Sense on Cents

Putting Perfume on a Pig!!

Posted by Larry Doyle on April 2nd, 2009 9:45 AM |

***Bumped up from original publication time of 7:30AM. The FASB has now just voted its approval of the change in mark-to-market accounting.

It is speculated that the FASB (Federal Accounting Standards Board) will today relax its rule known as the mark-to-market. This rule requires firms under the FASB’s purview to mark their assets to changing market prices on an ongoing basis. The institutions subject to this rule have been lobbying FASB and Congress for a change because the markets for these assets have imploded and in certain cases totally dried up.

What does the FASB plan to do? The FASB is going to cave to the lobbying pressure and will allow institutions to use their own internal models based upon cash flow analysis to price these assets. This change in the mark-to-market will not only allow institutions the flexibility to not mark down certain assets, but simultaneously mark up other assets.

The media only presents the impacted assets as “hard to value” or the dreaded “mortgage-backed securities” or “securitized assets”. In fact, many of these assets are very simple and plain vanilla. Let’s enter the world of the Federal Home Loan Banks.

The FHLB system consists of 12 regional banks and it provides liquidity (capital) for its respective members to operate. The FHLB system invests its own capital, primarily in plain vanilla conventional mortgages (Freddie Mac, Fannie Mae, Ginnie Mae) and Jumbo ARMS (adjustable rate mortgages) and fixed-rate pass-thrus. Certain banks within the FHLB system may have moved slightly off the plain vanilla path to purchase a small percentage of sub-prime assets, but that was much more the exception than the norm. Read the rest »

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Is The Market Overbought?

Posted by Larry Doyle on April 1st, 2009 9:55 PM |

A few weeks ago, I wrote a piece on whether the market was oversold. Allow me to re-introduce a few topics . . .

The market 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

And now the update:

1st quarter earnings are due out over the next few weeks. Most analysts and managers I follow believe these earnings will be lower than expectations and that 4th quarter 2008 earnings will be revised lower. Will companies provide guidance going forward? Many companies have refrained given the economic uncertainty. Read the rest »

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Hancock Tower Cut In Half

Posted by Larry Doyle on April 1st, 2009 2:59 PM |

Many people may not fully appreciate the dynamics of the “shadow banking system.” Credit for consumers, small business, and corporations is still largely a function of bank lending. Many parts of our economy are railing on banks for not providing more credit. The banks do deserve plenty of blame for not allocating more credit and at reasonable rates (primarily consumer credit). That said, the “shadow banking system” (funds generated by securitizing assets) has largely shut down.

The stream of credit from the “shadow banking system” represented approximately 40% of the credit injected into our economy. While plenty of people clearly feel this lack of credit at the individual level, what does it mean at the corporate level?

Let’s review a major real estate transaction. Bloomberg reports, Hancock Tower Sells at About Half Price to Normandy. This tower is a first class office building in a prime Boston location. Read the rest »

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Dodd’s Production Run Is Way Down!!

Posted by Larry Doyle on April 1st, 2009 1:51 PM |

Any salesperson on Wall Street is always faced with the question as to the nature of his book of business. Meaning, not only what type of business he transacts but even more importantly, with whom does he do business. While there are many fabulous salespeople on Wall Street, sales managers are forever reviewing account coverage assignments. Given these account reviews and changes, I always maintained that there was not a lot of “security” in the securities business. Ultimately, a salesperson is only as good as his book, meaning the depth and breadth of relationships.

Putting a twist on this coverage model, it appears as if Senator Chris Dodd has a problem. Aside from pure partisan politics in the midst of an economic tsunami, Dodd’s personal relationships with many financial companies has run its course. I do not mean to say that Dodd and these individuals may not maintain an ongoing relationship, but the fact is a number of financial firms which supported Dodd over the years are either bankrupt, merged, or wards of the state. (Freddie, Fannie, AIG, Citi)

Bloomberg reports:

The Democrat has less than half the campaign cash he had at a comparable point in his last re-election bid, when he faced far fewer hurdles. Last year, he emptied an account built up largely through financial-company employees’ donations to pay for a presidential run; now, he has to replenish his coffers even as the firms his panel regulates struggle with losses and back away from their one-time champion turned critic.

Read the rest »

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Market Moving News

Posted by Larry Doyle on April 1st, 2009 10:02 AM |

End of quarter trading is often skewed with many fund managers buying winners and selling losers so as not to have to report those holdings in quarterly reports. Additionally, the market often finds reason to trade up on the last day of a quarter to “put a happy face” on a whining child.

The first day of the new quarter brings us a reversion to previous tough economic news. On the labor front, I commented yesterday in my March 2009 Market Review that a seeming stabilization in the labor market was a positive. That rug got pulled out from under investors this morning. ADP reports that jobless claims are rising from the 650k range to 742k. That 15% increase in projected unemployment is weighing on the market.

Additionally, investors should not view the relaxation of the mark-to-market accounting rule as a positive for the market. The WSJ reports this morning: Read the rest »

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March 2009 Market Review

Posted by Larry Doyle on March 31st, 2009 7:47 PM |

march-market-review1

The markets, overall, experienced a very solid rebound this month. Technically, the market got oversold bottoming out on March 6th when the S&P 500 hit the devilish level of 666!! Perhaps some divine intervention prevailed and shed a wee bit of grace on the market in the spirit of Saint Patrick. Perhaps not, as well. In any event, we rebounded close to 20% over the last three weeks. The bounce has allowed us to catch our breath but I caution everybody to remain on guard.

The rebound gained support from the following factors as well:

1. stabilization in the weekly unemployment claims at the 650k; level

2. improved figures in housing starts and new home sales;

3. speculation that the FASB will relax the mark-to-market; Read the rest »

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“Before Any Fraud Ensued”

Posted by Larry Doyle on March 31st, 2009 1:31 PM |

There seems to be a growing stream of information and activity surrounding the travesty with Auction Rate Preferred Securities, otherwise known as ARPS. Citigroup and Wachovia just settled a $4.7 billion claim brought by California investors. Oppenheimer Holdings, based in Toronto, is considering incorporating itself in the United States in an attempt to receive government funds via the TARP (Troubled Asset Recovery Program) to settle outstanding claims by ARPS investors.

This morning, Bloomberg reports UBS Auction-Rate Securities Suit Dismissed by Judge. What is this? No fraud was perpetrated? Did the investors not properly make their claim? Was UBS not liable in the underwriting and selling of ARPS? Is Sense on Cents making no sense with all the writing on this topic? Let’s review what the judge in this case has to say: Read the rest »

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Housing Prices Plummet, Consumer Confidence at All-Time Lows

Posted by Larry Doyle on March 31st, 2009 11:42 AM |

While recent housing data has shown a pickup in home sales and housing starts, albeit from very low levels, data released this morning showed no stability in home prices. The WSJ reports:

Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and nine… falling more than 20% in the last year,” said David M. Blitzer, chairman of S&P’s index committee. Both composite indexes and 13 of the 20 metropolitan areas reported record year-over-year declines.

As of January, the 10-city index is down 30% from its mid-2006 peak and the 20-city is down 29%. The two indexes have fallen every month since August 2006, 30 straight.

The indexes showed prices in 10 major metropolitan areas fell 19.4% in January from a year earlier and 2.5% from December. The drop marks the 10-city index’s 16th-straight monthly report of a record decline.

In 20 major metropolitan areas, home prices dropped 19% from the prior year, also a record, and 2.8% from December. Read the rest »

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IMF: Influential and Manipulative Financing?

Posted by Larry Doyle on March 31st, 2009 8:19 AM |

Could American banking regulators and the Federal Reserve itself work under the purview of the International Monetary Fund? With the G-20 getting ready to meet later this week in London, increased global financial regulation is a major topic on the agenda. French Prime Minister Sarkozy is leading the charge. The WSJ reports An Empowered IMF Faces Pivotal Test:

The IMF is about to gain more power. Thursday’s summit of leaders of the Group of 20 industrialized and developing nations is poised to elevate the IMF by promising to pump more than $250 billion into the fund, and asking it to issue “early warnings” about countries in peril.

“Everyone sees the need for a rejuvenated IMF,” says Egyptian Finance Minister Youssef Boutros-Ghali, who heads a policy-making group that oversees the IMF.

The IMF’s track record around the globe is decidedly mixed. In certain countries, such as Ukraine and Belarus, economic conditions worsened despite IMF aid. Read the rest »

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Bigger Than Madoff?

Posted by Larry Doyle on March 30th, 2009 7:56 PM |

Each and every time I read a review of the Auction Rate Preferred Securities market, I come away thinking it was one enormous Ponzi scheme. Let’s review the facts as reported from a just published Bloomberg story of a $4.7 BILLION Settlement by Citigroup and Wachovia with California Auction Rate Investors:

States, student-loan agencies and closed-end mutual funds were the primary issuers of the securities, long-term bonds with interest rates set at weekly or monthly auctions.

1. Issuers have long term projects funded by long term loans or preferred shares. Those loans or shares are the underlying collateral in an auction rate preferred transaction. While people investing in a pure Ponzi scheme believed they were investing in a legitimate money manager’s business, investors in ARPS believed they were investing in a money market fund. The key here is MISREPRESENTATION.

The debt, marketed by bankers as cash equivalents, offered investors yields of a quarter-percentage point or more above conventional money-market funds, indexes show.

2. In both a Ponzi scheme and ARPS, the allure of regular liquidity with solid returns draws new money into the game. With a Ponzi scheme, the returns are better than a benchmark index. With ARPS, the returns were better than other cash alternatives or money market funds. Read the rest »

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