bizzXceleration: Performance, Value and Profit

It's time for a brief data interlude to check in with the "real world" and see how it's doing. With today's Employment data the markets were pretty happy so as a consequence not only did they dance higher but the it looks like the chances of a correction are well behind us. Given all that and what we've had to see before about L.T. trends, PE's, Employment, yadda, yadda we could dance back thru stuff, update the charts and say about the same thing. We're going to let it rest a bit, start with the markets and then focus on some other economic data.

This is a policy-dependent environment where the biggest challenge is for the various fiscal and monetary authorities to gently unwind things while not aborting a nascent recovery. Speaking of which you'll find a very nice composite chart courtesy of the STL Fed's data system in the readings comparing GDP to Employment but then walking you thru what's going on with employment - take a VERY good luck because we've never seen this many people out of work for this long and there are some real structural risks. You'll also find some other stuff reinforcing the notion of a U-shaped recovery plus a bunch of stuff on Europe (Greece), Japan and China. In fact there's a big chunk of China stuff in both the Markets and Economy sections. The readings end up with some very interesting excerpts on credit and monetary policy, which is where we want to concentrate. The video clip is an interview with Charlie Munger done at Stanford (early 2009?) on the Crisis and what he thinks of policy. This is a man completely devoid of ideological biases who makes it his business to understand things - in vast contrast to almost all the other strategists and pontificators. We suggest you pay attention because what he had to say almost a year ago played out about as he called and the ripples are still with us, which subjects we take up next!

What's Going on With the Markets

 But let's start the graph- and chatfests by taking a quick look at the state of the markets, courtesy of INO.com and channeled via Investment Postcards. Now this is actually an interactive tool clip where one of INO's analysts walks you thru the DJIA, the NASDAQ and the SP500 and talks about trends and turning points.

In each case he finds nearly identical results, which is there is a magic resistance level and if the markets stay off, or bounce off, that number they'll still be in an uptrend are likely to head higher. Given that they've effectively been in a sideways trading range since September and the long-term downtrend from Oct07 is still intact we're definitely talking about a trader's market.

The really interesting thing is not all that per se but that so many other folks are seeing it roughly the same way as we're seeing it. So, as usual, the acid questions: at these valuations and given the economic outlook where's the return? Feel free to keep riding this as long as you like but have your fallback positions thought out and prepared. Just as a little anecdote in Jan08 my suggestions to a bunch of folks was to head for the sidelines with short-term Treasuries. Out of maybe 50+ folks (actually on a network basis more like 150+, not counting the blog posts) maybe 1-3 paid any attention whatsoever. Of course my second suggestion was to look into inverse ETFs. No we're not about to repeat all that but over the rest of this quarter and thru the next stimulus will fade and earnings realities will start catching up.

Continue reading "It's All About the Money: Markets, Economy, Credit, Oh MY!" »

Posted by dblwyo at 06:52 PM | Permalink | Comments (0)

Yesterday was a day of political kabuki in the US Senate as Sec. Paulson and Chairman Ben were raked over the coals, tripped, stripped and drug back over 'em again and again and again. It was truly a massive display of unusual bi-partisan unity by every Senator of both parties with nary a display of understanding, sympathy or constructive suggestions. As political theater it was entertaining to the extent that you admire the works of the Marquis de Sade. Whether it will turn out to be unavoidable and useful are really the questions. Put another way given how angry, ill-informed and torch-waving the electorate is was this 1/3 posturing and 2/3 preparation or 1/3 posturing, 5/6 dead serious and 1/6 who knows ? On the answers to that question hinges the fate of the economy, literally.

Market as Proxy

During the bulk of the day I had the chance to listen to the live testimonay and questions on-line while tracking the markets performance and it was amazing. After a very bad Monday Tue. started out flattish and then started falling apart as the level of objections became clear. Then when it looked as if some rationality was setting in and folks had calmed down the markets picked up considerably, much to the relief of the traders who'd bet on a relief rally following Mon's debacle. Alas it was not to be because around 3pm the the stories started to hit and the realities of the kabuki reached a wider audience....call it the kabuki kaboom. By close of business we were down 4+% in the worst 2-day drop in years. So far today things have been oscillating wildly as the Buffet Goldman put faded instantly to be replaced by apprehensive waiting for today's play.

Clearing the Air

Let's try and clear the air a little bit despite the fact that everything you're hearing, reading and people are talking about is largely distorted, serves an agenda that's not necessarily helpful or is just plain wrong. Sadly, for myself in particular, some of the financial journalists and bloggers for whom my respect has been the utmost are among those getting it wrong, being non-contributory or just terminally - implications intended - ideological. You should know who you are and it's rather sad that you don't. Let me give you two acid test questions for all of those "pontificating poobahs of pessimism": 1) if you don't like the proposal what's wrong with it and how would you fix it ? 2) in the timeframe we have before the markets crash and take the economy with it ? 3) if you don't like the plan at all what's your alternative proposal - let it all fail so the devil can sort out the hindmost ? Fortunately there are a few folks who are acting sensibly with names like Gross, Buffett, et.al. And our friends at BNN come thru again with a fair, balanced and reasonable interview.

First off it's not either a bailout or $700B. In fact none of the so-called bailouts are even that from Bear-Sterns to AIG to this "re-capitalization" plan. Nor are the Wall St. fatcats getting rich off of it. In fact many of them are getting wiped out, not to mention the ordinary folks being put on the street. There's a lot more secretaries than poobahs at Lehman or any of these firms. Dick Fuld sold his stock for something like $600K when last year it was worth about $170M. In the AIG case the $85B "bailout" is a loan, the Fed gets 90% of the stock, the CEO was fired and the stockholders were wiped out. And the Fed's getting paid 11% on the money - try and find that sort of return anywhere. When you take each one of these apart the details vary but they are variations on the same theme.

Take the giant bailout for example. The idea is to buy up the bad investments on the banks books because if they sold them at "fire-sale prices" the result would be many would be out of business and credit in the US economy would vanish. I'm not sure how to to make clear what that means - most companies in the US borrow money every day or every week to fund receivables, smooth out payables, finance payrolls while waiting to get paid and all that's just the normal course of business. Most people have car loans, many have mortgages, credit cards and so forth. THAT ALL GOES AWAY. The economy slows down and then stops completely...pretty soon no more car loans...no more auto manufacturing...no more auto jobs....well maybe that's a bad example but you get the idea. We're not talking about rescuing the fat cats we're talking about Joe Boilermaker's job, paycheck, healthcare, and everything else under the sun.

Objections and Consequences 

The major trotted out objections seem to be four: an equity stake, more oversight, help with foreclosure prevention and no golden executive comp. First off this was a proposal on three pages originally put together at Congress's request for them to turn into legislation, which they did, rather quickly and well. With the exception of the adders. Second off some speed was and is of the essence. As Sen. Dodd put it perfectly during his closing comments yesterday, "our legislative process doesn't lend itself to responding to crisis like this". They want weeks and months to carefully craft a package. I'd ask what's wrong with pushing something thru now to keep the markets from imploding while crafting a more meticulous package over the next 2-3 months. By the way for all those asking for fundamental strategic reform of financial regulation Sec. Paulson put forward a comprehensive proposal in March which the Congress has chosen not to act on. Be that as it may as a proposal it was supposed to be emended. As the Sec. testified he's not asking for no oversight and welcomes it. As for controlling executive compensation well enough, bargain that thru. An equity stake - that'd have to be thought thru but the precedents are already in place. Foreclosure prevention - that's populist pork-barrel-rolling at it's worst. First, until housing prices come down to reasonable levels this whole thing will keep breaking out. Second, everybody needs a haircut. And third that's a separate, major issue where the clock isn't ticking away in seconds.  

As a final point consider this - even if we lost every dime of the $700B plus all the prior investments but managed to get economic growth to stay higher than it would be we make money. Put another way we don't end up with 10-12% unemployment and an economy growing at 1% for ten years. Consider the last graphic which shows actual GDP vs Potentil - the gap between them is lost output. To make those differences bigger we also graphed (on the right-hand scale) the YoY growth rates. Now we have an $11T economy. Supposed we get a decline for the next two years of -3%/year (possible but optimistic in a credit collapse), so we have a minimal deadweight loss of -$333B x 2 = -$666B (accidental but meaningful numerology). And suppose we slowly recover for ten years at 1% instead of growing at potential. Let's close with a little worked out table: 

 At the end of ten years the difference between a mild downturn followed by a return over several years to potential growth and a slightly more severe downturn followed by a Japalaise decade is $2.6T in the last year alone. The total difference over all ten years is -$14T while the net present value is -$9.4T ! In either case that's a lot of lost jobs, people dying in emergency rooms, unbuilt houses and un-educated kids. And that's comparing a good case to a bad one...not the terrible one we're at risk of. Seems to me $700B is a pretty good investment for that kind of return.

Continue reading "Political Kabuki: It's NOT a Bailout, It's Your Life !" »

Posted by dblwyo at 12:51 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.

Continue reading "Credit Meltdown, Economy and Consequences: Putting the Pieces Together" »

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

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. 

Continue reading "John Galt vs the Fed: Credit, Crisis and Collapse" »

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

The elephant in the room is the fundamental breakdown in the structure of the credit markets which is leading to wave after wave off cross-instrument and cross-market disruptions. About the time we think that one set of ripples from a single rock toppling into the credit pond has died down or been contained another and bigger rock (or boulder or ...) topples into and the ripples get bigger and bigger. As you may have gathered it's my habit to softclip interesting stories and keep them around to buildup a timeline. In tracking the credit markets it was really only necessary to track a core, usually Treasuries and the yield curve, because the relationship of those markets was the engine that drove everything else. Now every instrument and every market has its' own unique characteristics depending on how much structure, synthesis, leverage and perversity is embodied in that market. While we don't know the size of the problem or the linkages the best we can project is that it will continue, and we don't have any real clues as to all the myriad inter-connects. Tech guys talk about network structure where everything links to everything else  talke about the N-squared problem. In other words it's not just about A <--> B links but A <--> C, C <--> Z, Z <--> who knows.

Continue reading "WRFest 1Mar08(Credit Markets): Credit Contagion, the Fed and Outlook" »

Posted by dblwyo at 10:48 AM | Permalink | Comments (0)

Well the search for the quasi-innocent to punish is underway (if you recall that old description of new project gone awry ?). While the Fed is not entirely blameless we seem to be heaping all the negatives on them and ignoring both the difficulties, the real situation and the malfeasances of many other players. The problem being that if we try and burn the witches to stop the plauge then the rats and fleas will still be with us; and we'll get another outbreak soon enough. There's a very good NYT story today which is well worth your time whose fundamental premise I disagree with. Which is not to say that there's not a lot that coulda/should been done and STILL will need doing. That's where we should be concentrating.

 UPDATE: CNBC has an interesting and useful discussion (not the typical debate) with Martin Meyer, Greg Ip, et.al. discussing what the Fed is trying to accomplish. Partly based on 'inside baseball' interviews with serious players. While you'll need to draw your own interpretations and conclusions this is one of the more realistics and balanced overviews I've seen. Particularly points to pay attention to are the discussion of outlooks, the credit mechanisms, etc. This is the first inkling that some folks are getting the idea of how badly broke the credit mechanisms are and what the constraints on Fed policy are.

Below the line you'll find an exerpt plus the URL's for my two favorite insightful bloggers on this topic. Here are my comments:

Sorry but this is an area where I need to caveat Barry's and the readers normal assessments a bit. Remember the conundrum ? Well with excess global liquidities the Fed and other central banks had limited abilities to raise long-term rates. Nobody's paying attention to that point but it is profound. Nor is anybody giving credence to another couple of critical points. The Fed would have had to start raising rates in '03 - think about what else was going on then and ask yourself if that was the time and place. Another point that Uncle Alan has made is that the Fed shouldn't be bursting bubbles as many have argued. Aside from whether they could or not the risk of inducing a major downturn to deflation, that's Depression, are too high.

The real problem here is that leveraged structured debt created perverse incentives to maximize the deal flow at the expense of rapidly declining asset quality. Instead of the supposed traditional model of making money by investing in sound assets. This was a regulatory problem and where the Fed did fail was in lacking the foresight and imagination to institute new regulatory regimes to a) prevent predatory lending and b)invent new mechanisms to reduce the proportion of bad assets that were re-leveraged. Any suggestions because it still remains to be done.

The final barrier was that these should have been put in in '04 when the possible impacts were first being discussed among central banks. Would there have been any support by anybody in that timeframe ?

Fed policy is actually pretty logical and reasonable within the limits of understanding and tools - not always right but a lot better than it has been among Central bankers. Try this on for size:

Credit Mess & the Fed: Credit Mess and the Fed: Understanding the Strategic Posture

Continue reading "Let's Blame Uncle Alan: Fed Policy and the Credit Crisis" »

Posted by dblwyo at 08:29 AM | Permalink | Comments (0)

Well the flow of news in the last 24 hours is significant - one is tempted to say astounding. After a "disappointing" 1/4-pt cut in the Fed and Fed Funds rates the Fed yesterday announced a whole slew of policy initiatives designed to attack the freeze in the credit markets, especially the short-term and bank lending markets, directly.Make no mistake about it,

this is not only a serious problem in its' own right but thru freezing up the credit markets threatens to trigger a major economic downturn, potentially on a worldwide basis.

The Fed's announcement of upto $40B of short-term lending using these new, or newly applied, policy tools and the massive worldwide coordination efforts (not seen since the 911 crisis) are measures of how seriously they are taking this. Today's WSJ has a great summary article - if you've no subscription we've excerpted key portions below but get a copy however you can. And to add some spice to the sauce check out David Wessel's brief video commentary at right. In fact start there. Meanwhile the WSJ excerpts are below coupled with more readings below the line extending yesterday's post of readings and resources.

(WSJ) Fed Tries to Free Up Credit  The Fed said it will provide banks up to $40 billion in the next eight days as part of a coordinated effort with four other central banks aimed at reviving lending.

Continue reading "The Fed & the Credit Mess: Readings II" »

Posted by dblwyo at 11:20 AM | Permalink | Comments (2)

The other aspect of the credit crisis to understand is the Fed. While we don't pretend to speak for them, or even too them :), we do think that most of their actions are readily understood by a) understanding the deeper structure of the environment and trends and b) how they see the world. More on that later but we believe that they've become increasingly transparent and are being entirely rational and logical in their actions, within the limits of the available data, analysis and human insight of course.

The critical problem is not that the Fed is facing the classic tradeoff between inflation and a slowing economy. No - it's much....much worse. They're between the rock of inflation and dollar problems on the one hand the hard place of an increasingly fragile economy.

The real problem, though, is that there is a tsunami of credit market breakdowns due to structural problems in leveraged debt instruments mounting toward them.

And us. Anyway you'll find an appropriate collection of readings and resources below the line here... 

Continue reading "The Fed and the Credit Crisis: More Readings & Resources" »

Posted by dblwyo at 01:16 PM | Permalink | Comments (0)

To the best of my understanding whinging is the British (English) term for whiners and complainers but it sounds more subtle and sophisticated to say it with an English accent :). BTW - please consider singing Schadenfreude to the tune of Oh Tannenbaum to get a flavor of our perspecive here !

It strikes me as greatly ironic that the Fed (Greenspan) has been blamed for letting rates remain low for too long and the role and impacts of the financial community in substituting credit and leverage on bad...bad diligence - think adult supervision - gets short shrift from the players. So short that as soon as things got a little tight a couple of weeks ago certain parties, as in all of them, where whinging about needing an immediate cut in the policy federal funds target. Fortunately good sense, experience, education and insight led to some short-term functional and operational fixes when the gearbox seized up (and make NO mistake it really seized up and we were all staring into the abyss). The accompanying chart shows target funds rate vs actual and up until that seize it was the normal minor fluctuations. The intervention by Ben & Co. strikes me as brilliant and courageous. If you won't mind me quoting myself let me borrow from an e-mail exchange on the topic that was also a posted comment on another blog. Before that let me mention that what we're seeing in the markets, in discussions of Fed policy and in discussions of the outlook for the economy (see this earlier post ) is a pretty complete lack of reality or the first stage in denial. We'll dig into the Markets and Fed Policy to get a better handle in follow-on posts but let's put it all in context. First, the brief dissection of Fed tactics and strategy:

Let's put ourselves in the Fed's shoes for a minute & recall their jobs are to 1) manage the economy around the speed limit - which gets most of the attention. But also 2) to make sure financial markets are orderly and don't seize up and 3) oversee the regulatory mechanisms that are required to keep the Jay Goulds of the world from taking the rest of us to the cleaners. The last statement indicated really that they're perfectly comfortable with what is essentially a neutral stance while recognizing a widening housing problem AND a liquidity squeeze (not a credit crunch which is when non-price restrictions keep any money from flowing [recall Reg Q and disintermediation ?]). It's funny that not too long ago everybody was complaining that they left rates too low for too long and not everybody's whining :). The Fed can't control the fundamental speed limit of the economy but can try to keep it as close to that potential as possible which means dampening down inflation on one side and demand shortfalls on the other. They're doing a fantastic job in the face of uncertainty. At the same time notice that the $ is very weak AND China is beginning to export inflation. Econ policy targeted rates need to stay up. Meanwhile we have an asset bubble based on bad diligence plus leverage & more bad diligence and discipline. That all needs to work out (recall Moral Hazard).
As it happens though the mechanism for actually managing rates is the same one for ensuring the system doesn't seize - and the discount window is always open but only used when Fed funds rates are lower than inter-bank loans. Given the shortfalls in ready liquidity in this last week the central banks are doing exactly what they're supposed to do and releasing funds into the system to maintain the target rate. The two are separate but highly inter-linked decisions. But don't read - as best I can tell - the injection of liquidity to keep the wheels greased as any change in policy. Which, as BR noted earlier, shouldn't be done or we'll get the buyout, buyback and over-leveraged asset boom driven by bad credit that's been needing to be cleaned out for a while now.

 The key here is whether or not there is adult supervision of financial decision making by all the players. Below is Minyanville's take-off on Jim Cramer's well-known tantrum from several weeks ago. That may have faded from your memory by this time but it shouldn't. The deeper question is, was this a black swan or was it anticipatable. Given that some very smart money, e.g. Wilbur Ross, have positioned themselves to take advantage of the still-to-be-worked-out implosion of the credit markets probably not. One could also point to excellent discussions by Paul McCulley and Bill Gross of PIMCO or a string of Jim Jubak columns (all referenced in various Weekly Readers) to confirm that. So to put it in context we offer up three different video takes. First, from Minyanville and then from WSJ's interview with Mr. Ross, finally concluding with Cramer's (admittedly rather brave) apperance on the Colbert Show where he sorta does and sorta doesn't take credit for the Fed fix.

Here's Hoofy and Boo to put it into perspective:

Continue reading "Schadenfreude, Oh Schadenfreude: the Fed vs the Whingers" »

Posted by dblwyo at 03:52 PM | Permalink | Comments (0)