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HomeGoldman’s Jan Hatzius: ‘Substantial Hangover’ in U.S. Economy
Posted by Larry Doyle on August 25th, 2009 8:22 AM |
Say what you want about Goldman Sachs in its entirety, but I tip my cap to Goldman economist Jan Hatzius for an extremely forthright and aggressive interview I just watched on Bloomberg Surveillance.
In so many words, Hatzius seems very concerned about a double dip recession here in the United States in 2010. That is my assessment. Hatzius himself did not use that phrase.
Highlights of his commentary include:
>> call for a 3% GDP in both the 3rd and 4th quarters of 2009 driven by fiscal stimulus programs and inventory buildup.
>> without the benefits of the stimulus and further inventory rebound, the U.S. economy will suffer from a ‘substantial hangover’ in 2010.
>> Hatzius does not see China or other surplus nations suffering from this hangover. He is quite bullish on prospects for the Chinese economy.
What are the effects of our hangover and implications for government policy?
>> likely double digit unemployment with no quick improvement
>> Federal Reserve will likely keep the Fed Funds rate at 0-.25% for all of 2010
>> no inflationary pressures for a few years
>> given lack of growth in the private sector, very real chance that the Federal Reserve will extend its quantitative easing program in which it purchases liquid assets (U.S. Treasury debt, agency debt, and mortgage-backed securities). Hatzius threw out that there is a very real possibility the size of the Fed’s balance sheet could double to $4 TRILLION. Be mindful that the Fed’s balance sheet has already doubled over the course of this crisis!!
>> substantial decline in commercial real estate has yet to occur.
>> Cash for Clunkers will likely add .3 to .4 to current quarter GDP, but some of that is certainly pulling demand forward and will be ‘paid back’ with slower growth in 2010.
>> when the economy does gain traction, he believes Bernanke (whom Obama will reappoint to another term) will raise rates aggressively.
Hatzius’ assessment is consistent with the Main Street economy which remains disconnected with Wall Street price action. While Main Street has a headache and hangover, Wall Street rocks on with easy money from Washington.
When will Main Street get in on the action?
LD
Cerberus Investors Head for the Exit
Posted by Larry Doyle on August 24th, 2009 12:38 PM |
Oh how the mighty have fallen.
Cerberus was once one of the highest profile private equity and hedge fund players on Wall Street. Today, Cerberus is being seriously humbled.
Cerberus entered the public realm late last year given the problems within the automotive industry. Cerberus had taken a controlling stake in Chrysler. I opened the doors on this private equity machine last December 11th by writing, “Who and What is Cerberus…??” I wrote:
While the debate in Washington over a potential rescue package of the domestic auto industry seems to be ending and a short term “bridge loan” is being arranged, I empathize with the innocent laborers and families within these companies and across the industry who have truly suffered from the imprudent management of this business model. One outfit that is heavily involved in this industry, though, deserves no sympathy. Everybody knows General Motors, Ford, and Chrysler, but not many people know of Cerberus Capital Management.
GM and Ford are publicly traded entities. Chrysler, however, is 80% owned by one of the largest private equity funds in the business. If any company understands risk, the cost of capital, business models, restructurings, leveraged buyouts, asset liquidations, return on equity, etc it is Cerberus Capital Management.
Fast forward 9 months and a large percentage of investors in Cerberus have seen enough and want their money back. The Wall Street Journal highlights this development in writing Cerberus Investors Choose to Withdraw:
Clients of Cerberus Capital Management’s core hedge funds have opted to withdraw the majority of money from the funds, marking a sharp rebuke to the weakened firm and its boss Stephen Feinberg.
Clients owning more than $4 billion of the $7.7 billion in assets in the Cerberus Partners hedge funds have opted to liquidate their holdings, rather than allow Cerberus to collect its typical fees and continue making new investments, say people familiar with the matter.
Mr. Feinberg, striking an apologetic tone, personally called Cerberus clients this week to share the tally, which was current as of Friday and could still change, according to people familiar with the discussions. Cerberus executives hope that some investors who have opted for withdrawals can be convinced to change their minds, people familiar with the matter said.
Investors had been told they had until this week to vote on the fate of their hedge-fund holdings, a choice that was fraught, the people say. The tradeoff: liquidate now for an uncertain payout, or stay with Cerberus and roll the dice on a new fund.
That a significant portion of investors decided to walk is a comedown for Mr. Feinberg and Cerberus, long one of the biggest and most successful private equity and hedge-fund firms and best known of late for its two failed investments in Chrysler LLC and GMAC LLC. Just a few years ago, investors clamored to get into Mr. Feinberg’s funds, as the firm benefited from a boom in hedge funds and its own strong track record.
The development also shows the difficulties hedge-fund investors have getting out of so-called illiquid assets, which often are heavily concentrated in a few companies or involve stakes in private companies and which have been hard to sell except at steep discounts during the financial crisis.
Will these withdrawals signal the end of Cerberus as a viable entity? Not necessarily so. That said, the rally in the markets does not necessarily mean that Cerberus investors will benefit. Why? The cost of liquidity can be extremely high during challenging markets. Rest assured, despite the ongoing rally in the major market averages, the markets overall remain challenged.
Just ask Stephen Feinberg and his partners at Cerberus.
LD
Getting Goldman’s Call
Posted by Larry Doyle on August 24th, 2009 7:57 AM |
Goldman Sachs remains the focus of media attention. How do these wizards of Wall Street make so much money? What goes on inside 85 Broad Street? Is everything on the up and up? Are they smarter than everybody else on Wall Street? Does Goldman have better systems?
I addressed the Goldman business model on July 6th when I wrote, “How Does Goldman Sachs Operate?” I specifically highlighted:
Goldman decided to utilize its capital and balance sheet less so for origination capabilities and much more for principal trading (that is, making bets and taking positions with its own capital). Effectively, Goldman decided to operate much more like a large multi-strategy hedge fund. Goldman took enormous risks both in their proprietary books but also in their trading activity with customers. Goldman made a concerted decision to dominate the markets in which they chose to play.
If a firm is going to take large principal risk positions both within proprietary books and customer books (trading accounts used to trade with clients), two factors are of overwelming importance: information and relationships.
Goldman worked both of these angles very, very hard. Goldman developed extremely close relationships with the largest customers in the market and the largest power brokers in Washington and around the globe.
Many of Goldman’s relationships are with very active trading hedge funds. These funds know one goal–making money. Are rules violated? I’m sure they have been.
This morning, The Wall Street Journal reports Goldman’s Trading Tips Rewards Its Biggest Clients:
Goldman Sachs Group Inc. research analyst Marc Irizarry’s published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster “neutral” in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman’s traders the stock was likely to head higher, company documents show.
The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry’s research didn’t find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.
Every week, Goldman analysts offer stock tips at a gathering the firm calls a “trading huddle.” But few of the thousands of clients who receive Goldman’s written research reports ever hear about the recommendations.
At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman’s widely circulated research reports. Some Goldman traders who make bets with the firm’s own money attend the meetings.
Critics complain that Goldman’s distribution of the trading ideas only to its own traders and key clients hurts other customers who aren’t given the opportunity to trade on the information.
Securities laws require firms like Goldman to engage in “fair dealing with customers,” and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman’s stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research.
Former Goldman client George Klopfer of Park City, Utah, who was unaware of the trading tips until recently, says the practice is unfair. “When I joined Goldman as a client, I got all these fancy brochures saying they put the client first,” he says. “I just don’t want to have to worry about them or big clients trading on stuff like this. I was at the end of the food chain.” He says he pulled out most of the $20 million in his account earlier this year after losing money on several Goldman funds. Goldman says individual clients like Mr. Klopfer typically have a long-term investing approach and are not focused on individual stocks.
![[Goldman's Trading Tips Reward Its Biggest Clients]](http://s.wsj.net/public/resources/images/P1-AR261A_GOLDM_NS_20090823184910.gif)
I take the following away from this WSJ commentary: (more…)
NoQuarter Radio’s Sense on Cents with Larry Doyle, Sunday Night at 8PM
Posted by Larry Doyle on August 22nd, 2009 6:07 PM |
SORRY for not having the show this evening. We had a tremendous storm roll through our area at 7pm. Lost phones and power. I just finished bailing the basement. I think I’ll be friends with a Wet-Vac tomorrow….LD
As the markets rebound and the economy seems to recover, please join me this Sunday evening for NQR’s Sense on Cents with Larry Doyle as we dig deeper and work harder in navigating the economic landscape. Is the market and economy truly rebounding as quickly as it may appear? Is Wall Street back to ‘business as usual?’ Is the banking system properly portraying its overall health? Let’s explore and traverse not only Wall Street, but more importantly Main Street. Who is declaring victory in this battle while who is cautioning us to remain on guard as we navigate? What are the credit markets and credit availability telling us?
These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere! What is on your mind? What would you like to address? Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins.
As a reminder, all of my radio shows are archived and can be listened to right here at Sense on Cents by clicking on the NoQuarter Radio tab located under the page header. (FYI, I keep an audio player of my most recent episode in the right sidebar). In addition, all NoQuarter Radio programming is available as a free podcast on iTunes. From the iTunes Store page, type “NQR podcasts” in the search window.
Many thanks to Larry Johnson and the rest of the team at NoQuarterUSA blog for providing such a vibrant vehicle as NoQuarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!
Will Goldman Sachs Be Bulls, Bears, or Pigs?
Posted by Larry Doyle on August 21st, 2009 4:46 PM |
There is no doubt that Goldman Sachs is currently the preeminent shop on Wall Street. JP Morgan is a respectable second. I am not sure if there is a close third.
Despite Goldman’s resurgence, they have a major problem — that being their public image. What are some of Goldman’s issues? They include:
1. the firm’s close ties with Washington insiders . . .
2.their agggressive trading and risk profile . . .
3. the proprietary nature of their business . . .
4. the mere fact that they have made so much money (with the assistance and in the presence of Uncle Sam), while the economy continues to suffer . . .
Charlie Gasparino of CNBC addresses a number of these points as well as the fact that Goldman will likely face the public’s wrath when they pay out billions in bonuses come year end. The Goldman execs exacerbate the situation by playing the ethnic angle as Gasparino writes, Goldman Execs Blame Anti-Semitism. In my opinion, Goldman makes a huge mistake playing that card.
The fact is the public sees Goldman specifically and Wall Street in general benefitting from taxpayer dollars injected into the system along with a host of Fed and Treasury programs. While Goldman has paid back its TARP funds, they have still benefitted from financing backed by the FDIC. Moreso than direct benefits to the firm, Goldman has clearly benefitted indirectly from the gamut of Uncle Sam’s largesse.
Uncle Sam clearly has a large amount of ‘skin in the game.’ Goldman can address its image and burgeoning reputation problem by increasing its own ‘skin in the game.’ How can they achieve this? They should compensate employees in stock to a much greater extent and have that stock vest over a longer time period.
Typically, senior executives, traders, and bankers are paid approximately 35% in stock and the stock would vest over a three year time frame. As such, individuals would typically have one year’s worth of compensation tied up in the firm.
Let’s see Goldman pay people 65-70% in stock and have it vest over a 5 to 6 year time frame. If Goldman is concerned about losing people, that pay structure would serve as a real disincentive for other firms to hire Goldman people. Make no mistake, Goldman employees would NOT be happy to be paid in this format . . . BUT there would be plenty of people on Wall Street who would take that pay structure right now to work at Goldman Sachs.
Goldman has the opportunity through this bonus cycle to display whether they are bulls, bears, or pigs.
LD
Let’s Look at Housing
Posted by Larry Doyle on August 21st, 2009 12:16 PM |
The National Association of Realtors just announced that existing home sales rose to the highest level in the last two years. This is obviously a good sign. What drove the increase and what is going on within the housing market broadly speaking? Can we assign a clean bill of health to the entire housing market based upon this report? Let’s dig deeper.
Bloomberg looks into this morning’s report and highlights the following in writing Existing Home Sales in U.S. Jump to Two Year High:
> Foreclosure-driven declines in prices, government credits for first-time buyers and near-record-low borrowing costs may keep stoking demand, helping the economy recover from the worst recession since the 1930s. Ongoing job losses are a reminder that more Americans will probably lose their homes, indicating a rebound will be slow to take hold.
Sense on Cents commentary: as I attested on August 11th in writing the “U.S. Mortgage/Housing Market has a Split Personality,” the economy has a decidedly different dynamic at work between lower priced homes which can be financed with conforming mortgages (ultimately purchased by Freddie Mac and Fannie Mae) and higher priced homes needing to be financed with Jumbo mortgages (not readily available by our friendly banks!!).
>Purchases of existing homes increased 5 percent compared with a year earlier. The median price dropped to $178,400 from the $210,100 in July 2008.
Sense on Cents commentary: do not look for price appreciation anytime soon. In fact, while home prices on the lower end may begin to stabilize on a relative basis, higher priced homes (those needing Jumbo financing) will remain under pressure.
> The number of previously-owned unsold homes on the market jumped 7.3 percent to 4.09 million in July, a “notable” increase, according to Lawrence Yun, the Realtors’ chief economist. At the current sales pace, it would take 9.4 months to sell those houses, the same as in June.
>About $3.4 trillion worth of houses are at risk of default because the owners owe more than the property is worth, Santa Ana, California-based First American CoreLogic said last week. By putting more homes on the market, foreclosures are keeping inventory higher than levels consistent with stable prices.
Sense on Cents commentary: the increase in unsold homes will keep prices under pressure which will help promote sales activity but will also serve to keep pressure on retail sales as consumers feel a negative wealth effect. Additionally, the supply of homes does not fully address the shadow inventory of homes held by banks but not yet put on the market. This shadow supply will likely increase given what is in the delinquency and foreclosure pipeline. (more…)
Banks Want to Continue Rope-a-Dope Accounting
Posted by Larry Doyle on August 21st, 2009 8:04 AM |
If a financial position is hidden, disguised, or in some manner unreported, does that mean it does not exist or is not impactful? Will the American taxpayer continue to bear the burden of unsafe and undisciplined lending and investment practices on behalf of our banking system without being able to demand truth and transparency? Make no mistake, these very practices have brought our economy and financial system to its knees and if the banking system continues to get its way, we will remain subject to the massive risks connected with them. Let’s navigate this corner of our economic landscape and see what the implications are going forward.
CFO Magazine highlights the growing pressure from within the banking industry to delay the implementation of accounting rules requiring banks to bring investment positions onto the balance sheet and raise sufficient capital to support them. In short, these accounting rules would strike at the nexus of the off-balance sheet vehicles which crippled many banks. CFO reports:
Bank regulators are set to discuss accounting standards next week, with an aim toward determining the potential affects that off-balance-sheet rules may have on some financial institutions. During the past year, bankers have fretted about new accounting rules that would force them to bring back on their balance sheets billions of dollars worth of assets — a move bankers have argued will throw regulatory capital ratios into chaos.
Bankers may fret, but taxpayers are picking up the tab on an ongoing basis. If these bankers really want to see ‘fretting,’ then they should start talking to the American public.
Why are the bankers concerned about implementing these new accounting rules? They believe it will force them to raise new capital, dilute their stock value (which will most likely negatively impact their own personal wealth), and increase the potential of a takeover or some other form of business transfer, including potential liquidation. The bankers would prefer to continue to operate in an undercapitalized fashion while they ‘hope and pray’ for a turnaround in the housing market which is at the very core of their investment holdings and overall franchise. (more…)
Bank of America Credit Cards Less Than Prime
Posted by Larry Doyle on August 24th, 2009 3:20 PM |
Why are banks tightening credit to the extent that they are extending credit at all? The mere fact that so many of their current loans and credit lines are increasingly delinquent and defaulting. Of the largest credit card outfits, one bank stands out as holding the worst performing credit card portfolio. Who might that be? Bank of America.
In fact, by banking standards Bank of America’s credit card portfolio would be considered sub-prime. Bloomberg highlights this development in writing, Bank of America Shuns Sales of Card Debt, Ducks Subprime Label:
Why is BofA’s credit card portfolio so much worse off than its major competitors and what are the implications of this reality? (more…)
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Posted in Bank of America, Credit Card companies, General | 4 Comments »