Sense on Cents

Very Entertaining

Posted by Larry Doyle on March 13th, 2009 10:35 AM |

If I go to a comedian, I look to be entertained. I do not look for piercing insights on global issues. Alternately, when I want cogent financial analysis I don’t go to an entertainer. The following photo and captions from the New York Post are self-explanatory:

cramer-stewart

If you want to review a topic which is less entertaining, but much more critically important in navigating the economic landscape, let’s take a quick look at how the Chinese export engine is humming. Uh-oh!! Chinese exports in February dropped almost 26% from a year earlier. That decline displays an acceleration in the 17% drop experienced in January. Thank you John Mauldin, one of our Economic All-Stars (left sidebar), for providing us this less than entertaining but extremely insightful perspective, China: Exports Drop.

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Change The Rules of The Game

Posted by Larry Doyle on March 13th, 2009 8:07 AM |

Well, when you do not like how a game is going, change the rules.

The primary reason for the market rally yesterday was a Congressional hearing pressuring FASB (Financial Accounting Standards Board) to revise its rule known as the “mark-to-market.” Thank you FL for providing a heads up on this hearing.

In layman’s terms, the mark-to-market is the equivalent of inventory valuation. Nobody likes when inventory declines in value but if that is the reality, then so be it. Would your banker laugh at you if you told him you weren’t going to properly mark inventory? Do you think he’d continue to offer you a line of credit? Are we supposed to invest in banks without a credible mark-to-market?

I have VERY mixed feelings about changing this rule. I do think there are merits in never having imposed this rule for certain less liquid assets, such as commercial real estate. However, the pressure banks are applying on Congress and Congress, in turn, on FASB is for a suspension of the mark-to-market on so called super-senior classes of CDOs.

Make no mistake, if this rule is changed it will provide capital relief because the “inventory will not have to be marked down.” However, it comes at the price of a lack of transparency and full understanding as to a bank’s true capital position. I recall writing in my very first piece on October 14th:

if the government accedes to the pressure being applied to suspend the mark to market accounting principle, I would expect that move would only prolong the underperformance of the economy . . . I view a suspension of the mark to market as the equivalent of an agreement to officially allow one to “cook their books”

I hold the same opinion today. We will see a lot more on this topic over the next few weeks as FASB Pledges Mark-to-Market Guidance Soon.

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Is My Insurance Insured?

Posted by Larry Doyle on March 12th, 2009 6:30 PM |

The world of insurance occupies almost every corner of our lives. Life, home, auto, disability, long term care, personal articles. Rather than addressing what is insured, an easier question may be to ask what isn’t insured.

insurance-policies1 Given the intricate web of products and accompanying risks, we clearly are not currently dealing with your grandfathers’ insurance companies.

All that said, insurance is a relatively simple business. A policy is underwritten, premiums are collected and invested, and on and on we go. In fact, with major policies incorporating outsized risks, insurers can “lay off” risk with reinsurers, such as Munich Reinsurance, Swiss Reinsurance, and General Reinsurance. One would think this should be a steady and stable, if not quiet, industry. It would be such if companies did not reach for outsized returns through ever greater risks, primarily in the products in which they invested. While The Quiet Company, Northwestern Mutual invests primarily in high quality corporate bonds, entities like AIG trafficked in esoteric CDS. Hartford Financial Services played in the lower credit sectors of the commercial mortgage space, sub-prime mortgages, and junk bonds. Read the rest »

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Is the Market Oversold? UPDATE

Posted by Larry Doyle on March 12th, 2009 2:28 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

I have never seen such divergent views on expected future earnings which directly impacts any reasonable fundamental analysis. Read the rest »

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FROM THE ARCHIVES: How Bernie “Madoff” with $50 Billion

Posted by Larry Doyle on March 12th, 2009 10:44 AM |

Bernie Madoff pleaded guilty to his Ponzi scheme today. I thought it would be timely to post my piece from December 14, 2008:

The neighborhood of Far Rockaway in Queens, NY epitomizes the essence of middle income urban life. To say that the kids from this neighborhood develop “street smarts” at a very early age is a huge understatement.

Hustlers of every strain, predominantly positive in nature, grow up early in Rockaway. The movie, “Flamingo Kid,” starring Matt Dillon is set in Rockaway Beach. From the beaches in Rockaway one could see the Twin Towers off in the distance. Dreams of fortunes and fame earned on Wall St. drove many with real ambition. Bernie Madoff was one of those boys filled with ambition. However, while ambition can be an amazingly powerful force, if left unchecked it can be fatal.

When the tide is high and the surf is pounding in Rockaway, the kids frolic and never want to come out of the water. However, when the tide goes out, the ocean can leave a few gems. Often times, though, the waves leave a mix of driftwood and waste and a very unpleasant, if not putrid, odor.

Bernie Madoff

In similar fashion, in 2008 the tide on Wall St. has gone out. While there will be some gems amidst the rubble, it is also mostly a mix of driftwood and waste left upon the shore. Just as at times large fish are trapped and die as the tide recedes, this past Thursday, the unchecked ambition from one of Rockaway’s boys finally caught up with him and in so doing left the biggest “carcass” in the person of Bernard Madoff on the shore for all to observe.

How is it that this “fish” which appeared to be the marvel that created wonderment in the form of outsized financial returns for so many for so long was actually a shark that enveloped and ultimately devoured his followers? Let’s enter the world of this “shark.”

Read the rest »

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How Do We Track Housing?

Posted by Larry Doyle on March 12th, 2009 7:07 AM |

housing-crisis At the core of most, if not all, of our economic problems lies housing. I do not need to replay the tape of low rates, shoddy underwriting, and Wall Street securitizations that all played a dramatic role in creating a bubble the likes of which we have never seen and hopefully never will again. All that said, housing is an enormous market with a wide array of factors impacting it. How does one track it? Are we supposed to rely on our local brokers telling us things feel better? Should we ask contractors if they are bidding on jobs? Dare we rely on our local or national media outlets to provide their expertise and pandering? If we did, housing may have bottomed 14 different times in the last 10 months. In all seriousness, how can we track housing? Welcome to Sense on Cents.

There are two indexes that have developed over the last few years and are enormously respected by market participants. One index, the S&P/Case-Shiller Home Price Indexes, is released on a monthly basis. This index tracks a variety of regions in the country but not every region. Still, all things considered, this index is widely watched as a reliable indicator of health in housing. The index is typically released toward the end of each month. The most recently released report was on February 24th, A Look at Case-Shiller Numbers, by Metro Area. In this report, all indications are that housing has yet to see any support. Read the rest »

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See Me in My Office

Posted by Larry Doyle on March 11th, 2009 7:29 PM |

report-card What student in high school, college, or graduate school does not dread hearing his teacher or professor remark, “young man, see me in my office!” Good news is typically shared in an open forum even if in private discussion. Breaking out the ruler is often reserved for “the office.”

Picture this, as young Barack Obama and Timmy Geithner go in to meet their professor, Mr. Wall Street Economist.

“You wanted to see us, sir?”

“Yes. Even though it’s early in the marking period, I need to speak with both of you about your performance. I detect some issues.”

“Well, just what do you mean, sir? We’re trying hard. We’re working at grasping the material.”

“It strikes me, gentlemen, that you are not fully focused, you are stuck more on appearance than substance, you are quite glib at times, and have an interest more in being liked than in being comprehensive. Those are not the building blocks for long term success!!”

Taken fully aback, the gentlemen lean forward and apprise the professor, “Change is coming. Don’t worry, you will see a rededication and resulting redistribution in our performance. We have become friendly with some previous students who have offered to help us: Nancy, Harry, Hillary, Steny, Chris, and a few other all have reached out. We’ll speak with them. Maybe we can borrow their notes! We’re not going back, we’re moving forward. Change!!”

The professor responds, “I hope so, but I have always thought blind hope is a lousy hedge. We’ll see!!”

If only Barack and Tim were merely going through school and had the luxury of learning on the job; however, in real life Obama, Geithner Get Low Grades From Economists.

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Where Can I Put My Money?

Posted by Larry Doyle on March 11th, 2009 5:06 PM |

With stock markets down 15-20% on the year and 50% over the last 14 months, everybody in the market is asking the same question, “where can I put my money?” While many asset managers are touting the equity markets as a great buy at these levels, cooler and calmer heads are stating that the economy and markets are likely to have a slow recovery. The question screams where to put one’s money to earn more than the pittance offered in bank checking and savings accounts.

I read a very informative piece in today’s WSJ, Locking In Returns You Like. First off, this piece is very user friendly. It provides a wealth of information and links to websites which will provide good market insight.

Over and above referencing some quality products (GNMAs, TIPS, municipals), it also broaches the topic of laddering which I believe is a very valuable technique in building a bond portfolio.

Additionally, the article highlights FPA New Income Fund which is managed by one of our Economic All-Stars Bob Rodriguez. (I have no professional relationship with anybody on this site!!)

I think you will find this article a very valuable resource and I would recommend putting it in the “save” column for future reference. As you review the products highlighted and topics broached, please do not hesitate to ask anything you may not fully understand.

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Charlie Rose Speaks to Tim Geithner

Posted by Larry Doyle on March 11th, 2009 12:54 PM |

I will provide my insights and perspectives on Charlie Rose’s interview of Treasury Secretary Tim Geithner last evening. The interview has been broken down into 6 separate clips, with my commentary preceding each clip.

Part 1
In this clip, Geithner wears both the political and policy hats. While promoting the Obama agenda initially (housing, education, healthcare, energy), he then turns toward the specifics of unlocking the consumer credit securitization markets via the TALF (Term Asset Backed Securities Loan Facility). This facility attempts to restart the securitization market and model which I wrote was broken back on November 12th (The Wall Street Model Is Broken…and Won’t Soon be Fixed). That market provides approximately 40% of the financing to a wide array of consumer finance markets. Geithner attempts to portray a measure of confidence and aggressiveness. The market has currently responded with a vote of no confidence.

Part 2 Read the rest »

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Libor Creeping Higher

Posted by Larry Doyle on March 11th, 2009 5:45 AM |

For those involved in the markets, very often the first rate one checks in the morning is Libor (London Interbank Offered Rate). For those not directly involved in the markets, perhaps tomorrow morning or Thursday you may start your day by asking your partner, “where’s Libor?” In all seriousness, the 1 month and 3 month Libor rates may very well be the most closely watched indicators of market health in the world.

As Libor is the rate at which banks can borrow from each other in the London market, the rate is an indication as to the availability of dollars and the confidence banks have in each other’s credit. Traditionally, Libor tracked the Federal Funds rate (the rate at which banks borrow from the Federal Reserve) very closely. However, on the heels of the failure of Lehman Bros. last September, the confidence banks and investors had in each other plummeted. The relationship between the Fed Funds rate and 3 month Libor blew out. The 3 month Libor rate went as high as 4.7% from just outside 1%. Recall that at that period there was concern about money market funds “breaking the buck” amongst a whole set of other issues. Read the rest »

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