have that luxury. Why? Fears of inflation.

Additionally, this report will make the underwriting of the massive Treasury supply (3yr, 10yr, 30yr) next week very challenging.

The greenback also had a nice spike after this report. This move is consistent with a market expectation of an increase in rates by the Federal Reserve.

Can the equity market continue to rally in the face of rising rates? I will monitor closely.

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Economic and Market Cross Currents

Posted by Larry Doyle on August 6th, 2009 4:56 PM |

On an otherwise uneventful Summer afternoon in the markets, a few developments today caught my eye:

1. Retail Sales remain decidedly sluggish as same store sales declined in July by the second sharpest amount of the year. Is that any indication of an economy truly turning the corner? As I wrote on July 29th in my post, “Economy and Markets: Improving, Declining, or Adapting?”

While most economists and market analysts are looking at statistics and data to determine whether the economy and consumers are improving or rolling over, my take is different. I view the economy and consumers as adapting to the new dynamic at work in our country.

Economists point to the drawdown in inventories as a reason why future GDP reports will rebound strongly. That rebound will only occur if consumers start spending. I personally do not expect that will happen to a meaningful extent anytime soon.

2. Bloomberg reports Tudor Hedge Fund Says Gain in Stocks is ‘Bear-Market’ Rally:

Tudor Investment Corp., the $10.8 billion hedge fund firm run by Paul Tudor Jones, told clients that the gain in U.S. stocks in the past 100 days is a “bear- market rally.”

“Impressive counter-trend rallies are a feature, not an oddity, of secular bear markets,” the firm said in an Aug. 3 investor letter. “We are not inclined to aggressively chase the market here. Rather, we eye a better opportunity to be long equities into year-end on a potential autumnal pullback.”

The Standard & Poor’s 500 Index of the largest U.S. companies has climbed 47 percent since falling to a 12-year low on March 9. The index broached 1,000 for the first time in nine months this week after companies reported better-than-expected profits.

“Investor psyche is still fragile,” Greenwich, Connecticut-based Tudor said. Slowing growth in China and the return of front-page stories on swine flu are “further catalysts for global equity markets to pause in September,” the letter said.

Tudor is viewed as one of the top money managers in the business. I respect his opinion. Read the rest »

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China Wants Inflation Protection

Posted by Larry Doyle on August 6th, 2009 1:35 PM |

Will China continue to fund the U.S. deficit? What would happen to interest rates if China exited our U.S. Treasury market? Where would the United States attract the necessary funds? This dilemma has been one of the most widely debated topics in financial markets.

On the heels of the U.S.-China economic summit held last week in Washington, a story is now seeping into the market that at the behest of the Chinese, the U.S. Treasury will increase issuance of Treasury Inflation Protected Securities (TIPS). The Wall Street Journal reports, U.S., in Nod to China,to Sell More TIPS. This story gives us a lot of food for thought, including:

1. how quickly do the Chinese think inflation may rear its ugly head?

2. do the Chinese have a lack of confidence in Ben Bernanke specifically or the Federal Reserve in general?

3. how high do the Chinese think inflation may rise?

4. will we continue to witness Chinese officials calling for a move away from the U.S. dollar as the international reserve currency?

5. could we envision the U. S. Treasury executing the sale of TIPS on a private placement basis to the Chinese?

Who knows how this scenario will play out. For our purposes, the fact that our largest creditor is looking for inflation protection speaks volumes.

If the Chinese are concerned about inflation, then I am as well.

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Crime Pays

Posted by Larry Doyle on August 6th, 2009 11:44 AM |

The Wall Street Journal reports that former AIG CEO Hank Greenberg has settled accounting charges brought by the SEC for $15 million. Greenberg to Pay $15 Million to Settle SEC Fraud Case. For Greenberg, that $15 million settlement is the equivalent of leaving a nice tip after a good meal.

Recall that Greenberg recently won a case against AIG over claims to $4.3 billion of AIG stock. As Bloomberg reported on July 8th, AIG Looting Case Against Starr Was Weak.

The fact is Hank Greenberg has always been viewed as an arrogant, ruthless individual who ran AIG as his personal fiefdom. As was shared with me and I wrote this past February 24th in a post, “How Does One Lose $125 Billion?”:

It is believed by some AIG veterans that under Hank’s watch the books were cooked via a money laundering scheme centered offshore and executed through an office in New Hampshire.

The accounting malfeasance supposedly went back to the 1970s.

More than a little disconcerting.

$15 million is hardly a rounding error for Mr. Greenberg.

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What’s Next for Freddie and Fannie?

Posted by Larry Doyle on August 6th, 2009 8:51 AM |

When losses get so large something ultimately must be done.

In that vein, I am not surprised to see news developing about Freddie Mac and Fannie Mae’s future. The Washington Post is reporting Administration Considers Splitting Fannie Mae, Freddie Mac:

The Obama administration launched a broad government effort this week to overhaul mortgage giants Fannie Mae and Freddie Mac and is considering splitting the companies and putting their troubled assets in a new federally backed corporation, administration officials said.

Troubled assets is a misnomer. ALL of their assets are troubled. Some are more troubled than others. How so? Freddie Mac and Fannie Mae absorb all of the credit risk on loans which they guarantee. Given the current state of our domestic housing market, the risk or troubled nature of every mortgage in our country, let alone in Freddie and Fannie’s portfolio, has increased. As loans continue to default at ever increasing rates Freddie and Fannie just bleed money. More troubled assets encompass a variety of commercial mortgages, Alt-A, and sub-prime mortgages.

I am very interested to see how a good bank/bad bank model would be structured. The fact is to wipe the slate clean, Uncle Sam would literally have to move ALL of Freddie’s and Fannie’s current assets. At that point, Freddie and Fannie should simply guarantee future mortgages without actually purchasing them (meaning let the mortgage securities be purchased by private entities in the marketplace) with proper risk based pricing applied. Short of that, a restructured Freddie and Fannie will likely only replicate a version of past errors.

Do our regulators have the courage to push for this initiative? We will hear that they will work toward this structure ‘down the road.’ How long is the road? This situation will be very interesting. Will it be transparent?

Such an approach would keep the government on the hook for losses into the indeterminate future but would also clear the way for the revamped companies to play a critical role of financing home loans throughout the country.

This statement is nothing short of an acceptance of a ‘socialized housing program’ to absorb current and future losses but also to underwrite future loans at what will effectively be below market rates. The fact is losses will be perpetuated simply because Freddie and Fannie will continue to subsidize mortgages via lower mortgage rates. In the process, risk is being mispriced under the guise of supporting our housing market. Increased risk will ultimately mean increased losses. Read the rest »

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FHLB-Chicago Skating on Very Thin Ice

Posted by Larry Doyle on August 5th, 2009 4:21 PM |

The Federal Home Loan Bank (FHLB) system represents significant risks within our financial system. The fact that you do not hear about this system does not mean the risks are shallow or insignificant. You do not hear about the FHLB system simply because the general media pays no attention to it. They should.

Thanks to a close friend for sharing a recent FHLB-Chicago Presentation. This overview provides the following:

1. market update
2. financial results
3. developments in products, credit, and collateral
4. future outlook

Based on my experience, the FHLB-Chicago was always one of the more conservatively managed banks within the FHLB system. That said, after reviewing their financials it is very apparent that this bank is skating on very thin ice and if not for the relaxation of the mark-to-market by the FASB would be well below regulatory capital standards.

For those intrigued by the inner workings of a FHLB, this review provides riveting details. If you are looking for the Cliff Notes, allow me to highlight:

Pages 27-28
The Net Income Statement for ytd 2009 and comparable period in 2008 displays the enormous benefit of the relaxation of the mark-to-market accounting standard as the bank swings from a $152 million loss in 2008 to a $64million gain for ytd 2009.

Pages 35-36
The regulatory capital ratios for FHLB-Chicago highlight that this entity has approximately a mere $200 million in excess capital above the minimum requirement. For an entity this size, $200 million is razor thin.

Page 39
Credit impairment of this bank’s assets is truly mind boggling. As of year end 2007, the FHLB-Chicago viewed 100% of their assets as being AAA. Fast forward a mere 18 months, now 35% of these assets are rated CCC or worse. Please review the graph on this page for a hint as to the destructive nature of these ratings downgrades on this bank. FHLB-Chicago is representative of many financial entities in our banking system today. No surprise why so many are failing and will continue to fail. This graph is very powerful. What do you think the bid is for that CCC bucket of assets right now? Zero or very close.

Page 40
The FHLB-Chicago highlights that they have taken writedowns of $263 million on their assets due to credit impairments while they still view potential writedowns of $1.213 billion on these assets due to market conditions.

Given that the FHLB-Chicago admittedly has a mere $200 million in excess capital to satisfy the minimum regulatory capital ratio, we can see that without the relaxation of the mark-to-market they would be woefully capital deficient.

Is the housing market going to improve markedly so that their assets will dramatically increase in value, especially that 35% in the CCC bucket? I would not bet on it.

. . . and the FHLB-Chicago is one of the better managed.

Related Sense on Cents Commentary

Freddie Mac, Fannie Mae Deja Vu?; May 28, 2009

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