bizzXceleration: Performance, Value and Profit

Given all the turmoil we thought it might be time to pull together another graphically-based assessment of where the markets have been and where they might be going. So instead of putting our summry together with the regular market readings in the Readfest we'll try for a comprehensive review of the various marketspaces followed by our regular excerpt exercise. And as usual we'll start with the SP500, which we use as our benchmark for central tendencies.

BtW we won't necessarily be updating our Structure/Fundamentals/Technical/Sentiment framework because, for all practical purposes, what we had to say the last time is holding up pretty well. And you can consider our running posts as sitting within that context and updating it for currency as appropriate. Market Assessment: Running of the Bulls or Cusp Points ? In particular this post refreshes the technical assessment though they're consistent and implicitly refreshes the sentiment assessment. Which, just for the record, we consider much too optimistic but increasingly woven with fear. 

Now as to the SP500 take a look at the composite chart at the right which puts 10-Day and 6-Months together. In the 10Day you can see where the Fed saved civilization for us philistines and speculators (we're just waiting for the pundits to start with the Sodom and Gommorrah metaphors). And then we started to slowly give it back. We've talked several times about the "SAVE" and the current Business Cycle so our views on the context should be pretty clear. What was interesting is that the stair-step we noticed and commented on in our last market post continues. The downtrend wasn't broken and the "rally" stopped right at the 50-day MA. A sign of at least profound uncertainty and perhaps weakness. Now in the prior two downsteps the "flags" were busted to the downside but not this time, not yet. Which means the running debate between the "there's lots more to come" school (ours) and the U-shaped mild recovery and late year uptick school continues to be played out on a daily basis. The upcoming Employment reports will be fascinating for, among other things, their impact on the outlook. For a comprehensive review of the overall economic situation try WRFest 30Mar08(Economy): GDP, Housing, HF, Oh My !.

BTW - we strongly suggest you keep reading, or at least keep skimming, to the other markets section where we discuss Interest Rates, Gold, Exchange Rates and the Oil's interactions and the risks of a dropping dollar leading to an unpegging by the major exporter nations. Which could add another big brick to the wall. 

Market Comparisons

The composite chart at right compares foreign and US Markets to each other on a 6Mo and since Jan07 basis. Again it looks to us like the interpretation is pretty straight-forward, consistent with what we've been saying for quite a while AND indicates a change in the dynamics. The markets are proxied by ETFs though there's some currancy translatation issues if you want local returns but are Europe (IEV), Japan (EWJ), China/Asia (EPP), Emerging Markets (EEM) and the US (SP500, RUT, Nasdaq). The foreign/emerging bubble appears to be gone, markets are moving largely together but, as folks have been noticing, US relative performance ain't bad.

Sector Comparisons 

These two composite charts look at SP major sectors using ETFs as proxies again in two groups. The first those that had been performing at or below the general market trends and the second the sectors performing above. The sectors are Finance (XLF), Healthcare (XLV), Staples (XLP) and Discretionary (XLY) in the first composite, again on a 6Mon & Jan07toDate basis. Actually you see our themes playing out in a way. Nobody's really gone anywhere except Finance and Discretionary on the downside. Which gets back to what view of the outlook is priced in.

In the second composite the sectors are Technology (XLK), Utilities (XLU), Industrials (XLI), Energy (XLE) and Telecom (IYZ). These are the sectors that have been doing relative better. Oddly in the last six months the only sectors doing worse than the SP500 are Tech & Telecom, though the latter has been in the dumps for a while. Everybody else except energy is flat but in the last six months even Energy is down. There are a bunch of pieces you need to put togther here by the way. If our thesis about worldwide linkages is correct sectors that benefited from globalization will show damage and perhaps more than expected, e.g. Industrials. And while we strongly believe that Energy and Commodities will be under imbalance pressures for a long time there's both a short-term speculative component and an intermediate developing country component that might take hits. As for the other sectors it's a worthwhile exercise to compare our GDP component work (More on GDP and Economic Outlook) to sector earnings and ask youself if the analysts expectations will hold up.

Other Markets

Now the overall situation is getting complicated, inter-linked and convoluted enough we'll also add in an overview of some of the other key market indicators: Interest Rates, Gold, Exchange Rates and Oil (though again we'll point out that the recent economic updates dive into the monetary indicators pretty deeply). The first composite chart is a 1-year look at 10-Yr Treasures (TNX) and the XAU gold indicator together. Notice that TNX has dropped precipitously while XAU has jumped in almost a mirror image. Part of that is inflation hedge as rates come down. 

The other interesting comparison is between exchange rates and Oil. Here another 1-year composite with the Euro/$ rate on top and the DJAID Oil index on bottom. The $ has fallen significantly and rapidly against the Euro as the interest rate differential between the Fed and the ECB has widened. Not a surprise - they're focused on inflation and we're focused on avoiding a Recession turning into something worse. But it is the biggest policy gap in a long,...long time. Gee, oddly as the $ gets cheaper Oil gets much more expensive. Wonder how that happens.

The biggest danger here is that the ME/Gulf states peg their currancies to the $ which is both costing them money, depreciating their investment returns and generating high inflation. If you haven't noticed rising food costs are generating accelerating unrest thruout the ME and the rest of the world. Similarly China keeps the Yuan pegged to the $ to help out its' export industries but as the result of all the money flowing into China inflation is getting pretty serious there to. If both these groups were to unpeg their currencies from the $, as many have urged them, you'd see a major collapse in it's value. And resultant huge pressures to raise interest rates to protect it. Which would in turn feedback and accelerate the economic downturn.

Whee, we'd have fun then ! 

Posted by dblwyo at 06:19 PM | Permalink | Comments (0)

Well it's time to return to our regular programming having spent much of the last week or so focused on the minor distractions of collapse in the credit markets and the resultant collapse of Western Civilization as well know it. Despite widespread acknowledgement of the reality of that near-death experience and the Fed's miracle of financial engineering the other 90% of the the marketplace and economic news didn't get the attention it deserves. In the excerpts postings you'll find stories on GDP and its' near stall as well as all the other data (Home prices and sales, Consumer confidence and spending and factory orders among others). All of which was NOT, we repeat NOT, good. Meanwhile credit conditions continue to tighten and the economic contagion appears to keep spreading to Europe and Japan. In particular we'll call your attention to the excerpt on Housing where the headline and talking head coverage was almost malfeasantly misleading. We analyzed it earlier this week in a dedidcated post but you'll find more below, especially CalculatedRisk's comments on a recent John Mauldin newsletter that details how no bottom is in sight in Housing. This and similar deeper understandings about the business cycle, etc. should stand you in good stead - a) we're early days as yet in the downturn, b) none of this appears to be generally accepted and c) is not therefore reflected in stock prices. Just to pull the pieces all together here's the pieces we've put up in a sort of logical order.

•  The Great Circle: Where We're At in the Business Cyle Reviewing the nature and structure of business cycles and the specific data for this one.
• More Dialog: Facing Harsher Realities in Housing Deep dive on a comprehensive review of the situation in Housing which argues that we're at best approx. 1/4 of the way thru the total adjustment process at best. Depending on how you frame it with further sales and price declines, more huge waves of foreclosures and an extended bottoming process before price declines stop.
• Economic Dashboard: Current High-Frequency Indicators A comprehensive summary and analysis of our complete suite of monthly high-frequency indicators. Two in particular were "interesting" - the indicator of future consumption is combined growth in real wages and employment which has turned negaive. And YOY growth in the real money base continues to shrink because of the credit crisis.

So as you skim over the excerpts we'd suggest reviewing those three posts which provide as complete a framework and simple a toolkit for do-it-yourself economic analysis in easy-to-see graphic form as we can manage. And if you've got any questions about our hyperbolic summary of the troubles in the credit markets may we suggest reviewing the following:

•  A Dialog Concerning Three Systems: Real Economy, Finance & Credit
• Continuing the Dialog: Facing Realities in the Credit Market
• Five "Funny" Things on the Way to the Market
• Adult Supervision Re-emerges: Bush Proposal for Regulatory Overhaul

Now in the spirit of "seeing things as they are" we'll ask the semi-rhetorical question - would one of the most conservative and ideological administrations in post-war history be proposing the most sweeping, deep, structural and systematic regulatory reform if the situation wasn't forcing the deepest re-thinking of the financial systems. If you continue to doubt then our first post this morning was particuarly to your address:

• Sunday Morning Reflections: Learning to See Things as They Are
  

Economy

Economy Nearly Stalled in 4th Quarter The economy nearly sputtered out in the final quarter of last year and is probably faring even worse now amid the continuing housing, credit and financial crises. Many economists say they believe growth in the current January-to-March quarter will be even weaker than the 0.6 percent figure of the previous quarter. A growing number also say the economy may actually be shrinking now. Under one rough rule, the economy needs to contract for six straight months to be considered in a recession. The government will release its estimate for first-quarter GDP in late April. Consumers, whose spending is indispensable to the economy's vitality, boosted buying at a 2.3 percent pace in the fourth quarter. That was better than the 1.9 percent growth rate previously estimated but still marked a slowing from the third quarter's 2.8 percent pace. Businesses -- nervous about customers' waning appetite to buy given all the problems in the economy -- cut back sharply on their inventories of unsold goods. That shaved 1.79 percentage points off fourth-quarter GDP, the most in more than two years. Spending by businesses on equipment and software, meanwhile, rose at a pace of 3.1 percent in the final quarter of last year. That was slightly less than previously estimated and marked a slowdown from the prior quarter's 6.2 percent growth rate. Businesses profits also took a hit in the final quarter. A measure linked to the GDP report showed that after-tax profits fell 3.3 percent at the end of last year, after being flat in the prior quarter. There was a bright spot in the mostly gloomy report, however. Sales of U.S. goods and services to other countries grew at a 6.5 percent pace. That was better than the 4.8 percent growth rate previously estimated, although it was down sharply from the prior quarter's blistering 19.1 percent growth rate.

• Home Price Index in U.S. Fell Record 10.7% in January, Shiller Survey Says
• Consumer Confidence in U.S. Falls; Outlook Drops to Lowest Level Since '73
• Factory Orders Decline for Second Month
• New Home Sales Hit 13-Year Low
• Consumer Spending Weak in February

Did Economy Really Escape Fourth Quarter Drop? One tiny nugget of good news in the latest gross domestic product report is that the U.S. economy managed to avoid contracting by eking a 0.6% gain. Or did it? A separate measure of the economy touted by Federal Reserve officials last year — gross domestic income — posted its largest decline, at a 1% annualized rate, since the 2001 recession, according to the same GDP report. GDP is a consumption-based measure, adding up consumer, business and other spending and investment. In contrast, GDI is income-based, adding up things like personal income and corporate profits. GDI is included in quarterly GDP, but not in the first estimate. GDP-based models in Nalewaik’s study pegged odds for the past four recessions at their starting points at 52%, 40%, 45% and, for the 2001 recession, just 23%. GDI-based measures, in contrast, signaled odds of 78%, 44%, 72% and, for 2001, 70%. After all, if GDI is to be believed, the debate may not be whether the U.S. is slipping into recession in 2008, but whether it’s already been in one for months.

·         Estimating PCE Growth for Q1 2008 The two month estimate suggests real PCE growth in Q2 will be under 1% - but still positive. Looking at the data, real PCE has been essentially flat for four straight months. Based on various economic reports, I'd expect March to be even weaker. This suggests that real PCE in Q1 will still be positive, but somewhat below the two month estimate of 1%. In Q4, real PCE increased 2.3%, but real GDP only increased 0.6%. With real PCE below 1% in Q1, I'd expect a negative real GDP report for Q1. This is very similar to how the last consumer led recession started in 1990.

·         Fisher of Fed Sees US Economy in `Prolonged' Slowdown: Federal Reserve Bank of Dallas President Richard Fisher speaks at a community forum in Waco, Texas, about Federal Reserve monetary policy, the outlook for the U.S. and regional economies and the financial industry. Fisher of Fed Sees U.S. Economy in `Prolonged' Slowdown (vidclip)

·         Davidowitz Says Stores Face `Apocalypse' With Consumers: Video March 28 (Bloomberg) -- Howard Davidowitz, chairman of Davidowitz & Associates Inc., talks with Bloomberg's Betty Liu from New York about the outlook for U.S. department stores, the impact of Federal Reserve monetary policy and tax rebates on consumer spending and the economy. J.C. Penney Co., the third-largest U.S. department-store chain, plunged the most in three weeks in New York trading after the retailer cut its quarterly sales and profit forecasts on slower consumer spending. Bloomberg's Julie Hyman also speaks. Vidclip

·         Jan Hatzius of Goldman Sees `Consumer Recession' in U.S.: Audio March 28 (Bloomberg) -- Jan Hatzius, chief U.S. economist at Goldman Sachs & Co., talks with Bloomberg's Karen Moskow from New York about the outlook for the U.S. economy and consumer spending, Federal Reserve monetary policy and the financial industry. Vidclip

Home prices may not rebound till 2010  U.S. home prices are unlikely to recover until at least 2010, one of the nation's top housing economists said Thursday, adding that home building this year is likely to post its worst year in five decades. Speaking to the National Economists Club, Frank Nothaft, the chief economist for government-sponsored mortgage buyer Freddie Mac, painted a grim picture of today's housing market. Through the final three months of 2007, he said, sales of existing homes were down 29 percent from the same period two years earlier. Forty-six states had falling home prices in the fourth quarter, and prices nationwide were down 9.3 percent. In the Pacific region, which saw the steepest drop, prices fell an average of 17.2 percent, followed by mountain states, whose home prices fell an average of 12.9 percent. "I don't think we're going to see any improvement in the national house-price matrix until 2010," said Nothaft, a respected government economist who's followed the national housing market for more than two decades. He projected a 16 percent drop in mortgage originations this year, for new home loans and refinancing. He expects foreclosures, which rose by about 1.5 million in 2007, to increase even more this year. If there was any good news in the stark snapshot of the housing crisis, it came from a bit of really bad news. The Freddie Mac economist thinks that new single-family home starts this year will be the lowest in 50 years, back when Dwight D. Eisenhower was president. What's good about that? The plunge in new-home construction means that fewer homes will come onto the market in an environment with few buyers.

Mauldin: Where is the Bottom in Housing? John Mauldin writes: Where is the Bottom in Housing? (hat tips: many!) Mauldin provides a good overview of the housing market. His analysis is based on information from John Burns Real Estate Consulting and T2 Partners. Both Burns and T2 have made their presentations public. There is all kinds of charts and information available, but I'll comment on a couple of points. First, on sales, I think Burns is too optimistic for 2008 and too pessimistic for 2009. Right now we are on pace for just under 5 million existing home sales in 2008, and 600 thousand new home sales (and sales will probably fall further). A forecast for 6 million total sales in 2008 is probably too high. Similarly a forecast of 4 million total sales in 2009 is probably too pessimistic. The reason Burns is probably too pessimistic on total sales in 2009 is because prices will likely decline further than Burns is forecasting (helping sales). Burns is only forecasting a 16% nationwide price decline from peak to trough. Based on the Case-Shiller National index, house prices are already off 10.1% as of the end of 2007 - with much more declines likely in 2008.

Small Firms Find Credit Is Tightening The Small Business Administration has not said publicly that it is worried about a credit squeeze but signs point to a decline in business loans through its main program. Lenders’ credit woes are starting to take a toll on small businesses. Though it may be too early to determine how hard small businesses will be hit, some national surveys show that the businesses are encountering more restrictions at lending institutions, making it harder to get the credit necessary to expand or, in some cases, stay afloat. Last month, a Federal Reserve report found that a third of banks in the United States had tightened their lending standards for small-business loans. Soundings of business owners themselves are mixed because credit availability is not uniform across the country. More than half of those responding to the National Small Business Association’s online poll two weeks ago replied “yes” when asked whether their business had “been impacted by the credit crunch in recent months.” But another group, the National Federation of Independent Business, said that more than a third of the members responding to its February survey said they were borrowing normally, and only 4 percent said there was a problem getting a loan. Euro Money-Market Rates Increase to Highest This Year as Banks Hoard Cash

Fed Auctions Billions in Securities Big investment houses took the Federal Reserve up on its first-time offer Thursday to let them borrow Treasury securities, the latest effort to ease a painful credit crisis. The Federal Reserve auctioned $75 billion worth of Treasury securities. Bidders paid an interest rate of 0.330 percent. Demand was high. The Fed received bids of $86.1 billion worth of the securities. It was the first time the Fed conducted an auction of this kind. The next one will be held April 3. The program, dubbed the Term Securities Lending Facility, was announced earlier this month by the Fed and is intended as a booster shot for financial institutions and for the troubled mortgage market. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions that started Thursday. Big Wall Street investment firms could borrow much-in-demand Treasury securities from the Fed and put up more risky investments, including certain shunned mortgage-backed securities as collateral for the 28-day loans.

• Europe's Central Banks Inject More Funds The News: Major European central banks pumped funds into money markets. The Background: Europe's economy is showing resilience, but authorities sought to ease end-of-quarter strains. The Bottom Line: Rates at which banks lend to each other have nudged higher, toward levels last seen last year at the height of the credit crunch.

Inflation steals the limelight China's already battered stock markets could tumble further against a darkening economic backdrop ahead of August's Olympics Games, as the U.S. recession begins to take its toll and China further tightens its monetary policies to combat runaway inflation. After quintupling in just two years, China's benchmark Shanghai Composite Index has plunged 40% since peaking at an all-time high in October, confounding the expectations of investors who expected the remarkable run to continue through the Games. Troubles in the domestic economy and as well as the international credit crisis weighed on markets, and those troubles are not likely to disappear even after the Olympics, analysts said. While the ongoing unrest in Tibet is unlikely to have much of an impact on the Olympics, the stock market or the economy at large, turmoil never sends a comforting welcome signal to investors, especially when a market is already under pressure.

Japan's Core Inflation Rises, Jobless Rate Worsens  -- Japan's inflation rate climbed at its fastest rate in a decade in February and the jobless rate worsened to 3.9% under data released Friday, raising concerns about the health of the world's second-largest economy. The core consumer price index, which excludes volatile fresh food prices, rose 1.0% in February from a year ago -- the fastest reading since March 1998, the Ministry of Internal Affairs and Communications said. Japan has long struggled with deflation, or falling prices, but Friday's data, which also marked the fifth straight month of gains, show that higher prices for imported oil and commodities are adding pressure on living costs. Separate data released by the ministry said household spending was flat in February from a year earlier, an indication that the economy was getting less support from domestic demand, while exports that have long driven the nation's growth are also losing steam.

IMF Will Cut Euro-Area Growth Forecast for 2008 Below 1.4%, De Tijd Says

Posted by dblwyo at 04:44 PM | Permalink | Comments (0)

Sunday morning is traditionally a day of peace, family, worship and a break. At its' best it's a time to take a step back from the hurly-burly of the week, take a deep breath, clear your head and get re-grounded. We all need such periods and it's no accident that every religious tradition, among other reasons, provides them. At it's best Sunday is a day not just of rest but of reflection. So we'd like to suggest a topic for contemplation - learning to see things as they are.

Now it's not as if we haven't ranted on before about the topic - "facts, facts, what are the facts" - and will keep on doing so. Sometimes the facts as raw data are hard to decipher so you need a framework for ordering them into structured information. Which, in our small way, we make an attempt at providing. And we spent a lot of time this last week on gathering data, putting up frameworks and exploring interpretations on the credit markets, the Fed's recent actions, the stunning and monumental changes in the way we're going to be running our economy and so forth. But we're not even sure ourselves that all that has sunk home because it's still early in the game and it's hard to see what's coming and how it'll impact us, individually and collectively.

We do know though that navigating these turbulant times will require at least three things:

1) a clear-head and a calm mind

2) a focus on the facts based on the patterns and frameworks that work which make sure our mind is clear because we understand what's going on

3) and the ability to act on the implications and conclusions of our analysis.

Now after the break we bring in some other voices courtesy of TheBigPicture who we 'borrowed' three posts, or excerpts thereof, to reinforce our point. One is on the post-fact society - a label we find enormously amusing and another is on the permanent reality distortion field the NAR seems determined to maintain around Housing. Yet that RDF is in fact more damaging to the NAR and the nations' realtors and the Housing market than helpful. Because at the end of the day pretending the world is otherwise can only be gotten away with for so long. Eventually it catches up with you.

It may take a while but it does. And there "being nothing new under the sun" let us announce the new Age of Kipling. A poet much referenced, little read and often neglected and grossly misunderstood. As an example sometime really read his poem that includes the famous "east is east and west is west" sometime - you'll find the conclusion very different than any time we've ever seen it quoted and used.(The Ballad of East and West) You can find him online complete here btw. But in turbelent times we think a different one is appropriate:

If

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:

If you can dream -- and not make dreams your master;
If you can think -- and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two imposters just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build 'em up with worn-out tools;

....see the URL for the whole and perhaps consider this one as well:

 "I Keep Six Honest..." 

READINGS

Investing in a Post-Fact Society One of the concerns we have expressed here over the years is that there was much more -- and less -- to the post 2001 recession recovery than met the eye. Several years ago, this was a controversial position. We first suspected we were on to something, however, when the many critics of this view found it much easier to use epithets  (negative, naysayer, perma-bear) than to do the credible critiques of our positions, or any kind of critical  analysis.  It reminded me of an old lawyer's joke: "When the facts go against you, stress the law; when the law is against you, emphasis the facts; when your case has both the law and the facts against it, call the other lawyer an asshole." As of March 22, we are still in the early stages of any sort of widespread understanding about this post-recession recovery cycle. Many people are just starting to realize how much fertilizer has been spread around. Many of the stated economic gains have been a false ghost. Whether it was overstated job creation (NFP), understated inflation (CPI) or "inflated" growth (GDP), a shocking amount of the debate about the economic expansion has been primarily spin.

Good Advice During Turbulent Times What happens when markets suffer a panic? Well, a lot of things: investors deal with emotional outbursts, a frenzy of talking heads, and lots of really bad advice. At the same time, these dislocations create opportunity -- if you manage to keep your wits about you. From an interesting article in the WSJ this week, comes this modified list.

How Counter-Productive is Realtor Association Spin? One of themes we've looked at over the years is the spin that some trade groups put out on top of their data releases. Some Trade Associations, like the ATA tonnage index, or the Home Builders Index, simply put out the straight dope -- an unvarnished, unblinking look at their industries, so their members can better make informed business decisions with the available data. Other groups massage the data, spin the message, and try to present their info in the most positive light  -- regardless of the underlying data. They seem to believe that if only the public believes things are okay, it will become a self-fulfilling prophecy. The National Association of Realtors falls into this latter category. They have been calling the bottom in Housing, well, ever since the top 2 1/2 years ago; Their consistent claims of stabilization and price improvements later in the the year -- as prices have continued to slide -- have earned them the title of Worst. Forecasters. Ever. What is more damning, IMHO, is that they are not just wrong, but purposefully misleading for commercial purposes. I believe that is defined as Fraud.Occasionally, they manage to find success -- but only when a complacent and/or ignorant financial press fails to do its job. Today, we see evidence of that in an embarrassingly incorrect front page story in the Wall Street Journal: Wave of Foreclosures Drives Prices Lower, Lures Buyers. And what were those numbers? The year-over-year data for existing home sales were DOWN 23.8% below February 2007 levels. That datapoint never found its way into the WSJ article at all. I cannot recall a more blatant misreporting of fact, or a larger or more embarrassing error in a front page WSJ article, ever. While the NAR might be high-fiving each other over their successful deception at the Journal, they may wish to reconsider.

Posted by dblwyo at 06:44 AM | Permalink | Comments (0)

Well, well, well. This is startling news but the Bush Administration under Sec. Paulsen's leadership has proposed a broad overhaul of national financial regulation. Think about that for a minute - a strongly conservative President under the leadership of the ex-CEO of Goldman is not just beginning to re-think their regulatory approach but is putting a major proposal on the table that's the first major re-thinking since the Great Depression. And from what little I can see of the early sketches it's an extrordinarily profound, comprehensive and thoughtful proposal. More interestingly it's been worked on for over a year and largely in secret. The latter may be the most astounding part. But the case has certainly be made and the timing of the announcement couldn't be better.

You really need to pay attention to this one because, win, lose or draw, the Finance Industry, the Markets and the Economy will not be the same ever again.

And leave you with two key observations - that this passes in good form is in all our best interests. Whatever you can do to get behind it we'd suggest you do. Second - the last big bout of regulatory reform brought you SOX. The two are fundamentallly different cases, especially since this get's to the beating heart of our economy. Nonetheless SOX consisted of 1/3 really good business practice that companies should have been doing anyway but weren't. And 2/3 regulation by rule and inspection that resulted in difficult and expensive regulation but not necessarily reform. The big question here becomes not just policy but enforcement mechanism. Since this is just a quick note with much more to follow we've decided to share som old jottings of ours on thinking thru alternatives to regulatory reform. Please excuse the informalities and idiosynchracies. Dloadable file: "Notes on Regulatory Reform"

Meanwhile here's the jump off excerpt:

Bush Seeks Financial Regulation Overhaul The Bush administration is proposing a sweeping overhaul of the way the government regulates the nation's financial services industry from banks and securities firms to mortgage brokers and insurance companies. The Fed would be given broad authority to oversee financial market stability. That would include new powers to examine the books of any institution deemed to represent a potential threat to the proper functioning of the overall financial system. The administration divided its recommendations into short-term goals that could be adopted quickly, intermediate recommendations and an "optimal" regulatory framework, which contains a radical restructuring of how the government supervises banks and other financial institutions. The recommendations are the product of a yearlong review that was begun in an effort to modernize the government's regulatory structure so that the country's financial services industries could better compete in a fast-changing global economy. The proposal would allow the Fed, in its new role as "market stability regulator," to dispatch examiners to check the books not just of commercial banks but of all segments of the financial services industry. The administration proposal would also consolidate the current scheme of bank regulation by shutting down the Office of Thrift Supervision and transferring its functions to the Office of the Comptroller of the Currency, which regulates nationally chartered banks. The plan recommends that the Securities and Exchange Commission, which regulates stock trading, be merged with the Commodity Futures Trading Commission, which regulates futures trades for oil, grains and various other commodities. The plan would create a national regulator for the insurance industry, which is now largely governed by the states, and would create a Mortgage Origination Commission to try to address the abuses exposed in the current tidal wave of mortgage defaults. The role Federal Reserve Chairman Ben Bernanke and his colleagues have been playing to shore up the financial system would be formalized in the administration plan by giving Fed officials greater power to detect where threats might be lurking in the system.

Posted by dblwyo at 05:12 AM | Permalink | Comments (0)

With the release today of the Personal Consumption data we now have the complete suite of H.F. economic indicators thru Feb. available so we're going to update them all and the associated charts. As you'd expect, at least in our views of the world, there were no real surprises and consumption continued its' downtrend. Now if you pay attention to the headlines spending edged up 0.1% and was flat after adjusting for inflation. But in real consumer spending was up ~ 1.7% YoY, which sounds like good news until you understand that it ran above 3.0% for most of the last two years and began slowing in the Fall. And further that real Retail Sales has turned negative. After the break we'll go into that as well as the investment indicators, the outlook for consumer spending and the monetary, price and interest rate indicators. By and large all of which showed continued deterioration.

What we want to jump off with those is a deeper dive into the things that show where Consumer spending is going. There are three primary drivers: real Wage growth, Employment growth and the ability to borrow. As we've discussed the latter held up consumer spending thru the downturn thru MEW but is rapidly going away for the obvious reasons. So let's take a look at a longer baseline for Wages and Employment. In some ways the charts almost speak for themselves but let's add a few words. In the first sub-chart you can see where real Wages have actually been trending down except for two blips since Jan00. The latest and biggest blip was the god's gift of lower oil prices and inflation in late '06 which probably held things up thruout '07 and staved off a recession then. That's all reversed. Employment growth was never very robust and has slowly been deteriorating the middle of '06 in a very steady downtrend. The latest YoY numbers were ~ .6% which is recessionary in and of itself. As we proceed along the cycle you can anticipate further declines in both these numbers. So as you look at the charts below, which cover a shorter timeframe, keep all this in mind.

Current Indicators: Consumption + Investment

Let's start by looking at the combined chart for current activity. The upper sub-chart shows real Consumption (PCE), real Retail Sales and Auto Sales on a YoY% basis. After holding steady for a while PCE has been drifting down but the real interesting thing is real Sales. Retail has been slowing sharply since the late Fall no matter what the headlines would have had you believe while Autos, which are on the r.h.s. btw, have been negative the entire period here.

On the Investment front New Home Sales continue to abysmal indeed with a 3MoMA showing a YOY% decline of 34% ! The other fun news we went into in detail yesterday with a thorough composite view of the longer term outlook. Which is indeed looking like a harsh reality that still hasn't sunk in yet (More Dialog: Facing Harsher Realities in Housing).There was a blip in New Capex Orders which we don't have a good explantion for though it may just be a return to the bigger downtrend. We'll have to see how that plays out as it isn't consistent with any other data - it is amusing though that all the headlines were touting the surprise MtM negative s. 

Future Indicators: Wages + Employment

We started by taking a look back to Jan00 at the growth in these but let's focus now on our normal charts which related them together and to consumption and sales activity. At this finer level of detail you can see that Real Wage growth is not only headed down but turned negative in the Fall and appears to be acclerating. Other than job market pressures consider that the Oil Inflation tax on spending power. Similarly Employment growth is very low though not yet negative. The result is W+E growth which has turned negative.

Over the long-run changes in PCE are driven by W+E changes which you can begin to see in the second sub-chart but is very...very clear when comparing it to real Retail Sales. In fact the uncanny tracking may just be a charting artifact but it's kinda scary to me. Think about this little relationship:

W+E(-) ==> Real Sales (-) ==> PCE (-) ==> GDP(-) ==> Employ(--)

where (-) is a minus sign or downtrend with the number indicating the relative strength.

Interest Rates, Money and Rates

We could probably leave it there but let's try to pierce the veil of money a bit since, as we should all be in the process of learning by now, money, rates and credit markets are vitally important to the functioning of the real economy (Wall St. turns out to impact Main and visa versa indeed). BtW just in case you're not too concerned we reviewed the last minute avoidance of the collapse of Western Civilization in the previous post. And discussed five fundamental structural changes you ought to pay some attention to. Five "Funny" Things on the Way to the Market

Anyway back to the regular program of looking at the details.The first sub-chart shows the spread between 3Mo Treasuries and paper which is still wide but narrowed a tad, which is a good thing. Interestingly the Fed Fund vs 10Yr Treasuries widened considerably, which might be taken as either a return of a normal cyclic expectations, i.e. a normal yield curve. Or as an indicator that the credit crisis, which resulted in credit tightening and reduced credit availability, is still with us. In other words no matter what the Fed has been doing on rates the pipes are so clogged up that the funds aren't getting to the economy (Continuing the Dialog: Facing Realities in the Credit Market). That latter view is reflected in the inflation-adjusted Monetary Base indicator. Think about that one very carefull. The MBase is the amount of effective funds available to run the economy, inflation-adjustments put it into real terms and the YOY% changes tells us how it's working. Unfortunately it doesn't appear on this frequency to be working very well at all since YOY rates are still -3% !!! Notice that the abrupt shrinking of the Mbase corresponds exactly to the onset of the crisis last August ! The Fed may have save us from collapse but there's still a lot of work to do here. Let's try that again and this time with some oomph, please !

No matter what the Fed has done the real money supply has been shrinking

since the start of the credit crisis and nobody has noticed. 

The next sub-charts show CPI as being well out of the comfort zone around 4% and PPI being downright scary in the neighborhood of 10%. Aside from being transmitted into CPI unless the slowing economy manuver works think about what that implies for margins and earnings - a pressure showing up in the Consumer companies and a threatened trucking strike. Normally you'd expect to see interest rates headed up in that sort of environment but the divergence between the 10YR and inflation is pretty wide. Which is not independent of the third sub-chart which shows contineud YOY declines of -10% in the dollar and increases in Oil prices of ~ 70% !! Whee, are we having fun yet ?

BtW as those all interact with a lower dollar increasing oil prices and feeding back to inflationary pressures which in turn drives up oil and drives down the dollar. If the Chinese and the ME ever stop pegging their currencies to ours interest rates will have to take a huge jump to protect the dollar AND keep pulling in the foreign fund flows that are keeping us afloat. Comes 'round, goes 'round indeed. 

Posted by dblwyo at 03:06 PM | Permalink | Comments (4)

In the last 10+ days we experienced four major changes in the way the world works that haven't gotten the attention they deserve. Though all of them made the front page of the WSJ with long, in-depth and excellent articles. And several other places as well. So let me try and point them out as a prelude to follow-on detailed discussions but first ask a key question - how do you boil a frog ? Surely everybody's heard that joke by now but the sad part is my first time was over two decades ago by a speaker talking about changes in the world and business. Guess what - they all happened by and large, nobody payed any attention and everybody was "surprised" when the tipping points were crossed. Just as they've been surprised by the economic data and market disruptions of the last few months. We'll probably get the same reaction from our review and discussion of those four things but once more into the breech, dear readers. Our friend at Non-Sequiter pretty well captures it though.

Just in case you missed it here are the four things and an appropriate headline (we'll put up more detailed excerpts in our readfests so don't take notes). And it's not as funny, so may not hit home as hard and be dismissed as too intellectual but the chart at right is a repeat from an earlier post on business strategy. And it deserves another looksee because it provides a pretty good blueprint and checklist of the big picture you ought to be a little aware of. Especially with all these deep structural changes. Remember those frogs ! 

1. Market Collapse - over St. Paddy's weekend the Fed avoided a major collapse of the credit markets which would have taken out the underpinnings on all markets and perhaps the economy as a whole.

• Has the Fed redeemed itself? The central bank's cunning after-hours plan to sell Bear Stearns to JPMorgan may have prevented the collapse of the financial system and total economic ruin. 
  

2. Structural Changes - the Fed's actions were unprecedented since the Great Depression because for the first time they extended lending to non-bank and non-regulated financial institutions, the "shadow-banking system", that now occupies the role that only commercial banks had before in creating credit and allocating capital.

• Ten Days That Changed Capitalism The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse

3. Regulatory Changes - these financial institutions have proven beyond doubt that they require adult supervision and as a result a four decade+ national debate over the extent of regulation will complete a course reversal begun by the tech bust and Enron, et.al. Even a Republican administration as well as the key policy-makers at the Fed envision closer supervision and regulation.

• Paulson Calls for Broad Look at Financial Regulations The crash of Wall Street's once mighty Bear Stearns underscores the need to bring investment houses under the kind of federal oversight that has long been given to commercial banks, Treasury Secretary Henry Paulson said Wednesday. 
  

4. Long-term Investment Performance - with the downturns we've basically experienced a "lost decade" of low to non-existent stock/investment returns where too much money was chasing too few good opportunities and then leveraged up to the point of insanity. Underneath that rather deep structural fact/change is the even deeper one that the US economy has matured and no longer offers major new  engines to drive returns, economic growth or jobs.

• Stocks Tarnished By 'Lost Decade' -- U.S. Shares in Longest Funk Since 1970s. The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm...

5.  Finance Industry  - the  Finance  industry as whole has had at least the last two decades of product and business model innovation proven to be  unworkable and unproductive. As  a  result it will be  facing  a huge re-thinking  in  its' business models, strategies, products and operations.  Especially in  its'  compensations,  controls and management systems.

• End of Wall Street as we know it Financial firms have relied on a highly flawed business model for years. The time has come to fix it. The standards that rule most businesses­­ - avoiding excessive leverage, reining in rampant pay and the massive dilution that goes with it­­ - didn't apply to Wall Street. 
  

Posted by dblwyo at 06:59 AM | Permalink | Comments (2)

In the spirit we're pursuing here of asking what are the facts, no matter what headlines or denials seem to obscure them, we'd like to focus on this week's Housing data. Which is about as bad as it gets but NOT as bad as it's going to get. Over the last few months we've shifted from denial to contained  to serious (though one still is croggled by the uptick in Homebuilder stocks !) to more and more accurate grasps of the breadth and depth of the problem. However now that Paulson, the Fed, and market commentators are starting to mumble things like 2010 those harsh realities still don't seem to be reflected in anyone's thinking about the economy, business cycle or market outlooks.

So in the spirit of letting the data speak we're going to borrow some charts from CalculatedRisk and put them in our framework. On the grounds of why do something badly that an expert has done extremely well. The key questions are where are we at and where are we likely to end up. First off we've obviously been in the most unusal Housing bubble in the post-war period. Home construction is a major driver of Investment spending directly and Consumption indirectly. As you can see on the bottom sub-chart a boom above trends started in the late '90s but turned into a real bubble after '03 and is now in a steep and precipitous decline. CR's other key point is that such drops always lead to a recession. If the general economic downturn mirrors the Housing decline we've got serious problems ahead. The top sub-chart is even more interesting because it starts to tell us, being inflation-adjusted, how far we went in prices, how far we need to come down and how long the adjustment process might last. The Composite-10 national averages peaked in 1990 and took 7 years to adjust, find bottom and then begin climbing out. And on that measure we're only about a year into this downturn. All that unsinn you heard about a bottom this year or even in '09 looks wildly misplaced. Even finding a bottom in '10 looks very optimistic, at least for prices, though sales may bottom earlier.

Existing Home Sales

The headlines were about as disinegenous, wrong and bad as it could possibly get (in fact BigPicture had a great rant taking the WSJ to task). They said that Feb. existing sales picked up over Jan. Good golly - they always do. That's the seasonal pattern. If you look at CR's chart you'll see that sales overall are still headed down, that YOY there was a big...big fall off in existing home sales and it's likely to get worse. Not least, as the 2nd sub-chart shows, because the inventory of homes for sales shot up dramatically in Jan. and Feb. Now tell me, how does one reach any kind of benign, sanguine or other polite word interpretation of that data ? For those you can are you willing to share your drugs with the rest of us ?

New Home Sales

The picture for New Home Sales is no better. Sales continue to decline, with all that implies for real estate investment and associted consumption. Based on the sales rate, while absolute inventory showed a slight decrease - which got too much ink IOHO, the months of supply continued to shoot up. Again there wouldn't appear to be any positive way to spin those facts. Despite the NAR continuing efforts to bath the rest of the world in it's reality distortion field - an effort BTW which harms their own cause because it leads to homeowners being grossly unwilling to lower their selling prices to rational levels.

Again and again - what are the facts ? Here the facts would argue that at the very best we're barely 1/4 of the way into a prolonged and painful, very painful, adjustment process. And that might be optimistic from the long-term price chart we began with. Just to put a point on it consider CR's recent post on Lennar's terrible news:Lennar: Housing Market Conditions "continued to deteriorate" in Q1

Posted by dblwyo at 09:30 AM | Permalink | Comments (0)

The prior post focused on putting the systemic risks in the Credit Markets as clearly and simply as we could manage and we'd like to continue that discourse by looking at what other folks had to say. The graphic at right take you to a recent apperance on Charlie Rose by Andrew Ross Sorkin discussing the BSC deal. Bear in mind that was the Mon. during the height of the crisis but it's not bad "Inside Baseball" despite the lack of detail. And despite the fact that the discussion and subsequent NYT stories still don't quite have it right. Before diving in however let's borrow a point from one of our favorite scifi characters Lazarus Long.

"What are the facts? Again and again and again-what are the facts? Shun wishful thinking, ignore divine revelation, forget what “the stars foretell,” avoid opinion, care not what the neighbors think, never mind the unguessable “verdict of history”--what are the facts, and to how many decimal places? You pilot always into an unknown future; facts are your single clue. Get the facts!"

The link to Galileo is that he's credited with being the Father of modern science by placing an emphasis on what the actual data is really telling us. When you listen to the Sorkin interview here are some points we'd like to add:

1. BSC was effectively bankrupt because of margin calls by its' trading partners.
2. JPM's "price" for BSC wasn't $2 or $10 per share. It will be the estimate $6B of hard dollar costs, taking $30B of bad paper and 2-3 years of writedown exposure plus all the additional time, effort, money and other resource required to manage the acquisition.
3. IOHO JPM is unlikely to be fully compensated for many years for these costs and risks and what they did is more in the nature of a public service; continuing the traditions set by the first J.P. Morgan himeself. Considering what they are risking I sincerely hope they make alot of money.
4. Any acquirer of BSC had to have a high-quality and large enough balance sheet to absorb the bad paper. They also had to be a regulated entity to have access to the Fed financing that makes this workable and addresses the need to re-start the credit and capital markets. Requirements #2 eliminates most of the other large banks, several of whom should be looked at as effectively insolvent and most of whom are facing continued writeoffs, as we learned today. Requirements #1 and #3 eliminate the non-regulated financial firms, e.g. Goldman.
5. This was a miracle.

The key to all this is the breakdown in the mechanisms of the credit markets which posed a systemic risk. A point both admitted and strongly reinforced by Paulson's speech today. We're going to have to completely re-think our regulatory regime and extend it to the shadow banking system. This is the beginnings of a major re-thinking and re-structuring of the Financial Industry - how it's regulated, how it operates, its' business models & strategies, its' compensation programs and how it makes its' money. Those are the criteria we'll need to be paying attention to for the next few years.

After the break we provide an excerpt on Paulson's speech plus two more really outstanding Rose programs with Larry Summers and Paul Volcker. Who if you listen carefully provide much hard-learned wisdom on what broke, why what the Fed did was vital and the extent of the systemic risks. Listen carefully because the language is so careful you miss the sound of the Angel of Death's wings brushing us.

Paulson Calls for Broad Look at Financial Regulations The crash of Wall Street's once mighty Bear Stearns underscores the need to bring investment houses under the kind of federal oversight that has long been given to commercial banks, Treasury Secretary Henry Paulson said Wednesday. In a speech to the U.S. Chamber of Commerce, Paulson said the Bush administration will soon release just such a blueprint in an effort to promote a smoother functioning of financial markets. For months the financial markets -- rocked by the double blows of a housing and credit crises -- have been suffering through extreme turmoil, threatening to plunge the U.S. economy into a deep recession. The modern U.S. financial system is a complex web of financial players -- institutions and individuals and practices that are subject to different rules and regulations. Commercial banks, long a financial bedrock, are subject to regulations and supervision. Paulson said he "fully supported that action" but said it also raises important policy considerations about the oversight of investment houses. The secretary said that commercial banks' access to the Fed's emergency lending "discount window" has traditionally been accompanied by regulatory oversight and supervision. "Certainly any regular access to the discount window should involve the same type of regulation and supervision," Paulson said, in an apparent reference to the Fed's temporary extension of this emergency lending to investment houses.

• A continued discussion about the purchase of Bear Stearns with former Secretary of the Treasury and current President of Harvard University, Lawrence Summers.
• A discussion about the economy with Paul Volcker, former Fed chairman and one of the most respected figures on the economy, in an exclusive interview.

Posted by dblwyo at 02:34 PM | Permalink | Comments (0)

The title is a play on Galileo's most famous work ( D ialogue Concerning the Two Chief World Systems)in which he discussed the sun-centered vs the earth-centered models of the solar system (actually the Universe). He almost lost his life, and Bruno did, for espousing the Copernician view despite prior decades of Church sponsorship for his research. The real reason wasn't so much the obvious disagreements but this was at the height of the Wars of Religion where the Church was facing the most serious challenge to it's authority and legitimacy in its' history. When Galileo challenged a worldview he was challenging the authority of the Church and politicians have no sense of humor about things like that. Well today we're faced with a discussion of the nature of three systems: the Economy (Business Cycle), Markets and Credit. Over several months now and with several key recent posts we've been offerring up our view of what we think the Copernician model should be. Judging from today's news headlines about the "surprising" drop in capital orders, new home sales, or the earlier ones on New Homes the common wisdome can by and large be characterized as Aristotelian, that is based on a badly flawed model of the way the Universe is built. Which did explain some data until the larger picture emerged.

Rather than keep stretching the metaphor here let me put a point on it. Last week we were faced with a systemic crisis in the Credit Markets, which normally function smoothly, transpartently and invisibly, that could have led to serious worldwide economic disruptions. Serious as in the D-word or worse. Now I consider that a low proability outcome but the catastrophic consequences are so severe that anything necessary to avert that should be done. I'm also convinced that the Fed has finally found/create a set of policy tools that will enable it to support an orderly un-winding of this mess. The trigger for this post is that, while we've covered all this ground before, some friends e-mailed me a few questions and it was startlingly clear that by using mild and abstract labels that the emotional implications were escaping everyone. So we're going to try and be a bit more blunt here.

To get started let me borrow the dictionary definition of Systemic:

of, relating to, or common to a system: as
a : affecting the body generally
b : supplying those parts of the body that receive blood through the aorta rather than through the pulmonary artery
c : of, relating to, or being a pesticide that as used is harmless to the plant or higher animal but when absorbed into its sap or bloodstream makes the entire organism toxic to pests (as an insect or fungus)

1rst Exceprt

First off the Credit Markets are broken as badly as they've been in our lifetimes. The Fed may finally, repeat repeat repeat, MAY have finally found an instrument to manage orderly writedowns by re-liquifying the market thru taking the ugly stuff off the financials books in return for payback. In the long-run they may actually make a lot. That just keeps the machinery turning over.

 

Make absolutely no mistake about it - while we were all out having fun the markets almost collapsed weekend before last and would, almost literally, taken Western Civilization as we know it with it. The price for Bear was NOT $2 or $10 - it was taking $30B of synthethic debt off it's books that it couldn't trade because nobody thought they were solvent, i.e. could pay their bills. They were and are so tied into all the other major institutions that if they'd gone bankrupt - which they were going to have to do Mon morning - just about every major financial institution in the world would have found itself facing huge writedowns and a giant cascading run on the bank.

 

The reasons for that are that nobody will buy the funny paper, even at cents on the $ because they're not sure what it's worth.

 

My recommended fix is something like the Resolution Trust Corporation which would be funded by the gov't and Fed operations that would force homeowners to write down the value of their houses to something reasonable, pay their remaining mortgages, force the originators and banks to write down their investments and ditto for the other financial institutions.

 

Anything less and you continue to have a risk of systemic collapse - too bland and not emotional enough to convery what might have happened ? Think of an alien space virus running thru the linkages in an entire ecological basin infecting each plant, animal, the soil, the water and the air. And when it enters the body of a living thing it causes their respiratory and circulatory systems to slowly congeal until they can no longer function. And then imagine that at some point the virus auto-catalyzes into metastasis and each infected individual suddenly collapses and infects the things around them in an ever-widening circle of macro catalysis.

 

Does that help ? Since you're not sleeping at night anyway thought I'd give you something to think on.

 

Try these as backups since I just put them up in the last few days trying to specifically analyze these inter-related problems.

 

Credit Meltdown, Economy and Consequences: Putting the Pieces Together

Key Postings III: Credit Breakdown, Liquidities and the Fed

The Great Circle: Where We're At in the Business Cyle

WRFest 23Mar08(Economy): Jaded and Faded

WRFest 23Mar08(Markets): From Margin Call to Great Unraveling

 2nd Excerpt

Q: Things are bad but you're really, really concerned that things could over the cliff altogether?

A:

How to put this ? Absolutely. But I don't consider it a high probability event. The caveat being that the risk was systemic - everytying unraveling all at once. They went from a credit crunch to a liquidity (got no money to pay my bills) to a solvancy (my margins are being called and I can't sell anything for 1/2 what it's worth so I'm bankrupt) to a close brush with financial collapse.

 

That said I also believe the that Fed's buying bad paper from broker-dealers who are not regulated using adaptations of more traditional intervention instruments was brilliant, a marvelous performance under pressure and may start freeing up the logjam. BSC won't be the last of the problems but we may now be in position to manage an orderly re-liquification of the credit markets, re-pricing of risk and de-leveraging. I repeat orderly. When the machinery of the system siezes up as badly as it did though it's like an engine without oil - with the same sort of consequences.

 

We're about 1/4 or less thru the credit market workdowns, about 1/4 of the way thru the Housing mess and barely started on the cyclic downturn.

 

NOBODY but nobody seems to grasp any of that judging from the headlines. The good to outstanding news is the people who matter do.

 

Posted by dblwyo at 11:28 AM | Permalink | Comments (0)

This has been an interesting, even bizzarre, market as those who feel that the kitchen sinks are accounted for and discounted in prices "debate" those who feel it hasn't been. As you might have gathered we're definitely in the latter camp. Along with such minor and inexperienced observers with names like Feldstein, Summers, Greenspan, Krugman and Volcker. In the long-run what we're seeing here is the beginnings of a "great unraveling" where the excesses in financial markets and the industry as whole are undone and then repaired. And when the unsustainable levels of Consumption that have been financed with debt-based funny money are also. In fact we're in the early stages of a reversal of over two decades and beginning to enter an entirely new and different regime for which noone is prepared, at least broadly speaking.

In the short-run we may get a bounce as optimism triumphs over both experience and the data.

 In fact from the chart at right you can get a sense of how this argument has been playing out. It shows the SP500 for the last six months. After a bit of contemplation and reflection we noticed something interesting which is captured in the added trendlines. As the financial breakdown has played out we got a stair-step market that's moved thru 2+ phases. In each of the phases you can see a flag or pennant forming with lower highs and higher lows which is often taken to be a sign of a breakout to a new upturn. Yet in each of the prior two cusp points there was another breakout to the downside where the downtrend became steeper. The Fed's drastic actions last week may have cleared the clogged arteries but that'll just enable the machinery to conduct an orderly unwinding IOHO. In the short-term, and since we're using a chart thru the end of last week without capturing the first part of this, we might see the uptick continuing. The technical test will be if the market manages to climb back above the 50-day MA, which so far it hasn't done. Historically btw March has always been one of the best months for markets so if a new bounce isn't established it could get to be an ugly summer. My favorite financial columnist (Jim Jubak) has about 50% of his portfolio in Cash for example ! Unless you're a trader that's probably a very good strategic position right now. Even if we break thru the 50Da MA that will still not reflect the underlying realities of growth prospects, earnings and necessary PE revisions. Again of course in our 'humble opines !

Now to be fair several key players have actually been bothanticipating and positioning themselves for this mess and done so presciently and brilliantly. The hedge fund managers who profited in the $Bs come to mind as does Wilbur Ross who began re-positioning his companies early least year. But the man who takes the cake is Bill Gross, the Bond King, who's been pretty forthright on his views (his monthly PIMCO columns are always a worthwhile reading investment and can be compared to Buffet's shareholders letters - Buffet of course has also proven prescient and well-positioned). If you click to read nothing else read the NYT story on how he's been running PIMCO in this crisis. 

Just for fun, and infotainment,lets hat-tip Mr.Ritholz at BigPicture with his take...

Last week, I questioned the conventional wisdom which claimed that there was Not Enough Bullish Sentiment? It seemed that there were plenty of Bulls who looked at the 15% pullback in the S&P500 as an ordinary dip-buying opportunity.In a moderate recession, an 85 day, 15% drop would likely be insufficient to reflect the changes in both growth and earnings -- much less a deeper, more protracted recession.The counter-argument is that the Fed has flooded so much cash onto the system, the recession no longer would matters.Looking from a sentiment perspective, its hard to say that the we've seen the sort of fear that typically accompanies a lasting market bottom. There's still plenty of speculative juice around. Consider these headlines from over weekend:The closest thing to an admonition of caution was Barron's Technical columnist, Michael Kahn, who called this The Market Bottom That Wasn't. That doesn't mean we can't see a decent bounce here -- there's lots of liquidity, and as we saw last week, the market stopped going down on bad news. That's usually good for a 5-10-15% counter trend rally. We saw that begin last week.But Dow 20,000 this year?  I highly doubt it . . .

UPDATE: Yahoo Finance had an interesting online opinion poll that pretty well captures the diversity in the debate on the outlook. Notice that the answers are pretty evenly distributed.

Markets & Investing

What Created This Monster? LIKE Noah building his ark as thunderheads gathered, Bill Gross has spent the last two years anticipating the flood that swamped Bear Stearns about 10 days ago. As manager of the world’s biggest bond fund and custodian of nearly a trillion dollars in assets, Mr. Gross amassed a cash hoard of $50 billion in case trading partners suddenly demanded payment from his firm, Pimco. And every day for the last three weeks he has convened meetings in a war room in Pimco’s headquarters in Newport Beach, Calif., “to make sure the ark doesn’t have any leaks,” Mr. Gross said. “We come in every day at 3:30 a.m. and leave at 6 p.m. I’m not used to setting my alarm for 2:45 a.m., but these are extraordinary times.”Even though Mr. Gross, 63, is a market veteran who has lived through the collapse of other banks and brokerage firms, the 1987 stock market crash, and the near meltdown of the Long-Term Capital Management hedge fund a decade ago, he says the current crisis feels different — in both size and significance.The Federal Reserve not only taken has action unprecedented since the Great Depression — by lending money directly to major investment banks — but also has put taxpayers on the hook for billions of dollars in questionable trades these same bankers made when the good times were rolling.“Bear Stearns has made it obvious that things have gone too far,” says Mr. Gross, who plans to use some of his cash to bargain-shop. “The investment community has morphed into something beyond banks and something beyond regulation. We call it the shadow banking system.”It is the private trading of complex instruments that lurk in the financial shadows that worries regulators and Wall Street and that have created stresses in the broader economy. Economic downturns and panics have occurred before, of course. Few, however, have posed such a serious threat to the entire financial system that regulators have responded as if they were confronting a potential epidemic.

Posted by dblwyo at 08:00 PM | Permalink | Comments (0)

In the midst of all the sturm und drang over the near collapse of the financial system there were stories aplenty about the economy which recieved little or no attention, at least in the sense of being reflected in the level of emotional investment in paying attention. Given the un-remitting run of bad news it seems to us that everyone's more than a little jaded (the other day Joe Kernan on CNBC even went so far as to say he's tired and wants to move on). And the meme is still widespread, prevalent and embedded that the full extent of an economic downturn has been "faded", that is incorporated into everyone's thinking, business plans, investment outlook and earnings and valuation estimates. UNSINN ! Or in English, nonsense. What the Fed did was get the machinery working again with a new set of tools so that we can in fact have an orderly unwinding of the excesses and a downturn won't bring about a major economic collapse. In yesterday's post (The Great Circle: Where We're At in the Business Cyle) on the Business Cycle we tried to intercept and filter what still appears to be the standard wisdom by reviewing how a cycle works, what the lag structures are, where we're at in the current cycle and what the data tell us. In our opinion we're still early days yet and the full extent of the downturn is not visible nor incorporated into much of the decision-making - despite being, we feel, readily visible in our simple charts.

Just to take one example the headline on Existing Home Sales was that they were up. Well guess what - Feb is always higher than Jan but when you look at the real data YOY sales were down ~ 24% ! Which is what the headline should have told you, in addition to the biggest price drop we've seen in years, rising cancellations, rapidly accelerating foreclosures and so on. Sorry to be the bearer of more bad tidings but when you review the excerpts you'll find that, almost without exception, none of it is good and ALL of it is following predictable paths consistent with our view of the business cycle. In fact we are early days and the downturn is just beginning to move into the Main St. heart of the economy.

Which BtW makes the recent market surge most likely a dead cat bounce ! 

Economy

U.S. Receives a Margin Call The growing crisis of confidence in the U.S. economy is extending to the credit-worthiness of borrowers across the spectrum, including American homeowners. As global investors pull money from the U.S., few believe the worst is over. The U.S. is at the receiving end of a massive margin call: Across the economy, wary lenders are demanding that borrowers put up more collateral or sell assets to reduce debts. The unfolding financial crisis -- one that began with bad bets on securities backed by subprime mortgages, then sparked a tightening of credit between big banks -- appears to be broadening further. For years, the U.S. economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer. Recent days' cascade of bad news, culminating in yesterday's bailout of Bear Stearns Cos., is accelerating the erosion of trust in the longevity of some brand-name U.S. financial institutions. The growing crisis of confidence now extends to the credit-worthiness of borrowers across the spectrum -- touching American homeowners, who are seeing the value of their bedrock asset decline, and raising questions about the capacity of the Federal Reserve and U.S. government to rapidly repair the problems. That is a troubling prospect for a savings-short, debt-heavy economy that relies on $2 billion a day from abroad to finance investment. It is raising the specter of the long-feared crash in the dollar that could further rattle financial markets and boost U.S. interest rates. But few in markets and elsewhere are convinced that the worst is over for the U.S., as each player moves to protect its own interests against potential calamities seen as improbable just a few months ago. The resulting blow to confidence threatens to further weaken lending, borrowing, spending and investment in the U.S. economy.

How bad is the mortgage crisis going to get? What started in subprime is likely to continue cascading into the markets and keep the economy down until 2010, economist Paul Krugman forecasts. Bottom line for homeowners: An average drop of 25%. You've been saying 2010 is when we get out of this recession. How did you arrive at that date? The last recession officially ended after eight months, but employment didn't start to recover until 30 months later, so I think we go at least that long this time. If the recession started in January 2008, then that would mean July 2010 is the first month we have anything that feels like a recovery. But I wouldn't be surprised if it goes longer than that - maybe into 2011. What's changed? There has been the realization that the increased nervousness about risk and deleveraging is going to hit a lot of markets a long way removed from subprime - like when people start to see auction-rate securities go. Something has finally tipped the balance. We've got Fannie Mae and Freddie Mac suddenly having to pay substantial spreads. It seems to me like every few weeks there's another $300 billion market I've never heard of that has just collapsed. And there's credit cards, auto loans - I don't know what's next. But it's clear we're going to have a commercial real estate crash not too far short of the severity of the housing crash.

• Factory Output Shrinks More Than Forecast as Fed Seeks to Thwart Recession Industrial production in the U.S. dropped more than forecast in February as the economic slump deepened even before the crisis in financial markets intensified.
• Producer Prices in U.S. Rise 0.3%, Less Than Estimated; Core Climbs 0.5% Prices paid to U.S. producers rose less than forecast in February, while wholesale costs excluding food and energy jumped by the most since November 2006.
• Housing Starts in U.S. Drop 0.6%; Building Permits Decline to 16-Year Low Housing starts in the U.S. dropped in February and building permits fell to the lowest level in more than 16 years, signaling slowing construction will continue to hurt economic growth.
• Oil, Copper Lead Commodity Slide as Slowing Economy May End `Buying Orgy' Crude oil, copper and coffee led the biggest decline in commodities since 2001 on speculation that a U.S. recession will stall demand for raw materials.
• Paulson Admits U.S. Economy in Sharp Decline
• Housing Starts, New Home Sales and Cancellations It appears starts of single family homes (built for sale) have fallen below the current new home sales rate. This would imply that the inventory for new homes has started to decline (my quick estimate is that new home inventory is currently declining at about a 100 thousand annual rate). But how high is inventory? If sales hold at steady at 600 thousand Seasonally Adjusted Annual Rate (SAAR), a six months supply would be an inventory of 300 thousand units. Based on the Census Bureau reported inventory level, this would mean a decline of 182 thousand units. (Based on the cancellation adjusted levels, add another 108 thousand units or so). So even though the homebuilders appear to be working off inventory, it is at a very slow pace compared to the number of excess units. Even if sales hold steady, starts of single family homes (built for sale) probably will decline further as builders work to reduce inventory.Of course homebuilders are providing incentives and cutting prices to move inventory. As an example, this is from DR Horton:

·         Slump Moves From Wall St. to Main St. With Wall Street caught in a credit crisis that has captured headlines, the forces assailing the economy are now spreading beyond areas hit hardest by the boom-turned-bust in real estate like California, Florida and Nevada. Now, the downturn is seeping into new parts of the country, to communities that seemed insulated only months ago. The broadening of the slowdown, the plunge in home prices and near-paralysis in the financial system are fueling worries that what most economists now see as an inevitable recession could end up being especially painful. Indeed, some economists fear it will last longer and inflict more bite on workers and businesses than the last two recessions, which gripped the economy in 2001 and for eight months straddling 1990 and 1991. This time, these experts say, a recession in which economic activity falls over a sustained period and joblessness rises across the board could even persist into next year. ECRI: U.S. "unambiguously" in a recession, Philly Fed Index

OECD Anticipates No Growth in U.S. in Second Quarter, Slowdown in Europe The U.S. economy will fail to grow for the first quarter since 2001 in the three months ending in June, the Organization for Economic Cooperation and Development predicted.

•  European Services, Manufacturing Growth Slowed More Than Forecast in March Growth in Europe's service and manufacturing industries slowed more than economists forecast this month, a sign that the euro's appreciation to a record and oil prices above $100 a barrel are hurting economic expansion.

Potential Policy Tug of War With the U.S. dollar tumbling to its lowest level against the yen since 1995 and hitting another record low against the euro, some traders and analysts wonder whether the Treasury Department may soon have to intervene to brake the currency's fall, something it was last forced to do in the mid-1990s. But currency interventions have a mixed record of success around the world. In this case, if the Treasury decided to act, it might find itself moving in the opposite direction of an even more powerful market force: the Federal Reserve. When a government intervenes in currency markets, it buys or sells a currency depending on the direction in which it wants it to move. In this case, the Treasury would be forced to buy dollars, constraining their supply, to slow or halt the pace of its decline. When the Fed lowers interest rates, as it has been doing aggressively in recent months, it is effectively pumping dollars into the financial system.

European Exports to U.S. Drop for First Time in Four Years on Euro's Gain European exports to the U.S. fell last year for the first time in four years as the euro's advance reduced the competitiveness of the region's goods. Shipments to the U.S. declined 3 percent to 194 billion euros ($305 billion) in 2007, the European Union's statistics office in Luxembourg said today. That followed an 8 percent increase in 2006 and was the first full-year decline since 2003. The outlook for European exports has deteriorated further this year, with the euro rising 18 percent against the dollar in the last 12 months and the U.S. economy, the world's largest, teetering close to a recession. The increase has prompted European Central Bank President

China's looming Olympics disaster The Beijing games are supposed to showcase China's stature on the world stage. But they're producing protests at home and may shut down big hunks of the nation's economy. Yes, the Beijing Olympics, which were supposed to showcase China to the world, are still likely to provide exactly the kind of prestige-building extravaganza that the country's leaders had hoped for. But domestically, the games are quickly turning into an economic and political disaster. Once upon a time -- maybe six months ago -- investors (including yours truly) looked on the Olympics as a guarantee that China's stock market and economy would keep chugging along through the summer. "Safe until August" was the mantra. Now, it increasingly looks like the games themselves could be the catalyst for a significant downturn in China's stock market and economy. All this might not matter to overseas investors if the Chinese stock market wasn't looking so wobbly right now. Hong Kong's Hang Seng Index ($HSIX) is down 17.6% from the start of 2008. The more volatile mainland Shanghai market is down 25% since the start of the year. What might be wrong with China's stock markets is, in part, a reflection of rising anger at the national government in the run-up to the Beijing Olympics. But what we're seeing in China right now is a rising sense among investors that they really can't trust the government to do the right thing by them and a worry that the government may, whatever its intentions, not be the infallible manager of all things economic and financial that investors had been counting on. That's a fear that overseas investors should think about, too: China's government is about to try to slow runaway inflation while readjusting the value of the country's currency, keeping the economy growing at better than 8% a year, reducing income inequality and rebuilding some parts of the medical and educational infrastructure. Asking any government to handle all that without a slip is asking a lot.

Posted by dblwyo at 07:12 AM | Permalink | Comments (0)

 There's an overwhelming floods of headlines, comments and data flowing around us which'll continue but which we can use some tools to filter in sense. Among all the various strands two stand out as the central themes. The first, which we talked about extensively last week and will continue to talk about, is that we're in the midst of a major systemic disruption in the credit markets. Systemic sounds so calm and collected but look it up. Now for the record we're not done BUT we think that the Fed has finally found/created/invented the toolkit to be able to establish and maintain orderly markets. WHEW ! The second is an almost complete failure on the part of the professional investment community to grasp the nature and structure of the business cycle, in general and this one in particular. We can only gape in wonder. After all this is their job.

There's been an enormous and growing amount of chatter in almost every forum about the "Recession" and the outlook. There's been a larger, perhaps more hidden, discussion and sets of decisions that didn't think anything was coming or at best it would be very mild. As of right now little of this is correct but the dangerous one is the latter. We could take a lot of examples but the major investment manager (there have been more than several so we won't pick on a name per se) who recently said, "I wasn't convinced anything was coming but the last employment reports really scared me" captures much of the neglectful thinking. We've covered all of this ground in various forms and at various times before and even done the occasional comprehensive review and update. Our end-of-year/new year review and outlook for example. And our basic tools, techniques, analysis and prognostications haven't altered since the very first posting (Pass 1+ - The 'REAL' Data (Output, Consumption, etc.) over a year ago ! Even so it seemed like a very good time to recover and lay down the basics and see if that helps people get a clear picture of where we're at and what's likely to happen. We hope it helps.

UPDATE (3/24 18:18): Cases-in-Point. As a lesson in paying attention to the real data and the real patterns the headlines today were all about Existing Home Sales increasing MtM. Aside from the seasonal noise the YOY changes were much different. Our e-colleague CalculuatedRisk has done his usual straightfoward and reliable (& readily understandable job) of dissecting these realities in two posts plus another one on the Chicago Fed's take on Recession:February Existing Home Sales, More on February Existing Home Sales and Inventory and Chicago Fed: "Increasing Likelihood Recession has Begun".

A key quote:

"The first graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in February 2008 (5.03 million SAAR) were the weakest February since 1998 (4.77 million SAAR). Here is a graph of Not Seasonally Adjusted existing home sales for 2005 through 2008. This graph shows that sales have plunged in February 2008 compared to the previous three years. This also shows that February is typically one of the least important months of the year for existing home sales."

In other words there is literally no resemblance between the headlines and the underlying realities. You must understand the structure of the phenomenon. It is easy to understand. And apparantly the vast majority point-blank refuses to look at things as they really are. A phenomenon for which we have no explanation and simply keep shaking our head in crogglement. 

Now just for the record we didn't use "Circle of Life" just for fun or post the graphic which'll take you to the song entirely for fun. The Economy is a circle, what comes 'round goes 'round and it demonstrates ebb and flows as much as the tides do and for similar reasons. Because it's a natural part of the way things work. Every cycle is different but they all share certain common characteristics and an overall character. At the end of the day when you plot the tide against time it looks like an oscillating sine curve just as the economy does. But just as different places on a coast and up the river will see high and low marks at different times the economy also has an inter-linked set of timetables which almost of the commentary that worries us is ignoring. So just for fun and as a favor listen to the song and really listen to what the words are saying about natural order, rythms and inter-relationships. The economy is as much natural ecology as it is anything.

Business Cycle

The graphic at right is my version of the how the basic business cycle works. You'll find it consistent with Ellis' "Ahead-of-the-Curve" or Mankiw's Macro for that matter. [BtW - an earlier posting offers up some guides to getting grounded in macro-econ:Social Notes: Be Your Own Economist and Related Readings]. And more detailed discussion in these prior posts:WtW Part Deux: Patterns, Cycles & Indicators,Weigh the World Works: Understanding the Business Cycle . But it's not an accident that we show the cycle as a circle because you see the feedback loops. Here Consumption is the engine which drives the Economy which Business then evaluates and makes decisions about Capex and Hiring. Consumer decisions are governed by their expectations about jobs, wages and borrowing capacity. Businessess have a similar evaluation governor that they use to decide to speed up, slow down or stay steady.

The OTHER key thing though to think about is that timing of going 'round the circle. Current Consumption determines current Production and evaluation of the growth determines Hiring which in turn determines future Consumption and so. It runs in reverse too, which is what's happening now. Now there is a normal pattern to this rythm which got disrupted by the Tech Boom/Bust where we were lucky to avoide a major downturn (yes the D-word is appropriate) but policy sustained consumer spending above where it'd be and avoided that. At the cost of a weak recovery that's been a poor generator of jobs and organic growth.

Current Business Cycle

So what is our timing, that is where are we at in our current cycle ? And what does that imply for the data we should be looking at ? The graphic at right is one you've seen before but it shows us at the tip of the cusp where a slowing economy tips over into a downturn. Which would mean that GDP would have been slowing for a while, as would employment and other lagging indicators but would be likely to show larger decreases. Well guess what - that's about exactly what's been going on. It also means, if we've got our timing right, that there's a long way to go. We've also mentioned the alternative paths before but you really need to think about that again, and again. So what do the actual data show ?

Real Business Cycle: Consumption => GDP => Employment

Oddly enough when you look back at the actual data, shown as YOY% changes as usual, the charts look startlingly like the conceptual pictures in the graphics. Gee, wonder how that works out ? Looking back to 1980, which is the last time we actually had a serious downturn with lots of disruption and volatility [trans: nobody's seen the real deal in a longtime and their reflexes are rusty]. Again we've talked about a lot of this before so let's just point out that a) Employment is both lagging and has been exceptionally weak this time. And b) Consumption tends to drive GDP but held up startlingly well during the '01 downturn. And then enterred a longer-term slowdown as the economy failed, we repeat failed, to re-establish organic growth after the stimulii faded.

Wages + Employment => Consumption

So if Consumption drives the Economy what drives it - other than the general discussion we had above ? Partly of course, as the mild downturn shows, it can be held up by borrowing against wealth, in this case Housing. But the core, tidal rythm (the circle of economic life) that establishes and sustains consumption is changes in employment and real wages. Which we can represent by looking at the YOY% changes in the combination, here W+E. Notice that we got a real positive gift from the gods in '06 when the sudden downturn in Oil prices pulled down inflation and pumped up real wages. Well guess what, that's history.

GDP => Investment => GDP

A feedback loop is when changes in one thing causes changes changes in another which, turnabout, feeds back and causes changes in the original. As GDP grows we reach a point where more capacity is required which in turn leads to Investment in equipment and hiriing. Which in turn leads to more Consumption and so on. Well a) the feedback runs in the other direction just as well and b) part of the linkage is expectations as well as current experience (the little blackbox sideloops in our initial cycle diagram). 

Summary

Hopefully you can look at these graphics and charts and come to your own interpretation of where we're at in the business cycle. And what the various data and headlines mean. Here's our bottomline - it's early in a downturn. The credit market crisis has a long way to go BUT has a shot at being an orderly de-leveraging instead of an implosion. Fed policy should help us avoide tipping over into a major downturn but this is still going to be longer and deeper than the majority of the Street is aware of as yet. And we really will need serious fiscal stimulus to avoid something more severe. 

Posted by dblwyo at 05:10 AM | Permalink | Comments (0)

DLS stands for "Dirty Little Secret" in case you didn't know and it refers to those "inside baseball" hidden characteristics that, once all the formal stuff is out of the way, actually determine how something works. The Technology Industry has two major ones, one of which we'll focus on. The first is that the cultural gap between business and technology continues to be wider than any other Mars/Venus split you can name. Men understand Women better than IT gets business and visa versa. That was sorta o.k. when all the bottom of the stack was new and obvious needs exceeded capabilities. Now it's a continuing disaster. We'll focus on that but just FYI is that the other DLS is that decisions are made on technology use by politics, not what best serves value and service. IT needs adult supervision but doesn't get it from the business side, which has abandoned it's responsiblities.

But when that gap is bridged the results can be truly magic. Unfortunately the small list of comanies that use IT strategically is largely the same small list it's been for almost 20 years. Until actively managing the "two-culture" gap becomes standard business practice companies won't use technology systematically, systemtically or correctly. Vendors will keep building the wrong things. And investment returns will still be commodity-like because the bottom 3/4 of the IT stack are commodities. It's what's hurting Dell and MSFT for example. On the other hand what Jobs and Apple has done is concieve and execute total technology solutions that start with customer value, translate it into high-value strategies and execute it comprehensively in total solutions. IF technology worked as well in general as Quicken did in managing your home finances a lot of money could be picked off the table. The graphic shows how it should be and isn't. Now here's an interesting fact - it dates from circa 1991 ! And is based on work, some from IBM's Business Institute dating back to the late '70s !! BUT when you find a tech company who can bridge that gap you've found a real winner. Or a company who runs its' own business by using technology truly strategically.

 Introduction

The excerpts below start with a front-page WSJ article from last week that discusses these problems - front page ! WSJ ! 20+ years and counting ! SHEESH !! It's followed by a hopeful article on re-thinking the user interface which will be one of the great themes that play out in the next decade across the board, largely under the influences of innovators like Apple and others. Much of the rest of the readings aren't so hopeful. For example, speaking of DLS's it turns out that MSFT's exec knew Vista was a potential disaster but the company chose to go ahead in spite of that. And speaking of maturity and exhausting a value prop Google is starting to come under the same questioning scrutiny that MSFT did in the late '90s.

Then there's a bunch of Telecom stories from MOT's continuing struggles to arrest its' decline and get back in the game at the bottom of the Telecom stack to the CEO of British Telecom talking about value-adding services being the Next Big Thing. Again in both cases think of the graphic and how what they say they're doing addresses the gap between business value and technology delivery. Sprint is next up and one has to suspect they're beyond recovery for a combination of a failure to execute and a failure to deliver value. We end with a set of stories on the rapidly emerging adoption of new cellphone technologies to business, particularly Apple's recent announcement on the iPhone. And conclude with a brief introduction to Hulu, the new joint-venture that's bringing old media into the new media/telecom world. We've tried it and as a solution it's excellent and user-friendly. What it lacks is depth of content as well as structured organization as that depth grows. BUT think of this - as we move into a world where any content is deliverable at any time on any device in any location two things.

1) Those industries are about to undergo radical shifts in structure.

Key Articles

Hidden Potential There's often a wall between a firm's IT department and everything else. That wall has to go. Some of the biggest names in the business world have used information technology to their competitive advantage: Merrill Lynch, American Airlines, FedEx, Barclays, to name a few. Despite their example, such companies are still exceptions. Simply put, top executives at most companies fail to recognize the value of IT. It can help a company transform data from its operations, its business partners and its markets into useful competitive information. It can be the source of profitable innovations in the way a company interacts with its customers and suppliers. But there is still a tendency to think of IT as a basic utility, like plumbing or telephone service. In many industries, IT consumes a significant amount of capital expenditures and gross revenue. Though recent research has shown that managing IT well can significantly increase a firm's profits and deliver substantially higher returns on IT investments, its potential is overlooked, and even its workaday application is often mismanaged. The result isn't just missed opportunities -- it's also wasted money. Analysts estimate that hundreds of billions of dollars are blown every year on IT projects that fail to achieve the desired goals.The reason for all this is the metaphorical glass wall that separates the IT group from the rest of the business at most companies. The wall prevents IT from being part of the discussion at the highest levels of company planning, robbing a firm of its full potential.

Helping the computer to work in new ways The idea of directly manipulating information on a computer screen is almost as old as computer graphics terminals, going back at least to 1963, to Ivan Sutherland's Sketchpad drawing system, which he created at the Massachusetts Institute of Technology for his doctoral thesis. Since then, a thriving scientific and engineering discipline has sprung up around systems that bridge what was originally called the man-machine interface. There has been a broad exploration of pointing devices, alternatives to keyboards for entering information, voice-recognition technologies and even sensors that capture and interact with human brain waves. What is new is a convergence of more powerful and less expensive computer hardware and an inspired set of mostly younger software designers who came of age well past the advent of the original graphical user interface paradigm of the 1970s and '80s. One intriguing example of this new immersive approach to Web navigation is the PicLens software from Cooliris, a 10-person start-up based here. The software does away with the browser frame and gives the user the effect of flying through a three-dimensional space that feels like an unending hallway of images. The transition to more immersive displays is happening in part because of more powerful computer hardware, but also because of an explosion of more powerful programming tools. These tools offer visual effects that were once within the grasp of only the most skillful programmers to a wide audience with only basic skills.

Posted by dblwyo at 07:39 AM | Permalink | Comments (0)

While we've let the week's emergency news about the Credit Crisis swamp our regularly scheduled postings on the weekly news we've slowly been picking it up, piecemeal. Previously the week's collection of Finance Industry news went up and needless to say the implosions are continuing to ripple. Let's shift gears a bit and focus more mainstream traditional businesses now. After the break you'll find stories on the global Nucelear Power industry and Russia's re-entry, Chrysler's on-going recovery struggles and Delphi's much worse ones and the rapid re-sinking of the airline industry (Airline Merger Frenzies (II): Network Structure, Costs and Strategic Outlook). The excerpts end though with a positive story which is interesting for its' own sake as well as for what it tells us about arrest and recovery of a declining business by re-focusing on basics. operations and execution.

The story is about Lord & Taylor's recovery post it's buyout from the May/Federated chain which was almost its' deathknell. Implicit in the story is the role of forward-looking management, strategic re-construction and execution. These lessons are not only important for investors but also for anyone working for a company. You owe it to yourself to understand the basic dynamics of the economy, the situation of your industry and the long-term performance of your company or investment. We can't emphasize those learnings enough so we'll keep repeating them in the hopd that they'll sink in. But if you'd like an abject...whoops, we mean object...Freudian slip...lesson consider what Wall St. had gone thru and will be going thru with write-offs and layoffs. Or consider the exemplar case of Bear Sterns. Malfeasnt and complaisant management destroyed an 85 year company that survived the Great Depression, WW2 and the tumult since thru blind greed and technical incompetence. Consider where you're at.

Just to put a point on it consider this excerpt about the recovery, re-engineering and transformation of P&G in the last few years. A company that looks like it's set to survive well and be in an excellent position as we work thru the coming unpleasantness:

'The consumer is boss'  No question, P&G was struggling. We'd issued a big profit warning in March, and the business was still performing below expectations. We'd moved to a new global-business-unit-led strategy. We'd totally changed the organization structure. We were adjusting to more global competition, a faster-changing industry landscape, and the challenges of the Internet. In the midst of all this, we'd raised the company's goals to unprecedented levels. In hindsight, we were trying to change too much too fast. Job one was to determine the state of P&G's business. When I began digging into the numbers, I found that we were in worse shape than I had suspected. On June 8 we issued another profit warning, and the stock fell further. We had lost more than $50 billion in market capitalization in six months. I knew it would take another three to six months to know whether we had bottomed out. In the meantime, I had to retain key people. I talked one-on-one with each leader to come to a clear understanding of the business challenges and opportunities. I encouraged them to compete like hell externally but to collaborate like family internally. Just about everyone signed on to this vision. Proud P&Gers, we were embarrassed by recent results. To turn the company around, we focused on a few simple, powerful things.

You might want to re-examine a prior post where we set out our framework for what it takes to run a good business as a reference point as well: WRFest 2Mar08(Business): Paper, Auto and Retail News.

READINGS

Putin Beats Soviet Sword Into Atomic Weapon for Selling Generator Plants While the Soviet Union lost the Cold War, the Russians are back as a nuclear force. Asmolov, deputy head of nuclear-plant operator Rosenergoatom in Moscow, is tapping yesterday's military brains to develop a new generation of atomic plants. Russia's reactor industry aims to compete with Westinghouse Electric Co., General Electric Co. and Areva SA. Global power needs will double by 2030, according to the Paris-based International Energy Agency, set up in the 1970s to counter the influence of oil exporting nations. Pressure to cut emissions of gases that contribute to global warming has made nuclear power more attractive, despite safety concerns. Reactor orders may total 237 globally by 2030, according to the World Nuclear Association in London. ZAO AtomStroyExport, Russia's nuclear-reactor builder, says each megawatt of installed capacity costs about $3 million. The typical reactor size is about 1,000 megawatts. After 20 years in which few nuclear generating stations were built, Kiriyenko faces shortages of contractors with experience building atomic plants, components such as turbines and nuclear engineers. Factories that in Soviet days churned out enough equipment to build 10 or more reactors a year went bankrupt in the mid- 1990s or switched to making products such as machine tools or gear for the oil industry after the Iron Curtain collapsed. Many of the plants were sold to local businessmen, forcing Rosatom to repurchase the factories or swap assets to rebuild the industry.

Chrysler: 'The best little car company in America' Chrysler wants to be "the best little car company in America," the automaker's president recently said. But in order to do that, it's setting its sights beyond the United States. Chrysler will never approach the sales volumes of market leaders like General Motors and Toyota, Press said. They each already sell more than three times as many cars worldwide as Chrysler hopes to sell. The goal is global volume of about 3 million cars, which is slightly ahead of its current sales volume. But Chrysler will have to do that in the face of severely shrinking U.S. sales and a weak international presence. Last year, it sold only about 238,000 cars outside of North America, according to the company. A lynchpin of its strategy is world-car designs: Identical vehicles that can be sold both in the U.S. and overseas. That differs from the global product strategy of GM and Ford, which usually design American cars for the domestic market but different cars for overseas countries while sharing unseen components to save costs. In contrast, Dodge and Chrysler cars will be designed to appeal to those who want something different and identifiably American, no matter where in the world they may be, said Press. Mr. Press surprised the industry last year when he left Toyota, where he had been a board member and the company’s highest-ranking American executive, to join Chrysler, smallest of the troubled Detroit Big Three automakers. Steeped in Toyota’s customer-driven culture of continuous improvement, Mr. Press, 61, had been the steady hand behind the Japanese company’s methodical expansion in the United States. Now as Chrysler‘s vice chairman and president, Mr. Press is trying to bring stability to a company known for stomach-churning roller-coaster rides through boom and bust cycles — from the government-loan bailout in the late 1970s under Lee Iacocca to its failed marriage with German automaker Daimler-Benz.

Delphi's Woes: Chapter 11 Relations between auto supplier Delphi Corp. and its investors continue to sour, leaving a bankruptcy reorganization in disarray weeks before it is expected to close. The past few days have brought back-and-forth charges, with Delphi accusing investors of illegal insider trading. Investors have resisted Delphi's wishes to wrap up its 29-month bankruptcy stay, charging that the Troy, Mich., company is impatiently jumping into the troubled credit markets at their expense.

Airlines Lose Altitude The airlines are getting swatted out of the sky today, with J.P. Morgan Chase playing the role of King Kong, batting down earnings and growth estimates and downgrading several major carriers. Jamie Baker, analyst at J.P. Morgan, fingers anticipated declines in demand as a result of the economic slowing, as well as uncertainty surrounding deal closures (such as the Delta-Northwest merger) for poor expectations going forward. The Amex Airline Index is down 5.7% today, with big losses in Northwest, AMR, Alaska Air, US Airways and Airtran Holdings.  Airlines have struggled due to rising oil prices, of late around $109 a barrel, and J.P. Morgan says “even a best-ever recessionary demand scenario results in a $4 billion industry loss. And if demand trends mirror prior recessions, a $9 billion loss can’t be ruled out. And in that scenario cash becomes scarce for many.”

What's old is new: Lord & Taylor's rebirth To the surprise of the fashion world, Lord & Taylor avoided going the way of the leisure suit and is in the process of staging a comeback. Back in 2006, the company's future looked less certain. Federated Department Stores had just purchased Lord & Taylor parent, the May Company, and then put Lord & Taylor on the block. When NRDC emerged as the new owner, everyone including Elfers thought it was a real estate play. What changed his mind? Lord & Taylor's business, which had been in a downward spiral for years, started to rebound. Profits and sales soared to their highest level in 15 years. Lord & Taylor also got a lucky break. Federated, now known as Macy's, closed or re-branded dozens of stores in the Northeast, knocking out much of Lord & Taylor's competition in key cities. In 2006, according to Elfers, comparable store sales soared 30 percent in Boston and 24 percent in Washington, D.C. Under May's stewardship, Lord & Taylor went down market, adding cheaper goods and promoting them with frequent sales. There was little money to invest in store refurbishments. "Lord & Taylor was starved of capital," said Marvin Traub, the former CEO of Bloomingdale's, who now runs his own consulting firm. Elfers wanted to bring Lord & Taylor back to its carriage trade roots and once again make it a beacon for American designers, as it was in the '40s and '50s. She dropped tired brands - Liz Claiborne, Tommy Hilfiger and Nautica, among them - and gave up $350 million worth of sales in the process. In their place went trendier labels, including Coach, Tracy Reese and Ted Baker. Today, Eighty-five percent of the merchandise found in Lord & Taylor wasn't there three years ago. Another brave decision was to close 32 underperforming stores in 2003. Getting the company fully back on its feet would require money. Once NRDC became convinced of Lord & Taylor's staying power, it agreed to invest $500 million over five years on store renovations, including an overhaul of the Fifth Avenue location.

PROCUREMENT: How AirBus Beat Boeing The recent U.S. Air Force decision to buy a new generation of aerial tankers from a European firm (AirBus), rather than U.S. aircraft builder Boeing, shocked many observers. But a close look at the fine print revealed that AirBus beat Boeing in many key areas, and decisively so. The two big factors were superior performance (fewer of the AirBus aircraft were needed to get the job done) and more reliable performance of the suppliers. In this case, it's AirBus's U.S. partner, Northrup, that provided an edge. The air force examined recent project performance by Boeing and AirBus/Northrup, and found that the latter team was more likely to deliver the aircraft on time and at the agreed upon price. Boeing also lost points for providing questionable cost estimates. The air force crunched the numbers of the two proposals and determined that, while 49 of the AirBus tankers would be available by 2013, only 19 of the Boeing version would be ready.

Posted by dblwyo at 12:36 PM | Permalink | Comments (0)

This is the third in a set of postings collections designed to provide 1-stop shopping for key and critical topic areas. The previous ones dealt with the Economy and the Markets and both can be found in the Key Posts archive along with selected individual key posts. The basic idea in all cases is to collect pervious fairly deep dives that provide tools that ought to be in your toolbox for understanding and analyzing each of these areas. Hopefully with the idea that the fluttering complexities of the headlines and various talking heads can be filterred and interpreted into a coherent whole using them. You'll have to let me know.

As just about everybody has realized this ain't your standard downturn because it's being heavily influenced by deep structural breakdowns in the credit markets. Earlier posts reviewed the situation we face with a "normally" slowing economy compounded by the sudden downturn in Housing which was, directly and indirectly, the engine that drove our so-called recovery over the last several years. The boom in asset prices, including it should be noted, the stock market was driven by liquidity and leverage based on the gross under-pricing of risks (as well as bad to malfeasant business management in the financial sector).

We've all, including the experts, been struggling to get a handle on what's going on here. An analogy that occurs to me is to compare the economy to a complex piece of machinery or process manufacturing plant. For example a refinery. Now that machinery is energized and controlled by the credit markets which ship the necessary lubricants from real marekt to real market to keep everything turning over. The relationships between multiple credit markets are usually so stable and predictable that all we need to understand is the distribution of interest rates over time and over risk. The first is otherwise called the yield curve and describes the range of rates from short-term to very long-term. The second is the spread between different markets and instruments and represents the estimated riskiness associated with each instrument and seperate market. When short-term rates rise above long-term ones we have an inverted yield curve indicating that demand for loanable funds will gone down due to economic slowing. A situation we're in now. And when spreads between markets rise as liquidity is pulled out of the system then the relative risk factors are being re-adjusted. Three/four times since last August those spreads have spiked tremendously as people realized they had no clue as to the actual risk and return situation.

BUT....BUT...BUT we're actually had a much more arcane and dangerous situation which is a meltdown in the fundamental functioning of the credit markets. Otherwise describable as not being able to get loans and funds at any price. This is similar to the infamous liquidity trap of macro-theory fame but has taken place in the credit markets. It was created by that Fear Factor and when it's in play traditional monetary policy WILL NOT work - the standard mechanisms of inter-market credit adjustment are broken. Perhaps the best way to continue the analogy is go to back to the plumbing notion. We've got blocked pipes, corroded pipes, broken ones and badly kinked ones. What the Fed is trying to do is repair all that damage and let the normal, and hopefully orderly, processes of a recession work out without subsiding into a major economic collapse. In doing so they've displayed amazing insight and ingenuity and may, with this week's moves have reached a point where they've found the basic toolkit that they can use to manage an orderly downturn without it turning into a disaster. Let's hope so. 

CREDIT BREAKDOWN TOOLKIT

Posted by dblwyo at 02:09 PM | Permalink | Comments (0)

Well we're off to an interesting start to the week, after an absolutely fascinating weekend. One thing that truly fascinates us is that as the fundamental economic, monetary and credit news goes from bad to worse we appear to be enterring a market bounce. The disconnect gap between the markets and these other factors is as wide as it's been in decades and is based on a view of the outlook that is both simple and optimistic, at least in our opinion. And dreadfully wrong. If our assessments are anywhere near correct, which the recent excerpts back up, we'd suggest taking this as an opportunity to re-position yourself accordingly.

UPDATE -let me change things around a bit. Two recent vidclips put some of this in context. The first from Jim Jubak and the 2nd from Mohamed el-Arrian of PIMCO. Any startling coincidence between the seriousness of their assessment and mine is entirely deliberate.

1. Why JPM for BSC (they had no damm choice and no alternatives):
   Bear Stearns deal scary
   JPMorgan Chase is paying just $236 million for Bear Stearns, whose building alone is worth $1 billion plus. Why that’s scary: The Fed was desperate to find someone to take over Bear, and the only bank strong enough to do it was able to cut a great deal, says MSN Money's Jim Jubak.
   
2. Beyond BSC/JPM (earlier in the week the Fed violated ~ 80 years of policy precedent by a) buying securities from b) non-commerical banks; in all the hoorah that's been lost):
   El-Erian on Feds Actions
   Mohamed El-Erian, co-CEO and co-CIO of PIMCO, advises the Fed to purchase outright high-quality mortgage securities.

INTRO

Below you'll find a careful selection of stories we think you ought to pay some attention to, which we'll try and summarize briefly to start with after the break. Before that though let's cut to the bottomline. The economy's slowing severely but would pull thru in a year+ but is exposed to severe downside risks from the meltdown of the credit markets. Which began re-melting for the 4th time since last Aug 3-4 weeks ago and reached a crescendo last week with a run on Bear-Sterns that WAS NOT VISIBLE at the begining of the week. If it had gotten out of control we would have not had a metastatic outbreak or even the contagion I keep yammering about but a major outbreak of credit collapse. This was a Hail Mary except it was done with skill, hardwork, guts and forethought. AND it won't be the last time while we work thru all this crap.

The stories after the break include a great Fortune interview with Paul Krugman where he provides short, pithy assessments of many of these factors that align with our take AND put him the camp of Messiuers Feldstein and Summers. Followed by a WSJ article discussing the domino theory of credit market contagion and collapse which leads nicely to another story on why monetary policy is proving so ineffective, given these broken credit mechanisms. Which, pointing to another WSJ article, is going to lead to a massive re-examination of the regulatory and institutional framework of the markets and the industry. And, in a colum by Sean Tully of Fortune, the end of Wall street as we knew it. To which we say here, here. The question is what will replace it and there we become open to political gerry-mandering and special interest manipulations which could be more dangerous than the original de-regulation has proven.

BtW - in case anyone's wondering we'd translate "re-position your portfolio" as go heavy on cash and short-term bond funds but look at longer term funds such as Pimco's Total Return as well as gold, precious metals and commodities. Though the later are ripe for a correction as the economy slows. And if you're feeling aggressive and if there's a bounce that would be a good time to investigate inverse, or short, funds and ETFs. Ryder and ProFunds have excellent choices btw.

SUMMARY

First, the credit markets are in the beginnings of a possible meltdown which has resulted in severely contractionary monetary policy. Second the economy was headed into a slowdown anyway which WAS likely to be longer and deeper than the too-sanguine optimism of the street. Third the key engine, Housing, is at best about a 1/3 of the way thru it's contraction and that is spreading to Commercial Real Estate, which will expose the financials to more write-downs not factored onto their books. Which will in turn further contract credit. Fourth the Fed is doing everything in the books and investing new approaches as we go though traditional monetary policy is NOT working, as we've explained several times, and they're creating new instruments to intervene directly in the markets as we speak. Fifth - this wasn't really caused by the sub-prime crisis, though it was initially triggerred by it. It was caused by major structural flaws in the Finance industry where "new" business models emphasized trading using leverage and gambled with other people's money. Because the Industry shifted from a business model of making loans on quality assets and associated fees to originating loans and distributing them it created a set of perverse incentives to maximize the flow of bad deals. Which was further accelerated by immense liquidity created by leveraged synthetic debt, thereby creating a feedback loop of immense proportions which put more and more funds into the markets to chase fewer and fewer opportunities. This is now all going into reverse thru de-leveraging and risk re-pricing. We have to survive this and then we can anticipate a complete re-structuring of the Finance Industry and entirely new comprehensive, massive regulatory regimes because the Industry has established that it's not capable of adult self-supervision. That's it in a nutshell. Let's hope we all survive. The chances are better than 50% but the risks are mounting.

Current Readings

How bad is the mortgage crisis going to get? What started in subprime is likely to continue cascading into the markets and keep the economy down until 2010, economist Paul Krugman forecasts. Bottom line for homeowners: An average drop of 25%. You've been saying 2010 is when we get out of this recession. How did you arrive at that date? The last recession officially ended after eight months, but employment didn't start to recover until 30 months later, so I think we go at least that long this time. If the recession started in January 2008, then that would mean July 2010 is the first month we have anything that feels like a recovery. But I wouldn't be surprised if it goes longer than that - maybe into 2011. What's changed? There has been the realization that the increased nervousness about risk and deleveraging is going to hit a lot of markets a long way removed from subprime - like when people start to see auction-rate securities go. Something has finally tipped the balance. We've got Fannie Mae and Freddie Mac suddenly having to pay substantial spreads. It seems to me like every few weeks there's another $300 billion market I've never heard of that has just collapsed. And there's credit cards, auto loans - I don't know what's next. But it's clear we're going to have a commercial real estate crash not too far short of the severity of the housing crash.

News Analysis: A Wall Street Domino Theory The Federal Reserve’s unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system. Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism. The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted. 

Why the Fed can't put out the fire. Even many of those who believe Fed must make another big rate cut Tuesday concede it can't do much to calm troubled markets. With Wall Street hit by a crisis of confidence, many are hoping the nation's central bank can save the day. The Federal Reserve's main weapon: Cutting interest rates, and most economists expect a big slash of three-quarters of a percentage point on Tuesday. But even those economists in favor of such a move concede it will do little to calm investor fears. But Lyle Gramley, a Fed governor from 1980 to 1985 and now a senior economic advisor for the Stanford Washington Research Group, said that such a failure would have far broader implications for the economy and the financial markets and the Fed has to do what it can to avoid that. "If the Fed had sat aside and let Bear go down the tubes, the cascading effects would have been ghastly," he said. Gramley and some other experts believe the solution to the current credit crisis will have to come from Congress, not the Fed, and that the federal government will have to take steps to bail out both Wall Street firms holding mortgage-backed securities as well as homeowners who have mortgages with balances greater than the value of their homes. And no matter what the Fed does, market fears probably won't go away any time soon. After all, some investors will probably take more Fed cuts as a sign that the central bank sees more trouble ahead.

U.S. Mulls Next Steps in Crisis  The U.S. is likely to respond to the unfolding financial crisis with a heavier hand, in the form of corporate bailouts, fiscal incentives and regulation. The swiftness and virulence of the financial problems have been stunning. The problems are rooted in a bipartisan goal to figure out ways for lower-income Americans to buy homes, so that they could build financial wealth and plant deep stakes in their neighborhoods. But the instruments that mortgage companies devised included provisions -- interest resets after five years, no down payments -- that buyers didn't fully appreciate could backfire. When those subprime mortgages were bundled into packages of debt and sold to a daisy chain of interlocked financial institutions, the risks of those provisions eluded investors considered far more sophisticated than first-time home buyers. Essentially, the risks were hidden from view -- "a lack of transparency," financial types call it. The irony is that the U.S. and the International Monetary Fund have been lecturing developing countries since at least the 1980s of that very danger. If economic risks aren't transparent to investors, they're likely to blow up, and can drag down an economy. Barry Eichengreen, an economic historian at the University of California at Berkeley, says that institutions bailed out by the government can expect stricter government oversight. That includes investment-banking firms, now that they are able to borrow from the Fed, and could include hedge funds and private-equity firms if they get government bailouts. "If we're going to use public money to prevent the finance system from collapsing," he says, "the quid pro quo is more oversight during normal times." "This regimen of total deregulation has essentially allowed the economy to be held hostage to some financially irresponsible actions," says Rep. Frank. "There is no choice but to pay some ransom."

End of Wall Street as we know it Financial firms have relied on a highly flawed business model for years. The time has come to fix it. The standards that rule most businesses­­ - avoiding excessive leverage, reining in rampant pay and the massive dilution that goes with it­­ - didn't apply to Wall Street. So what if investors didn't understand all those arcane instruments and sophisticated hedging strategies? Wall Street was the black box on the Hudson that worked its own brand of magic. Today, the magic is fading fast. It's time to step back and analyze how financial firms actually operate.The truth is that they've been relying on a highly-flawed business model for years. Put simply, Wall Street firms used towering leverage to make tons of money in a long-running bull market that blatantly underpriced risk. At the same time, they handed a huge chunk of the gains to employees in the form of excessive pay. Now that run is over, and the price of risk is rising dramatically. That's driving down value of everything from junk bonds to mortgaged backed securities. Wall Street's addiction to leverage is cutting the wrong way.

Posted by dblwyo at 08:47 AM | Permalink | Comments (2)

Let's pick up the thread of our weekly Readfest with last week's excerpts on the Finance Industry. Obviously THE major story was the sudden evaporation of Bear-Stearns as a going concern. There's a lot to say about that and the whole story is far...far from in. From various sources as late as Thur. executive mgt. hadn't a clue but, as in all sudden catasrophic events, there was a tipping point on Fri. Which led from a "we can make it thru" to "oh, my god we've got to bail". In some ways my hat's off to the BSC leadership team who had less than 24 hrs. to re-wrap their heads, to the Fed and to JPM and Jaime Dimon who responded with what, so far, appears to be style, grace, guts and knowledge. I'm sure as the story comes out they may have had a little more warning but it still isn't every day that an 88-year old legend that was worth $30-40B on Fri. afternoon gets sold for a paper price of $2/share or approx. $298M ! Astounding.

Bear may be, or have been, a special case but let's recall two things. First it was their CDO troubles that were the proximate canary for this almost a year ago (actually the real canary was the Shanghai surprise if we code've decoded it). And 2nd we know that there sure aren't the only financial institution under one sort of pressure or another. In fact we've argued that the Finance Industry on a whole is going to have to completely re-think it's business models, which stopped being about taking care of the customer, creating new value-adding service and so forth and became about trading for their own account.

With one exception all the excerpts will be stories of how the credit contagion ripples are being reflected in various firms and sectors and how badly they are likely to perform. That exception fits our prescription fo the survivors - yet to be determined of course - in terms of finding new value-add thru new market and product strategies. But as a whole the stories tell us that upcoming earnings are likely to be grim and mounting layoffs grimmer.

We found it particularly amusing that as Mozillo the Tanned was testifying the FBI was kicking off a criminal investigation of Countrywide. The rest of the stories aren' THAT bad but from Goldman to Carlyle there stories of stumbles. Bon Appetit'

Finance Industry Readings

Banks Springing Up to Serve the Underserved Nuestro Banco is certainly outside the mainstream of banking in this country, a mainstream dominated by financial giants like Bank of America, Chase, Wachovia, Wells Fargo and Citibank. But many bankers and banking customers find benefits in that niche position, where particular consumer and small-business demographics can be accommodated — to the profit of all. For bankers, focusing on a niche is a way to set themselves apart from the competition. “If a person sees three banks on the same block, each one offering the same products at the same price, what differentiates you?” asks Steven F. Young, senior vice president for consumer banking at Wainwright Bank and Trust in Boston. Wainwright’s reputation as a socially responsible bank that invests most of its deposits in community development and progressive nonprofit organizations “has led us to be very profitable,” Mr. Young said. “People like what we’re doing with their money.” For consumers and small businesses, niche banks offer products, services and expertise that are often unavailable elsewhere. “With the big banks, you have a fairly impersonal relationship,” says Ingo Walter, a finance professor at the Stern School of Business at New York University. “Small banks are part of the community and people perceive that they get a different level of service.” Though no one keeps records indicating whether the number of niche banks is rising or waning, experts in the banking field see growth in three particular areas: Hispanic banking, environmentally responsible banking and banking aimed at observant Muslims.

March May Be Quite Cruel Some ailing companies are bracing for their own March madness. It is the time of year when companies, as some deal makers say, "open the kimono," revealing to lenders year-end audits, budget projections or income-statement forecasts. These often give lenders an early glimpse of trouble ahead, a warning that a loan agreement could be violated or that a borrower will need more credit. This year's meetings are likely to be a lot more tense than in recent years, bankers say. Credit and patience are in short supply, as banks try to husband capital and jettison underperforming loans. Likewise, a growing number of lenders will this month push borrowers to choose among several painful options -- such as seeking a bidder to buy all or some of the company, undertaking a massive restructuring or finding an investor to inject more capital. If those choices don't work, that could mean new bankruptcy filings. The clampdown on troubled companies is the latest sign of a broader retrenchment by banks. A Federal Reserve survey earlier this year found that about one-third of U.S. banks have tightened their standards on loans they make to businesses of all sizes. And about 45% of banks told the Fed that they are charging more for credit lines to large and midsize companies.

Grim Reaper of Jobs Stalks the Street Painful firings are coming. Many say layoffs will be worse than those in 2001-2002 and others are invoking the bloodlettings of the early 1990s. Wall Street has been in denial about the task, but the longer the wait the worse the news. The irony is that the process reinforces the cycles the Street is trying to prevent. An investment banker fearful of being fired in a downturn will furiously harvest cash when times are good. That creates dangerous incentives along the way, as bankers focus on short-term profits, neglecting long-term risks. Meantime, the industry is going to eat itself. Top Wall Street executives foresee layoffs of as high as 20% for Wall Street, which employs about 210,000 in New York state alone. If layoffs are that severe, job rolls would plunge to mid-'90s levels. A look at the numbers explains the restlessness. U.S. investment-banking fees are off 48% from the year-earlier period, according to Dealogic. Banks' lending revenues have fallen a stunning 84%, mergers work is off by half, and debt and equity levels are each off by 21%. Some bankers in the lending business are reporting to work two days a week. "If they say they're busy, they're lying," said one head of investment banking.Yet the numbers don't describe the full picture. Easy credit via bank loans, high-yield bonds and asset-backed securities nourished the investment-banking ecosystem. A $10 billion private-equity deal might beget $40 million of advisory revenue, plus $70 million in bank lending fees, and $50 million in fees for loans against real estate. That might create an IPO two years down the line, generating $60 million more. Poof. That's gone. For seven months, Wall Street has been in denial about the task ahead. The expectation was that the markets would clear by the spring or summer. And even if they didn't, it would be foolish to slash a work force before the inevitable recovery.

FBI Investigates Countrywide Countrywide faces an FBI inquiry into whether officials misrepresented its financial position and the quality of its mortgage loans in filings. People familiar with the matter said its losses may be much greater than it has said. The Federal Bureau of Investigation is probing subprime lender Countrywide Financial Corp. for possible securities fraud, according to law-enforcement officials and finance-industry executives. The inquiry involves whether company officials made misrepresentations about the company's financial position and the quality of its mortgage loans in securities filings, four people with knowledge of the matter said. It is at an early stage, they emphasized. Federal investigators are looking at evidence that may indicate widespread fraud in the origination of Countrywide mortgages, said one person with knowledge of the inquiry. If borne out, that could raise questions about whether company executives knew about the prospect that Countrywide's mortgage securities would suffer many more defaults than predicted in offering documents. Another potential issue facing the company is whether it has been candid in its accounting for losses. People familiar with the matter said that Countrywide's losses may be several times greater than it has disclosed. Countrywide, which agreed in January to be acquired by Bank of America for $4 billion, already is under investigation by the Securities and Exchange Commission for possibly improper accounting. SEC investigators are working closely with FBI agents on several subprime investigations, officials said. The attorneys general of Florida and Illinois have launched probes too. Countrywide also is the subject of a class-action, securities-fraud civil lawsuit by various government pension funds and their managers, including the city and state of New York.

Buyout All-Stars Stumble February was a rough month for Sun Capital Partners Inc.The rapid-fire filings illustrate just how life has changed for the private-equity industry, where easy credit, a steady economy and willing sellers created a buying bonanza. And no firm was more voracious than Sun, whose well-oiled deal machine has purchased, on average, a business every 11 days for the past three years. The Boca Raton, Fla., turnaround specialist seeks businesses that few others will touch. Its portfolio reads like a roster of the misbegotten: women's-clothing chain Limited, bought from Limited Brands; fast-food chain Boston Market Corp.; discount retailer ShopKo; and department-store chain Mervyns. More than half of the revenue from Sun's 75 companies comes from retailers, restaurants or auto businesses -- all cyclical industries that depend on ever-fragile consumer-spending levels. Many of the buyout targets were already struggling in a robust economy. A weak economy won't help.

How mighty Carlyle fell Throw a heavy user of short-term financing into an increasingly fearful market, and you have the makings of a disaster - as investors in Carlyle Capital learned this week to their dismay. Shares of the Amsterdam-listed mortgage investment fund were suspended Friday after Carlyle Capital's lenders began selling off the firm's $21.7 billion portfolio to meet margin calls. The move came on the heels of the fund's failure to meet multiple demands for additional collateral after the value of its bond holdings dropped. Carlyle Capital - an affiliate of U.S. private equity giant Carlyle Group that twice tapped its parent for loans during an earlier liquidity squeeze back in August - said Friday it was considering "all available options." David Merkel, chief economist for broker-dealer Finacorp Securities, says the firms' dependence on short-term loans called repurchase agreements, or repos, meant they had "no time to react" when the latest round of mortgage fears descended on the debt markets last month. Over the past month, the spreads between government-backed Treasury securities and even the safest nongovernment debt have widened as investors have demanded more compensation for perceived risk. That trend has sharply driven up costs for firms such as Carlyle Capital and Thornburg that borrowed using repo loans that mature in as little as a day or a week. The huge sums the firms borrowed only compounded those woes. Carlyle Capital reportedly borrowed more than $30 for each dollar of equity held in the firm - meaning that when its holdings dropped 3%, the firm's margin was wiped out, prompting its lenders to demand more collateral. The problems at Thornburg and Carlyle Capital surprised some investors because both firms have billed themselves as having invested in only high-quality assets: prime jumbo mortgages in Thornburg's case, and so-called agency securities - those issued by government-sponsored mortgage investors Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) - in Carlyle Capital's.

Blankfein Loses Wall Street Halo as Earnings Estimates Show Luck Runs Out -- Lloyd Blankfein, who helped make Goldman Sachs Group Inc. the most profitable firm in Wall Street history, is about to show investors why it's better to be lucky than smart. Blankfein piloted Goldman to record profits during the past two years by sidestepping the collapse of the U.S. subprime mortgage market, boosting trading risks, and investing in private equity, leveraged loans and real estate. With credit markets seizing up and investment bankers off to the slowest start to a new year since 2003, analysts estimate the New York- based company will report the steepest quarterly earnings drop since its initial public offering in 1999.

Burden of debt weighs heavily on the buyout industry In recent years, private equity firms have bought thousands of companies, mostly with borrowed money. Blackstone and others argue that they can run these businesses more efficiently - and therefore more profitably - than they could be run as public companies. Now, the bankers and investors who financed the boom in corporate takeovers are running for the exits. Loans and junk bonds that deal makers used to pay for the acquisitions - debts that must be repaid by the companies, not the deal makers - are sinking in value. The speed and ferocity of the industry's reversal has taken even Wall Street by surprise. On Monday, Carlyle Capital, a highly leveraged fund linked to another buyout firm, Carlyle Group, confronted the prospect of insolvency. Carlyle's troubles, along with talk that Bear Stearns may be running short of cash, helped drive stocks lower. Bear Stearns denied the speculation. But companies far from Wall Street are feeling the pain of the private equity crisis. In 2006, for example, Freescale Semiconductor, which makes computer chips, found itself the object of the biggest buyout battle ever in the technology industry.

Posted by dblwyo at 10:53 PM | Permalink | Comments (0)

This is the second post collecting interesting and/or useful posts that provide what we hope are valuable tools for understanding a particular subject area. The overall structure is built around our Economy-Market-Industry-Business mantra with some specific additions. This one focuses on understanding markets and the consequences for investments. Given that the markets were down as much as 2.5% today before recovering almost to breakeven, which in our view reflects a reasonable grasp on the various crisis facing us, this might be timely. We'd have to guestimate that many of the market participants believe that all these various critical factors are reflected in earnings estimates and pricing valuation (PE ratios). Which you'll allow us, please, to doubt ! The prior post summarizing the Economic Tookit and the preceeding regular Readfest and deeper dive posts on the economy, especially the the strong views of Messieurs Feldstein and Summers suggest that doubt is well-grounded. As does the brilliant ad hocary of the Fed over the weekend. It seems extremely hard to us to reconcile the two perspectives - but that's what makes horse races.

So as an aid for you to do your own thinking we offer up the follow lists of posts along with descriptions and addresses. The table proceeds from fundamentals showing how earnings are linked to the economy to tools and approaches for grounded valuation analysis. Extended with more tools and frameworks for interpreting market behavior at different timeframes by looking at Structure/Fundamentals/Technical/Sentiment. And then translated into somewhat more specific guidance on portfolio structure, instrument choice and investing strategy that builds on these foundations. Finally we sample some previous Market Status summaries and readfests which use these various approaches to try and interpret things. You'll have to decide if it's workable and satisfactory of course; but on the whole it's turning out to be a fairly accurate and useful set.

Posted by dblwyo at 03:18 PM | Permalink | Comments (0)

Over the weekend in response to our Bear-Sterns and the credit crisis post a friend e-mailed back to ask for specific recommendations for re-positioning his investments. While we don't provide specific advice, particularly to friends, we have built up a decent little toolkit of ways to frame and think about that and related problems. Having found ourselves pointing back frequently to some of those prior posts we decided to create a shortcut and collected previous posts into a single category where what we think are key tools which you can use are assembled in one basket. After the break you'll find the first guide table to the Economic Assessment Toolkit. There are a couple of things we'd like to note to set the stage.

First our overall concern is with finding ways to improve business performance but that performance operates in an economic and market environment that sets certain requirements. Doing the wrong thing well isn't, in our books, good business performance. Conversely when a rising tide is lifting all boats it pays to understand which are the best built boats. And when a falling tide is threatening to sink everybody it's those boats you need to find. So we spend a fair amount of time on the inter-linked topics of Economy <==> Markets <==> Business.

Second, we're also very firm believers that when you better understand how things are working, both with individual firms and their environments, you'll make better decisions. AND, in particular, we think it's possible to depict and analyze many of the cross-currents in this complex world using simple but accurate tools that allow you to develop those understandings and make better decisions. That's not to say a bit of work, thinking and time & attention aren't still required. They most definitely are, indeed ! BUT the can be reduced from the arcane and the unknowable to the graspable and analyzable. Which is about as much progress as we hope for here. Only time will tell whethere we're getting it right or not. That said many of these earlier toolkit posting and subsequent follow-ons are proving out so far and that, IOHO, strengthens the argument for paying some attention. Please feel free to vehemently disagree, encouraged even. What we'd then hope is that in the process you'll come to your own more firmly grounded conclusions. Which you might even be willing to share ! :).

So this is the first part of our toolkit collection effort focused on the first big topic area: the Economy. As a pre-amble we'll point you to these two prior posts which tried to summarize the current status and outlook for the year, which we think support the "it's working pretty well argument". In other words start here:

• Seeing thru Maya: Piercing the Veils of Delusion

• WRFest 12Jan08 (Economy & Markets): the Non-Sanguine Outlook

Guide

 The table is structured with selected prior posts to take you from general & foundational tools to current situation assessments. The first topic is the Business Cycle understanding which helps you organize the flood of headline information and position us in terms of the overall pattern. MOST of the commentary you read fails to understand the nature of the cycle, its' structure or where we're at. The GDP Analysis takes the cycle framework and provides the specific and most recent GDP and related data from the last quarterly to analyze the actual situation of overall GDP and each of its' major componentes, e.g. Investment. This is particularly helpful, for example, in guestimating future spending patterns. With these tools we were able to take a pretty good guess that downgrades in Technology spending were forthcoming. The H.F. monthly reports are dashboards that take these frameworks and provide the latest monthly data in chart form on current status, emerging demand patterns and other key data (inflation, oil prices, interest rates, monetary policy). With a basic understanding and the monthly data you ought to be able to make your own current estimation of where you think the economy is actually at. At least that's the goal !

Toolkit Table

Posted by dblwyo at 10:26 AM | Permalink | Comments (0)

Earlier this week we put up two carefully considered posts  on the cascading credit crisis and early Thur. called the attention our network to them with a special e-mail. The title of the e-mail was "Brushed by the Wings of the Angel of Death" which wasn't entirely hyperbole. The core of the e-mail is reproduced below, idiosynchracies and all. Fri. morning the non-hyperbolic nature of that description was illustrated by the emergency rescue of Bear-Sterns by a combination of J.P. Morgan and the Fed, who were acting to prevent the disorderly collapse of the credit markets, not bailing out some miscreant investment bank.

The key words here are collapse and credit markets, the sine qua non of making the economy turn over. If they grind to a halt as they threaten to do so does the economy. Fri's headlines was and will be scary, nor do the emergency fixes resolve the underlying problems. But the scariest headline would have been Bear NOT Rescued because it would have triggerred the collapse. What we're seeing here is a giant run on the bank, except this time it's a run on the system and the normal policy mechanisms, as we've repeatedly said, are NOT working. The Fed is inventing policy and mechanisms on the fly and hopefully it'll be sufficient to allow an orderly working out of these problems. But it won't prevent a downturn in the credit markets and a much more severe and long-running downturn in the economy than most think. As a matter of personal decision-making it's important, vitally so, for you to come to grips with how serious this is, what it means for your own personal plans and those of your investments and place of employment. This is being managed by competent, dedicated and hard-working people who know what they're doing as well as anyone. Which won't prevent a downturn but should mitigate it. But the risks are to the downside of the downside and you should be planning and positioning yourself accordingly.

The box is a WSJ brief summary of the Bear specifics while after the break you'll find a nested sequence of reading excerpts, including some very nice historical ones, that trace the problem from small to large to systemic. While you don't have to click thru we strongly recommend reading, not skimming these. And if anybody has any questions or challenges or alternatives please post them in the comments and we'll try to address them.

By Mo. morning it's likely Bear will be either bought or in bankruptcy. But the systemic problems are just beginning to erupt from metastasis (and if that calls up terrible images of inoperable cancer good - the only objection we hope to have is the inoperable) to visible contagiong. Even if the Fed controls and manages this and other outbreaks the impacts will be what Feldstein and Summers have been warning they will be. Please start thinking thru your strategies.

 e-Mail Excerpt

In case you hadn't noticed we just went thru our 3rd major crisis in the credit markets as increasing tightening and fear led to investment banks asking highly leveraged hedge funds to be asked for more collateral. Which in turn caused them to sell assets at fire-sale liquidation prices, even when those were the best assets on the books. The net result is that the Fed's intervention on Mon arrested yet another collapse in the credit markets - a major lubricant for the economic engine - but didn't fix the underlying structural problems. Those, IMHO, will only be fixed by time, write-downs, de-leveraging and re-pricing of risks. A process which will take many months and perhaps years.

In the meantime we were headed for an economic downturn anyway which is being further accelerated by problems in Housing and credit alone with declining consumer demand. We're still, despite the headlines, very early in a cyclic downturn and there is widespread mis-understanding of the nature of the business cycle. The following blog posts may be worth your attention as they try and collect some recent readings, talk about the situation and lay out some "simple" tools for understanding the cycle and the Fed's recent actions.

We're skidding into a turn into the economy on narrow, twisty backroads in bad country with steep dropoffs. And various players have added a lot of oil to the road. We can't avoide the skid but have to steer thru it. Hopefully the drivers are skilled, knowledgable and clear-headed. So far this Fed has done, IMHO, a magnificent job in a fraught situation. But it seems to me that you ought to be aware of all this churn around you.

Posted by dblwyo at 04:27 PM | Permalink | Comments (0)

If anybody's in doubt yesterday's emergency rescue of BearSterns, you know they who were entirely w/o trouble or credit problems just 48 hrs earlier, should go a long way toward double-underlining the seriousness of the credit crisis. We're presuming here that anybody reading this blog knows that Bear was rescured literally at the last moment from liquidation by the FED (!!) and J.P. Morgan. On the grounds that the whole house of cards might come tumbling down. The right thing to do IMHO but not the last chance to do it - very unfortunately. And who knows where the next shoe will topple. So the economy's not the only place where it's all about the credit, as you can see from the chart.

Below the break are the week's market related readings - most of which are related to spreading credit problems, e.g. Wilbur Ross's take that we're going to see serious bank failures. Wow deja vu all over again. There's a bunch more readings in the Credit vs Market section that strike that same theme and point to other weak spots. We'd suggest starting with a skim of the first two excerpts which are nice overviews of differring sorts. The first a review of the events and the 2nd a review of a recent book on the extent and magnitude of the crisis. As always you can click thru to the original article. There were actually very few strictly market related posts but two were G-S's advice to SELL the rally (here, here) except you didn't get much chance. And another from Prieur de Pleiss looking at the long-run correlations between buying at low PEs and long-term returns. THIS is the one to pay real attention to. Especially given what's likely to happen to earnings and PE compression.

Turning back to the chart we'll let you inspect it yourself but add three observations.

First the short-term 10-day chart shows the wild swings as credit drugs took hold or faded. First the Fed intervened and it jumped. As that was fading S&P told us the worse was over - or at least the end was visible and it re-jumped. But before it could fade the Bear-Sterns news put the lie to that fantasy. The middle sub-chart shows Six-months and while the expected upside breakout went the other way it's also going sideways - which we take as a sign that Mr. Market is both strongly bi-polar and still in denial. Hard to do in light of unrelievedly bad economic news in the last couple of weeks (Mar15 summary, H.F. Data Analysis). Hard to understand how moving from "worst economic problem we've seen in a generation" (Summers) to "worst economic risks we've seen post WW2" (Feldstein) in about a week allows "time to buy at the bottom" but there it is. Our position is that simple charts and a little thought make things pretty clear but that is apparantly not the case.

As for the longer term in the 3rd sub-chart let's try a thought exercise to re-iterate a constant theme here. We've barely cleared up the '07 messes which were largely buyout/buyback/liquidity induced feeding frenzies. So, while everybody in the it's over camp is talking about the <20% drop, we'd like to suggest that bouncing off the lower upchannel bound would make sense with the mild downturn NOT now being expected. Maybe. But the starting point for a correction out to be with the fluff scraped off. And it is' just a mild downturn that's 20% from there, slightly more severe let's say 30%. And if Feldstein/Summers/et.al. are right and Ben can't pull enough rabbits from the hat fast enough well....you pick. But try running that math against 1500 as your start point and see where you end up !

General & Special Readings 

What a Difference 18 Months Make (or, Reality Bites) When reality is shockingly unpleasant, the market sometimes chooses to ignore it. Eventually, though, reality cannot be denied. Start with the housing downturn, whose significance many underestimated (including the Fed). Then there was the sub-prime situation, which many people (once again, including the Fed also) erroneously believed was contained. As Jim Grant wryly observed, it was "Contained" -- to Planet Earth. Add to this the hard- and soft-commodity inflation emerged which many -- including the Fed -- thought was anchored. I'm starting to notice a pattern here . . . All this denial led to the biggest credit crisis in 50 years with risk being reassessed as credit spreads widen and remain wide.

The pendulum swings He puts the eventual bill for the financial follies of the past few years at some $1 trillion—if all the excessive leverage (or borrowing) is wound down in an orderly fashion, which he considers unlikely. Thanks to securitisation, poor-quality mortgages are marbled through the entire global credit system. And there is more to come: commercial property, credit cards, corporate debt, credit-default swaps. For the most exposed institutions, it will be death by a thousand cuts. Changes in the structure of the markets add to the problem. Unlike commercial banks, investment banks and hedge funds tend to increase their leverage during booms and shrink it in rough times. Since these two groups now account for half of all credit, their accelerated deleveraging is likely to make the credit contraction much worse than in past cycles. Mr Morris sees hedge funds—spared the worst at the start of the crisis but now suffering as their lenders demand more collateral—as the next weak link. He describes three trends converging to create the bubble. By 2006 the growing trend towards deregulation had pushed three-quarters of all lending outside the purview of regulators. Securitisation created a serious agency problem, leaving loan originators, who were paid up-front, with no incentive to avoid bad credits and every reason to piggyback inappropriate products onto good ones (in one particularly depressing tale, a retired postal worker whose mortgage is almost paid off is switched to an interest-only product that leaves him in danger of losing his home). Banks and rating agencies were gripped by the pretence that all finance can be calculated by risk-modelling eggheads. It did not help that many investors blindly accepted the rating agencies as a kind of “financial Supreme Court”.

Market Outlook 

Midday Tidbits — The Response to the Fed Response Goldman Sachs strategists advise selling this rally, saying the Federal Reserve’s action “does nothing to attack the root cause of credit and funding risks: asset price depreciation.” The company believes housing prices will fall an additional 10% to 12%, and commercial real estate prices will fall an additional 15% to 20%. Mortgage rates jumped higher in the week ending March 7, note economists at Lehman Brothers. they point out that the average rate on a 30-year fixed-rate mortgage rose 0.39 percentage point to 6.37%, highest since last summer. Adjustable-rate loans are at eight-year highs, meanwhile. Michael Pento of Delta Global Advisors notes that the Fed’s plan appears to be “increasing the money supply and real estate loan volume until home prices cease contracting. This is all there is to its ultimate plan for rescuing the economy and balance sheets of investment banks. Put another way, the Fed is trying to bail out certain investment banks on the back of the currency and at the expense of savers– simple cronyism in its most base form.” Duration and Reach of Financial Market Stress Challenging Fed

Are Low P/Es a Valid Reason to Buy? With the economy showing clear signs of recession and the credit markets in turmoil, the floor under stock prices seems to be getting thinner. Here is another reason to worry: Stock prices aren't as cheap as they seem, and based on other periods when inflation was accelerating and the economy weak, the market can struggle for prolonged periods. Until 2000, investors feasted on the combination of rising P/E ratios and rising stock prices. At the end of the 1980-82 bear market, S&P stocks changed hands at a price-to-earnings ratio of 8.7, according to Morgan Stanley's data. In the next 17 years, the ratio moved higher, topping out just shy of 30 in the spring of 1999. During that time, when the S&P rose an average of about 17% a year, roughly one-third of returns on the S&P 500 were the result of rising P/E multiples, according to Ibbotson Associates. That period also featured a long downtrend in inflation and interest rates, which generally lead directly to higher multiples. Now, inflation is quickening, and interest rates, while heading down, can't fall much further. This suggests an environment less conducive to rising stock multiples.

• Equity Prices of Major World Markets in Pictures

Credit Crisis and the Markets 

Billionaire Investor Sees Bank Failures Ahead Billionaire investor Wilbur Ross says the current market downturn differs from previous slumps in that no American banks have yet failed this time, but he suggests that's about to change. "I think that's going to be the next wave, and coupled with problems in the commercial real estate market; I think they'll be the next bubbles that burst," the chairman and CEO of W. L. Ross and Company told CNBC's "Squawk Box" in an exclusive interview. Ross's comments echo those made by Federal Reserve Chairman Ben Bernanke, who told a Senate committee on Feb. 28 that some smaller regional banks that heavily invested in real estate could go under. Ross and other high-profile investors have made recent moves in the credit markets, explaining that they have done so to snap up bargains. Last week it was reported that Ross had invested $1 billion into municipal bonds. In the meantime, Ross said he didn't think the U.S. economy would recover any time soon. Straightening out the problems in the bond industry, particularly the situation of the insurers who backstop bond offerings, would go a long way toward fixing the current paralysis in the credit markets, Ross intimated. That process is underway, he suggested, with the current reassessment by ratings agencies of the bond insurers.

Standard & Poor's raised its estimate of subprime write-downs to $285 billion and said credit problems are far from contained, but said large financial firms may be getting over the write-down hump.

Fear Cycle Hits Structured Products Rational thinking has gone out the window in the credit markets. As investors fret about the unraveling of complex structured products, they are driving risk premiums on a closely watched derivative index -- the investment-grade Market CDX IG9 index -- to record weak levels that few imagined could be reached a year ago. That, in turn, is creating a vicious cycle: the wider the risk premiums go on this index, the more of these complex structured products -- which are at the heart of the ongoing credit crunch -- get dragged into the maelstrom. The IG9 index reflects the cost of insuring against default by 125 U.S. and Canadian investment-grade companies. It widens when investors buy protection in anticipation of further troubles in corporate credit. Structured products also used the index, primarily selling protection, as part of elaborate money-making strategies. The widening index is putting extraordinary pressure on complex products such as constant proportion debt obligations and collateralized debt obligations, and is threatening to trigger the unwinding of investment positions.

•  Citi Sees US Investment Banks Writing Down $9 Bln
• Gross, Ross, SEC Fail to Ease Auction-Rate Paralysis With Failures at 60%

Hedge Funds Reel as Bankers Increase Collateral Demands Even on Treasuries The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States. Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral. While lenders are most unsettled by credit consisting of real estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasuries, considered the world's safest securities, because of the price fluctuations in the bond market. The lending crackdown is the worst to hit the $1.9 trillion hedge-fund industry since Russia's debt default in 1998 roiled global credit markets and required the U.S. Federal Reserve to pressure the securities industry to arrange a $3.6 billion bailout of Greenwich, Connecticut-based Long-Term Capital Management LP. Today, hedge funds are being forced to sell assets to meet banks' margin calls, resulting in the dissolution of the funds.

Housing's next shoe to drop The credit crunch has finally hit the traditional mortgage market. Investors are now shunning mortgage-backed securities issued by government sponsored enterprises Fannie Mae and Freddie Mac, which have been critical in keeping the real estate market from completely falling apart. Some fear this development will make it harder for people, even those with strong credit histories, to get a home loan.

·         Foreclosures up 60%

Posted by dblwyo at 03:39 PM | Permalink | Comments (0)

When the retirng head of the NBER, Martin Feldstein, comes out and says it, that is we're in a recession, then it's getting pretty serious. That's not the only thing he had to say though, of course. The rest of it may sound strangely familiar to readers, at least we hope so. Something about the worst downturn since WW2. None of which is still reflected in the Street's thinking but as you'll in the excerpts both the public economics community AND the CFO's of major corporations are on-board. Furthermore their assessments pretty much mean our take on where we're at in the cycle are dead on. Feldstein's stance has been seconded by Larry Summers in a speech last week at Stamford and the URL pointers to the vidclips are posted below. It's becoming the Marty and Larry show ? Wonder if they have the same agent ?

Our opinions are pretty much a matter of record as well and have been for a long time. The two recent posts that we put up on a complete review of the High-Frequency (HF) indicators and the breakage on a deep structural level in the credit markets are really worth reviewing. Lots of charts in both and some might be a little "wonkish" (as Krugman terms the set we adapted from him) but the postings are still worth reading if you haven't. 

• He's Back: Retail Sales and other H.F. Scary Data
• Galt vs the Fed II: Credit Disequilibriums, Broken Markets and Economic Implosions

Economy

End to the Good Times (Such as They Were) If history is a reliable guide, the recession of 2008 is now unavoidable. The dismal jobs report released Friday showed overall employment to be lower than it was three months ago. Every time such a slump has occurred since the early 1970s, a recession has followed — or already been under way. And if the good times have really ended, they were never that good to begin with. Most American households are still not earning as much annually as they did in 1999, once inflation is taken into account. Since the Census Bureau began keeping records in the 1960s, a prolonged expansion has never ended without household income having set a new record. For months, policy makers and Wall Street economists have been predicting, and hoping, that the aggressive series of interest rate cuts by the Federal Reserve would keep the economy growing, despite the housing bust. But the possibility seemed to diminish almost by the hour on Friday.

U.S. Slowdown Will Be Deeper, Rebound Weaker Than Forecast, Survey Shows The economic slowdown in the U.S. will be deeper and the recovery weaker than previously forecast, according to a Bloomberg News monthly survey. The world's largest economy will grow at an annual rate of 0.3 percent from January through June, a half point less than projected in February, according to the median estimate of 62 economists polled from March 3 to March 10. Rising fuel prices, shrinking payrolls and falling home values will weaken consumer spending and blunt the impact of tax rebates that start going out in May. The Federal Reserve, struggling to offset the credit crunch and housing contraction, will cut the benchmark interest rate by another percentage point and keep it at 2 percent through December, the survey predicts. The odds of a recession over the next 12 months were pegged at 50 percent, the same as in the February survey, according to the median estimate of 42 economists that responded to the question.

·         THE U.S. HAS finally slid into recession, according to the majority of economists in the latest Wall Street Journal economic-forecasting survey, a view that was reinforced by new data showing a sharp drop in retail sales last month. (WSJ)

·         Q4 Mortgage Equity Withdrawal: $76 Billion MEW was declining in Q4 2007, however, these numbers are not seasonally adjusted. MEW in Q4 2006 was $94.6 Billion, so MEW has only fallen 20% from Q4 2006. As homeowner equity continues to decline sharply in the coming quarters, combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

·         Retail Sales Plunge by 0.6 Percent The Commerce Department reported Thursday that retail sales fell by 0.6 percent last month, far worse than the small 0.2 percent increase that analysts had been expecting. The weakness was widespread with sales of autos, furniture and appliances all down. It marked the second time in the past three months that retail sales have taken a tumble. Sales had fallen by an even bigger 0.7 percent in December, the largest drop in six months, as the nation's retailers suffered through a dismal holiday shopping season. Sales posted a modest 0.4 percent gain in January.

·         Real Retail Sales Although the Census Bureau reported that nominal retail sales increased 2.4% year-over-year, real retail sales declined over 1% (on a YoY basis). This is a recessionary level for retail sales.

·         Larry Summars vidclip at Stamford’s SIPR economic outlook conference ( ~ 11min). Long version ( ~ 50 min.)

·         U.S. Faces Severe Recession: NBER's Feldstein The United States is in a recession that could be "substantially more severe" than recent ones, National Bureau of Economic Research President Martin Feldstein said on Friday. "The situation is very bad, the situation is getting worse, and the risks are that it could get very bad," Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida. "There's no doubt that this year and next year are going to be very difficult years." The Fed's huge new credit facility, announced on Tuesday, "can help in a rather small way ... but the underlying risks will remain with the institutions that borrow from the Fed, and this does nothing to change their capital," Feldstein noted. Feldstein said the combination of monetary and fiscal stimulus and the falling dollar "will help to dampen the magnitude of the downturn but won't be enough to sustain an expansion."

Recession has already started, CFOs say-survey A recession has already started and the downturn is likely to last longer than in the recent past, with the economy recovering only late next year, according to a quarterly survey of corporate finance chiefs released on Wednesday. Fifty-four percent of the CFOs said the United States is in recession, and another 24 percent said there is a high likelihood of one starting later this year, according to a Duke University/CFO Magazine survey completed on March 7. Nearly three-quarters of the CFOs said they were more pessimistic this quarter than in the prior quarter about the U.S. economy, reflecting concerns about consumer spending, turmoil in credit and housing markets, and high energy prices. An index of optimism, which rates the economy on a 1 to 100 scale, is at 52, the lowest in the seven-year history of the index, the survey found. "The last two recessions lasted only eight months," said Duke professor Campbell Harvey, founding director of the survey. "In contrast, 90 percent of the CFOs do not believe the economy will turn the corner in 2008. Indeed, many of them believe it will be late 2009 before a recovery takes hold." In response, companies are scaling back plans for capital spending and are not planning significant hiring, in part because of high labor costs, according to the survey, which has been conducted for 12 years.

A Construction Sector, Once Robust, Now Falters IT has been the worst of times for the residential construction industry in America — and among the best of times for construction companies that build other kinds of buildings, ranging from hotels to office buildings and stores. Now, however, there are signs of weakness in some of those nonresidential sectors, and governments, whose share of construction spending had risen to a 15-year high, appear to be increasingly hesitant to spend. A result is that overall construction spending has begun to fall. That trend appears likely to accelerate as credit remains tight for builders and as local governments become worried that revenue from property and sales taxes may fall as home prices decline and consumers tighten their belts. The accompanying charts show the annual rate of change in various categories of construction spending over 24-month periods. For private residential construction, the annual rate of decline has hit 18.6 percent, with the amount being spent in that area a third less than it was two years ago. That is the fastest decline in such spending since the government began keeping records in 1964. But private nonresidential construction picked up the difference until recently, as spending on office building construction rose at the fastest pace in nearly a decade, more than 20 percent a year. Hotel construction has climbed even more rapidly, rising over the past two years at an annual rate of more than 50 percent. But spending growth has slowed drastically in recent months. Spending on hotels is growing at a rate that is less than a quarter of what it was a few months ago, and spending on office buildings has declined even more rapidly. The area of private construction spending that is most important to the consumer economy — the spending on commercial space, including stores — has been declining in recent months.

TIPS Prove Bernanke Has Lost Control of Inflation as Yields Turn Negative Bond investors have never been so sure that the Federal Reserve will lose control of inflation. They're so convinced that they're giving up yields just to buy debt securities that protect against rising consumer prices. The yield on the five-year Treasury Inflation-Protected Security due in 2012 has been negative since Feb. 29, and traded today at minus 0.17 percent. The notes, which were first sold in 1997, have never before traded below zero. Even so, firms from Deutsche Asset Management to Vanguard Group Inc., the second- biggest U.S. mutual fund company, say TIPS are a bargain. For the first time in a generation, money managers must come to grips with a central bank that's more intent on spurring the economy than restraining price increases. With oil above $100 a barrel, gold approaching $1,000 an ounce and the dollar at a record low against the euro, TIPS show investors aren't convinced Fed Chairman Ben S. Bernanke will be able to tame inflation once policy makers stop cutting interest rates.

IMF Nods to Spending Spree by Asian Countries Undermined by Slump in U.S. Asian governments are abandoning spending restraint and trying to get their consumers to do the same in their battle to overcome slowing growth. The Philippines may discard plans to balance its budget this year as President Gloria Arroyo's government accelerates investment in public works and social services. Thailand's government is spending 1.5 trillion baht ($47 billion) to expand mass transportation and improve health care. Hong Kong is cutting taxes, and Singapore is handing out cash to its citizens. Such policies, aimed at generating more demand at home to make up for slowing overseas sales, come with the encouragement of the International Monetary Fund, in a reversal of its long- standing push for fiscal restraint. Developing more self- sustaining domestic sources of growth may help Asia's emerging economies shift away from dependence on exports. In developing Asian nations, the IMF predicts growth will decline to 8.6 percent in 2008 from an estimated 9.6 percent in each of the past two years. The region's economies, almost twice as reliant on overseas sales as the rest of the world, are being dragged down by weakness in the U.S., Japan and Europe, the markets for 60 percent of Asian shipments. Purchasing managers' indexes in China, Singapore and India already indicate slowing manufacturing growth.

Crude Awakening: Analysts Adjust A two-week string of record oil prices has left prognosticators at banks and brokerage firms struggling to keep pace. With crude futures trading firmly above $100 a barrel, oil economists are revising their forecasts -- up. Oil has traded at an average price of $95.12 a barrel this year on the New York Mercantile Exchange, up 65.5% from the start of last year. That has left many analysts' forecasts in the dust. Lehman Brothers, for example, recently boosted its first-quarter forecast for benchmark Nymex crude to $93 a barrel, up $7 from its earlier outlook. The bank sees oil averaging $86 this year, but acknowledges the pitfalls it's facing. A team of Goldman Sachs equity analysts, who three years ago made waves by predicting a price "super spike" to as high as a then-unheard of $105, weighed in again last week. They suggested prices could rocket as high as $200 a barrel if the U.S. economy regains momentum or a wrench is thrown in the world's oil supply. Oil and other commodities have bolted to records as investment funds seek out hard assets as a hedge against a falling dollar. That has led analysts and consumers to warn of a bubble, and has made forecasting an even more treacherous business than usual.

Posted by dblwyo at 10:00 PM | Permalink | Comments (0)

Decoupling ? Decoupling ? Anyone ? Anyone ? If there are any true believers the readings below should help correct your thinking. For the rest of us there are some interesting points about how the wave of the US slowdown is both spreading and exposing fault lines in foreign countries. For example in Japan who's non-recovery from the "Lost Decade" has a lot to do with weaknesses in it's political structure. Ones btw that are oddly reflected in the populist rhetoric of some of our campaigns.

SE Asia is also coming under increasing pressure and is now facing the need to find sources of internal stimulas, as are India and China. The latter in particular though is now finding itself an exporter of inflation, as was predictable and predicted, due to rising wage costs in the coastal cities.

We care about all this because it lessons demand for US exports, raises the cost-push inflation risks, and, as the dollar continues to weaken, reduces the carry trade which was a major prop to the stock market. Also if you've been an investor in these markets it's long past time to get out no matter what the talking heads have been saying. Don't say you weren't warned - AGAIN. 

IMF Nods to Spending Spree by Asian Countries Undermined by Slump in U.S. Asian governments are abandoning spending restraint and trying to get their consumers to do the same in their battle to overcome slowing growth. The Philippines may discard plans to balance its budget this year as President Gloria Arroyo's government accelerates investment in public works and social services. Thailand's government is spending 1.5 trillion baht ($47 billion) to expand mass transportation and improve health care. Hong Kong is cutting taxes, and Singapore is handing out cash to its citizens. Such policies, aimed at generating more demand at home to make up for slowing overseas sales, come with the encouragement of the International Monetary Fund, in a reversal of its long- standing push for fiscal restraint. Developing more self- sustaining domestic sources of growth may help Asia's emerging economies shift away from dependence on exports. In developing Asian nations, the IMF predicts growth will decline to 8.6 percent in 2008 from an estimated 9.6 percent in each of the past two years. The region's economies, almost twice as reliant on overseas sales as the rest of the world, are being dragged down by weakness in the U.S., Japan and Europe, the markets for 60 percent of Asian shipments. Purchasing managers' indexes in China, Singapore and India already indicate slowing manufacturing growth.

Under pressure Small firms, the bedrock of Japanese industrial might, face hard times. Small and medium-sized enterprises (SMEs), defined in the manufacturing sector as those having capital below ¥300m ($3m) or fewer than 300 employees, represent 99.7% of companies in Japan. They employ around 70% of the workforce and account for half of manufacturing by value. Many of them are found in clusters, in areas such as Tokyo's Ota ward and the city of Higashi-osaka. They specialise in fields such as electronics manufacturing, precision engineering and fine chemicals. A few date back centuries. As in Germany, many of these anonymous, often family-run small companies boast world-class technology that enables big firms to succeed. But in Japan, firms like Densho are becoming the exception rather than the rule. In recent years big firms have put pressure on their suppliers, forcing them to cut prices and accept lower margins. Meanwhile, Japan's manufacturing industry is under increasing pressure from Chinese firms offering improving quality, large volumes and low prices. Rising energy and transport costs and the fragility of the Japanese economy only add to the pain. Accordingly, Japan's Mittelstand is struggling. Only about one-third of firms with less than ¥100m in capital are profitable, according to the tax agency, compared with half of larger firms (see chart).

Yen Bulls Test Bank of Japan's Indifference to Biggest Rally This Decade For the first time in more than a decade, foreign exchange traders are confident that the Bank of Japan won't intervene in the currency market, paving the way for the yen to extend its biggest rally since 2000. Japanese authorities sold the currency on all four occasions since 1995 when the yen approached the 100 mark in a bid to support exporters from Toyota Motor Corp. to Sony Corp. When the yen strengthened to a eight-year high of 101.43 last week, Finance Minister Fukushiro Nukaga stopped short of signaling that officials are concerned, only saying the government needs to watch currency moves ``carefully.'' An attempt to influence exchange rates would bring Japan into conflict with the U.S., which relies on a weak dollar to underpin an economy on the verge of a recession. Citigroup Inc. and Royal Bank of Scotland Group Plc, the third- and fourth- biggest traders, say Nukaga will let the yen break 100 because it's 40 percent weaker than its peak in 1995 on a trade-weighted basis.

Inflation is China's next export Having long accused Beijing of manipulating its currency to keep Chinese exports inexpensive, thus gaining an unfair trade advantage, Americans might find a troublesome new export from China: inflation. The manufacturing sector in China can no longer offset rising prices with productivity gains because of the combined gains in the yuan - up 3 percent against the dollar in the past two months - as well as food, energy and other raw material price increases that have pushed domestic inflation to 11-year highs. Efficiency at listed manufacturing companies in China peaked last year and has already started to deteriorate. On top of that, Beijing is considering letting land and other resource prices rise to market levels, while a more stringent labor law that took affect this week will surely push up labor costs. The question is, will China be able to pass on higher costs to global consumers? What a change from the past five years. During that period China was a deflationary force, helping keep global prices low. To be sure, Chinese exports to the United States are still slightly cheaper than they were in 2003, according to U.S. government figures. But the trend is clear. Prices have started to climb in the past year, and increases are likely to accelerate in 2008.

China banks could face credit crisis of their own Banks in China seem to have dodged a bullet in the U.S. subprime mortgage crisis. Chinese lenders accumulated large amounts of that bad debt. But bankers have assured investors they are within manageable levels that won't greatly affect their profit, fattened by a domestic economy that is growing at double-digit rates. But that doesn't mean China will be able to avert a credit crunch of its own making. In fact, risks are growing of a credit crisis with Chinese characteristics. A crisis like that could rock global markets, because China has been one of the few bright spots in the world economy. With memories still fresh of Beijing's having injected more than $260 billion into its banks while shifting bad loans off their books, another huge bailout may become necessary if loose lending practices are not halted. What could trigger such a turnaround in the Chinese credit market? A sudden sharp slowing of the Chinese economy. That's not as far-fetched as it might seem. Weaker overseas demand and the bursting of an asset bubble in China could result in defaults by droves of companies. Sudden deflation of a bubble can lead to fast-deteriorating asset quality, cascading in a chain reaction through the financial system, as has happened in the United States.

Posted by dblwyo at 04:16 PM | Permalink | Comments (0)

He in this case being the Rminator and while he's not necessarily in the house that's his engine your hear revving up. Today's economic news was the release of Feb. retail sales data. As we, and others have been expecting, it was down. With the Commerce Dept. estimating it dropped 0.6% MtM though they estimated a 2.4% YoY increase in nominal sales. Much more importantly estimates of real retail sales showed a pretty severe drop. My e-friend CalculatedRisk estimated a drop over 1%(Real Retail Sales). Using a different, simpler but consistent method we estimated that YOY sales dropped -1.45% for Feb. and the 3MoMA was -.84%. In any case the particular monthly number isn't as important as they trend which is captured in the chart at right. In the top you see real and nominal sales which have been trending downward on the whole since early '06. The interesting thing to notice is that there was a late pickup in nominal sales in late '07 due to inflation but now it's headed down. Consequently the real sales line is dropping much more steeply. We've been making the points about business cycles, lag structures and where we're at. This gives us an excellent idea and you can see it. And the bottom shows sales since Jan93 and we'll make the obvious point. Real sales has dropped about as much as it did at the bottom of the '01 mild recession. And if we're right about the cycle well, "argh...Captain you're strainin' the ingines...I cannah hold her".

In other word we're very early in the downturn part of the cycle but from these charts arresting the decceleration doesn't appear likely; and we're early days yet. To keep hammering on that point - where will real sales go if they've already fallen as far as '01 and we're early in even a mild downturn ?

But let's dig into things a little more with a refresh and update of our pool of high-frequency economic data after the break. 

Consumption and Investment

Let's start with the two key engines of the economy in the chart at right. In the top you see real consumption (PCER) and real retail sales along with Auto sales (r.h. side) on a YOY basis. By and large nobody's doing well and, even though this data is only thru the end of Jan for the complete set, is pretty well confirms the new sales data. The bottom show various investment spending indicators, and with the exception of an interesting uptick in capex x-Aircraft spending, Industrial Production and Nw Home sales confirm that investment is continuing down. BtW yesterday saw the release of the Duke CFO survey which was very pessimitistic and projected increased hiring and capex spending reductions ahead. For the big picture on GDP and components see this prior post.

Future Demand: Wages + Employment

We've discussed how one of the better indicators of future demand is the combined change in real wages and employment because it drives consumption, which in turn drives investment. The bottom chart shows the YOY changes in real weekly wages and employment and their combination, thru the end of Jan. Employment shows a steady downtrend but real wages took a hit from inflation, after last summer's beneficial surprise from oil price decreases (which likely postponed the reckonings). The top part of the chart compares W+E changes to real sales and consumption changes. Notice the parallels though we see W+E turning down earlier, and perhaps steeper. When you imagine what the impact of the most recent Employment surprise (Rational Responses: Current Employment Picture) will be it's a scary picture, at least to us.

Money, Interest and Inflation

Those two chunks of data describe the real economy as it is and is likely to be. The third set of H.F. data we like to look at concerns the money supply, interest rates and inflation to see are they helping or hurting. And we'd have to say the later by and large. Actually not B-n-L but completely. Let's take a look. 

In the top the 10Yr Tresury vs FedFund spread is flattening which is a recessionary indicator because it anticipates lower future demand for funds. On the other hand all the credit market mess we discussed shows up in the spread between 3Mo Treasures and Commerical Paper, which got better but is still wide. Unfortunatel all the thrashing to get more liquidity into the system isn't helping. The final line shows the inflation-adjusted monetary base, i.e. how much money's in the system, and it shows a severe downtrend on a YOY basis (r.h. scale) actually declining. Yesterday's posts on the credit crisis and Fed policy walked thru some of the reasons for that. (Galt vs the Fed II: Credit Disequilibriums, Broken Markets and Economic Implosions).

The middle part shows the CPI, PPI and 10YR Tresury rates which are moving in different directions. CPI is increasing but PPI accelerating but as the Fed attempts to figth off the Rminator interest rates have dropped steeply. All in all we share their priorities but this also stores up some risks for the future. But the world is tradeoffs. It's also inter-connections as the bottom part of the chart shows where the Dollar continues to drop more rapidly, partly explained by the interest-rate gaps between the US and the other major developed countries (their money is worth more because you get a higher return show it takes more dollars to buy anything). Which then ripples forward into significant increases in Oil prices too.

One damm thing just leads to another as they say and that's what we're facing. 

Posted by dblwyo at 11:57 AM | Permalink | Comments (0)

1. The economy is in a downturn that's a natural characteristic of business cycles but which threatens to tip over into something much worse as consumer demand slows and the credit crisis threatens to seize up.
2. Credit markets are normally the lubricant that allows for the smooth functioning of the cycle, up and down, but the normal predictable patterns in the overall market and the stable relationships between markets, which are not a given but the result of market equilibrating forces, are as badly broken as they've been in the post-WW2 era.
• Comparable examples of credit collapse would be 1929, 1912, the 1870s, 1920ish in Britain under Churchill and the problems in the 1890s. The situation is that serious. 
3. If the credit markets are not repaired, including order write-downs, de-leveragings, re-pricing of risk and huge losses necessary for a return of normalities then the economy is at serious risk of major...major problems. (that's a euphemism btw but I'm superstitious)

And apparantly our judgement on the situation is not entirely an isolated one. From the WSJ's "Market Blog" we have this little tidbit:

Midday Tidbits — The Response to the Fed Response Goldman Sachs strategists advise selling this rally, saying the Federal Reserve’s action “does nothing to attack the root cause of credit and funding risks: asset price depreciation.” The company believes housing prices will fall an additional 10% to 12%, and commercial real estate prices will fall an additional 15% to 20%. Mortgage rates jumped higher in the week ending March 7, note economists at Lehman Brothers. they point out that the average rate on a 30-year fixed-rate mortgage rose 0.39 percentage point to 6.37%, highest since last summer. Adjustable-rate loans are at eight-year highs, meanwhile. Michael Pento of Delta Global Advisors notes that the Fed’s plan appears to be “increasing the money supply and real estate loan volume until home prices cease contracting. This is all there is to its ultimate plan for rescuing the economy and balance sheets of investment banks. Put another way, the Fed is trying to bail out certain investment banks on the back of the currency and at the expense of savers– simple cronyism in its most base form.” 

Just remember we're still slidng into that curve and there's a lot of oil been put down.

Economic Situation

The chart at right defines the business cycle situation of the economy and the competing views of where we're at and what's going on. The mis-understanding of the nature of cycles, the lag structure, i.e. consumer demand, etc. and the alternatives is very widespread. Fortunately not among folks like Summers or at the Fed. Recent policy steps are an attempt to get from the black to the yellow curve while Wall St. fantasies are the purple line. Credit market devolution could take us to the red line with all that implies and appears to be the danger foremost in policy makers minds. As it should be. Carried far enough this could make Japan's "Lost Decade" a walk in the part by comparison.

Normal Credit Market Situation

Paul Krugman in a recent blog post put up some fascinating charts trying to explain how various financial markets inter-act and clear, that is return to a stable equilibrium. A lot of great papers will be written about this period if anybody can afford to write and read them. Right now we need to fix the problem. The first sub-chart shows the normal relationships among Treasuries (TT), Money (MM) and Securities (SS) when all these different asset/credit markets are cleared, in equilibrium and in equilibrium with each other. This is the "normal" (non-Minsky) situation. The schedules express the markets as functions of the tradeoff between normal economic interest rates (R _t ) and those in the securities markets (R _s). The second sub-chart shows the situation in a "normal" downturn - which remember we're facing anyway - when the Fed lowers interest rates by increasing the money supply. Which causes Treasuries to shift and a new equilibrium to be reached without de-stabilizing the securities markets.

Unfortunately that's NOT, we repeat NOT...NOT...NOT, the situation we're faced with given the seizures in the credit markets. 

Abie Normal Credit Breakdowns

The next  chart set  shows the situation we find ourselves facing and what the Fed is trying to do about it. Here, in the first sub-chart, the "flight to quality" is (conceptually) driving up the apparent interest rate by shifting the SS schedule to a much higher point on the MM schedule, that is drying up liquidity. And thereby forcing the 3rd market to shift to a much higher interest rate to "clear". As long as the markets are convinced they've no idea - thru their own machinations of course - what the real value and returns are on the synthetic instruments they've created this will remain our situation. What the recent Fed actions do is start to re-value those by letting them be used as collateral. In the diagram making loans to banks so as to shift the TT schedule back down and bring the SS schedule with it.

When my neighbors house is on-fire I don't want the fire department to decide they haven't paid their "voluntary" contributions and not put the fire out before it destroys my house or the neighborhood. Nor do I want to rationalize non-intervention by calling proactive action "socialism" and dismissng it. This is too serious for either amusing intellectual bon mots or insufficiently deep dives on the structural breakage.

Posted by dblwyo at 06:36 PM | Permalink | Comments (0)

The two most interesting strategic stories in the last week were, IMHO, the sad charade in Washington as the "captains of the financial ship" were purportedly called on the carpet about the credit crisis. We'll have more to say on that later because an understanding of the situation will help dissect it. The other most interesting was our salvation thru the Fed's extension of credit facilities to banks by allowing them to use imperiled securities as collateral on temporary loans. But let's set the stage for that action by quoting from Caroline Baum's most recent opinion column on Bloomberg. She "quotes" in-directly from Ayn Rand's hero John Galt, mimicing his suggestion that the best and the brightest withdraw from the world until government stops interferring in our lives and businesses:

Today's economic and financial crisis would resolve itself more quickly and efficiently if the government got out of the way. 

That's as close to the single most irresponsible and mis-informed suggestion I've seen on this topic because it fails to grasp the extent of the breakdown in the credit markets, despite an otherwise complete and able survey of the symptoms. And because it fails to grasp the threat to the operation of the larger economy. It was certainly clever and educated in a liberal arts sense. A better assessment by someone with a much more profound, and we do mean PROFOUND, grasp of the situation comes from Larry Summers and his recent speech at Stamford's SIPR conference on the economy. 

"the U.S. will be judged to be currently in recession," adding that he believes the country is facing the most serious economic and financial stresses "in at least a generation -- and possibly much longer." "We are in unusual territory with respect to recession," he said. "We are in nearly unprecedented territory with respect to financial strain."

Sadly John Mauldin who's newsletter I'm an admiring reader of endorsed Baum's position without the usual care he displays into digging into the underlying structural situation. As a start on getting a better and deeper picture we've collected these and other readings for you.

And we'll follow this up with our own analytical interpretation in a follow-on post very shortly (we promise).

But here's the bottomline:

We're enterring a bad set of curves on a twisty road and somebody has not only poured oil on the road but keeps putting more down. We can't not enter the curve - we're going to fast. What we can do is hope that the driver is the most skilled, knowledgable and decisive one available to us. Not a sixteen year old learning to drive and full of mis-placed self-confidence nor someone with years of experience who's past it.

It's our opinion that the drivers we've got are about as good as it gets and a lot better than we deserve. Let's hope that's a true and accurate assessment, eh !

Readings

John Galt Plan Might Save U.S. Financial System: Caroline Baum Let's face it: The Federal Reserve must be scared to death as it watches the financial system unravel. Unravel would appear to be the operative word as leverage proves to be as toxic on the way down as it was intoxicating on the way up. By late last week, events seemed to be spinning out of control. Credit spreads were blowing out, with tax-exempt municipal bonds out-yielding Treasuries by a record and the spread between Fannie Mae mortgage-backed securities and government bonds hitting a 22-year high. Treasury bill yields were collapsing (further). The U.S. dollar was sinking like a stone. And commodity prices, in their lofty ascent, had all the makings of a market unhinged from the fundamentals, which, after all, is the definition of a bubble. Mortgage foreclosures hit an all-time high in the fourth quarter of last year while homeowners' equity, or the value of a home less the outstanding mortgage, sank to an all-time low of 47.9 percent. This measure of owners' equity has been declining since the Fed started collecting data in 1945. (This isn't your father's housing market.) More unusual was the drop in the value of household real estate in the fourth quarter, one of a handful of declines in the half-century life of the series. Margin calls are causing forced selling of assets (often what investors can sell, not what they'd like to sell), which makes them cheaper, which triggers additional margin calls and more forced selling. No wonder the Fed announced two initiatives early Friday before the New York Stock Exchange opened to address ``heightened liquidity pressures.'' Today's economic and financial crisis would resolve itself more quickly and efficiently if the government got out of the way. Yes, there would be pain. Some banks would fail. Others would clamp down on credit to atone for the years of lax lending standards. Homeowners-in-name-only would become renters. Housing prices would fall until speculators found value.

Summers Says Stresses Require More Action Former Treasury Secretary Summers said that "the U.S. will be judged to be currently in recession," adding that he believes the country is facing the most serious economic and financial stresses "in at least a generation -- and possibly much longer." "We are in unusual territory with respect to recession," he said. "We are in nearly unprecedented territory with respect to financial strain." Mr. Summers called for more aggressive government action. He said it would be "a grave mistake to believe in self-equilibrating properties of the economy or markets for large shocks." "Confidence is essential and confidence depends on a perception of transparency and a perception of credibility," he said. "Confidence will not return in any environment" in which there is concern that "heavy and unknown shoes will drop soon," he said. "Denial ... in support of confidence is counterproductive," he said. Mr. Summers endorsed recent fiscal stimulus legislation and the Federal Reserve's interest rate cuts. He said more fiscal stimulus may be needed and planning should begin now, suggesting aid to state and local government should be considered.

What’s Ben doing? (Very wonkish) The financial crisis seems to have entered its third wave. Panic in August, then partial recovery thanks to lots of money thrown at the system by the Fed. Renewed panic late fall, then partial recovery thanks to even more money thrown in, especially the Temporary Auction Facility. And panic has set in yet again: So the Fed is throwing another wave of money in, via the TAF and also additional loans to banks. All this lending is backed by collateral: the banks are setting aside various stuff, but probably mainly mortgage-backed securities. How do we think about all this? The basic idea (which goes back to James Tobin) involves thinking of equilibrium in the markets for assets, while putting the question of how all this interacts with the markets for goods and labor temporarily off to one side. So, in this case, imagine that there are three assets: money (really monetary base), Treasury bills, and private securities (think mortgage-backed). There are three separate market-clearing conditions, which can be represented by the lines SS, TT, and MM below; the interest rates on T-bills and private securities have to adjust so as to clear all three. But if any two markets clear, the third one does too… OK, this is just like the way you analyze sterilized intervention in currencies. And the usual problem with such intervention applies: the financial markets are so huge that even big interventions tend to look like a drop in the bucket. If foreign exchange intervention works, it’s usually because of the “slap in the face” effect: the markets are getting hysterical, and intervention gives them a chance to come to their senses. And the problem now becomes obvious. This is now the third time Ben & co. have tried slapping the market in the face — and panic keeps coming back. So maybe the markets aren’t hysterical — maybe they’re just facing reality. And in that case the markets don’t need a slap in the face, they need more fundamental treatment — and maybe triage. Why sterilization matters 

·         The Face-Slap Theory Friday’s employment report — which was so weak that it had many economists declaring that we’re already in a recession — was bad news. But it was actually less disturbing than what’s going on in the financial markets. The scariest thing I’ve read recently is a speech given last week by Tim Geithner, the president of the Federal Reserve Bank of New York. Mr. Geithner came as close as a Fed official can to saying that we’re in the midst of a financial meltdown. To understand the gravity of the situation, you have to know what the Fed did last summer, and again last fall. What’s going on? Mr. Geithner described a vicious circle in which banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing “significant collateral damage to market functioning.” A report released last Friday by JPMorgan Chase was even blunter. It described what’s happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn’t have. (A financial joke making the rounds, via the blog Calculated Risk: “Who is this guy Margin that keeps calling me?”). The only way the Fed’s action could work is through the slap-in-the-face effect: by creating a pause in the selling frenzy, the Fed could give hysterical markets a chance to regain their sense of perspective. And to be fair, that has worked in the past. But slap-in-the-face only works if the market’s problems are mainly a matter of psychology. And given that the Fed has already slapped the market in the face twice, only to see the financial crisis come roaring back, that’s hard to believe. The third time could be the charm. But I doubt it. Soon, we’ll probably have to do something real about reducing the risks investors face.

·         Bernanke Seeks to Avert Deeper Downturn by Accepting Mortgage-Backed Debt Federal Reserve Chairman Ben S. Bernanke's latest attempt to alleviate seized-up credit markets marks his most direct effort yet to repair the mortgage meltdown that poses the biggest threat to the economy. The Fed pledged yesterday to lend, in return for mortgage debt, $200 billion of Treasuries to the securities firms that trade directly with the central bank. Officials told reporters later that the program may escalate from there as the central bank seeks to break the logjam in the home-loan market. The step goes beyond past initiatives because the Fed can now inject liquidity without flooding the banking system with cash. Bernanke and his colleagues are trying to halt a cycle in which the losses on mortgage investments cause banks to cut their lending, sending the economy into a deeper contraction. ``It is a strong attempt to stabilize a crisis,'' Henry Kaufman, president of Henry Kaufman & Co. and the former chief economist at Salomon Brothers Inc., said in a Bloomberg Radio interview. ``It is a further recognition that this credit crisis is deeper and wider, and has been exceedingly opaque, in contrast to earlier credit crises.''

U.S. Slowdown Will Be Deeper, Rebound Weaker Than Forecast, Survey Shows The economic slowdown in the U.S. will be deeper and the recovery weaker than previously forecast, according to a Bloomberg News monthly survey. The world's largest economy will grow at an annual rate of 0.3 percent from January through June, a half point less than projected in February, according to the median estimate of 62 economists polled from March 3 to March 10. Rising fuel prices, shrinking payrolls and falling home values will weaken consumer spending and blunt the impact of tax rebates that start going out in May. The Federal Reserve, struggling to offset the credit crunch and housing contraction, will cut the benchmark interest rate by another percentage point and keep it at 2 percent through December, the survey predicts. The odds of a recession over the next 12 months were pegged at 50 percent, the same as in the February survey, according to the median estimate of 42 economists that responded to the question.

·         Q4 Mortgage Equity Withdrawal: $76 Billion MEW was declining in Q4 2007, however, these numbers are not seasonally adjusted. MEW in Q4 2006 was $94.6 Billion, so MEW has only fallen 20% from Q4 2006. As homeowner equity continues to decline sharply in the coming quarters, combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

Larry Summars vidclip at Stamford’s SIPR economic outlook conference ( ~ 11min). Long version ( ~ 50 min.)

Posted by dblwyo at 11:24 AM | Permalink | Comments (0)

Somehow or another all the business news is either finance or technology news these days. I'm sure that's not true but that's the net effect give my readings. The huge wave of finance industry news is, under the circumstances, not a surprise and we covered it yesterday. It's worth bearing in mind that the Industry was a whole appears to a) be as badly broken thru its' own self-inflicted wounds compounding and b) as the credit markets go thru an extensive de-leveraging process that the industry will be badly shaken up and re-structured. And perhaps c) we may have a long way to go.

The first two stories below are on Chrysler and Pfizer - both of which industries have backed themselves into similar corners. The Auto industry by getting stuck in its' own rigidities and denying the need for change for 3+ decades. As we've mentioned the core of the Pharma industry is their R&D activities and, very unfortunately for them, their core business model of chemistry-based drug development is broken by exhaustion. And the nextgen replacement (bio-chemical/biological) is not a near- or intermediate-term potential (though depending your horizon you should be lookin at systems biology and what's going on with "synthetic" life). Whic leaves us a bunch of Tech industry stories. Which in turn are stories about escalating pressures for cost control and change, companies failing to innovate and some succeeding.

In the latter class are Apple and TIVO both of whom have focused on defining and delivering value. Preceeding them is a story about one MS fantasy about Yahoo - that it'll help take them into the on-line software arena by combining Yhoo's on-line DNA and MS's software development DNA. Excuse me - their core strategic value propositions at which they've been failing miserably for years now ? Yahoo obviously but for those of you not enchanted with Longhorn, excuse me Vista the pitiflul remenants of a grand(iose) vision terribly executed and perhaps flawed in conception (btw do a search on Code Red and MS sometime for an understanding of how badly their supposed core competence in programming failed them). The other side of the coin is HPQ which is well on it's way to re-balanced and re-factoring itself, illustrated by a story on Hurd's moving to the next step by starting in on re-directing their R&D labs toward a stronger commercial focus (a step Gerstner took at IBM back around the mid-90s).

The first two tech-related stories are more general interest tech stories which define the ecology of the industry. One counseling IT departments to start putting pricing pressure on their vendors. The other on the topic of business vs technology alignment. We've all heard the stories about businesses able to change an industry thru the strategic use of technology. The problem is that for 20 years it's generally the same small handful of exemplary firms, e.g. WMT, FDX, Schwab, et.al. What you may not be aware of is that there's a huge gap between the MIS department and the operational business which the industry has been struggling with for decades. And despite the bottom of the "stack" becoming a commodity the top part where business solutions live is as much about magic, mis-communication and 70% failure to deliver rates as it ever has been.

As a friend of mine with almost 40 years in the business said:

La plus ca change, la plus ce meme chose.

Eight-Brand Pileup Hinders GM For dealers like him, GM's move to populate many of its divisions with vehicles that look alike largely for the sake of maintaining each brand's market share amounts to "robbing Peter to pay Paul," he said. After three years of restructuring, GM is still racking up billion-dollar losses and isn't ready to say when it will return to profitability. The slumping U.S. economy is certainly a big factor, and one reason GM reported a drop in February vehicles sales yesterday. But Mr. Maguire's predicament is an age-old one that continues to undermine the Detroit auto maker's efforts: The eight brands in its portfolio often compete with each other -- both for customers and a slice of GM's marketing budget. For example, GM has four mass-market midsize sedans. There is no doubt GM has made some progress in its restructuring. Since 2005, it has cut yearly fixed costs by $9 billion, shed a third of its unionized work force, closed several plants and improved the quality and feel of its cars and trucks. But to make money again, the company has to rev up sales in all eight brands. Mr. LaNeve said GM will slim down the product lines in the future, taking out underperforming models, or models that unnecessarily duplicate others. GM is also working to reduce overhead and overlap among its brands. Buick, Pontiac and GMC vehicles are sold mostly through dealers that carry all three makes. To keep them from competing with each other, GM has trimmed their product lines so that Buick offers premium cars and wagons, Pontiac offers sporty models and GMC concentrates on trucks. Still, internal competition continues, and nowhere is that more evident than in GM's push into crossovers, which look like sport-utility vehicles but are lighter and more fuel-efficient.

Can Pfizer Deliver a New Prescription? More than a year and a half into his tenure at Pfizer, CEO Jeffrey Kindler doesn't have much to show for his bold predictions that he would transform how the company does business, and investors are getting restless. The company also hasn't demonstrated how it might solve its biggest problem: The impending loss of about $13 billion of annual revenue from the cholesterol fighter Lipitor, which could face generic competition as soon as 2010. There is nothing apparent in Pfizer's late-stage research pipeline that could come close to replacing those sales, and Mr. Kindler has made no acquisitions significant enough to fill the void. Mr. Kindler initially delighted Wall Street as he visited with analysts to get their input. But his strategy update in January 2007 disappointed some investors because it featured well-worn solutions such as layoffs and manufacturing-site closures. In a January preview of this year's plan, Mr. Kindler told analysts of five initiatives, including finding new opportunities for established products and fostering a culture of improvement. But within Pfizer, Mr. Kindler has revealed plans that "are really aggressive," including new products, sizable takeovers and further cost cuts, according to this person.

Technology Environment

Now's the Time to Exact a Better Deal from Your IT Vendor The last time we sweated through an economy as harsh as today's environment--back around 2002--the technology market looked very different. CIO's, fresh off a multiyear technology-buying spree fueled by the dotcom boom, were trying to justify their spending in an uncertain post-9/11 economy. Sure, the economy stunk. But CIO's could negotiate better deals thanks to a competitive vendor landscape.
Today, CIO's have mostly mastered the case for ROI but are under new pressure to come up with ways IT can generate revenue for their companies. And the economy stinks. Again. But you're wrong if you think a potential recession, combined with big-time consolidation in the software market, has stripped CIO's of all bargaining power. Now is the right time to push technology vendors for a better deal than the one you have, even if you've recently signed contracts, say CIO's and their heavy-hitter negotiators.

Next-generation CIOs Should Focus on Change, Not Just Business CIOs who think of themselves as savvy technologists skilled in aligning the work of the IT department with the goals of the parent corporation are in serious trouble and don't even know it. They're smart, well trained, fully adapted to the last major wave of technology-fueled business innovation – and as anachronistic as a T. Rex expecting a giant meteor strike to bring great new opportunities for giant carnivorous saurians. "Aligning IT with business – which has been a CIO's main goal since forever – that's gone," "IT is too integral to the practice – to the operation of the business – to be something separate that you align. You can't align IT decision-making and business decision-making; you have to treat them as an integrated decision-making process." That ability to go beyond IT-business alignment was an important factor in what made companies named to the Baseline 500 among the most effective users of technology in the business world, according to Paul Strassman, the productivity expert, IT consultant and former senior IT executive at Xerox, Kraft and NASA who did the principal analysis of Baseline 500 companies in 2007. During its first 40 years of existence, IT's role was to reduce costs, increase the efficiency of existing operations and automate what it could, Strassmann said. As the structure of global business and economics changed, however, so did the requirement of IT to be more than a support structure for business decision makers.

Tech Business 

HP to announce revamping of famed HP Labs Silicon Valley is too familiar with the failure of the research lab previously known as Xerox PARC to capitalize on its early innovations for the personal computer in the 1980s. Their work provided the seeds for the point-and-click user interface commercialized first by Apple and then Microsoft and Xerox got only Apple shares. Amid this backdrop, Hewlett-Packard will unveil a big push to ensure that its famed research group, HP Labs, about a mile from PARC, contributes more to the printer and computer giant's bottom line. HP Labs, PARC, SRI and IBM's Almaden Research Center are the elders among the Valley's research institutions that are now all confronting new ways to turn some of their research into commercially viable projects at a faster pace. This Thursday, at an event hosted by HP CEO Mark Hurd, executives will sketch out new directions for HP Labs. This revamp is expected to be the biggest reorganization of HP Labs in more than a decade, and details are expected to provide the key areas of focus for the future for one of the tech industry's most prestigious research laboratories.

Yahoo's software potential Microsoft Chief Financial Officer Chris Liddell cited Yahoo's potential role in response to a question on how the major shift in the way software is sold could affect the tech company's business model -- even as he maintained that Microsoft is still weighing its options after the board of Yahoo rejected its acquisition offer.Microsoft emerged as tech behemoth by selling software mainly as a shrink-wrapped product from which it derived hefty profits from licensing and other fees. However, a growing number of tech companies have shifted to a new business model in which customers, particularly businesses, pay a fee for access to software programs through the Web. Is Yahoo a wrong turn for Microsoft?

What makes Apple golden The mass market is supposed to be dead, but you would never know it from Apple. In February the iTunes Store became the second-largest music retailer in the U.S., right behind Wal-Mart. The iPod is to music players what Kleenex is to tissue or Xerox is to copiers. Almost everything Apple makes transcends gender, geography, age, and race. An Apple Store is a demographic melting pot, with computer games for kids and a Genius Bar for their parents and so much cool stuff to touch that it's a magnet for teens and twentysomethings. Apple scoffs at the notion of a target market. It doesn't even conduct focus groups. "You can't ask people what they want if it's around the next corner," says Steve Jobs, Apple's CEO and cofounder. At Apple (AAPL, Fortune 500), new-product development starts in the gut and gets hatched in rolling conversations that go something like this: What do we hate? (Our cellphones.) What do we have the technology to make? (A cellphone with a Mac inside.) What would we like to own? (You guessed it, an iPhone.) "One of the keys to Apple is that we build products that really turn us on," says Jobs.With that simple formula, Apple not only has upstaged the likes of Microsoft (MSFT, Fortune 500) but has set the gold standard for corporate America with an entirely new business model: creating a brand, morphing it, and reincarnating it to thrive in a disruptive age. Now, just seven years after it unveiled the first iPod, fully half of Apple's revenues come from music and iPods. Interest in the iPod and iPhone has rubbed off on the Mac, whose sales growth outpaces the industry's. Apple has demonstrated how to create real, breathtaking growth by dreaming up products so new and ingenious that they have upended one industry after another: consumer electronics, the record industry, the movie industry, video and music production. The trouble with Steve Jobs

How TiVo won Apparently, the revolution will be televised - and recorded - on Tivo. With apologies to '70s jazz-poet Gil Scott Heron, Tivo is poised to continue the media upheaval it began more than a decade ago with faster growth and a new plan to help advertisers, and cable and broadcast providers, rethink their relationships with consumers. So why is this small, money-losing company so hot? In the 11 years since the Alviso, California, company was founded, Tivo has almost singlehandedly created "time shifting." The company's set-top device and installed software enables U.S. consumers in more than 4 million homes to unshackle themselves from appointment TV viewing, allowing them to record and then watch their favorite shows whenever they choose. That's not, of course, an earth-shattering idea; VCRs have been doing this for decades. Tivo's edge is simple but critical: it's easy to use. Thanks to broad appeal among consumers, Tivo (TIVO) shares have performed well over the last year, rising more than 52% while the S&P 500 dipped 4% over the same period.And now, at last, there seems to be a path to profitability. A successful courtroom defense of its software patents laid the groundwork for what many analysts believe to be a coming period of exponential growth

Posted by dblwyo at 11:54 AM | Permalink | Comments (0)

The last post pretty well summarized the credit contagion crisis in it's title: WRFest 9Mar08(Economy): It's All About the Credit. And the results of being all about the credit is de-leveraging, magin calls and liquidation. The only real question left, aside from all thos messy...messy details, is how will this impact each of the players at the industry and company level. There's another one I guess - who'll be well-enough positioned to take advantage of this insanity by having the credit, cash and liquidiy to take advantage of what are really once-in-a-lifetime opportunities. Hopefully. After the break what we have are the week's business stories ranging from the beginning of hearings on finance industry CEO compensation (one of last week's potentially most interesting and important stories. Do the words de-regulation, Enron and SOX ring any bells. THINK about it). Almost all the rest of the stories can be summarized whether banks, LBO's, hedge funds, insurers, whatever is who survives and who doesn't. IF we're not being clear here this is going to be a real mess, take a lot to cleanup and is barely started. This is the Housing market ~ early '06 when everybody could see it coming who paid attention but the scope and breadth wasn't clear in the face of denials.

To put this in context this CNBC intereview with, among others, Wilbur Ross touches all these issues:  Equities Roundtable

But here's a good strategy summary - which we'll suggest re-titling as "the damm thing's broke bad and we need to fix it before it sinks us !".Fallout Exposes Holes in Risk Rules Some of the top banking brains spent years designing rules to help financial institutions stay out of trouble. Their primary tenet: Banks should decide for themselves how much risk they should take on. But now those loose guidelines are facing a backlash. New Scenario: The global turmoil stemming from the U.S. mortgage crunch has banks and governments rethinking a set of risk-guidelines drafted a decade ago. The Players: Banking regulators, who have hatched a new set of rules, known as Basel II; bank executives, who are suddenly grappling with huge subprime-mortgage-related write-downs. Lessons Learned: Fears that hedge funds would be the source of the next crisis may have been off base, while confidence that banks knew how much risk they were taking was overstated. Today, in Washington, D.C., the Senate Banking Committee is expected to grill federal regulators on what went wrong. Did banks know how much risk they were taking? Did they know how much capital they needed to cushion them from sour loans? Did they prepare themselves adequately for the evaporation of "liquidity," or their ability to easily sell their securities or loans? The answer to all three questions appears to be "no." The recent financial blow-ups came largely not from hedge funds, whose lightly regulated status has preoccupied Washington for years, but from banks watched over by national governments. 

Finance Industry Readings

Bank CEOs Blasted for Payouts Top banking industry executives earned hundreds of millions through their salary, retirement and stock sales last year while their companies got scorched by the mortgage market meltdown, a congressional report said Thursday. The report comes a day before Rep. Henry Waxman is expected to grill Angelo Mozilo, chief executive officer of Countrywide Financial Corp., former Citigroup CEO Charles Prince and Stan O'Neal, former CEO of Merrill Lynch & Co. In calling the hearing of his Oversight and Government Reform Committee, Waxman, D-Calif., said he'll examine if their "level of compensation is justified." With the three companies losing a combined $20 billion in the second half of 2007, Waxman wants to know how much the top executives are taking home -- and had his staff review internal documents and Securities and Exchange Commission filings to find out. The report said Mozilo received more than $120 million in compensation and stock sales last year. O'Neal left Merrill Lynch in October with $161.5 million in stock, options and retirement benefits, after leaving the brokerage with its biggest-ever quarterly loss and Prince left with a $10 million bonus, $28 million in stock and options and $1.5 million in other perks when he left Citigroup last fall, according to the report. Representatives for the three companies did not immediately comment.

Citigroup's Prospects Look Dim to Investors For the first time in well over a decade, Citigroup Inc. shares yesterday traded below book value, a yardstick that measures what would be left for shareholders if the company were liquidated. When Citibank fell below book value in credit crunch of the early 1990s, it was a great time to buy its stock. But when it comes to the current-day Citigroup, few see the unenviable drop below book as a reason to load up on the stock. Instead, it strongly indicates that investors fear that Citigroup's problems, which erupted last year with multibillion subprime related losses, are far from over.The stock was pummeled after the head of the $13 billion Dubai International Capital, a government investment fund, yesterday said that Citigroup remains in trouble despite the cash injections it recently has received from so-called sovereign-wealth funds in the Middle East and elsewhere. "It's going to take more than that to rescue Citi," said Sameer al-Ansari, the fund's chief executive, at a conference in Dubai. Adding to the gloom: A Merrill Lynch analyst warned that Citigroup is likely to report a first-quarter loss, dragged down by as much as $18 billion in first-quarter write-downs on loans and investments. Since November, Citigroup has collected more than $20 billion in capital from sovereign funds and other investors, including Abu Dhabi and Kuwait, but not Dubai. That essentially made up for the write-downs the bank suffered in the second half of 2007. Four at Four: Ten Years Gone at Citi

·         What went wrong at Citigroup? The bank's balance sheet is fast deteriorating as customers struggle to meet credit obligations. The road to recovery may involve more job cuts, asset sales and cash infusions from overseas. So what is the matter with Citi? The list of problems is long, though nearly all stem from the credit and housing crises. Merrill's Moszkowski cites the "vicious" decline in home values and the "continued deterioration in U.S. residential and commercial mortgage markets, corporate debt markets and key investment-banking categories." Citi's Japanese consumer-finance business is having trouble, but the international bank's main troubles are in the United States. American consumers are having a tougher time meeting credit obligations, especially mortgages, causing loans on Citi's balance sheet to turn bad at a faster pace. Oppenheimer's Meredith Whitney, one of the Citi's most pessimistic (and, so far, correct) analysts, thinks Citi could be forced to sell up to $100 billion in assets. That's difficult to do while markets suffer from credit turmoil. Though analysts aren't questioning Citi's long-term survival, few expect an easy road ahead, especially if the credit crisis doesn't ease and loans continue turning sour. Keefe, Bruyette & Woods analyst Diane Merdian recently calculated a "worst-case scenario," which she places at a 10% probability of occurring: If Citi had to write off all of its subprime and other risky debt, it would take a $32 billion pretax hit, she figures, and Citi might need to raise $20 billion more in capital. That could cut Citi's share value to $15.19. That's another hit of more than 30%. Investors may continue running away from Citi's stock until they get signals -- either from the credit markets or from Citi executives -- that their worst nightmares won't come true.

Anatomy of a hedge fund collapse The recent collapse of the $150 million Tequesta Mortgage fund. Like much larger and higher-profile rivals that have imploded in recent weeks, Tequesta collapsed when it couldn't meet demands for more collateral from its prime broker - in Tequesta's case, Citigroup (C, Fortune 500). Unlike other hedge funds that cratered from bad housing-related bets, Tequesta steered clear of the mortgage- and asset-backed credit markets now getting walloped by the real estate bust. In fact, Tequesta's investment strategy of avoiding credit risk was paying off, according to bond salesmen and rival fund managers who bought the Tequesta positions seized by Citigroup. Tequesta's portfolio managers watched on the sidelines as banks dumped billions of dollars worth of mortgage bonds to free up capital. Even bonds backed by loans to the wealthiest Americans traded lower. This raised alarms among Tequesta's lenders. Executives at investment-bank prime brokerage operations saw the sharp drop in the value of Tequesta's holdings. Making matters worse: Unlike other lenders making margin calls, Citigroup was willing to liquidate inventory below loan values - the value it had assigned the bond when they initially provided the fund its margin - and recognize losses just to get the bonds off its books. A Citigroup spokeswoman declined comment. In one case, Citigroup seized collateral from Tequesta and put it up for sale in a bid-list auction. According to a trader at another firm, however, Citigroup's mortgage trading desk offered to sell Tequesta's bonds to regional brokerage firms at prices even lower than listed prices. In another instance, Tequesta's portfolio managers were told by Citigroup rivals that its seized bonds had been offered to other hedge funds for more than $25 below where they had been trading in the previous days.

Hedge Funds Squeezed by Lenders The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back. Loans from banks and brokerages had allowed hedge funds, which manage some $1.9 trillion in clients' money, to amass many times that amount in investments. But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets. This is producing a negative cycle that has policy makers deeply worried. When investors rush to dump assets, prices fall and lenders feel compelled to make further demands, or "margin calls," which cause even more selling. So far, the turbulence touched off last summer hasn't resulted in many big hedge-fund blowups. If that changes, banks and other financial firms could end up holding even more hard-to-sell securities.

Cycles Pass, but Private Equity Is Forever  Don’t write off private equity just yet because of the credit crunch. That, like all previous cycles, shall pass. Thus sayeth Alison Mass, co-head of Goldman Sachs Group’s financial-sponsors group, speaking at the 20th Annual Buyouts East 2008 conference today in New York. “Private equity is not a new business,” she said. “It consists of firms that have been in business for decades. But it’s a cyclical business. [The firms] have seen these cycles before.” Indeed, some of the best returns the industry has recorded came from down years, she said. In the downturn from 2000 to 2002, the best-performing firms generated annualized compound return rates of more than 10%, according to Mass. The industry has changed in other ways. Large firms, for instance, which are sitting on record amounts of cash, are holding their investments longer or are diversifying into other asset classes like real estate, hedge funds, mezzanine and distressed debt. Others are doing smaller deals. Mass said she is getting calls from clients looking to do deals in the $800 million range, which just a year ago the same firms couldn’t even afford to spend time on. “You have to keep the machine working,” Mass said.

Bond insurer crisis: A golden goose egg It's not all bad news for the bond insurance industry nowadays. The ongoing crisis, which has left smaller outfits like ACA Financial Guaranty Corp. in shambles and continues to threaten the survival of industry leaders Ambac and MBIA, is benefiting a select few companies. Two firms, in particular, Financial Security Assurance and Assured Guaranty Ltd. - financial guarantors with their AAA ratings firmly in place - have enjoyed a surge in new business just within the last few months. "This crisis, to this point, has been very good for them," said Matt Fabian, a managing director at Concord, Massachusetts-based consulting firm Municipal Market Advisors. FSA, which has consistently been a leader insuring municipal bonds in recent years, saw its market share jump above 65% this month, up from just 22% as of the end of 2007, according to Thomson Financial. Assured Guaranty (AGO) , on the other hand, was still a low-key player in the financial guaranty business in early 2007. Nowadays, it has the second-biggest market share in the municipal bond insurance industry behind FSA, according to Thomson.

Thornburg Faces Big Margin Calls, Survival at Stake Thornburg Mortgage Inc (NYSE:TMA - News), which provides loans to help people buy expensive homes, said on Friday its survival is at stake because it cannot meet its own lenders' demands for $610 million of cash or collateral. Shares of Thornburg fell 43 cents, or 26 percent, to $1.22 in afternoon trading on the New York Stock Exchange. The news caused a decline in bank stocks and broader U.S. market indexes on concern that credit market turmoil may spread further. Thornburg said falling mortgage prices, together with liquidity imperiled by a surge of margin calls from its own lenders, "have raised substantial doubt about the company's ability to continue as a going concern." It said the margin calls "significantly exceeded" its cash, though some lenders froze further calls through Friday. Margin calls force borrowers to pay back loans or post collateral. Analysts have said Santa, Fe, New Mexico-based Thornburg might need to file for bankruptcy protection.The company has struggled as investors stop buying many mortgage securities they no longer consider safe. These include the large, adjustable-rate mortgages in which Thornburg specializes, including many with "triple-A" credit ratings.

Posted by dblwyo at 12:10 PM | Permalink | Comments (0)

It is indeed all about the credit markets. Over the last few weeks (months) wrestling with the credit contagion has migrated from being primarily a Business section topic as the financial industry dealth with life-threatening pressures. Then it become a major, almost, dominant topic in the Markets section readings as the disruption threatened to move from breaking the funamental mechanisms of the credit markets per se to all other markets to now it's one of the three dominant economics themes. So while this is primarily about the week's story excerpts on the Economy we've also included the few Markets postings plus a pointer to the large and earlier post on the multiple and multifarious (nefarious ? :) ) stories on breakages in many....many credit markets. As we've been warning the fundamental mechanisms are broken and this last week saw widespread margin calls which are leading to major liquidations. BUT for the economy that means that $T's of lending are being withdrawn - in other words loanable funds are being withdrawn from sustaining spending and investment faster than policy can help prop them up.

After the break you'll see various readings related to these themes and thesii as well as more on Housing, Employment, the cliff-diving Dollar (who's behavior is a natural result of interest rate gaps and the algebra of income accounting).

Yet at the same time we're facing an economy at the beginnings of a downturn from normal cyclic forces and another major headwind do to Housing. We got a sour chuckle or three at the level of shock and surprise being expressed since much of the core economic data has been visibly slowing for some time. And we also got another "shocker" in last week's employment numbers - wow, deja vu all over again as Mork liked to say. We can't emphasize it enough - there is a natural and recurring pattern and lag structure to economic data as we're just starting to tip over we expect Employment to get accelratingly worse. Especially as the Housing based support thru MEW of consumer spending is knocked out.

Another key point which is just beginning to dawn on folks 80% of the world's consumption demand comes from the US, Europe and Japan. As the US slows so are Europe and Japan. As a result world outlooks are weakening - surprise again. But...again an important point to bear in mind...this is beginning to expose some major fault lines in the major devloping economies who's fragilities may be subject to severe shocks. We're going to let the Fed in the person of Gov. Mishkin set the stage for the readings:

Economy

Credit Crisis Seen As Economic Threat The cascading fallout from the subprime loan crisis, barely a cloud on the horizon a year ago, is now viewed by experts as the economy's gravest threat. In a survey being released Monday, 34 percent of the members of the National Association for Business Economics ranked the financial market turmoil from those loan defaults as the No. 1 threat to the economy over the next two years. That compares with 18 percent from an August survey, when the most serious threat was seen by 20 percent of the economists as terrorism and the conflicts in the Middle East. A year ago, the credit crisis did not even register as a chief threat. Fed Chief: Mortgage Crisis to Continue- Federal Reserve Chairman Ben Bernanke called Tuesday for additional action to prevent more distressed homeowners from falling into foreclosure.

·         Credit Default Swaps Overwhelm Bernanke Ease as Corporate Debt Costs Surge Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates. General Electric Co. is one of five U.S. companies rated AAA by both Standard & Poor's and Moody's Investors Service, making its ability to repay debt unquestioned. Yet when the Fairfield, Connecticut-based firm sold 2.25 billion euros ($3.35 billion) of five-year bonds last week, its annual interest payment was $17 million higher than on a sale nine months ago. Borrowers from investor Warren Buffett's Berkshire Hathaway Inc. to Germany's Heidelberg Cement AG face the same predicament. Yields on $5.12 trillion of corporate bonds tracked by Merrill Lynch & Co. average 2.05 percentage points more than U.S. Treasuries, the most since at least 1997. The higher costs are an unintended consequence of securities that allow investors to speculate on corporate creditworthiness. So-called correlation models used to value them have become unreliable in the fallout from the U.S. subprime mortgage crisis. Last month some showed the odds of a default by an investment- grade company spreading to others exceeded 100 percent -- a mathematical impossibility, according to UBS AG

• Real interest rates are now negative Nothing in economic theory precludes negative real interest rates, or even suggests they should be anomalous. Nominal interest rates cannot be negative, because people would just hold cash instead of bonds, but real interest rates can be negative. If real interest rates were very negative, investors could start investing in inventories of goods, but this arbitrage is not easy. Storing goods is costly, and many things in the CPI basket, such as services, are not storable at all. In standard models of asset pricing, negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high. Low growth expectations encourage households to save, which drives down equilibrium rates of return. High uncertainty drives up risk premiums, which in turn drives down the return on safe assets, perhaps below zero. Both forces seem to be working now.
• Factory Orders Dropped in January U.S. factories saw demand for their products drop in January by the largest amount in five months, fresh evidence of an economy hobbled by housing and credit crises.
• US Service Sector Shrank in February The nation's service sector contracted in February for the second month in a row, a trade group said Wednesday.

Rational Responses: Current Employment Picture As most folks who follow the busines, or any other news, know Feb. Payroll data showed a surprising drop of -63K jobs instead of the expected increase of 34K. For those of you following along neither number is really too big a surprise as they'd both be well within the trends we've seen in previous data. And within the sampling error/estimation limits. Nonetheless this is a weak jobs report. More interesting still is that Unemployment dropped to 4.8% from 4.9% ! What's going on. Well in fact under hidden pressures people are leaving the market, otherwise known as joining the Not In Labor Force (NILF) contingents. A finding that dovetails very nicely with our long-term findings that this isone of the weakest, if not THE, weakest job-creating "recoveries" on record. Let's take a short look at the headlines and then a harder look at what the data actuall tell us. After the break you'll find some interesting other blog posts on the underlying realities. If you keep reading you'll find one our patented multi-part charts taking a look at what the real data has to see.

Wall Street Gears for Its New Pain U.S. commercial real-estate values are starting to slide, and Goldman Sachs analysts project a prolonged sharp decline, with steep losses for financial firms. After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the subprime shakeout. As the economy wobbles and financing costs rise because of the credit crunch, commercial-real-estate values are starting to slide, with analysts at Goldman Sachs Group Inc. projecting a decline of 21% to 26% in the next two years. That means misery for securities firms with exposure to commercial-real-estate loans and commercial- mortgage-backed securities.

•  Sovereign Funds May Not Save Citigroup, Dubai Firm Says Citi Needs Cash Citigroup will require more investment from sources like oil-rich Mideast sovereign wealth funds amid further write-downs related to U.S. subprime mortgages, the head of a $13 billion Dubai-owned investment firm said. 

Dollar Declines to Three-Year Low Against Yen as Debt Market Losses Spread The dollar declined to a three-year low against the yen on speculation banks will report more losses from the collapse of the U.S. subprime-mortgage market. The currency fell to less than 103 yen for the first time since January 2005 and approached its weakest ever against the euro as stocks dropped and the cost of protecting corporate debt from default rose to record highs in Japan and Europe. The dollar slipped before an industry report forecast to show manufacturing in the U.S. fell to the lowest level since April 2004.

Halfway There For Falling Home Prices? Lower interest rates from the Federal Reserve may be helping some homeowners and buyers, but they’re not doing much to revive the depressed housing market. One key reason: Many potential home buyers are staying on the sidelines because they expect home prices and interest rates to decline even more. That’s raising home inventories and pushing the time line for a housing turnaround further down the line. Home prices so far have declined only half as much as they ultimately will fall, said economists on a panel at the National Association for Business Economics’ policy conference today.

• Mortgage Foreclosures in U.S. Increase to Record as Homeowners `Give Up'
• Households with Mortgages: Percent Equity Close to 30%  By using the mid-points of each range, and solving for the price of the highest range to match the then Fed's estimate of household real estate assets at the end of 2006: $20.6 Trillion, we can estimate the total dollar value of houses with and without mortgages. Using this method, the total value of U.S. houses, at the end of 2006, with mortgages was $15.27 Trillion or 74.2% of the total. The value of houses without mortgages was $5.32 Trillion or 25.8% of the total U.S. household real estate. Assuming 74.2% of total assets is for households with mortgages ($14,954.8 billion), and since all of the mortgage debt ($10,508.8 billion) is from the households with mortgages, these homes have an average of 29.7% equity. It's important to remember this includes some homes with 90% equity, and 8.8 million homes with zero or negative equity

OECD Reduces 2008 Global Economic Growth Outlook to Below 2%, Gurria Says

Global credit fears are ripping into the euro zone, pushing up the relative cost of debt of all member states except Germany.. Spreads on 10-year government bonds issued by Italy, by far the euro zone's largest debtor, traded Thursday at 0.58 percentage point above equivalent German government bonds, the widest gap since the euro was launched in 1999 and up 0.2 percentage point since the year began. Similar trends are pummeling spreads of the so-called Club Med group of Spain, Italy, Greece, Portugal and even France, which has a solid triple-A rating. The movement, which has gathered pace quickly in the past month, perplexes analysts. Some say it is a distortion creating bargains. But others point to trends in the real economy -- notably slowing growth prospects for some of the Club Med countries -- and worry a storm may be brewing that will translate the bond movements into a serious policy dilemma.

Wang, Li May Inherit Slowing Chinese Economy Along With Rising Inflation China is naming a new generation of economic leaders just as its breakneck growth is slowing. The officials to be appointed at the National People's Congress that starts in Beijing tomorrow, including former Beijing Mayor Wang Qishan and Politburo member Li Keqiang, may have to reach deeper into an economic toolkit that mostly has been used to cool expansion. China has already paused after raising interest rates six times last year. Their task is complicated by the prospect of weaker global demand this year for exports, a main driver of the world's fourth-biggest economy. ``China's concerns are going to shift from the economy being too hot to potentially becoming too cold,'' said Donald Straszheim, vice chairman of Newport Beach, California-based Roth Capital Partners. ``We'll see an end to the interest-rate hikes, an end to bank reserve requirement hikes, and I believe we'll also see an end to the appreciating currency.'' Straszheim expects gross domestic product in China, the single biggest contributor to global growth, to rise 8.9 percent this year, down from a 13-year high of 11.4 percent in 2007. Government researchers foresee a decline to 10.5 percent.

• Chinese Premier Wen Jiabao said his nation faces rising economic risks from both inflation and a global economic slowdown, sounding a cautious note as he begins his second term.

Japan's Stress Test Japan's economic recovery is about to undergo a "stress test." Thanks to the country's heavy reliance on exports, the ripple effects of the American housing crisis are starting to hit home as external demand slows. Will this lead to just an ordinary downturn, or will it, as in 1997-2002, trigger something much worse? An ordinary downturn with a middling rebound is the most likely outcome. But Japan's lingering structural faults nonetheless create a more serious downside risk than is generally recognized. Despite all of the economic reform during the Koizumi era, Japan's economy remains unhealthily dependent on its export sector. Workers' incomes haven't risen enough to support consumer-led growth. A chronic problem since the mid-1970s, it has worsened further in this economic recovery. From 1980-2001, total employee compensation averaged 54% of real GDP. However, during this recovery this share has steadily fallen and is now only 49.6%. As a result, much of the increase in corporate profitability since 2002 has resulted not just from increased sales and better efficiency, but effectively from a transfer of income from workers to firms. In the short term, that helps companies improve their profit margins. But over the medium term, it means a shortage of consumer spending, a kind of "economic anorexia" that has already begun to eat into profits.

Credit Markets

Perchance do you recognize the picture at right ? It's one we've used before to try and capture the nature of the credit crisis. Beyond a spirt of schadenfreude & "told ya so" it's well worth re-visting to remind ourselves of exactly what's going on. In case you haven't noticed in the last week or so the news is increasingly full of margin calls, debt being sold for 70 cents on the $,or worse, forced liquidations and rapidly tighenting credit standards. All of which is reviwed in the "jump-the-gun" collection of readings after the break. We strongly suggest you skim and review these as just the summary excerpts should tell you how bad this potentially is. And not just in our opinion. A very distinguished panel of private and public economists just put out a report who's major finding is:

"The economic impact of the mortgage crisis and credit crunch will be huge, and it has barely begun..."

Markets

Media Appearance: CNBC's Squawk on the Street (3/5/08) At the time, I said we thought the first half of the year would be choppy with a negative bias, and its been pretty ugly since. (We had a good trading call on Morning Call Jan 23, but it was just a trade).Also on January 10th, I mentioned Agriculture, Energy, and Consumer Staples as safe havens. I also said more weakness was in store for the US dollar, and that would be good for Oil and Gold prices, as well as mining stocks (we still like 'em). I also said stay away from Tech and Financials, and I would reiterate that view today. We have been short AIG and short FNM for some time now, and they look like there is more pain to come. All of these calls seem to be working in our favor at the moment. So to reiterate, we remain cautious on US Equities, downright Bearish on overseas bourses, and believe things are likely to get even uglier before this is over. However, we could have a negative sentiment rally AGAIN -- like the Jan 23 call. But again, that's just a trade. A few things to watch: Precious Metals remain our favorite sectors . . . Silver and Nat Gas are interesting also.

10 tips for a tough tape Recognizing the problems isn't enough — it's all in the response . After years of credit consumption, asset-class inflation and dollar devaluation, we've arrived at the crossroads of our new financial fate. There are two potential paths, independent in both preparation and consequence. We've long offered the view that to understand where we are, we must appreciate how we got here. The stakes have been raised, however, as it's no longer enough to recognize the debt dependency, derivative machination and structural imbalances. We must now apply our experience and extract the proper response. As the disconnect between credit and equity comes to a head in front of what promises to be a massive move, I humbly submit 10 tips for a tough tape.

Posted by dblwyo at 07:47 PM | Permalink | Comments (0)

Odd as it might seem we're still, at the end of this week, just catching up with last week's news summaries. Here we want to focus on the Technology Industry with several interesting stories. In the process of several of these recent Tech focus summaries we've been wrapping the excepts with some charts that show how the industry is put together. Earlier we introduced a simple stack picture which showed all the elements from platform to middleware to application to interface that are necessary for any particular solution to be put in place. Think of that as the basic characterisitcs of the industry's ecology. Another dimenation that structures an ecology is the number of large and small players and what niches they go over. Which we try and capture with the accompanying chart.

Imagine that the stack describes the vertical axis (you have to  picture four segmenting lines horizontally across the dumbbell please). So another dimension of the ecology is the size of the customer from very small to very large. What the dumbbell tries to capture is how well populated, or covered or served, are each of the major niches. So for example IBM and it's strategic partners/competitors, e.g. SAP, ORCL, et.al., have their roots in the large end of the scale. And from platform to application they purport to cover most of the requirements and sell to most of the customers. In fact they ARE in fact installed, one way or another, at most of the customers. Last time I looked 70% of the world's data processing was still occurring at the large end and IBM is very much the dominant player on the platform and middlewar layers. In fact it defines the market despite all the hype you've been reading for 20 years about PC's taking over. When you hear someone talking about Software as a Service (SaaS), the applications cloud, etc. oddly enough they're returning to the roots of almost forty years ago with time-sharing !

On the other end is the small user - businessess and consumers alike (they're some caveats here though - Dell for example really had it's home base selling PC's to sophisticated users in large businessess who understood what they were getting and could provide their own support). But by and large the small end is well served by the Wintel guild though not as completely covered as the large end. That's for two really critical reasons. First the needs of many small businesses and users are served by spreadsheets and other simple application/middlware software packages, e.g. QuikBooks (as good an accounting and small business package as their is). The interesting thing is the un-populated middle where mid-sized businesses have needs that are often nearly as complex for sophisticated applications as large businesses but haven't the resources to afford large installations. In particular they can't afford the staff or application integration resources required to install, adapt and maintain these applications which means they are woefully under-served as measured by the gap between needs and solutions. In other words there is, and has been for decades, a bigger opportunity to help mid-sized businesses solve their technology problems than in any other part of the ecology. It's rather like it must have been for the early settlers first bringing more complex capabilities to North America in the 1600s and 1700s. With many of the same sort of challenges. And all the vendors know it because they keep going after those markets. The problem is that the applications are very complex, big, cumbersome and very...very hard to use. NOT until somebody figures out how to make easy-to-operate business applications that can be sold thru distribution channels will that change. But there are many huge cultural barriers in the way.

The following story excerpts should be read with this ecology in mind. The first one is about the growing use of freeware and/or inexpensive solutions, e.g. Wiki technology, to bring some of the level of sophistication for team collaboration to small and medium businesses to market. Then are two pairs of articles. The first pair contrasts Dell's continuing struggles to re-invent itself and how Apple can increasingly look to Macs, which are growing marketshare more rapidly than any other platform, to sustain itself. It turns out that all the iPod/iPhone/retail store helps with introducing new generations of users to a more friendly, easy-to-use platform, otherwise known as marketing. Meanwhile Dell's forays into Retail were doomed to fail because it's entire functional capabilities were built around the assemble-to-order business model which doesn't fit well into Retail channels.

The second pair looks at the bottom slice of the dumbbell and compares & contrasts the demand for data centers. Everybody thinks of Google as a search, that is software, company. But what makes it work is the acres of data centers and thousands of PC-class servers tied together in giant  sphaghetti furball that does all the constant searching and indexing. This might be one among several Google Achilles heels. It certainly means that they will be a capital intensive business. The greatly amusing thing for those of us with some experience is that very large servers (BTW - these are the guys actually running your life whether it's airline reservation systems, you bank or credit card company, your retailer's store orders of what have you) have been wrestling with these same scalability and management problems for decades. And very successfully we might add. IBM gets a huge amount of business from folks who take what're alledged to be a bunch of large SUN Unix servers and consolidating them to one easier-to-operate large mainframe, or a piece of it. And that's even more true of comparing server farms with thousands of PCs vs one mainframe. The staffing, power, reliability, etc. etc. are just not in the same class.

So as you evaluate the trends, directions and investment opportunities in these businesses you need to bear in mind what's really going on. Remember our discussion of Warren Buffett's maxim of "don't invest in anything you don't understand" ? Well it turns out that Warren spent decades of hard...hard work getting smart until he's built up a huge backlog. But he won't touch technology. As he says they'll still be drinking Coke, chewing gum and eating candy in 20 years. Guess what - they'll still be processing larger and larger amounts of data in 40. Who the successful players will be is another question but understanding the ecology will help you figure that out.

Technology Readings

Boosting teamwork with wikis At its simplest, a wiki is software that lets users work together to create and edit a collection of linked web pages. The online encyclopedia Wikipedia is the best-known example - its 85,000 contributors have written, edited, and policed the content of more than nine million entries. Like Wikipedia, all wikis benefit from the network effect: The more people who use it, the theory goes, the better the quality of the information. When FSB first wrote about business wikis nearly three years ago ("Workers of the World - Collaborate!" April 2005), they were largely untested, and early adopters were finding it hard to encourage employees to use them. Now the nearly universal familiarity with Wikipedia and a proliferation of services targeted at small business have helped make wikis commonplace. SocialText, one of the better-known providers, started hiring salespeople dedicated solely to the small-business market for the first time in 2007. Many firms, including Rosen's, are keeping secure wikis for purely internal affairs. But others are finding that opening them up to customers saves a surprising amount of time, energy, and money - and offers other benefits as well. Angel.com, a McLean, Va., maker of software for calling centers, which has 55 employees, created a wiki on SocialText last year that lets clients leave comments, share their likes and dislikes, and even submit suggestions for troubleshooting the software. Those features have slashed the company's tech-support workload and given Angel.com a 10% boost in productivity, estimates company CTO Sam Aparicio, 33.

Dell Recovery Plan Falters as Wal-Mart, Staples Shoppers Let PCs Languish Michael Dell gave himself until August to prove he can rescue his personal-computer company by selling machines through retailers. Shoppers at Wal-Mart Stores Inc. aren't buying it. Hewlett-Packard Co. and Sony Corp. are crowding out Dell Inc. computers at chains including Wal-Mart and Staples Inc., said Cowen & Co. analyst Louis Miscioscia in New York, who has had a ``neutral'' recommendation on the shares and an ``outperform'' assessment of Hewlett-Packard since August 2006. One year after Dell's return as chief executive officer, the turnaround he promised remains elusive. Dell, down 14 percent since January 2007, costs 13 times estimated profit, almost as much as Hewlett-Packard, which became the biggest PC maker in 2006. Dell will fall further behind with sales growth of 6.7 percent this year, compared with Hewlett-Packard's 10 percent, according to analysts' average estimates. Dell, 43, has remodeled his Round Rock, Texas-based company's direct-only sales strategy, attempting to fight Hewlett-Packard in retail outlets worldwide. Starting with Wal- Mart in June, he put Dell machines in 10,000 stores in the world's 10 largest markets in six months. ``I think 18 months is a good timeline to think about,'' Dell told Business Week in February 2007 when asked how long it would take to revive the company. It's been a struggle since then. Hewlett-Packard, the top seller of PCs for six straight quarters, is in 110,000 stores. Dell doesn't have enough models on display to satisfy shoppers looking to weigh their options, Miscioscia said. He said Dell had only three models at Best Buy Co. stores he visited and Wal-Mart displayed Dell's computers ``under glass in a cage, locked down tight.''

Mac has Apple's back The Mac might just be about to become even more important for Apple Inc.'s future growth plans. BMO Capital Markets analyst Keith Bachman on Monday cut his price target on Apple's stock to $140 a share from $160, and said in a research note that "Apple's three growth drivers [iPods, iPhones and Macs] has now turned to one," that being the company's line of Macintosh PCs. Bachman said that Apple's share gains in the PC market are continuing, "with strength in desktops in particular," and raised his Mac sales estimates to 9.4 million units from 8.2 million for Apple's current fiscal year, which ends in September. Bachman also raised his forecast for Mac sales for Apple's current quarter to 2.06 million units from 1.87 million. The analyst said the Mac's strength will take on more importance because the company is not likely to see the kind of growth from the iPhone that it has projected this year. Also, the iPod is starting to show some signs market saturation, leading to slower growth rates for the iconic digital media player.

A RAD Goal: Replicating Google These data centers are the engines that run Google's search software; Yahoo, Microsoft and Amazon have their own. A data center transforms thousands of cheap computers into a single massive Web server. The big search companies had to invent data centers at the dawn of the search era because the problem was far too big to run on a single machine, no matter its size. Today, the list of computer problems for which data centers might be useful is still growing. Yet, the facilities remain very difficult to design and operate; you basically have to be a Google or an Amazon to even try. Enter Dr. Fox and his team. Their goal is to make building and running data centers as easy an engineering feat as putting up a new building and turning on the lights. That's a time-honored job in computing: taking something recondite and esoteric, then making it simple and widely accessible. Over the decades, those forces worked to make possible the extraordinary computers now on every desktop. No one is suggesting there will ever be "personal data centers," but their use could extend outside the small circle of big Web companies.

IBM rolls out faster, cleaner mainframe IBM Corp. rolls out a new mainframe computer Tuesday boasting a 50% performance boost and dramatically lower energy costs than its predecessor. The new System z10, with a starting price at about $1 million, comes as IBM focuses on lowering the price tag for running its storied line of data-crunching workhorses. The Armonk, N.Y.-based company said it designed the new machine to help companies and government agencies that rely on mainframes - usually for critical data processing such as bank transactions or census statistics crunching - save money on energy bills and better handle a flood of Internet information. The size of IBM's investment - the company spent five years and $1.5 billion developing the new mainframe - also underscores its commitment to the long-term viability of the mainframe and efforts continue adapting the decades-old product line to the Internet age. For years some IT experts predicted the demise of the mainframe, bulky and expensive machines that face competition from smaller, less-expensive servers. But IBM says mainframe revenue is growing, rising in 5 out of the last 7 quarters, thanks in part to interest from emerging markets like Brazil, China, India and Russia.

A Highflier Loses Altitude as Google’s Clicks Go Flat Investors have focused with new intensity on Google’s so-called paid clicks, which grew at 30 percent in the fourth quarter, because the search and advertising giant earns the vast majority of its revenue from text ads, for which it is paid only when users click on them. Many analysts saw the comScore report as the clearest sign that Google, which does not give forecasts about its future performance, is not impervious to the slowdown that is buffeting the United States economy.

Posted by dblwyo at 06:54 AM | Permalink | Comments (0)

As most folks who follow the busines, or any other news, know Feb. Payroll data showed a surprising drop of -63K jobs instead of the expected increase of 34K. For those of you following along neither number is really too big a surprise as they'd both be well within the trends we've seen in previous data. And within the sampling error/estimation limits. Nonetheless this is a weak jobs report. More interesting still is that Unemployment dropped to 4.8% from 4.9% ! What's going on. Well in fact under hidden pressures people are leaving the market, otherwise known as joining the Not In Labor Force (NILF) contingents. A finding that dovetails very nicely with our long-term findings that this isone of the weakest, if not THE, weakest job-creating "recoveries" on record. Let's take a short look at the headlines and then a harder look at what the data actuall tell us. After the break you'll find some interesting other blog posts on the underlying realities. If you keep reading you'll find one our patented multi-part charts taking a look at what the real data has to see.

 Employers Slash Jobs by Most in 5 Years Employers slashed 63,000 jobs in February, the most in five years and the starkest sign yet that the country is heading dangerously toward recession or is in one already. The Labor Department's report, released Friday, also indicated that the nation's unemployment rate dipped from 4.9 percent in January to 4.8 percent last month as hundreds of thousands of people -- perhaps discouraged by their prospects -- left the civilian labor force. Job losses were widespread, with hefty cuts coming from construction, manufacturing, retailing, financial services and a variety of professional and business services. Those losses swamped gains elsewhere, including education and health care, leisure and hospitality and the government. The latest snapshot of the nation's employment climate underscored the heavy toll of the housing and credit crises on companies, jobseekers and the overall economy

The bottomline though is this: Employment was weak and weakning, continuing a trend that's been visible with our toolkit since '06 but accelerating. However it's far from terrible yet. What people forget is that employment is a lagging variable. If you believe our picture of the current business cycle we're just started. BtW - in parallel we'll also note that we are NOT in a recession, even when looked at as just a downturn in growth. BUT we ARE headed for one (WRFest 1Mar08(Economy): Bad News and a Sputtering Engine)and the real debate is can the Fed and the stalled, self-serving Congress do anything about in time to keep it from tipping over into something really ugly. On which subject we point you to the prior post on the credit contagion metastasis (Credit Crisis Metastasis: Who's Been Swimming Naked) which is much worse than you know or the markets have yet priced.

Take a look at the chart which shows total employment and the YOY% changes over two timeframes along with Unemployment. (click to enlarge). From the top sub-chart you can see the relationship between cycles and employment growth but notice that the trend is for growth to peak at lower highs and that this last "recovery" was, relatively speaking, terrible. The 2nd sub-chart gets more granular and begin at '00. You'll notice that because this has not been an organically self-sufficient cycle but an attempt thru policy to mitigate a major down drop that employment growth has been slowing since early '06. As the economy slows we'd expect it to tip over but with the looming expansions of the Housing AND Credit crisis it'll get much worse before it gets better. By the very nature of things. The bottom sub-chart shows Unemployment and the YOY% change (on a reversed scale please note. Again it took a longer than usual tie for unemployment to improve and it's started turning upward again.

The real problems are that "hidden" unemployment is worsening, more people are leaving the Labor force and the pressures on the job market have actually been present for quite a while. We'll refer you to two posts on BigPicture which dive into this background more:

• More on Unemployment Rates
• NonFarm Payroll Day: Not-So-Great Expectations
  

Posted by dblwyo at 02:18 PM | Permalink | Comments (0)

Perchance do you recognize the picture at right ? It's one we've used before to try and capture the nature of the credit crisis. Beyond a spirt of schadenfreude & "told ya so" it's well worth re-visting to remind ourselves of exactly what's going on. In case you haven't noticed in the last week or so the news is increasingly full of margin calls, debt being sold for 70 cents on the $,or worse, forced liquidations and rapidly tighenting credit standards. All of which is reviwed in the "jump-the-gun" collection of readings after the break. We strongly suggest you skim and review these as just the summary excerpts should tell you how bad this potentially is. And not just in our opinion. A very distinguished panel of private and public economists just put out a report who's major finding is:

"The economic impact of the mortgage crisis and credit crunch will be huge, and it has barely begun..."

In case it's slipped your mind the chart shows how problems in one asset, say mortgages, is leveraged in the origin-distribution model across a range of players where perverse incentives based on maiximizing flow cause them to neglect quality while building up exposure. And how that plays out with the a toppled rock in one class further rippling down across other instruments and classes. Now with de-leveraging and credit tightening it's both growing by leaps and bounds. And, in a way running in reverse as risk is being re-priced and leverage rapidly being taken out of the system. As we're finding out key markets have been locked up behind the scenes for at least a month now. In other words this chart started with housing & mortgages but it turns out, as we suggeste then, that you needed on for every other major asset class, e.g. CLO's,etc. But who'd have thought muni-bonds...or short-term "credit auction facilities" or ....or ....or ....nothing seems to be escaping.

Let's let Mr. Buffett have the last word in his usual to the point, pithy and witty style have the last word before wading into the dryer but more detailed readings:

"Some major financial institutions have, however, experienced staggering problems because they engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”

You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.
As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight."

Strategic Situation

The gathering credit crunch storm The economic impact of the mortgage crisis and credit crunch will be huge, and it has barely begun, a new study prepared by several prominent economists and released Friday has concluded. "Feedback from the financial market turmoil to the real economy could be substantial," it said. Unless they can quickly recapitalize, banks are likely to cut back their lending to consumers and businesses by more than $1 trillion, cutting economic growth by more than a percentage point over the next 12 months. The report was released at a forum on U.S. monetary policy in New York in which several senior Federal Reserve officials and economists were participating. Read the full study. After an initial period where several financial markets seemed immune from the crisis, the credit crunch is now gathering storm. The report estimates that the credit crunch is expected to push down growth by 1.3 percentage points over the next 12 months. Almost as alarming is the report's conclusion that this crisis is unique in the annals of U.S. economic history but now may serve as the template for more crises to come. What is different this time is the amount of leverage. Bank balance sheets were forced to expand in the wake of the mortgage crisis, as off-balance-sheet investments were forced onto their books. This so-called "unwanted lending" is set to reduce bank loans to business and consumers. At the forum, two top Fed officials -- Boston Fed President Eric Rosengren and Fed Governor Frederic Mishkin -- were asked to respond to the paper. Both said they agreed with the basic story. "I agree ... that relatively small losses in one sector of the credit market can have outsized impact on aggregate economic activity if they case a disruption to the financial system that leads to an amplified impact on lending," Mishkin said. In fact, Rosengren said the authors may have underestimated the economic impact because of the risk of rising unemployment and a sharper drop in home prices.

A top Fed official said the central bank failed to fully grasp risks taken by financial firms, and said it is likely to become "more forceful" with entities it supervises. During a sometimes-contentious Senate hearing, Fed Vice Chairman Donald Kohn said the central bank is likely to become "more forceful" with the financial institutions it supervises. Mr. Kohn didn't explain what new actions the Fed might take, but he did warn banks to rely less on the assessments of credit-rating agencies. After years of watching the banking industry make record profits, regulators are now scrambling to deal with turmoil stemming from problems in the U.S. housing market. Large U.S. banks have had to write down the value of assets by billions of dollars, including slivers of mortgage-backed debt that many believed were almost risk-free. Mr. Kohn's comments mark one of the few times that a top Fed official has acknowledged shortcomings in regulation as a cause of the mess.U.S. and foreign bank supervisors are taking a second look at risk-management practices at banks, in part because most of the big recent blowups have occurred at financial institutions closely supervised by regulators. U.S. regulators at the Senate hearing said they expected to make changes to new international rules that govern how much capital banks must hold, among other areas.

Specific Readings

New Spasm Jolts Credit Markets Despite repeated doses of medicine from central banks, short-term lending markets around the world are struggling again. The renewed turmoil marks the latest fallout from the deflation of U.S. housing values and the subprime-mortgage crisis. Despite repeated doses of medicine from central banks, short-term lending markets around the world are struggling again. In both Europe and the U.S., the rates that banks charge each other for short-term loans remain elevated, a sign of how cautious banks still are about using their capital. In other markets, investors are  signaling distress at banks. For example, the cost to buy insurance against a bank debt default is soaring, in some cases to more than 20 times the cost last summer. This unease is also filtering to other kinds of lending, pushing up interest rates on everything from municipal bonds to mortgages to corporate debt. The renewed turmoil in the credit system marks the latest fallout from the deflation of U.S. housing values and the crisis in the subprime-mortgage market. Banks are at the center of the storm. Even though they have already taking billions of dollars of write-offs on troubled subprime debt, many banks still don't seem finished with that reckoning process. This has left them constrained for capital, and reluctant to lend out money.

• Manufacturing, Services Still Weak The Fed's "beige book" said business activity was "softening or weakening" in several districts. Factory orders took a big spill in January, falling 2.5%, according to another report. Housing markets in many areas were also weak. With the credit crunch steadily worsening and no bottom to the housing slump in sight, the Federal Reserve appears poised to deliver another steep interest-rate cut in two weeks. In the past week, several Fed officials have signaled deep concern about the nation's economy. Most have acknowledged inflation is a risk but, except for one or two officials, that concern isn't likely to be an obstacle to further cuts in the Fed's short-term interest-rate target, now at 3%.
• Deleveraging's Vicious Spiral At the root of the credit crunch, is a process economists call deleveraging. It should result in a healthier financial system, but the process might feel like blood-letting.
• How could a mortgage-market meltdown cause so much of a disturbance and do so much damage to the U.S. economy? The short answer is leverage. 
• Citigroup Will Slash Mortgage Holdings by $45 Billion by Reducing Lending
• U.S. Corporate Bond Risk Rises on Speculation That Bank Losses Will Deepen

Banks Saddled with Unsold Bonds After Record $4.2 Trillion in 2007 Sales Sales of a record $4.2 trillion in bonds last year generated $18.8 billion in fees for Wall Street, including $1.69 billion for Citigroup Inc., the top bond underwriter in the Bloomberg 20 for the fourth straight year. Unfortunately, 2007 didn't end on Dec. 31. Banks and brokerages began 2008 with a backlog of high-yield bonds they agreed to sell to fund last year's leveraged buyouts -- and few willing investors. The market for riskier debt investments dried up in the second half of last year, as losses related to subprime mortgages soared and access to credit tightened. At the start of this year, the high-yield-debt market remained arid.

• How Bad Is It? Loan Prices Hover at 87 to 90 Cents How Bad Is It? is a recurring Deal Journal feature, devoted to confirming or debunking the worst fears about the severity of the credit crunch.Goldman Sachs Group private-equity chief Richard Friedman wasn’t too far off when he said “80 is the new par.” It was actually around 87 in February. Standard & Poor’s Leveraged Commentary & Data has this sobering observation: “Most players believe that the market has now established a new trading range, in the high 80s, with little chance of getting far into the 90s…the overhang of underwritten transactions remains formidable. And the market faces the obvious headwinds, from the economic slowdown to higher default rates to a still largely frozen CLO market…players generally think prices will stay in an 87-90 band until the winds of change shift.”

Auction-Rate Supply `Tsunami' Foreshadows Deeper Losses for Municipal Debt U.S. states and local governments may extend the worst slump in municipal bonds on record as they replace as much as $166 billion of auction-rate securities. California, Boston's biggest hospital and Duke Energy Corp. are converting their bonds to other types of tax-exempt debt after auction failures drove rates as high as 20 percent. The potential supply equals almost 40 percent of the municipal securities sold last year, overwhelming a market that tumbled 4.9 percent last month, according to indexes maintained by Merrill Lynch & Co., which began compiling market data in 1989. Rates increased last month as investors shunned the securities on concern the insurers that guaranteed the debt may be downgraded, and as dealers refused to buy bonds that went unsold at auctions. The higher borrowing costs are squeezing states and towns just as slowing growth threatens to cut revenue. Auction-Rate Bond Failures Approach 70%; Yields Almost Double From January

Countrywide's Mortgage Woes Deepen Countrywide Financial Corp.'s mortgage portfolio continues to deteriorate rapidly as defaults increase and home prices fall, a securities filing shows. The Calabasas, Calif., lender's annual filing with the Securities and Exchange Commission, released late Friday, showed a big increase in late payments on option adjustable-rate mortgages, known as option ARMs. These loans give borrowers several choices of payment each month, including one that covers only part of the interest normally due. When borrowers choose that minimal payment, the loan balance grows.

Asset-Backed, Commercial-Mortgage Spreads Hit Records on `Financial Ebola' The extra yields investors demand on bonds backed by assets from commercial mortgages to credit cards rose to records last week, as the debt slump prompts banks, hedge funds and other investors to shun the securities. The extra yields, or spreads, have surged since mid-2007 as a weakening U.S. economy erodes confidence in the bonds' credit quality and as losses on debt investments lead to forced sales and reduced demand. The spread widening may herald more losses for the world's largest banks, which have reported more than $180 billion in mortgage-related losses. ``People are calling it financial Ebola,'' Ed Steffelin, a senior managing director at GSC Group in New York… Yields on three-year, AAA rated credit-card bonds with floating rates rose to 75 basis points over the London interbank offered rate, up from 40 basis points at the start of the year, according to Deutsche Bank AG data. Spreads over three-year swap rates for three-year, AAA rated fixed-rate auto-loan securities rose to 140 basis points, up from 75 basis points. The average spread over U.S. Treasuries on AAA rated commercial-mortgage securities climbed to 364 basis points, from 167 basis points on Dec. 31. Ambac Slumps After $1.5 Billion Share Sale Fails to Allay Rating Concerns, Peloton Tells ABS Fund Investors They May Get No Money Back, People Say , Carlyle Capital Gets Default Notice After Missing Margin Calls Yesterday

• Fire sale at UBS? Swiss giant may have sold off a portfolio of Alt-A securities worth $24 billion, analyst says. UBS was "highly likely" to have sold the securities in a fire sale, according to J.P. Morgan analyst Kian Abouhossein, noting press speculation on the subject. "We see the speculated level of 70 cents on the dollar as realistic in a fire sale," he said in a note to clients on Thursday, adding the current market price is probably 84 cents on the dollar. UBS Falls on Report $24 Billion Mortgage `Fire Sale' May Extend Writedowns

Ambac Financial Group Inc. tumbled 19 percent in New York Stock Exchange trading after the bond insurer's plan to raise $1.5 billion failed to allay concern that it may lose its AAA credit rating. Investors had anticipated banks would be part of a bailout that would raise as much as $3 billion, enough to overcome record losses on subprime-mortgage debt. Instead, the New York-based company will seek buyers for $1 billion of common shares and $500 million of equity units, according to a statement today. Ambac shares dropped and credit-default swaps rose, indicating worsening perceptions of credit quality, even though Standard & Poor's and Moody's Investors Service said today they would probably confirm the company's AAA rating after the offering. With such a limited capital raising, Ambac may not be able to keep its AAA rating for long…

• Ambac tumbles on $1.5bn stock plan Ambac, the troubled bond insurer, lost nearly a fifth of its stock market value after revealing a $1.5bn recapitalisation plan that disappointed investors hoping for a bigger rescue effort

A 'Poseidon Adventure' in Bonds It's the "Poseidon Adventure" in government bonds. A tidal wave of (hedge fund) selling has just tipped the market upside down. So the yield on tax-free municipals, which is normally way down in the hold, has suddenly been lifted far above those on taxable Treasurys. It makes for an easy trade. "It's ludicrous," says Bob McIntosh, chief strategist for Boston fund company Eaton Vance and an expert in municipals. He calls it the craziest pricing he has seen "in twenty-five years following the municipal bond market." An upside-down market takes some getting used to. You need to climb "upwards" to the keel. Sell Treasurys. While there is no chance the bonds will default, there is a big risk their prices will drop. That will happen if interest rates rise higher because of inflation fears. And if you're looking for safe bonds, buy munis instead.

• Wilbur Ross has bought $1 billion of battered municipal bonds, joining a buying spurt by large investors.

Posted by dblwyo at 11:12 AM | Permalink | Comments (0)

There's not necessarily any major new sources of growth in the Telecommunications industry in the sense that major new capabilities are appearing. At the same time there is a fundamental, tsumanic structural change going on with changes in the nature of the underlying network. That basic change is the shift of all forms of Telecom network infrastructure to the new platform, VoIP. Or Voice-over-IP where IP is Internet Protocol. Actually it's much broader and more complex than that and isn't happening all at once but we tried to capture some of the simple characteristics in the accompanying chart. Many of the results of which you can see for yourself