Sense on Cents

When the Oracle of Omaha Speaks..

Posted by Larry Doyle on February 28th, 2009 4:20 PM |

Warren Buffett’s annual letter to shareholders is always a highly anticipated event by market participants. Given the fact that Berkshire is effectively a diversified holdings company, Buffett has a unique perspective into a wide array of businesses. He also has the wisdom of investing over many years and through many challenging markets.

Well, if misery loves company, it has a solid partner in the person of Warren Buffett because 2008 was Berkshire Hathaway’s worst year ever. In reviewing Buffett’s letter allow me to offer some highlights. For those who have an even passing interest in the markets and investing, reading this letter is akin to attending an opera by Pavarotti.

I beg your indulgence as I attempt to be the opening act and provide an overview of the “Oracle of Omaha’s” thoughts on the markets and economy: Read the rest »

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“My Mama Told Me . . .

Posted by Larry Doyle on February 28th, 2009 2:20 PM |

. . . You Better Shop Around.”

What does that wonderful song from Smokey Robinson and the Miracles have to do with our economy? I’ll tie that in a bit later.

More and more people are inquiring of me how and why banks are making credit tighter both in terms of availability and in terms of rates charged.

This tightening of credit is due to the “crowding out effect” from dramatically increased government borrowing along with the actuality and likelihood of increased defaults across all consumer and corporate loans. In the face of those defaults, banks will set aside more capital in reserve to cushion those losses.

What is a consumer to do? There are two tactics:

1. Everything’s Negotiable which I highlighted in a post dated December 23, 2008. Talk to your bankers and/or credit providers. Put your banks and other credit providers in competition. Where does one start and how does one easily comparison shop? I’m glad you asked because that leads me to point #2.

2. Shop around (thank you, Smokey)! Sense on Cents provides links via our Primers (in the right sidebar) for a look across the market to virtually every consumer credit need. Remember I have NO professional relationship with any of these entities. From borrowing needs to investing, with many stops in between, I hope these primers help you navigate the economic landscape going forward!!

And now, a trip down memory lane . . .

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February 2009 Market Review

Posted by Larry Doyle on February 28th, 2009 10:13 AM |

Prior to going to the comments section of my son’s report card, human nature dictates that I first look at the grades. In that same vein, let’s see how the markets performed for the month of February:

22709-market-changes

Let’s review my specific projections from the January 2009 Recap: Read the rest »

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The Case for Sense on Cents

Posted by Larry Doyle on February 27th, 2009 10:24 PM |

Welcome to Sense on Cents!!

Why am I so enthused about the potential for this site? I could write at length in answering that question, but in short I firmly believe the “product” delivered here is in very strong demand and very short supply. Collectively as we navigate the economic landscape we will learn, share, and become more comfortable with the economy, the markets, and global finance. While the economy dominates our news currently, where can one go to make sense of it? Welcome to Sense on Cents!

Sense on Cents is truly a reflection of my professional instincts and personal interests. I sincerely believe this site can elevate the level of financial literacy, economic knowledge, and market insights for those who come here. Additionally, I am pleased to provide a wealth of information on career planning, global perspectives, financial primers, and meaningful literature. The sharing of opinions and active dialogue are strongly encouraged. I hope you feel comfortable coming here, find it to be of great value, will offer your perspectives, and will spread the word! While making “sense on cents,” I feel strongly we will find the relationships and returns to be very rewarding, especially relative to the risks!

I thank Larry Johnson for his tremendous support from my very first day at No Quarter and look forward to a continuing, close working relationship with him, Susan, and all involved at NQ. I sincerely hope and believe our efforts can and will promote our mutual interests.
Read the rest »

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Mortgage Deduction . . . Crossing the Rubicon

Posted by Larry Doyle on February 27th, 2009 1:18 PM |

The mortgage interest deduction has been a cornerstone of American tax and housing policy. In fact, I can’t count the number of times I conversed with my accountant about maintaining mortgage debt based upon the feeling it was the one deduction the government would never touch. Well, never just pulled into the driveway!

For clarification purposes and at the request of a number of readers, allow me to address this deduction. As proposed in President Obama’s budget, for those households currently paying taxes in the 33% and 35% brackets, the mortgage deduction would now be at a 28% rate. The proposal would not take effect until 2011.

This Mortgage Deduction Looks Less Sacred. Its effect can and is hotly debated by economists and housing analysts. In my opinion, though, there are a few points not debatable. This initiative is another method of achieving wealth redistribution. It will make housing more expensive at the margin. It will put pressure on housing in general and in upper income areas specifically. Given that there are no initiatives proposed to support those needing Jumbo mortgages, this tax change will only further negatively impact this sector of the market.

Lastly, is this Obama’s “crossing the Rubicon?” Don’t think for a second that this initiative just developed. How and why did we NEVER hear about this during the campaign? Did he know how negatively it would be received?

In summary, having “crossed the Rubicon,” how far does he penetrate into the territory?

We’ll be watching, but knowing how wildly optimistic his growth projections are in his proposed budget, Obama will need more $$$. The mortgage interest deduction just became fair game.

I need to call my accountant.

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The Weakest Link

Posted by Larry Doyle on February 27th, 2009 10:45 AM |

It is widely believed that the weakest link in the global economy centers on Eastern Europe. In light of that, the leaders of 12 eastern European countries are holding an emergency economic summit this weekend. From that summit, it is expected that these countries will request an international bailout.

As of now it appears the countries in greatest degree of stress are Hungary, Ukraine, and Serbia. The expectation is that the group of countries will request the European Union to arrange a $230 billion bailout package. Who would provide the funding? A conglomerate of European Central Banks, the International Monetary Fund, the World Bank, European Investment Bank, and European Bank for Reconstruction and Development.

A major issue for eastern Europe is that their creditors, largely western European banks along with western European countries, are not exactly in great shape themselves. These countries may look to accelerate their entry into the EU and the full adoption of the Euro along with it.

As the pressure and stress builds, the chance of political dislocation also grows.

For further details on how Hungary Seeks $230 Billion Bailout for Eastern Europe. I will be monitoring this situation as it develops. As our global economy is very much interconnected, the increase in sovereign credit risks is a very serious concern.

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Stagflation…and More Market Moving News

Posted by Larry Doyle on February 27th, 2009 8:51 AM |

U.S. Economy Shrank 6.2% in Fourth Quarter, Most Since 1982 from initial report of -3.8%. Price index in the GDP report revised up to .5% from initial reporting of .1%

Both sides of this report, along with the recently reported higher than expected CPI (consumer price index) and PPI (producer price index) certainly seem to be pointing toward a greater likelihood of “stagflation. ” Our economy has not experienced that dreaded scenario since the early ’80s.

Additionally, Citi Gets Third Rescue as U.S. Plans to Raise Stake IF privately held preferred shareholders do the same. What does this mean? Current common equity holders in Citi will be significantly diluted and the U.S. taxpayer is moving into a first loss position. Why is the government doing this? Very simply because Citi would otherwise likely lose counterparties willing to trade with it given the concerns of losses embedded in its holdings of toxic mortgage assets.

Market reaction? Stock index futures are pointing toward a 2% decline!

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Shake Hands With Uncle Sam

Posted by Larry Doyle on February 27th, 2009 5:30 AM |

uncle-sam When trading bonds on Wall Street, I always wanted to know what the largest accounts were doing. A handful of these accounts were so massive that in order to make a meaningful change in their portfolio they had to execute trades of monstrous size. In executing trades with these clients, there was enormous risk. That said, if I did not provide enough liquidity to the accounts then we would stop seeing their inquiry. Information is everything, so not seeing their business was even more dangerous than printing some of it. Given this balancing act, I would try to pick and choose my spots. Amongst these clients is the largest bond manager in the country, Pacific Investment Management Company, otherwise known as Pimco, headed by the legendary Bill Gross (one of our Economic All-Stars highlighted in the lower left sidebar).

Bill offers his thoughts on a monthly basis. Anybody with even passing interest in the markets should read his remarks. I will offer an overview: Read the rest »

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Wie Geht’s?

Posted by Larry Doyle on February 26th, 2009 4:30 PM |

I have always been intrigued by Germany. From the history of the republic, to the wars, the division and reunification, Berlin, Munich, the food, the beer — there is a lot going on there. I had the good fortune of spending a college semester in Freiburg, which is in the southwestern corner of the country. “Wie geht’s,” meaning “how are you,” evokes many pleasant memories. The education both inside the classroom and out was fabulous.

There is little doubt that Germany carries the most weight within the European Union. Germany suffered massive inflation after the Weimar Republic and the fear of hyperinflation is deeply embedded in their culture. Given my experience and interest, I watch developments there fairly closely. Read the rest »

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Upon Further Review

Posted by Larry Doyle on February 26th, 2009 3:02 PM |

The FDIC just released its 4th quarter 2008 report. Read it and weep . . .

1. FDIC had a $26bln loss in the 4th quarter and now has only $18bln in reserves. (Little doubt that FDIC premiums — insurance premiums that banks must pay — will be increasing to rebuild reserves. All costs ultimately flow through to customers). In fact in today’s WSJ, FDIC Poised to Double Fees Charged to Lenders.

2. banking industry had first loss in 4th quarter 2008 since 1990

3. troubled institutions rose to 252 from 171 in 3rd quarter

4. banks have taken a total of $750 billion in writedowns on problem assets!!

5. banks have increased loan loss reserves to $69 billion from $32 billion

These numbers in conjunction with the Bank Stress Test lead me to make the relatively easy projections that:

— Government will have significant stakes in certain major institutions while continuing to take over and shut down many smaller institutions.

— Banks will continue to look to build reserves against future losses. This development along with a limited if not nearly non-existent “shadow banking system” (securitized consumer loan market) will mean that credit will be tight.

— As banks need to preserve capital, their ability to recruit and pay people will be severely restricted. I know employees are looking to leave these organizations to work at smaller shops without these problems.

— Although bank stocks are currently getting a bounce given government indications of support, these are not companies that have attractive growth prospects under these conditions.

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