bizzXceleration: Performance, Value and Profit

We interrupt our regularly scheduled posting to warn you that our early storm warning system has detected more early signs of bad credit weather. Over the weekend our alert news monitors found a new wave of back-on-balance sheet adjustments, Fannie Mae issued worse than expected news, both GSE's (FNM, FRE) announced that they would be restricting new mortgage loans and guarantees. And (H/T CalculatedRisk) Fannie's conference call tells us that the books closed in June but there were significant deteriorations in July MORE THAN THEY ANTICIPATED when putting together their books. As you can see from the early warning reserve dashboard Fannie has both upped its' reserves and doesn't begin to cover its' risks. Making a huge Treasury equity investment increasingly likely, indeed mandatory to keep them from sliding into major default (dare one say the BK-word ?) and at least threatening to follow Merrill in throwing existing stockholders to the wolves of insolvency.

What's It All Mean: the Vicious Circle Grinds On 

 

Continue reading "News Alert: Vicious Credit, Economy, Market Cycle Spotted" »

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

Having hopefully laid some groundwork with the prior post (Cramer's Anniversary: Continuing Credit Metastasis and Economic Outlook) on the continuing metastasis of the credit crunch and what it means for the Finance Industry, and its' links to and from the Economy, it's time to dive back into the muck. Sorta speaking of which we'll also point back to our posts (Tipping Points, Blindsides, Ouches: Tough Times Getting Tougher) on the tipping point being crossed into a much more rapidly weakening economy and ask you to keep that in mind as well - in spite of today's near-olympian euphoria in the markets. A small confession first though - we are SO.....O tired of talking about the Finance Industry. Why don't they just get this over ! Unfortuantely we may be 1/3-1/2 thru the Housing price declines but we're barely 1/4 thru the Housing downturn and it'll take much...much longer for the consequences to work thru the credit machinery. In other words be prepared to be swimming in this gunk for a long time to come. For proper perspective we give Mark Gilbert's pastische and parody of a famous Monty Ptyhon skit which is uproariously funny and painfully accurate:

CDO Market Is Dead, Not Just Pining for Fjords Hedge-Fund Guy enters an investment bank. ``I wish to complain about this derivative security what I purchased not two years ago from this very boutique,'' he says. ``Ah yes, the Collateralized-Debt Obligation,'' says the Wall Street Banker. ``What's wrong with him?'' ``I'll tell you what's wrong with him, my lad. He's dead, that's what's wrong with him!'' Wall Street Banker: ``No, no, he's ... restin'.'' Hedge-Fund Guy: ``Look, matey, I know a dead derivative when I see one, and I'm looking at one right now.'' ``No, no, he's not dead, he's restin'! Remarkable investment, the CDO, isn't it? Beautiful plumage!'' ``The plumage don't enter into it. He's stone dead.'' ``Nononono, no, no! He's restin'!'' 

GSE's as Exemplars: Fannie, Freddie and
the Disaster of Our Making

To understand what's going on with the breakdown of the markets we're going to use the GSE's Fannie and Freddie as our bad examples along with a large collection of other readings - all from the last few days (think of this as something like 20 normal blog posts rolled into one as usual). The Marketwatch vidclip (H/T BigPicture) of an interview with real estate economist Ken Rosen walks thru ALL the big problems facing the GSEs and the rest of the industry. Capital raising, more housing downturns (and other loans for others), more write-offs, more capital raising, shareholder dilution (destruction) and a long way to go in Housing alone. Listen to it for itself, to set the stage and on a third level think that this applies to every other financial firm in "same differences".

Risk Management vs Prudence

Not since this week it's become fashionable to get the crap out of Fannie and Freddie, as as the accompany chart shows you, there's some good reasons for that. (click to enlarge in a seperate window please). What's startling about that is that as several astute and prescient observers were already waving their arms and shouting fire the GSEs were lowering their loan standards and upping the Loan-to-Value limits beyond all reasons. All in the name of a) business competition and b) in adherence to their charter (see below for a couple of CNBC interviews with the current Fannie CEO on this). Lest we think too harshly of these guys however let's remember that not to long ago (three months ?!!) the entire country was banking on these guys to bail the entire country out of the housing disaster. After we all knew that they were in serious trouble.

We Were All in This Together

While we're all finger-pointing at Fannie, Freddie, the malfeasant Finance Industry and the evil real estate and mortgage broker types we ought to remember something. Directly or indirectly we all bellied up, or down as the case may be, to the trough to get our share of the slops. After the Tech Bust we were headed for a major downturn that was only averted by a historically surprising and entirely anomolous sustained level of consumer spending. Take a look at the associated composite chart, courtesy of CalculatedRisk. The top sub-chart shows GDP with and without Mortgage Equity Withdrawls. It doesn't take much decipherement to figure out that without MEW we'd have been in a really serious downturn - the D work might have been even appropriate. Or least the Japanese malaise. After the construction kept confusing people CR started just reporting MEW - absolutely and as a % of Disposable Income. From his work we can see that MEW ran between $100-$200B per quarter. And we're all excited about a single $150B stimulus ? Without Housing where would consumer spending have been ? And jobs ? And the markets ? The bottomlines here my friends are that without all those financial shenanigans we'd have been in the you-know-what.

Profits and Outlooks

After the break you'll find a large collection of readings that start with documenting the Dead Parrot bounce we're going thru and what some of the real data mean. For example a wonderfully eloquent rant by Barry Ritholz on really understanding Pending Home Sales - which almost everybody got as wrong as possible. We then dig into the cultural and institutional reasons for how and why we got into this mess - in particularly read "Confessions of a risk manager " for a realistic tale of the trenches. The last section talks about particularly players and uses three key ones to tell critical aspects of the story. From AIG we learn why being blind to the hand-writing on the wall is deadly dangerous. From FNM and FRE we learn that and how much farther there is to go for them and for the rest of the key players. We start that section with two old history softclips - sorry no URL's available - to remind us that once they were widow and orphan stocks then sequed into exemplars of bad practices and malfeasances from which they hadn't recovered when business urges and congressional and public pressure pushed them into bad decisions. With half the US mortgage market mind you - and the faith and credit of the entire US now at risk. Think about that for a minute. And finally we use Merrill to show what happens when the wolves catch the sleigh - somebody gets thrown overboard to buy some more time.

Continue reading "Riding the Storm - NOT: Breakdowns, Culture & Malfeasance in Finance" »

Posted by dblwyo at 10:16 AM | Permalink | Comments (1)

The Road to Perdition is paved often by good intentions and traveled by opportunists and in the near collapse of Fannie and Freddie we have both working over time over years, even decades. But in the last several days and weeks the shibbolethic ideologists have certainly been getting their licks in to. Not to long ago, despite the fundamental structural flaws being well-known, we were fantasizing about propping up the Housing freefall with GSE debt and loans. Unbelievable - das ist unsinn as my old German teacher used to say. And on the other side we have well-informed people ranting about rampant socialism and throwing their usual careful focus on the facts and the nature of things to the wind. We won't mention names but you know who y'all are. After the break there's a bunch of carefully selected readings which we hope you skim. If you haven't the time to go read them all then the last couple - the Economists dissection of the situation and the structural flaws and Larry Summer's short, pithy and brilliantly insightful summary are essential.

Essential, why ? Well first off let's put it in context. Combined they hold over $5 Trillion in mortgages and guarantees and are counter-parties to another $2.3T in credit swaps. We're talking here about numbers so unbelievably huge that the sovereign credit and wealth of major worldwide economies are the only basis of comparison. Right now we're in the worst financial structural breakdown we've seen since the Great Depression but it has barely scratched the performance of the economy unlike that earlier episode. Why ? Because policy-makers have a much deeper and more profound understanding of how to manage markets. It was policy error that turned the Great Crash into the Depression. And from Aug07 to Mar08 we were headed that way because non of the traditional instruments were working as they should in normal cyclic patterns. This was a structural problem. When BSC went down that, IOHO, seriously threatened the stability of the entire system. To understand the difference between what happens if/when BSC was allowed to go under in capitalist purity and what would happen if FNM/FRE went you need to wrap your head aroung the Richter Scale. A reading of 2.0 vs 4.0 is not twicet - each number up is 10X the prior number. But that's not the real rub - the energy release scales by a power law so that a difference in magnitude of 2 represents a 1000X more energy. BSC was a 3, maybe a 4.0. A collapse of the GSEs would be an 8.0, maybe a 9.0. The difference between a kiloton explosion and a gigaton in the financial system.

All of this ideological prattling about socialist intervention is utter nonsense, it's also extremely disingenuous as well. On at least two strategic fronts and sustained over years. The most recent one being that it was spending on Housing and the Housing ATM that allowed us to sail past the Tech Bust without a major downturn. Now if the GSEs were/are half, at least, of the mortgage markets, and as the giant players, define the cost structure where do you think we'd have been without their implicit subsidies of lower than market mortgage rates ? Where would the economy have been ? And where would the so-called rally from '02-'07 have been ? All of which the critics benefited from without objecting to how the sausage factory was working.

But our turning a blind eye to the sausage factory health standards has gone on for decades. The GSE's managed to run with minimal supervision, grow into a serious threat to the Western world (literally), maniuplate their books and bribe Congress widely and deeply for years with our implicit cooperation. Greenspan, and to his great credit Bush, started trying to tackle all this back in '04 when accounting shennigans finally caught up with the Pashas and Mandarins of the GSEs. But again we've benefited for years ourselves. As the Economist points out the GSE are/were leveraged  up about 65X - a level no private company would ever be allowed to run at and one possible only with wink-wink, nod-nod government backing.

Which gets to the second bottom line and then the third. Since everybody saw thru the veil of independence to the implicit guarantee what's really at stake here is the faith and credence of US government debt. If we let Fannie and Freddie go what won't we not stand behind next ? And how good is the dollar - who'd want to keep their reserves in the currency of the banana republics ? Those are literally and legitimately the kinds of questions lurking in the backs of the minds of Finance Ministries all over the world. If a direct collapse could have been an R-scale event of 8.0 then the impact on our ability to borrow, on interest rates and on the dollar would be a 10.0 !

Which is not to say this can be allowed to continue either - as Summers points out. The last time we backed ourselves into these corners where the government guaranteed the S&L mess without forcing changes in business models, operations, policies, risk management and controls was a disaster with a huge bill. We need to get thru this and then re-engineer the GSEs. Which is exactly what Paulsen and Bernanke are proposing. And have apparently been working on for months if not years.

So it's time to throw out the ideological, man the pumps, repair the ship and get her to port. And then re-build her from the ground up. Or else. Oh btw that R10.0, let me quote:

10.0+ Epic Never recorded; see below for equivalent seismic energy yield. Extremely rare (Unknown). 1 teraton equivalent. Estimate for a 2 km (~1.2 mi) rocky meteorite impacting at 25 km/s (~55,000 mph)

Continue reading "Bad Times, Really Bad Behavior, Bad Trouble: Fannie/Freddie and Perdition Road" »

Posted by dblwyo at 07:27 PM | Permalink | Comments (0)

Sometimes you work to a plan and sometimes you get interrupted by events. If you can put the events into the context of the plan we call that interrupt-driven event-managed, the sine qua non of aglity and resilience :). In this case the plan was to take forward the prior economic discussions and apply the implications to various business sectors. The last two days of market gyrations, Merrill's stunning announcements and some serendipitous inside scoop from Big Picture cause us to change course...a little. Consider the following excerpt from a recent post:

 Merrill's $5.7B Write-Down, $8.5B Share Issuance My (naive) question: "Wait a second -- didn't Merrill just report last week? How did they not disclose a $5.7 billion dollar whackage?"Merrill guy's by-the-book-answer: "Earnings were the 17th; The decision had not yet been made to sell the ABS CDOs, or take the writedown, or issue more stock. That was done this week." I think:  "yeah, sure it was."  Frickin weasels. 

Other Merrill guy says: "Geez, the stock is gonna get hit tomorrow" (ya think?) The stock closed Monday at $24.33, down 55% year-to-date. Merrill woman: "When do we buy this?" CDO guy: "When it hits $15" Me: Ouch!

Only that wasn't quite how it played out. The markets nose-dived yesterday and got another nosebleed today from re-climbing back to their previous altitudes. As Barry occasionally puts it ...WTF !!! Take a look at the accompany 10-Day composite chart of the SPX and NDX and tell me it all makes sense you. Particularly in light of the last two posts on the domestic and international economic situation (Note: trade talks have collapse - NOW that's really bad news as we discussed). No way that all makes sense. The commentary yesterday was that the IMF report on Housing troubles was the trigger and the running unsinn today that better confidence was the re-trigger. BS ! But let's put those arguments to bed.

WTF 1: Real Data on Confidence and Housing Prices 

The first composite chart shows U of Mich. consumer sentiment on a YoY% and absolute basis. Notice that YoY changes are as bad or worse as the Volcker-Reagan surprise short-stop of the economy that broke inflation. But on an absolute basis they're as bad as we've seen in nearly 30 years. Headlines may talk about MtM improvements but in actual fact these haven't been worse in a long...long time.

Now, courtesy of Calculated Risk consider the composite of Housing prices based on this morning's SP Case-Shiller reports. Ditto...they also are about as bad on both an absolute and YoY basis as we've seen in a very long time. Much worse if you think thru the absolute numbers we'd think that there's a long way to go before a semblance of normalcy returns to the housing markets....years of future pain. Now everybody may be getting jaded.

WTF 2: What Really Happened ?

On the basis of those charts plus Merrill's stunning anouncement, which follows right on the heels (that's deliberate - heels as in slimebxxx not heals as in fixes or even heels as in bringing up the rear) of MER's recent earnings announcements which said "we're under control, don't need more capital and no more write-offs. Sheesh.... Several reactions.

1. If they didn't know this was coming a few days ago their grasp of their own situation is sadly deficient and the company is completely out of control (which should also make you wonder about the rest of the industry).

2. If they did know it was coming and weren't ready or refused to couple the two together that's borderline malfeasance. If the deception was deliberate it's beyond borderline and on a murderous cattle raid that should start a war.

But wait, there's more.

3. Yesterday's news should have been insufficient to trigger the major drops we saw, especially since it was triggered and driven by financials. If it was/is true then today's more credible news on the economy PLUS MER's announcements should have seen an even bigger drop.

4. It looks like the details of the announcement got leaked out all over the place without being formally and publicly announced yesterday. That, I believe, satisfies the technical definition of criminal. Now we're beyond bad companies and into bad judgement and bad behavior - can you spell integrity.

5. Oh BtW, as long as we're having several WTF moments - the recent fantasy rally was based on the Financials having seen reality, admitted it and cleaned it up. So much for that notion.

Who do you think can trust to tell anything resembling the truth at this point ? Now there's a question you should never have to ask. It's one thing - not a good one IOHO - to spin-doctor to keep the patrons from stampeding in the fire. It's entirely another to tell them there was no fire, there is no fire and anyway it's out. And leave the building while leaving them there watching the movie.

After the break are some readings you might want to consider on this business picture designed to survey the depth and breadth of the breakage as well as provide some guidances for finding candidate truth-tellers. 

Update: BNN comes thru again with the best, substantive and human discussions that'll actually do you some good instead of being more tainment than info

 Scott Peterson reports on Merrill Lynch & Co.'s plans to raise $8.5B by selling stock.

 BNN speaks to Janet Tavakoli, president, Tavakoli Structured Finance Inc.

Continue reading "Bad Times, Bad Behavior: Merrill, Malfeasance, Markdowns, Markets" »

Posted by dblwyo at 11:21 AM | Permalink | Comments (0)

Time to re-visit some confessionals. In case you didn't notice the recent market rally was driven by the Financials ! Of all things. And they were driven by better than expected earnings, i.e. smaller than disastrous write-offs and terrible but not catastrophic impacts to their bottomlines. Unfortunately when you actually start parsing the news instead of reading the newswires PR announcements a slightly different set of pictures emerges. But let's start with this "simple", by our standards, little chart of the Finance ETF, XLF. On the "since Oct" chart the recent runup was huge IOHO - more even than the April surprise when it was all over. When you look at the 10-day chart you get the more granular anatomy and that it's starting to fade. Hopefully as some semblance of reality fades in. It hardly took a day, or less than, for the talking heads to get trotted out to talk about "worst is over" again and the time to be investigating putting money to work in the financials was now. One of the readings you'll see excerpted is about Bill Miller - the most exemplary fund manager of legend of the last two decades - who got completely trimmed up by large and bad bets on just that thesis. What happened ? Well for one thing let's remind ourselves of the arguments from the last post about what constitutes a good company (Bad Times, Good Companies: Who's Swimming Naked). And then suggest that we're looking at bad times for bad companies.

 Economic Consequences

 But, before pursuing that, you need to think about the consequences which are complex, convoluted but ultimately not surprising. When banks start writing off big numbers they take big hits on their capital and have less to loan. When they think the economic situation isn't good they tighten up lending standards. The end results is that credit gets scarcer and the economy experiences more down-pressure. Which gets reflected in interest rates and the money supply. Which is worsened in a credit crisis by elevated rates as risks are re-priced. All of which you see in this chart. On the top the 3Mo spread between Treasuries and Financial commercial paper remain at elevated levels while the spread between higher quality and more risky corporate bonds does as well. The really fascinating, puzzling and scary thing is that the spread between very short-term Fed Funds and 10Yr Treasuries has widened out enormously. That usually only happens when the economy is booming, there's a serious fear of inflation or rates are getting driven up by exchange rate pressures. Almost none of that seems to be the problem right now though. The middle chart shows the YoY% growth in the inflation-adjusted monetary base - and it's approx. 3.5% and returning to a downtrend. In other words despite a slowing economy, very low Fed rates and everything else that should be mitigating things credit is drying up at a serious rate. And it's NOT inflation as you can see on the bottom which compares core CPI to the spread between TIPs and 10YRs. The biggest, most astute and biggest bettors in the world don't see inflation as a problem. After parsing all the puts and takes we end up with a metastasizing credit crunch slowly oozing its' way/weight thru the economy. And you wondered why mortgage rates were jumping !

Business Implications & Inferences

Returning to contemplate the XLF jump leaves one more than a bit puzzled. Here's a set of hypothesis that you might want to kick around.

1. The Fed thru magic, innovation and cojones has created enough instruments to provide technical tools to address the credit crisis but we're still faced with the consequences of bad business decisions and a slowing economy. At least we're not facing collapse as we were in March.

2. The Financials have "merely" worked their way thru the immediate consequences of the crisis, not the crunch. As the economy slows the "credit death spiral" we've talked about before will start working it's way on their balance sheets, losses and loss provisions. With attendant impacts on profit and credit availability. IN other words this still has a long way to go. AmExp's results should be reviewed for the reality check.

3. None of this is/was being factored into the market's thinking on the financials....otherwise we shouldn't have seen a bounce.

4. Another thing we've talked about is broken business models, the strategic consequences of de-leveraging and the need to fundamental re-think all the major banking/finance segments for future prospects when leverage gets driven to a more rational 10X or less from the 20-30X that many were depending on for profits.

5. While several commentators have noted this from Charlie Gasparino to Bill Gross it would appear to not be being reflected in much of anyone's real thinking or investing. We refer you to Jim Jubak's recent column (today ?) on the terrible outlook for several major financials. In his and our estimation this is going to take years to re-engineer. And nobody is facing that music that we can tell. On any front.

We'll refer you back to a prior post (Red Sky Mornings, Investor Take Warning: More Finance Industry) for more graphics and discussion of leverage vs business models vs breakage. But if you don't look at much else please take a moment and consider these two CNBC vidclips:

• Getting Back to the Basics The future of Wall Street lies in its simpler sleeker past, says George Ball, Sanders Morris Harris Group.
• Merrill's Comeback Man CNBC's Charlie Gasparino takes a look at the executive who helped Merrill Lynch raise billions in new capital seven months ago.

UPDATE: One of the great recent discovers I"ve made is how truly balanced and sensible the Canadian Business News Network is. More on that later but for now here's a very recent clip outlining why a sensible sounding sr. investor thinks it's time to get back into Financials:

• BNN sets you up for your trading day with Clement Gignac, senior VP, chief economist and strategist, National Bank Financial.
  

As it happens I continue to disagree with him for all the reasons discussed but his reasoning would be reasonable if we were in normal times. Nonetheless he's clear, articulate and intelligent interviewed. A real pleasure to listen to !! 

Continue reading "Bad Times, Bad Companies: More Finance Industry" »

Posted by dblwyo at 01:50 PM | Permalink | Comments (0)

Recognize the old saying ? "Red sky at night, sailors delight. Red sky in the morning, sailor take warning" ? It's actually grounded in science....as well as centuries of experience. Where the winds tended to be Easterlies a red morning sky meant the sun was being reflected off heavy cloud cover, i.e. storms. We seem to be in the process of alternately re-discovering red skies in the Finance Industry and panicing and then thinking the storms have missed us.

The next step after the Economy post was going to be looking at the Int'l situation but we're coming back and jumping on the Finance Industry instead because of the weekend bailout of Fannie and Freddie and the FDIC taking control of a failed CA thrift, Indy-Mac. BtW - sorry for the brief hiatus. Another warning sign. Every time a window opened up in my schedule to post my ISP/Hosting provider was having problems. Guess who - Yahung, that's who. Another red sky we'll pick up later. The chart's a pretty good red sky warning - in fact we'd view it more as a collection of major storm clouds. The real thing to ponder here is not how bad the storms are, or are going to get, but why everyone was/is surprised. There are a couple of really key lessons to think about IOHO. Really...really think about. First off the sky's been read for a long-time. Jim Jubak had a major column on regional bank problems in Jan this year, CalculatedRisk has been warning about commercial real estate problems and regionals for a couple of years now. And of course we've been beating the drum for so long we ended up with a whole dedicated archive. Another thing at a deeper level in the surprise is the follow-on question - if everybody's this surprised what else aren't they thinking about it ? What's not priced into the sector and the markets ? Yet a third thing at yet a deeper level is the problem with business models - when we say we think the business models are broken that means many of the major financial institutions are going to go thru a lot of pain and will never come back as they were in terms of growth and profitability. Let's consider some graphics we've discussed before.

 Bad Loan Tsunamis

 We won't dig thru this in detail but do want to remind everybody of this on-going set of bad loan tsunamis that are still to come. First off we're a long way from done with the Housing downturn - that means more foreclosures, more losses and writeoffs and tighter credit. Even if the economy doesn't get any worse than it is - not likely btw - this anemic environment still means that a lot of auto, credit card and other consumer loans will deteriorate. And ditto on the business side. How this will work out with the screwy debt instruments, excess leverage, etc. we've gone over several places (Markets and Financials:4 Year Crunch, Broken BizzMods) but it ain't gonna be pretty by any means.

Business Model Breakage

Now let's stop and think about the basic banking business model a little. A bank accepts deposits so people won't have to carry around cash thereby lubricating the wheels of commerce and consumption. Further it then turns around and loans out those deposits to folks who plan on spending more then they've got handy - serving as the intermediary between folks with spare funds and those with shortages. The former get paid interest and the latter pay it and the bank's revenue stream comes from the difference. Now the real magic happens when leverage enters the picture because the banks assets (the loans) can be some larger multiple of its' liabilities (the deposits). All it needs to have on hand is enough ready liquidity to meet the normal demands for cash. Over literally centuries the rule-of-thumb has developed that a bank needs to have around 6-8% of it's "assets" on hand - this its' capital requirement. Unless there's a sudden surge in demand, like when there's a run. But now you can see where multiplying your assets by 10X or so generates a much larger revenue stream. The problems come when folks loose confidence in getting their money back and they're made worse when that leverage is 20X or 30X or 70X - enormously worse. And we're not making those numbers up the Investment Banks were running at 30X leverage and by the time all the shenanigans with off-balance sheeting financings, synthetic instruments, etc. were in place they represented big X's ! Unfortunately when the bigs drop in value by a few percentage points it chews up much bigger chunks of capital. And there you have the reverse of the virtuous leverage cycle used to generate profits. The vicious cycle of capital writedowns leading to insolvency and bankruptcy. Now here's the business model problem for the industry - the more profitable segments weren't based so much on innovations and value-add for customers. They were based on leverage. Which means all the previously high-profit and risky strategies are going to get squeezed bad. It put BSC and Indy-Mac out of business, threatens Lehman and has caused $Bs in writedowns worldwide. With more to come for the known and acknowledged problems.

What we're suggesting with our little graphic on future tsunamis that a whole slew of other problems is hiding in the wordwork and coming out like maggots in a carcass. Which sectors are carcasses, candidates or survivors is, IOHO and inexpert opinion, suggested by the color coding. After the break you'll find our most recent collection of readings backup up these arguments. Bon Appetit'.

Continue reading "Red Sky Mornings, Investor Take Warning: More Finance Industry" »

Posted by dblwyo at 02:59 PM | Permalink | Comments (0)

Well putting put up this rather large collection of Finance Industry readings wasn't the planned next step but it segues so naturally from the prior post on market outlooks. Not just because obviously, because the two are so tightly intertwined. But also because if our perspective an a major shift in sentiment is correct when you couple that with the emerging vicious feedback cycle between the economy, credit and losses the Finance Industry is about to get called out. Again..big time. Just in case you missed it a couple of prior posts set out the context and summarize the situation and might be worth re-visiting (Markets and Financials:4 Year Crunch, Broken BizzMods, Markets: Fear, Loathing, Schadenfreude and Cusps on Wall St.) though both are consistent with things we've been seeing and saying for months. So consider the table reset, as the case may be.

After the break you'll find some readings on four major aspects of the outlook for the street: Culture and Crime, Industry Outlook, Lehman and other Players. There was a whole slew of bad news for specific companies last week with large layoffs being announced, more write-downs, more capital raising and so on - and we haven't even see the downturn and those losses start yet ! Wow, deja vu' all over again. Two of the outlook articles are particularly amusing - particularly for afficinadoes of the Marquis, black humor or schadenfreude - the industry's write-offs SO FAR have wiped out profits since 2004. Except for the senior executive escapees. Wrap all that together and you also saw a bunch of bad news on the criminal side of things - not just the indictments against two senior BSC guys either but a big slew of FBI filings against mortgage fraud actions. If this all gets rolling it may make the aftermath of the Tech bust (remember Enron and the rest ?) look like patty-cake. A final piece of macro-new....the pressures for re-regulation are mounting rapidly and exponentially. After all when a Rep. Treasury Secretary who's an ex-CEO of Goldman starts pounding that drum...well we'd say that a broad consensus has been built up.

Other than that we'll just let you skim the readings - between their headlines and what we've already laid it all much pretty much screeches for itself. Going to be interesting though to see what happens, won't it ? One thing we're particularly fascinated by is this whole "business model" discussion - as in broken business model. We've heard and seen that meme really getting traction  just in the last few weeks. As you may know from reading along here we certainly believe it's true.

Bon Appetit' 

Continue reading "Crime, Punishment, (Profits) and Outlooks: High Noon at the Street ?" »

Posted by dblwyo at 06:50 PM | Permalink | Comments (2)

In this collection of readings excerpts we combine Markets and Financials because the underlying issues are so inter-twined. As usual the same talking head debate continues - is the worst over ? And what would trigger an uptick in the market ? But the game has changed on several fronts and two of the critical things we've talking about for months are now common currency memes and being reflected in almost every discussion we read or hear. The two ?

Credit  Crisis to Broken BizzMod

1) The Credit Crisis has morphed into an on-going credit crunch where key players are now talking about seeing things take the next 2-4 years to work out. We refer you to the accompanying graphic charting the propagation of the contagion that we've used before. (Finance Ind(Readings): Barbarians, Fixes and Outlooks) Interestingly one of the chief new naysayers is Bob Doll, CIO of Blackrock, who's earlier assessments that the worst was over has changed to the most pessimistic 2-4 estimate. It turns out that what he meant to say was that the breakdown was over and now we're into the longer-running de-leveraging and risk re-pricing. Oh...now you tell me. :)

2) Which leads to the new key issue/meme - the broken business model of the financial industry.(Finance Ind II(Readings): Fundamental Breakage in the BM) In the excerpts we've collected a bunch of key CNBC vidclips that talk about Investment Banks, Private Equity, the re-structuring of the LBO business, a bursting Hedge Fund bubble and some of the consequences.(Finance Ind III (Readings): Private Equity Futures - from Golden(Gilt) to Iron Age) The interview with James Stewart on long-term business model breakage is especially worth listening to IOHO. But the one you should/must listen to is Meredith Whitney's - who's assessment, based as it is on deep industry analysis, wide familiarities with the key companies and players and very deep analysis still, strangely enough, sounds a lot like ours.

Market Assessment 

How this is playing out in the markets is fascinating. The "will we go, will we stay, Jimmy Durante" theme remains with us...all based around an apparent lack of clarity with regard to the economic outlook. A surge in Unemployment took out the market week before last and good news on Retail Sales brought it back this last Fri. Good news which, when you parse it out, is anything but.(HF Indicators (Sales, Rates, Money, Inflation, Oil, Dollar): Unscheduled Interruption) We've highlighted four key technical indicators in the chart and you'll notice that despite Fri's surge that we didn't recover all that much ground.

Just for fun here's the 1-year weekly and 5-year monthly charts presented as simply as possible with a little trading trend stuff thrown in. Continuing our usual interpretation we don't see any signs in either of these that the markets are pricing in anything serious in our economic future. If you do please let us know. A point, btw, made in several of the excerpts. Notice on both that we got back essentially to the 200-day MA after correcting a mild 10% correction and that we're still barely busting the long-term lower bound on the trend.

Sector Comparisons

When you de-compose the overall market into sectors (having covered the int'l situation and emerging economies jointly in the prior post) an interesting picture emerges in the short/intermediate-terms and the longer-run. Here we've divided the SP sector ETFs into the worse and better performers. As you can see the only real pain is in Financials (XLF) - what a surprise - with Con. Discretionary (XLY) doing poorly and Healthcare (XLV) not feeling the love while Con. Staple (XLP) is holding up reasonably well considering what the economic numbers are telling us. On the other hand the vaunted strong performers aren't, over a year, doing that well either whether it's Technology (XLK), Industrials (XLI) or Materials (XLB). Only Energy (XLE) is still going gang-busters. If any theme emerges it's that Energy still has a good story and nobody else does but nobody's admitting it as yet.

Then when you shift your perspectives to the longer-term it gets even more interesting. Over the long-term the story's consistent but still not "pronounced" - that is we haven't seen the clear emergence of a strong direction, let alone one that matches up with our views on the economic outlook. Over five years Finance has essentially given up all it's gains - and if you belive the BM discussion (puns intended) there's a lot worse to come. Of the Weak group nobody's done particularly well. Of the Strong group only Energy has truly been an outstanding performer while the rest have done decently well. In the last five years we had, perhaps, three-five dominant investing themes. Real Estate that went bust but made money. Emerging Markets which are shifting rapidly. Energy and Commodities - still rolling along. The New World Economy - while true that would appear to be shifting somewhat as well. And then what ?

Continue reading "Markets and Financials:4 Year Crunch, Broken BizzMods" »

Posted by dblwyo at 08:38 AM | Permalink | Comments (1)

A major and critical part of the financial frenzies of the last several years have been the LBO buyout and somewhat related buyback booms. As most of us know by now there's been a relative freeze on LBO activity since last summer, at least among the very large/large PE funds. Talking to my friends in the mid-size business that began to show up abruptly around the holidays and, judging from various statistics on mid-size deals, has spread there as well, if not as seriously. Yet at the same time the various PE firms have continued, successfully, to raise enormous amounts of investment dollars. Despite the fact that, if anything, the freeze continues and, if you believe our analysis, is likely to face much worse.

Part of it of course is that buyout funds have, over the years provided unusually good returns and part of it is that there have been few alternatives in this era of low returns...so why not ? And another part, how much we don't know, is that LBO activity, or more correctly Private Equity investing is actually facing several interesting opportunities. Thought not as business as usual. But let's backtrack a bit and start with this chart, slightly dated, of the cycle in buyout fund investments.

You'll have to update it a bit in your minds eye with the '06 and '07 data which was even larger than the illustrated '05. The catch is that buyout investment kept on during YTD for this year as well. As you can see historically there were pronounced cycles in the business accompanied by a general upward trend in the amount of funds raised. A trend that was non-linear. It'll be interesting to see what updated versions of this chart look like when they become available because if the news headlines are right fund raising hasn't busted so far even if investing has.

There's another interesting aspect of this, which is what do you do with the money. With so much of it floating around there was not only an enormous increase in total funds but a lot of new firms and funds got started. Like the Hedge Fund industry though there are also enormous differences in performance. My suspicion is that these historical differences in fund performance and in performance over the years are about to get greatly exaggerated as we find out who's been swimming naked indeed. In the first sub-chart notice that the top firms enormously outperform the rest of the pack. And then bear in mind that all the newbies performance is not yet, and won't be for some time, reflected in those numbers. The second sub-chart suggests that there's also a big difference in performance over time that's worth looking at as well.

 Take a careful look at this chart and notice that the years of great performance are years of significant downturn - that is investments made during '91 and '01 did exceptionally well. Why ? Well largely because they weren't made at extraordinarily high multiples with unusual leverage built into them. All of which is not true this last few years. This time around there were three things that were generally true. 1) Prices (EBITDA multiples) were exceptionally high - most likely as a friend of mine has pointed out historically unique and never to be repeated. 2) Funding was easy and cheap so the levels of leverage in deals was also unusually large - which is about to come back and haunt folks a great deal. And 3) the terms of that borrowing were extraordinarily lenient - what're called "covenant lite" in terms of re-payment, default and other loan terms. Which means a lot of deals got done at too high a price, with too much leverage and assuming that prices would keep going up. Stop me when this all sounds familiar.

Yet in these potential disasters lurks at least a couple of key alternatives. Actually several. First off all that debt is going to generate a lot more distressed debt than in previous cycles and the PE firms are going to be able to pick it up for half price, or perhaps better. Though they'll then face some serious workout problems. Which leads to the second major opportunity for those who kept some dry powder and their heads - as Wilbur Ross has shown in his beginning to buy up mortgage servicing firms. There'll be a lot of companies across many industries who used capital to buyback their own stock, are now leveraged at the beginning of a major downturn AND didn't make the operational improvements they should have with those funds. Judging from the historical cycles illustrated above that suggests that as we move into and thru the downturn, whatever it's length and depth, PE companies who focus on returning to their roots and have the skills and acumen to do so will be doing well in the years ahead.

By return to their roots we mean moving away from financial engineering, though not ignoring or neglecting the benefits of capital re-structuring. And moving toward what's been claimed as the major benefit, capability and strategy of PE firms. Putting in money, re-vamping operations, instilling good management and management practices and in general returing enterprises to high performance status. The firms that can do that in the next few years stand to do very well indeed and ought to be entering a new era. Not a golden one that turned out to be gilt. Rather an "Age of Iron". Look back at the second chart and the huge jump in performance between the top and restof the pack, especially during tough times.

As you go over the readings below you'll find a lot of these various aspects reflected from the section on the Strategic Outlook to indicators of current deals slowing and/or going bad. To my favorite section on the Mid-Markets. Now there's not a lot ever covered in the MSM on the mid-markets. So what you'll read there are the excerpts from various newsletters and seminar announcements which have come to my attention. Which aside from their intrinsic merits also are great indicators of the outlook - and they all are focused, one way or another, on the situation as we've sketched it. Life is about to get interesting indeed for the Private Equity industry. 

Continue reading "Finance Ind III (Readings): Private Equity Futures - from Golden(Gilt) to Iron Age" »

Posted by dblwyo at 01:06 PM | Permalink | Comments (0)

Let's keep cranking on trying to take apart the current situation and strategic outlook for the Finance Industry. But first we should note that BM stands for "Business Model". Not what you thought it stood for but, nontheless, the pun was intended. And gets to the heart of our argument - which is that the business models of key sectors of the Finance Industry are flawed to badly broken, and we believe that many of the readings support that. The extent of the breakage depends on the sector but those which depended on leveraged trading and investment are most exposed for multiple reasons which are discussed below. Those closer to traditional banking and finance practices have lots of room to improve but equally a good dose of sound business practice, a little innovation and an increased focus on marketing and customer service would go a long way. If you are a stakeholder in any of these you need to walk thru the blueprint and use it as a checklist for assessing their statii and outlook.

The chart at right will be no surprise of course. It shows the Industry as a whole (XLF), the Broker-Dealers (IAI), the Insurance sub-industry (IAK) and Regional Banks (IAT). If you buy the arguments of the last three posts (Market, Economy, Finance I) we've had a bull rally with terrible misjudgments on valuations and earnings outlooks with a weakening economy which has yet to tip over into a real downturn. Consumer demand has been weakening in any case, and that was before factoring in the implicit tax of energy and food costs surges, which would feedback destructively to hiring and investment spending (per the normal causal linkages). And as a result we were about to see many more boulders topple into the credit pond with a series of feedback loops between deteriorating economics and worsening delinquencies. Net net the question would therefore be how much farther on that chart - over and above where we think the markets are going ?

Well we could let you just skim the readings excerpts and reach your own interpretations. Which we urge you to do. BUT...we'd also like to testfly the framework we deployed against our strategic evaluation of Citi as a way of thinking about the industry as a whole. Both because we think the general enterprise framework works and because the work that Pandit and his team have done strikes us as capturing 80-90% of the total industry situation (excluding the Insurance industry of course). (Poster-child II: Citi's Potential Turn-around as Performance Examplar) You'll find the readings below collected in various takes on the Strategic Outlook, specific companies (including one that shows AIG's writeoffs and capital raising changing radically in a week as well as UBS's huge discounted rights offering...shocking though nobody appeared shocked...numbness setting in all over ?). The final section gets to the heart of the matter by providing various readings on thinking about the futures of the industry...that is does their business model and strategies still work, if they ever did ? 

Based on those readings, all the prior posts which basically dealth with the same question and the strategic assessments in Citi's presentation we end up with the graphic at right. After two decades of innovation in the '70s and '80s which provided tremendous value-add and new services for consumers and business the industry shifted its' emphasis to leverage, complex products and trading on its' own account. That worked, apparently, since the mid-90s til last year. And then broke badly despite bringing us an unprecedented series of booms and busts for the same underlying structural reasons.

Now we're in a regime where de-leveraging will be the dominant macro-environmental theme and as a result capital requirements will be raised, explicitly by regulation or implicitly by investment returns. So instead of being able to reap the profits from being leveraged 30x, or 40x or 70x the banks, brokers/dealers are entering an era where they'll have to return to fundamentals. Hence our judgements in the various shade of warning indicators as to whether the business models of the last decade are sustainable going forward.

We could argue thru each sector individually and then discuss each of the major players but won't - though we do think this is the kind of evaluation any employee, investor or stakeholder needs to do for each and every one of them. What we will assert though is that these fundamental re-thinkings aren't widely recognized, acknowledged or accepted though several key commentators have made similar observations. And this kind of re-thinking is clearly implicit in Citi's new strategic framework. So apply the Buffett test - which of these are businesses you'd want to own a piece of as businessess ? Our answer - not many until these re-structurings are begun. On the other hand as Rubenstein, Buffett, Jubak, et.al. are pointing out there will be lots of gems to be sorted from the rubble. Once the rubble all falls down...which point we are IOHO a long way from. 

Continue reading "Finance Ind II(Readings): Fundamental Breakage in the BM" »

Posted by dblwyo at 10:04 AM | Permalink | Comments (0)

The prior two posts were our weekly surveys of Market and Economic information. We'll grant that typical blog practice is one/two clip(s) per post but we think something is served by collecting and categorizing them so that the patterns and implications are clearer. At least it works for us. We mention that by way of pro forma apologia for the infodensity, there and now. Because that econ/mkt information is only mildly interesting to us for its' own sake. What we think is even more important is the implications for business performance...industries...companies and you. Which is also by way of suggesting that with those two in mind it's really time to roll it forward and look at the consequences....which are, IOHO, pretty dire. Before rolling on we'd like to suggest a few minutes spent listening to Dave Wessel on CNBC will help set the table:Econ-Recon Mission  Perspectives on the economy, with David Wessel, The Wall Street Journal economics editor.

Here we'll focus on the implications for the Finance Industry...at least in part. Consider the graphic at right where we've down our best to capture what we think is going on. Though admittedly I'm not a finance industry expert we've all had to learn more about that arcane and mysterious industry in the last year than we ever wanted (btw do you realize we're over a year on the first small canary the Shanghai Surprise and the big one - the first BSC disasters ? Think about those as warning sigils in light of this arm-waving).

What we've tried to capture is the impact of the credit crisis so-called and how it's rippled thru the system and what's likely to still happen. So what we've seen so far is bad loans (1) moving up the chain of leveraged links to create ripples (2) and breakdowns across many different credit markets. That almost brought the whole house of cards down. Those losses led to massive writedowns and P&L losses (3) which severely damaged almost all the players in the Finance Industry. The catch on that set of loops is that sub-prime problems aren't thru and we have a whole host of other sources, e.g. ARM resets, HELOCs, etc. which are also turning bad; which'll keep that loop going. It's that metastasis of the credit contagion that folks like Whitney are warning about. Consider this the revenge of the "Rocks-in-the-Ponds" model.

The real on-going problem likes in the deteriorating general economic conditions which will lead to to additional credit tightening (4) and asset deteroriorations (5). In fact as we enter a "normal" cyclic downturn all the host of standard consumer and business loans (6) are now qued up to go thru a similar decline. And there impacts on things are not even factored in because everybody knows "the worst is over", right ? So as you skim the readings below please keep in mind that the real reason to make you wade thru the Market and Economy readings was to frame the context of what's going to happen to the Finance Industry as these cycles kick into high-gear. 

UPDATES (5/22): Two other major data points on rising delinquencies and on leveraged loans have been added to the readings. 

Continue reading "Finance Ind(Readings): Barbarians, Fixes and Outlooks" »

Posted by dblwyo at 02:59 PM | Permalink | Comments (0)

The meme running around the Street and the Treasury is, of course, that the worst is over. As we've noted previously that's a bit more than disingenuous (WRFest 4Apr08(Markets): Do We Stay, Do We Go..Jimmy,Readings (Finance): It's Over, It's Over...Yeah Right). The worst of the credit crisis in terms of a deep structural breakdown is over which just leaves us with a re-pricing of risk, de-leveraging and a burgeoning economic downturn that will lead to more writedowns, balance sheet pressures and losses from more bad loans and be based on feedback from the real economy. As opposed to internal dysfunctions in the broken credit markets. The real worst is yet to come and nobody's paying any attention. Us usual ?

Well not quite or entirely. Finally we're seeing some serious consideration of that feedback loop as well as a variety of articles finally addressing the real fundamentals of the Finance Industry. Are their business models broken ? We think so. And as a result there's going to have to be some very deep and fundamental re-thinking followed by some even deeper re-building, re-structuring and painful changes. Otherwise we'll just go thru this again...and again...and again.

All of which is reflected in the various company stories of continuing writedowns JUST dealing with the aftermath of all that bad paper. Some very serious players from JPM to Wolfensohn see more serious trouble ahead. Banks are going to be seeking and needing even more capital with all that implies about dilution, earnings pressures, tighter lending standards and so and so on. We've collected a bunch of stories that support that line of argument but conclude the excerpts with two poster children. On Fannie Mae who's recent announcements of surprisingly large losses, more trouble ahead and more capital raising were greeted by a stock price jump, of all things ! Which grossly misses the real, deep-seated damages done and the work to be faced. Our other poster child is Citigroup which, under Vikram Pandit, has made the right emergency moves but now everybody wants a clear, quick fix to make it all right. After four months in the job he's supposed to lay out the workable strategy for the next decade ?!

Give me a break. It's this kind of thinking that created all the problems in the first place. While the jury is out and will be for some time to come he seems to us to be taking some of the right, small steps. As he says you've got to get some of the immediate, small and operational improvements in place before you start re-engineering the super-structure. And Citi is a badly broken as they come, at least IOHO. For those of sufficiently long memories this reminds us of the early days of Gerstner's time at IBM when everybody wanted a vision and a strategy. As he said, "that's the last thing we need right now". Ditto for Citi. We'll see where Pandit goes but in our book he's started right. The question is...is anybody else getting it ? 

Continue reading "Business (Finance Industry): Boiled Frogs Getting Flayed" »

Posted by dblwyo at 02:10 PM | Permalink | Comments (0)

Here's our rather massive collection of readings excepts related to the Finance Industry. Judging from the fact that the ETF, XLF, is up almost 4% to day clearly the worst is over. Of course that not only is there no good news on the economic front but that this has been a month of writedowns and downsizings gone wild we'll admit to feeling a tad disconnected to the new realities. With this large a collection it'll be hard to summarize and just skimming the headlines, let alone the excerpts, will just about put you in the picture. But we'll take a pass.

1. The general theory, other than the talking heads talking themselves into thinking the "worst is over", seems to be that this was the kitchen-sink finale and from now on it'll be tough, very tough, but clear sailing. Until we see fundamental reform and re-structuring we're going to be locked into this boom-bust financial cycle with increasing frequency and severity of breakdowns.

2. The structural flaws of the industry's business models have yet to be addressed because it's the work of a decade or more - fair, considering it took nearly three to evolve this mess. Speaking of boiled frogs. UBS recently came out with the most candid internal appraisal which could be paraphrased as, "boy, did we ever screw the pooch on this" and "there was a total lack of either adult supervision or responsible business management". Seems fair to us.

3. The writeoffs aren't over and the various institutions are going to be exposed to more as Housing continues its' dive off the cliff, bad mortgages and securities reset and other asset classes, e.g. consumer debt, business loans, etc. come under increasing pressure. Future writeoffs will continue the debacle most likely. Which will in turn continue to put pressure on capital and will likely lead to a need for more infusions - the capital base of many of the banks is inadequate as it is without more writedowns.

3. In reaction to the destruction of capital the banks are tightening up on credit enormously. The business cycle was going to put serious pressure on loans anyway and lead to defaults, losses and bankruptcies. Combine the two and we have yet another Perfect Storm. And the writedowns, infusions, capital pressures, losses, etc. will feedback on one another. In other words in addition to the writedown problems we are just heading into a classical increase in loan losses.

4. These troubles in slightly different form are percolating to other sectors. While not exposed to the securitization debacle the Regional Banks are just beginning to feel the pain and are headed down their own slippery slop, I mean slope.

5. Accounting for this mess has been disingenous to deceptive with Level III "funny-money" assets protected and inappropriately valued and with various manuvers being used to keep other writeoffs and impairments away from the balance sheet and the bottomline. Even if nothing changes there'd therefore still be serious risks hiding in the wings. 

6. Each major sector is having problems from LBO loans to the PE firms. For example no LBO's no fees. And the LBO debt is getting written off at ginormous discounts. The PE guys are going to have to re-discover their roots of actually focusing on and improving the operations of their portfolio companies. Hedge funds are being called on the carpet as well.

7. And this all doesn't mention the burgeoning job losses that have actually been fairly low so far.

8. When you look at individual companies from UBS to Merrill to Wachovia to National City to Credit Suisse are facing major hurdles unique to them as well as the general breakdowns.

9. There are few, almost no, good stories on any front in this mess of messes. A possible exception is JP Morgan where Dimon has provided discipline and adult supervision. As a result JPM may be in a good position to do a little shopping. We're hard put to find anybody else. Nominations are open.

Before or after your excerpt skim the one single thing we think you ought to dive in on is George Soros' interview on Charlie Rose: A conversation with George Soros, Chairman, Soros Fund Management. And take a look at the chart at the right which shows corporate profits over the long term both in absolute terms and as shares of the total. There's a lot of information hiding there. For example why did corporate profits surge so hugely in this decade ? Well ask all the people who didn't get the jobs a real recovery would have generated. But for our purposes it's the shares that tell the story. Look at shares of the Financials.After growing gradually with the slow evolution of all this cleverness from 10% to 20% in the '80s it stayed in the 20% range thruout the '90s. And then suddenly boomed to 30% around 2000. Rapidly ! Now what sudden major structural innovation, say on the order of Pharmaceuticals, Electronics or the Internet lies behind that ? What new major source of value was created ? In case you're wondering that's both a rhetorical question and something for you to ponder. Because if there were no such innovation, i.e. if Financial firms were able to grab a dispproportionate share of  profits thru a combination of a weak economy and financial engineering, then it's not sustainable. And we're back to our first point.

Happy Skimming ! 

Continue reading "Readings (Finance): It's Over, It's Over...Yeah Right" »

Posted by dblwyo at 12:37 PM | Permalink | Comments (0)

Here's our collection of story excerpts for the Finance Industry. With all the near-death experiences we were going thru we didn't get the excerpts for the week of 23Mar up so they've been combined with last week's in one kind of massive posting. Nonetheless they make interesting reading taken all together, particularly in light of the market's huge rally with the SP500 up almost 4% and the Dow up just short of 400 points. Of course we've seen a lot more days like that in the last couple of months than not. And, for our money and for several of the commentators in our stories, the writedowns are far from over, the downsizings have just begun and we've got a long way to go. And we assure you that these weren't selected to excerpt just because they agree with our views. They capture some of the better thinking. We'll especially call you attention to the stories by Michael Lewis (Mr. Liar's Poker) and Merdith Whitney (who'll soon be known as Mrs. Dr. Doom for telling it like it is) who both point to troubles to come.

Our title comes from a Fortune article which got re-covered but came to a similar conclusion this week as well. And just happens to coincide with our assessments about the future of the Finance Industry which we've been harping away at in all the related posts. Another story worth paying attention to is the one reporting estimates of 200,000 job losses on Wall St., which is an unprecedented number.

Now tell me - is the worst over for the industry and financial stocks ? Or are we just at the gust front of the storm as the artificially inflated profits and earnings of the last decade are destroyed, the share of industry profits in national income begins to reverse, a new regulatory regime that'll change the rules systematically and systemically goes into effect ? And most especially (cf our earlier comments about good business practices) as the basic business models, management systems and leadership development of the industry are re-thought !

Interesting times indeed. 

Continue reading "WRFest 30Mar08(Finance Industry): End of Wall St. as We Know It ?" »

Posted by dblwyo at 09:40 PM | 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.

Continue reading "Adult Supervision Re-emerges: Bush Proposal for Regulatory Overhaul" »

Posted by dblwyo at 05:12 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:

Continue reading "Continuing the Dialog: Facing Realities in the Credit Market" »

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

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.

Continue reading "WRFest 16Mar08(Fin Ind):" »

Posted by dblwyo at 10:53 PM | 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

Continue reading "WRFest 9Mar08(Finance Industry): De-leverage, Margin Call, KaBoom" »

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

We've had several recent posts detailing the expanding crisis in the credit markets and the spreading turmoil and havoc it's creating. Including the increasing liklihood of the failures of major financial institutions (point: Ben Bernanke). And yesterday we noted Warren Buffett's comment on CNBC that he was being presented the opportunity buy loan portfolios for < 70% of their value or better (he of course was non-specific). In fact last Fri's big drop in the markets was partly due to the liquidation of an English hedge fund's (Pelaton) portfolio, or at least part of it. This post collects up some very interesting story exceprts on the continuing impacts on the LBO business. Now this is important not only for its' own sake but because buyouts were a major prop for market prices over the last two years. And THE major prop for the buyout feeding frenzy was the availability of cheap and easy credit for leveraged loans. Well lo and behold what should appear in our mail this morning but one of John Mauldin's occassional "Outside the Box" newsletters where some of his correspondents share their work with him and his readers.

Continue reading "WRFest 1Mar08(LBO Markets): Leveraged Loans, Liquidations and the LBO Bizz" »

Posted by dblwyo at 04:28 PM | Permalink | Comments (0)