Sense on Cents

If You Can Keep Your Head

Posted by Larry Doyle on February 20th, 2009 6:00 AM |

These are clearly the times that try our souls. In an attempt to bring a measure of perspective to the markets and economy, let me review some month-to-date stats for February and add economic commentary:

DJIA	-9%
S&P 500	-5.7%
Nasdaq	-2.3%
Bonds	Flat to -10%, depending on sector
$/Yen	94.14 vs.89.81
$/Euro	1.262 vs. 1.280
Oil	38.78 vs. 41.60
Gold	975 vs. 929

There really has been no place to hide. Why? Very simply because in a “massive margin call” (selling assets purchased with borrowed money) when debt cannot be refinanced, all assets are “on sale” in order to pay down debts!!

We have achieved the objective we were looking for in the DJIA and are about 5% away from the objective on the S&P. If there are people who were outright short the market “nobody ever went broke taking a profit.” The question is where do we go from here? In order to address that question, we need to break it down into its component parts. Read the rest »

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Midday Market Update

Posted by Larry Doyle on February 19th, 2009 12:37 PM |

Very interesting price action in today’s markets:

The day started off with stock markets higher by 1.5-2% given a little bit of a relief rally in overseas markets.

At 8:30AM, the Producer Price Index was released and it was significnatly higher than expected (it rose .8 and, without the volatile food and energy components, it rose .4; the consensus was for an increase of .3 and ex-food and energy .1). Unemployment claims were also released and remain at the elevated level of 627K.

Concerns about inflation along with concerns about an ongoing supply of government debt have driven bonds across all sectors down by .5-1%. High yield bonds are down more than that with concerns of the deepening recession leading to an increase in defaults.

All sectors of the stock market have reversed course and are now down .5-1%. The fact that the stock market could not hold earlier gains reinforces the strength of the bear market. We should look for a further selloff of another 4% to retest lows in the DJIA seen back in late 2002.

Currency markets are having a little bit of a reversal today with the Euro strengthening on indications of potential German intervention. The dollar is strengthening versus the Japanese yen.

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Housing and Responsibility

Posted by Larry Doyle on February 19th, 2009 6:00 AM |

President Barack Obama presented an overview of his plans to support the housing market yesterday. Obama highlighted the government would utilize the following methods to support those homeowners in default or close to foreclosure:

1. Support is only provided to those homeowners occupying the residence. No support for speculators or developers.

2. The government will increase the portfolios of Freddie Mac and Fannie Mae to purchase mortgages that are refinanced. These portfolios are currently sink holes swallowing billions in taxpayer funds given irresponsible management and pathetic risk management over the last 15 years.

3. The government will work with and incent mortgage servicers to rewrite mortgages to 31% of income for these homeowners. Read the rest »

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The Fed Speaks

Posted by Larry Doyle on February 18th, 2009 2:53 PM |

Fed chairman Ben Bernanke spoke at the National Press Club this afternoon and offered revisions for the Fed’s economic statistics for 2009. What do the numbers mean? Here’s a recap:

— the Fed expects GDP for 2009 to end up between -.5% to -1.3%, revised from -.2% to +1.1%. The Fed obviously is expecting a contraction in our economy for all of 2009 and further added it does not see much of a pickup in 2010.

— the Fed is setting a long term inflation target of 2% but does not expect to see a pickup in inflationary pressures for a protracted period.

— increasing its expectation for the unemployment rate in 4th quarter of 2009 to 8.5% to 8.8%.

— the Fed has seen no indication of stability in residential housing markets in January 2009.

— some Fed governors have increased concerns about defaults and foreclosures in the commercial real estate markets.

— the Fed believes long term growth potential for GDP is 2.5% to 2.7%.

— the Fed realizes that at some point it will need to contract the growth in its balance sheet to mitigate chances of increased inflation.

What does all this mean?

In summary, the Fed is publicly acknowledging that the economic recession will be longer, deeper, and more painful. They are also offering that they are determined not to let deflation or the threat of deflation impede the economy.

I see no reason to rush into adding risk assets (equities or speculative credits) on the heels of this report. It is actually very interesting to see that some high profile individuals and institutions have actually been selling assets:

T. Boone Pickens
Pickens Reduces Energy Investments, Holdings Fall 97%

Warren Buffet
Berkshire Reduces J&J Stake, Turns to Fixed-Income

Harvard University
Harvard Retreated From U.S. Stocks as Market Tumbled

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A Fresh and Honest Perspective

Posted by Larry Doyle on February 18th, 2009 11:07 AM |

It is often difficult, if not near impossible, for an individual, company, institution, or even a government to provide a measured, honest, and unbiased perspective of a difficult situation. Given one’s proximity and emotional attachment to the situation, human nature clouds one’s viewpoint and, in turn, one’s reactions and responses.

How great it is when we can receive the sage wisdom of a neighbor, a retired executive, a former coach, or on the international level a true statesman. While we may find it difficult to hear and deal with a tough message, ultimately the greatest form of “tough love” is simple truth and honesty.

A good friend of mine was gracious enough to share some video clips of a recent interview with Paul Keating, former Prime Minister and Treasurer of Australia. Mr. Keating speaks from experience and does not sugar coat the current economic turmoil. While the three video clips (listed below) run approximately 20 minutes in total length, please allow me to provide a bullet point overview of some of the highlights. When you do have some spare time, I strongly encourage you to view these clips and gain the benefits of his wisdom. I do not think you will be disappointed, although you may be a bit dismayed as to his blunt honesty. In the meantime, here’s a brief overview: Read the rest »

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Legalized Bribery UPDATE

Posted by Larry Doyle on February 18th, 2009 8:55 AM |

(Editor’s Note: This post is an update to the piece Legalized Bribery, which was originally published on 2/16/09)

***Update*** After Bernie Madoff, it appears the next largest, fraudulent investment scheme is centered on an entity known as Stanford Financial. This company has offices in Houston and also operated an offshore bank in the Caribbean. While this story is developing, it is not surprising that the main principal, Allen Stanford, knew how to play the “Legalized Bribery” game I highlighted on February 16th. Who benefitted from his millions in gifts and lobbying? Charlie Rangel (D-NY), Greg Meeks (D-NY), Bill Nelson (D-FL), Pete Sessions (R-TX), former CA governor Gray Davis, and the Democratic Party. Check it out: Texas Businessman Sought Influence in Corridors of Capitol

I will continue to update this story on an ongoing basis. In the meantime, you can access my original piece entitled Legalized Bribery.

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Where East Meets West

Posted by Larry Doyle on February 18th, 2009 6:00 AM |

In the late ’80s, an international banking crisis in Latin America and South America led to massive losses for many money center banks here in the United States. In the late ’90s, the collapse of the Thai bhat and Russian ruble were the precursors to global economic turmoil and significant dislocations in the capital markets. Fast forward to the current economic turmoil and the bulk of the problems have emanated in the developed markets. From the United States to the U.K. to Japan there are major destructive forces at work. Emerging markets have been following the developed markets with signs of stress present but not overwhelming…..until today.

As if western European banks did not already have enough to worry about, a major factor in Tuesday’s selloff in global equities was the expectation of truly massive unrealized losses due to exposure to the emerging economies of eastern Europe.

With capital flowing into eastern Europe truly drying up (effectively financial protectionism), the pace of delinquencies and defaults on loan payments is expected to skyrocket. European banks are not well positioned to deal with these losses. I would expect this situaiton will lead to the formal nationalization of many European banks. Does that create a wave of nationalization around the globe? At the very least it will put added pressure on the Euro and increase the sovereign credit risk of many European nations.

Banks Reel On Eastern Europe’s Bad News . . .
The Wall Street Journal; February 18, 2009
By Marc Champion, Joanna Slater and Carrick Mollenkamp

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Behind the Numbers…

Posted by Larry Doyle on February 17th, 2009 1:43 PM |

behind-the-numbers1 While the equity markets globally are down 3-4% today and are within a few per cent of the lows seen on November 20th, let’s take a look “behind the numbers” so we can most effectively “navigate the economic landscape.”

1. While the United States has lost 2 million jobs over the last three months, China has reportedly lost 20 million jobs in that same time period.

2. Japan’s 4th quarter GDP came in at -3.3%!! This retraction equates to an annual decline of approximately 13%!!

Comment….those numbers are not indicative of economies that are weathering the storm or ready to generate domestic consumption. No wonder why both Japan and China are so concerned about protectionist policies here in the United States. Read the rest »

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The Market Speaks . . . Investors Rush for the Exits

Posted by Larry Doyle on February 17th, 2009 8:12 AM |

Equity markets around the world are sufferring significant pullbacks overnight and this morning in the United States. What are the issues? Hope is a lousy hedge!! What does that mean? If we are relying on hope, rather than well defined plans to turn our economy and banking system, then investors are headed for the exits!

Let me highlight specific situations:

1. Banks around the world facing imminent downgrades in their credit rating due to continued pressures on their earnings capabilities and expectations of increasing defaults in their loan books.

2. Auto companies in the United States were supposed to deliver restructuring plans today. The market believes this situation is likely headed to a government backed bankruptcy.

3. Hedge funds are receiving notification that Wall Street banks are significantly pulling in, if not totally reneging on, credit lines. What does this mean? Many funds will have to find financing elsewhere or liquidate the business which means selling assets which will put further downward pressure on many sectors of the market. Read the rest »

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Legalized Bribery

Posted by Larry Doyle on February 16th, 2009 6:57 PM |

Quality business relationships are always mutually beneficial. If they are not mutually beneficial, then they will not thrive or perhaps even last at all. A strong business relationship, like any personal relationship, needs a foundation of honesty and money_sign integrity. As in any relationship, there will be plenty of instances in which the parties have disagreements and misunderstandings. If the relationship is strong enough, it can not only endure through these times but often grow stronger as a result of them.

The challenge in any relationship is when one party is conflicted and attempts to serve two masters. These conflicted relationships – whether personal, political, social, or business – must change in order to grow or are doomed to languish and underperform if not die completely. On Wall Street, a business that so grossly prioritizes short term profits versus long term customer relationships will not grow. Perhaps for a period of time the excess profits will be addicting and mesmerize management, but over time that model will not work. Bear Stearns is a classic example of this principle. From having worked there for 7 years in the 90s, I evidenced it firsthand. Read the rest »

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