Sense on Cents

What Are Insiders Doing?

Posted by Larry Doyle on April 25th, 2009 9:12 AM |

Who knows a business better than the executive in charge? Well, given the performance of many companies over the last few years many investors may wonder just how well the CEOs and board of directors know their own companies. That said, tracking “insider” activity is always prudent.

One should NEVER buy or sell a company stock based merely on “insider” activity. An individual executive may have personal financial reasons outside of his opinion on the company’s future to buy or sell the company stock. I have heard people make investment decisions based purely on insider activity and it is a mistake. Even so, one should be aware of insider activity within a specific company as a potential indication of executive sentiment. How does it go? Money talks…..

While insider activity for a specific company can be subject to particular individual circumstances, it defies logic to think that insider activity taken in totality is not an indication of overall executive sentiment on the future of the economy and market. Read the rest »

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Bank Stress Tests? Take Home Exams and Partially Self-Graded

Posted by Larry Doyle on April 24th, 2009 3:10 PM |

The Treasury just released the methodology used in assessing the vitality of the 19 largest banks via the Bank Stress Tests. The market took the release of this methodology as a big yawn. Treasury offered that the capital at some banks has been “substantially reduced.” Please tell us something we don’t know.

The worst case scenario used by Treasury still falls into the camp of what most analysts view as the expected scenario.

In reading deeper into some of the reviews of the methodology, I am struck by the leeway provided to the banks in measuring the credit quality of loans on the banks’ books and the likelihood of deterioration on those loans. I view that as the wiggle room described by Meredith Whitney earlier this week.

As Bloomberg reports, Fed Says Capital at Some Major Banks Is Substantially Reduced:

“Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate,” the study said.

Regulators used the market shocks of the second half of 2008, when Lehman Brothers Holdings Inc. declared bankruptcy, as the model for testing banks with trading portfolios of $100 billion or more.

As they pored over banks’ loan and securities portfolios and off-balance-sheet liabilities, examiners increasingly focused on the quality of credits. They were concerned about wide variations in underwriting standards, a regulatory official said this week.

Supervisors concluded that banks’ lending practices need to be given as much weight as macroeconomic scenarios in determining the health of each bank, the official said.

The goal of the reviews is to keep the major financial institutions lending over the next two years, and to determine how much capital they may need if the economic slump worsens.

Supervisors will weigh how much capital each company holds, its ability to retain earnings over the next few years, future access to private capital and the extent any asset writedowns.

The Bank Stress Tests are not only largely a take home exam, but now we discover they are partially self-graded.

Call me suspicious.

In speaking with friends on Wall Street, I have heard from a number of individuals that there is still a large short base in a number of the financials. The short base is providing a strong cushion to that sector specifically and the market in general.

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What Do People Think About Waterboarding Bernie Madoff?

Posted by Larry Doyle on April 24th, 2009 12:56 PM |

Where’s the money? What did Bernie Madoff do with the money?

Fortune Magazine reports that Madoff’s sidekick, Frank DiPascali, is starting to “sing.” However, what does Bernie know that Frank may not? With thousands of victims of the Madoff scandal personally bankrupted and emotionally crushed, how would people feel if the government “waterboarded” Bernie Madoff ?

What do you think?

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The Red Sea

Posted by Larry Doyle on April 24th, 2009 11:26 AM |

While there is tremendous focus on the Bank Stress Tests, there remains limited focus overall on the centerpieces of our domestic housing finance industry. I am talking about Freddie Mac, Fannie Mae, and the Federal Home Loan Banks. Some have categorized these institutions as “black holes.” I believe a more appropriate designation would be The Red Sea as these institutions are awash in losses and continue to bleed money.

We may never know the circumstances surrounding the death of acting Freddie Mac CFO, David Kellerman, but there is a lot of focus by government officials on these institutions. There has been much less focus by private analysts. To that end, I am most grateful to Bloomberg’s David Reilly for reporting on Fannie Mae Creates Housing Mirage With Bum Loans.

Effectively, Fannie Mae is giving funds away to very high credit risk individuals who would have otherwise most likely already defaulted on their mortgages. As Reilly reports:

Give money away. That was a solution to the housing crisis mortgage giant Fannie Mae hit on last year.

Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.

The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.

Make no mistake, this Fannie Mae program was also being utilized by Freddie Mac. Reports have come out that Freddie Mac’s Kellerman was pressured by Freddie’s accountants to improperly report their financials. In a similar vein, Fannie is playing another version of the “shell game” in order to buy time and forestall losses. Read the rest »

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California Sues Wells Fargo Over Auction Rate Securities

Posted by Larry Doyle on April 24th, 2009 5:37 AM |

Something is seriously wrong in our country when the general media does not hold a financial institution to bear when engaged in a fraudulent activity.

Once again today, another suit was brought on behalf of investors in Auction Rate Securities. Bloomberg reports, California Sues Wells Over Auction-Rate Securities.

Wells Fargo just announced tremendous earnings. While a handful of banks have either settled ARS suits or paid out their investors, Wells is still holding out on investors who purchased ARS from Wells’ financial advisors.

A website dedicated to covering the ARS travesty (www.auctionratepreferreds.org) indicates that the Wells Fargo Trust division servicing institutional customers stopped marketing ARS two years ago while Wells Fargo financial advisors continued to sell ARS to retail clients.

Bloomberg highlights:

California Attorney General Jerry Brown sued units of Wells Fargo & Co. claiming they deceptively advertised $1.5 billion of auction-rate securities sold to investors in the state as being as safe as cash.

Wells Fargo Investments LLC, Wells Fargo Brokerage Services LLC and Wells Fargo Institutional Services LLC promised investors that the securities were cash-like investments similar to money-market accounts when they weren’t, Brown said in a statement today. About 2,400 Californians are unable to sell the securities, marketed as short-term investments, and access money needed to pay their bills, Brown said.

While other banks, including Citigroup, have agreed to repurchase auction rate securities they sold, the Wells Fargo units have refused to follow suit, he said. The lawsuit seeks to recover $1.5 billion and civil penalties that could amount to hundreds of millions of dollars.

“Wells Fargo’s affiliates promised investors auction-rate securities were as safe and liquid as cash, when in fact they were not, and now investors are unable to get their money when they need it,” Brown said in the statement. The lawsuit was filed in San Francisco Superior Court.

While Bloomberg has offered coverage of this ARS fraud, I have seen no other media outlet provide any coverage.

Why is it that the media will not expose the fact that the Wall Street industry watchdog FINRA had a $647 million ARS stake in 2007? Is it too much to ask a media outlet to pursue and expose the hypocrisy and incompetence of that entity and its internal investment activities?

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Central Station

Posted by Larry Doyle on April 23rd, 2009 8:39 PM |

***UPDATE: The Central Station live event has ended, but you can view the topics we discussed by scrolling through the “Comments” section at the end of this post.***
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Sorry, folks. We are having some technical difficulties with the LiveChat software, so we’ll do Central Station the old-fashioned way. Send me your questions in the comments section and I’ll answer promptly.

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Trillion Dollars Here, Trillion There, Pretty Soon You’re Talking Real Money!

Posted by Larry Doyle on April 23rd, 2009 5:09 PM |

The commercial mortgage market has been around a long time; the commercial mortgage-backed securities (CMBS) market has only been around for little more than a decade. The growth of the CMBS market, in which the actual mortgages are pooled and securitized, has been significant in that it brought new pools of capital into the commercial real estate market.

Not unlike the residential mortgage market or the corporate loan market, the commercial mortgage market performed fine as long as the underwriting process maintained the necessary discipline. Much like other sectors, however, the commercial mortgage market is now sufferring as lax underwriting standards are catching up with it. Who wrote these loans with lax underwriting standards? Wall Street banks. These banks launched mortgage conduits which originated commercial mortgages for purposes of pooling and selling via the securitization market.

Friends of mine in the commercial real estate market have advised me of very aggressive pricing of many loans along with shoddy underwriting. As a large percentage of those loans are now approaching a refinancing date, the prospects of refinancing are challenging. In turn, the likelihood of rising defaults are increasing. Read the rest »

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Not again, Larry!!

Posted by Larry Doyle on April 23rd, 2009 5:04 PM |

I wish I were joking, but Larry Summers, Director of the National Economic Council, has been caught yet again sleeping on the job. Today Summers was caught on camera taking 40 winks during a meeting with President Obama and credit card officials:

If you remember, Summers was caught nodding off during a fiscal sustainability summit held back in February at the White House. From my piece on February 25, 2009: Does Larry Need a Stimulus? . . .

The Financial Times reported that Larry Summers fell asleep on the podium this past Monday at the Financial Responsibility Summit:

“Although Lawrence Summers, head of the National Economic Council, fell asleep on the podium, most attendees, including Republicans, appear to have appreciated the exercise.”

While I know that some of this material can be a little dry, one would hope it is not putting Larry to sleep!!

I’ll admit I fell asleep once or twice in science class, but I always made sure I was in the back of the room. Perhaps Larry already felt comfortable with the material.

You can’t make this stuff up…I only hope he passes the test!!

LD

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Sense on Cents Central Station

Posted by Larry Doyle on April 23rd, 2009 4:32 PM |

BACK BY POPULAR DEMAND (special shout out to “silver”)! Join me this evening beginning at 8:30 p.m. ET for Sense on Cents Central Station. This endeavor is a few hours of written Q/A and live chat with your resident host, Larry Doyle. I like to utilize the theme of a ride on the rails, so please allow me to elaborate.

With so many cross currents at play in the markets, economy, and world of global finance, where can one go to develop a framework of understanding, enjoy the company of friends, and make sense of the madness? Welcome to Sense on Cents Central Station. Our ride departs at 8:30 p.m. with an expected return at 10:00 p.m. (I’m hoping this time frame allows our West Coast friends to join in). While we traverse the curves along our track, we can address a wide range of issues, including: Hank Paulson blindsiding Ken Lewis, 1st quarter earnings (their transparency and quality), market performance this week, month, and year to date, the outlook for our financial regulatory structure, issues of personal finance, career planning, or anything else on your mind.

Our ride is most productive with as many people participating as possible. Please bring not only your questions, but also your views. Invite friends, neighbors, and colleagues along for the ride as well. Together we can collectively navigate the economic landscape.

I look forward to chatting with you beginning at 8:30 p.m. All Aboard!!

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Market Sentiment Very Balanced

Posted by Larry Doyle on April 23rd, 2009 2:06 PM |

Our Economic All-Star Laszlo Birinyi has recently had some very good calls on the market. His funds are outperforming the major stock market averages by 10-15%. Birinyi is an excellent stock picker but also has an experienced professional’s “feel” for the market.

His weekly Blogger Sentiment Poll provides us an easy snapshot as to current investor attitudes. Recall that when a bullish reading approaches 30%, it is an indication of the market being oversold. Similarly, if a bullish reading approaches 70% it is an indication of the market being overbought.

The market overall has done somewhat better over the last few weeks but has given some of that improvement back in this week’s trading. In investment terms, this price action is known as “running in place,” “range trading,” or “moving sideways.”

Not surprisingly, the readings in Birinyi’s polls indicate a very balanced short term sentiment.

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