Tuesday, December 30, 2008
Happy Holidays, Merrill Lynch Style
The foregoing stock options have been amended to eliminate the stock price hurdles applicable to a portion of such grants so that 100% of the then unvested stock options will vest and become exercisable immediately upon, and subject to, the closing of the Bank of America merger. In the absence of these amendments, 1/3 of the sign-on options would have vested on or prior to the closing of the merger in accordance with their existing terms. The exercise price of the options has not been amended, and when converted to Bank of America options based on the exchange ratio as provided in the merger agreement, the options are expected to continue to be substantially out of the money.
These amendments were made because the Merrill Lynch stock price hurdles are no longer relevant following the merger with Bank of America and because the executives will not have responsibility for the overall strategy and operations of the combined company as they did with Merrill Lynch and therefore will not be able to influence Bank of America’s stock price to the same extent.
WTF does that mean? There appears to be a little doublespeak here so I may be inaccurately interpreting this SEC filing. But, if I am reading this accurately, what it comes down to is John Thain apparently got his bonus the Merrill board denied. For those of you who are worried about your future, you can be assured of some peace of mind that the banksters are still very appreciative of the massive sums of money you are putting towards their salaries while you are booted to the curb. Happy Holidays, Merrill Lynch style.
Dow Chemical Is Unraveling And Its Long Term Viability Is Being Damaged
This week it appears Dow's Kuwaiti joint venture has been cancelled - we remarked that Dow's foreign investments could be cancelled. (Prepare for more of this across a multitude of corporations.) The ill-planned Rohn & Haas merger is now in jeopardy because it will more than likely substantially harm Dow's credit rating and, therefore, its long term viability. (Ratings agencies just downgraded Dow this week.) A failed merger at the agreed to price will likely cost Dow substantially as well. So, regardless of the merger outcome, Dow has been seriously damaged economically. And, Dow is rumored to potentially be cutting its dividend. These failures were easily avoided.
While Dow's CEO was a regular on the media circuit, it appears he should have been spending more time managing the business. And, it appears it has only taken about two years at the helm of Dow for him to jeopardize the long term health of the company. For that the CEO earned $15 million in 2007 and probably at least that much in 2008. One thing I am quite certain of is that Dow's CEO won't be a regular member of the media tour anymore.
In cases where CEOs didn't found a company, they are simply hired stewards. And, often not very good ones at that. As we have highlighted time and again, the wealth of the company is determined by the cumulative capital of its associates. A great CEO realizes this and works to unlock this capital onto the market. For that, it is empowered employees and shareholders who should be receiving the vast majority of the wealth created at publicly traded companies. Not the CEO. That is, unless the CEO has brought a successful strategy to the organization. To believe an administrator who doesn't invent, sell, create or make anything should be given unchecked power and unheard of riches in a publicly traded company is completely ridiculous. This elitist mindset is akin to a feudal system where the creativity and labor of the repressed create wealth for their repressors yet share little of the spoils. At some point society will no longer put misplaced trust in a self-appointed ruling class that obviously doesn't deserve such unchecked control. And, definitely doesn't deserve a pass on oversight. In fact, what we see today rails against the principles this country was founded on.
Mistakes are a part of life. That Dow's CEO made mistakes is irrelevant. What is important to understand is that a well-managed organization of Dow's size and scale should have well developed business processes and risk management practices to mitigate situations like those Dow is now dealing with. Those capabilities, processes and skills are the responsibility of the CEO and the board. That they obviously did not exist or were not respected at Dow Chemical points to a substantial deficiency in effective leadership. That deficiency has created risks that cost Dow Chemical billions of dollars and some level of unnecessary instability at the company.
Monday, December 29, 2008
Lobbyists, Former Goverment Officials And Well-Connected Cronies Look To Make A Fortune On Bankster Bailout While Citizens Are Left Paying The Bill
Saturday, December 27, 2008
Can OPEC Actually Afford To Cut Production?
OPEC countries have substantial debts and spent like drunken sailors on completely unsustainable economics over the last ten years. Now, with oil falling about $115 a barrel, their revenues are cut by 70% at constant production rates. If they cut production by an additional 10%, as they claimed they would a week and a half ago, they simply cut their own financial throats even deeper. I would not be surprised to see many OPEC nations cheat on production quotas as they always do. (I also expect the same from non OPEC oil producing states such as Russia.) All of these states need revenue. We could easily see a complete bust in oil prices at some point. Especially if we see major oil producing countries continue to pump oil at such high rates as I expect them to. When oil was blowing to the moon I told some friends we could see per gallon gasoline prices under a dollar in the U.S. (That includes tax for those outside of the U.S.) Not a one took me seriously because it seemed almost ridiculous at the time. If we see a complete oil bust, it would likely occur before the end of 2010. Such an event could create a very serious regional destabilization in the oil producing states from Russia down through the Middle East. More volatility.
Over the years I have seen analysis after analysis attempting to rationalize OPEC production cuts and increases tied to the price of oil. This is a lot about nothing. Oil market dynamics are driven by supply and demand not a roomful of bureaucrats stealing money from their citizens. OPEC announces it cuts production when oil drops to $10.......but the reality is $10 oil increases demand in a relatively stable global economy. OPEC cuts production when oil is $147......but the reality is oil at that price curbs demand.
The market has known for months that OPEC was supposedly going to cut production. But, prices aren't obliging. And, neither is a weaker dollar. OPEC doesn't control oil prices any more than a weak dollar guarantees oil is going to rise or anymore than the Federal Reserve controls the American economy. Remember when Wall Street was telling us that oil was so expensive because of a weak dollar? The weak dollar is a symptom not a cause for high oil prices. The dollar is still relatively weak being within ten to fifteen percent of its multi-decades low yet oil has imploded. Has anything Wall Street told us been based in truth?
Boone Pickens intimated last week that OPEC is engineering the price fall to keep the noose around our neck. Really? So OPEC is cutting their own income by nearly 80% at a time when many of these economies are going bust simply to keep the world hooked on oil? That is another real humdinger. Now, I like Boone and link to his alternative energy site on here because he is the only public voice pushing a specific actionable plan for alternative energy, but Boone's premise for rising oil prices was not based on truth. The U.S. does not need high oil prices to move to a sustainable economy, greater energy efficiency or alternative energy. It needs innovation. Something it does better than any other nation in history. That is not an accident either.
Who told you oil was a bubble for the last three years while the entire world embraced one of the greatest hoaxes of all time? Who loves you baby?
Friday, December 26, 2008
Spend Our Way To Prosperity?
Wednesday, December 24, 2008
Here's wishing everyone peace and joy this holiday season. I'll likely be away from the computer for the next week or two but I have some posts lined up on the blog's timer that will pop up over that time frame.
We've added a substantial number of email and RSS feed subscribers over the last year and I would like to throw out the tin cup to both new and existing readers. If you have gained anything from this blog and are fortunate enough to be employed or reasonably secure financially, I would ask you to consider giving a small pittance to someone less fortunate. Make a donation to a charity of your choice. Or consider becoming a loan shark using the microfinancing firms listed on this blog. If you are looking for an idea for a particular charity, the charities listed on this blog have been vetted by Charity Navigator. Even a donation of twenty bucks has the potential to change or even save a life. Become what we should all aspire to be by helping to make another's life a better one. Happy holidays.
Tuesday, December 23, 2008
Calls For A Rally - Wall Street's Conflict Of Interest
I'm certainly less bearish because selling pressure has abated but no one really knows if a sustainable rally will develop or how far a rally might go. Just because selling pressure has abated for some time doesn't mean there will be a rally. (This is not a rally....yet. It is volatility within a price band.) There have been very few compelling stocks except for possibly major gold producers we highlighted as becoming attractive in late October. But, those have made massive moves since. Some as much as 100%. I no longer find their valuations compelling.
The current move off of the late November low looks like another bearish five-wave rising wedge similar to the one we highlighted back in May. And, while it may be a temporary phenomenon, intraday buying pressure peaked on December 11th. If we don't see a pick up in buying soon, we can likely conclude technical traders are toying with the market and ultimately we could see more short term weakness.
Even though we have not seen a rally in over a year, many of the requirements for a strong rally still remain quite weak. As an example, short interest imploded as the market was crashing as I commented a few weekends ago. That means Wall Street has been severely damaged by this market. When you hear market technicians talk about markets requiring time to recover from a crash, that's because of the damage that has been inflicted on market participants. Financial damage. Low short interest through a market crash tells us most professional money was on the wrong side of the trade and/or has been trying to catch a falling knife instead of participating on the side of the decline.
As I said a few weeks ago, I would classify my near term position as relatively neutral with the potential for a rally in the next month or two. To see the largest annual drop in stock prices and expect to see an automatic reversal without some period of price stabilization is very unlikely. We will obviously see a resumption in selling or sustained buying at some point. That might be a month, a week or a year. There is no law of nature that requires the market to do anything other than tread price and time. In other words, the absence of a declining market does not necessarily translate into a rising market. Current market participants may not have witnessed this type of market, but history has shown us this type of market after crashes.
The real issue I am trying to get at is why so many talking heads are out in force telling us this rally has legs. I'm using exact words lifted from a popular talking head. Most on Wall Street have no competency in quantitative trading or investment models to guide them. Remember, Wall Street is generally nothing other than opinion and emotion. Those same opinions and emotions were at record bullish levels right before the global economy and asset markets went dumpster diving. Something we noted as a serious problem before the dive started. And, something that the recent Russell survey confirms exists again. Russell tries to spin this data as positive but that is simply emotional bias. Russell needs a rally just like the rest of Wall Street.
Here is more likely the reality behind the calls for a rally. First, it's likely herd behavior. No one wants to be left behind in picking a bottom. One person calls something and the next thing you know, the entire financial community has jumped on board. You know, like peak oil. Remember, original thought is not often practiced in the financial community. Second, Wall Street is paid on how many assets they have under management - something we have repeatedly railed against. Let's use an example here. Bill Miller recently called a bottom in equities. Not a bottom but the bottom. In the same breath he called for the Federal Reserve to step in and start buying stocks to support prices. Why would Miller make such a request if he were so confident?
Miller's mutual fund assets have fallen 75%. Think about that. That means his income has fallen by much more than 75%. What would happen if your income fell by more than 75%. That would likely mean you are collecting unemployment or having difficulty making ends meet. And, that too applies to Miller and more broadly to Wall Street and the financial community. There in lies the conflict of interest. Wall Street is teetering on the precipice. And, what happens when an industry is on the verge of collapse as they see record losses and outflows of capital? They do anything they can to stop it. The survival instinct. And, in this case, what might that be? That would be grabbing the microphone and telling everyone that a rally is imminent in an attempt to stop outflows. And, then what? Do anything you can to stabilize prices or even rally the market. That includes hedge funds, mutual funds, money managers, etc. that are all seeing redemptions.
Miller and others need main street to believe or they may not have enough money to pay for their yachts, penthouses and Ferraris or worse, they may have to find a new career. With the decline in assets and outflows of investor capital, Wall Street is starting to look like a very bloated Humpty Dumpty from an SG&A perspective. ie, Top heavy and unstable. We could end up with a complete rout of employment in the financial sector without some type of stabilization in asset prices and/or investor outflows. But, for quite a few years we have said this will likely happen. Wall Street really needs to stem the decline of assets. And, that means they need a rally to stem outflows. Therefore, if they can, they will. And, the Fed is now attempting to provide the fuel.
Some data does point to a possible stabilization in the coming months but that someone can pick the exact bottom after the biggest one year crash in history and the current market slop we see should leave anyone with a modicum of common sense highly dubious. Anyone calling late November the bottom or a tradable bottom is at best lucky and at worst not looking out for the best interests of investors or clients. But, then why should that be a surprise after many now see the real Wall Street for the first time.
The onus is on the bulls to prove their mettle given the damage that has been done. Until we see more evidence to the contrary, I would give significant, if not equal, credence to short term concerns of weakness back into the November low or the 600-724 region (S&P) we have highlighted.
Hedge Funds Get Bailout From Federal Reserve While Americans Spend Christmas Eating Gruel
Still, the only people not to receive a bailout are the American people. A friend and I were talking today about the unintended consequences we highlighted after the Fed's most recent action - that savers are punished at the expense of the banksters. How much income in savings has been lost since the Fed started cutting rates? Investments in money market funds, certificates of deposits, etc? Hundreds of billions of dollars or more. All in an attempt to save the banksters at the expense of hard working people. Not only is the Fed jeopardizing healthy banks to save the banksters but it is taking money out of the economy and wage earner's pockets to save the banking system.
Monday, December 22, 2008
More Volatility - Belgian Government Resigns
Now, wouldn't it be a great act of nobility if the CEOs on Wall Street and within other companies with failed strategies would do the honorable thing by resigning and returning all of their earnings over the last ten years? That includes Hank Paulson for his tenure at Gollum Sacked. And, the government, in its complicity and conflicts of interest, would follow suit? That would be all of Congress and every leader at the regulatory agencies both at the state and federal level.
I'm quite sure we would find adequately competent replacements. If nothing else, we would be able to find comparable replacements by hiring out of work chimps from the old Soviet space program.
Will There Be A Christmas? Santa Claus Seeks Government Bailout.
Sunday, December 21, 2008
As Russian Civil Unrest Increases, The Response Is More State-Sponsored Terror Over Its Own People
If anyone didn't see this environment coming, they need a history lesson. The greatest threat to humanity is state sponsored terror be it projected outward or at the expense of its own people. It is a timeless truth. One that great minds of freedom have recognized for thousands of years.
Any legislation or law enacted in times of volatility - often portrayed as protection for the sovereign - is nothing of the sort. That includes provisions of the Patriot Act in the United States. These power grabs by the state are timeless as our founding fathers warned us and many civil libertarians again warn us in today's world. As long as there is a state, no freedom is guaranteed. It is earned daily through activism.
Russians Hoard Dollars
China Bans BBC & New York Times
Saturday, December 20, 2008
Toyota Faces Credit Downgrade
When this crisis first broke and everyone wanted to highlight this as an American auto industry problem. Many inaccurately then pointed to Toyota as being perfectly healthy. We highlighted that Toyota could face severe problems of their own. Toyota's sales are down more than Ford's and similar to GM's. And, now Toyota has just reported it will file its first operating loss. Ever.
Wednesday S&P issued a report that highlights their credit concerns at Toyota. Over the last few years we highlighted many fundamental reasons that left us bearish on the mighty industrial powerhouse's stock. Now many of these fundamentals are starting to show their hand. I won't go so far as to say a downgrade is imminent but I would be surprised if it doesn't happen at some point. Toyota likely has significant challenges dead ahead as do all global auto makers. Challenges that will adversely impact company financial positions quite negatively.
We'll talk more about the auto industry in the future but the global auto industry crisis is more complex than the flippant position that GM management needs to be changed or that GM doesn't build cars people want. Those statements have truth to them and we were a lonely voice discussing those issues on here three years ago. But, the cause of the auto crisis is very marginally related to those problems.
Congress Fights For Lower Wages And Less Benefits For You
Friday, December 19, 2008
Citigroup Gets American Taxpayer Bailouts And Pumps Money Into Bankrupt Dubai. Remains Bullish.
By the way, does anyone still believe all of the gold bulls who are telling you the OPEC states, China and Russia are going to increase their gold reserves by thousands and thousands and thousands of tons and, by conclusion, drive incredible demand for gold? Or that the printing presses are in Bernanke's basement and the Fed is handing out money like a drunken sailor? I've made my position on gold eminently clear. And, it hasn't changed before or during this volatility. Although, as I have said, at some point it might.
Remember, the first person out holds the door. Last person out holds the bag.
Is This "The" Bottom Or A Tradable Bottom In Equities?
We have heard a chorus of bottom callers recently. The bottom or a tradable bottom is in. Heard that one before? How about every other week for all of 2008. Let's look at a graphic above. The chart is of the S&P since July overlaid with an algorithm that allows me to measure the participation rate of large buyers and sellers in the market. When the algorithm is above the zero line, as defined by the upward blue arrow, buyers are in control. The participation of large and sustained buyers is measured by the intensity of the red graphic. The same is said below the horizontal zero line as defined by the downward blue arrow.
We see that in July and August, large buyers were out in force with sustainable buying. Then, at the end of August, sellers began overwhelming buyers. September and October was defined by one of the largest crashes in U.S. equity history. It was also the largest global equity crash in history, wiping tens of trillions out of the global financial system.
Interspersed on the chart were three short bursts of buyers in October, November and then again in late November into the first few days of December. These are more than likely technical rebounds that can be defined by derivatives expirations week. Counter trend moves during these weeks are quite normal as we have talked about before. When the market has run away with a large move, markets sometimes see violent counter trend moves into expiration week. Especially in this environment where options hedging meant to protect holders of equities in a declining market has ironically likely contributed to the collapse in equity markets.
Focusing in on the box on the right hand side of the graphic, we see buyers and sellers represented over the last two weeks. Not only have we seen nothing more than price slop, except for a few days action in late November, but we see a lack of sustained buying or selling. While this condition has the potential to plant the seeds of an eventual rally, was the late November low "the" tradable bottom or absolute bottom? Regardless of what the opinionators believe, to date, the data looks highly dubious. More on that in a post I'll get up before Christmas.
Thursday, December 18, 2008
Wednesday, December 17, 2008
The Impact Of Tuesday's Fed Policy Actions
There doesn't seem to be many clear explanations of the Fed's actions recently. This is most likely because the Fed has never instituted these policies before. So, we hear comments like "If the Fed could buy a Picasso painting to save the economy, it would." Now exactly how would that help the economy? Even though the Fed is very mysterious and monetary policy often seems like voodoo this is all really quite simple. Tuesday's two announced policies of forcing banks to lend and offering no return on risk-free assets go hand-in-hand. The Fed is attempting to impact both supply and demand for credit. Force the banks to lend and force business and individuals to spend. Force may be too harsh of a word but the Fed wants the participants in the economy to believe cash is trash. They do that by removing the yield on risk-free assets and by offering credit in return. The ultimate goal is to re-ignite inflation so we don't drown in a mountain of debt. They intend to do this by encouraging risk-taking in the economy. Hopefully that's a lot easier to understand than TARP, repos, quantitative easing and the sinister notion that the Fed is dropping money from helicopters. (These positions are either based on lies or lack of understanding of Fed policy.) The real question is if it will work and what are the unintended consequences to such policies. One unintended consequence is that grandma's FDIC insured certificates of deposit yields are imploding. So, grandma now needs to invest her life savings in a hedge fund to pay her heating bill.
Here's something to think about. Interest rates were already the lowest in the last fifty years this past cycle and yet, as we noted numerous times while the world was partying hard, it did not positively impact the demand for capital. Should we anticipate something has magically changed? Do you now want to be greedy when others are fearful? Especially after those who advocated such a position, like Buffet, were crushed. It's quite easy to be nonchalant when you have $40 billion in cash. Not so easy when you don't know if you will have a job tomorrow or where your next check is going to come from.
In closing, let's look at what we can conclude from Tuesday's Fed policy announcements aside from Wall Street's attempted emotional manipulation of the post announcement rally. (More on that in the next post.) $8 trillion in Fed actions, a $300 billion stimulus package, $150 billion in pork on the back of the $700 billion in TARP funding, rate cuts to one half of one percent and similar actions by bankers and governments around the globe that took place before Tuesday have not stemmed the global economic crisis.
Therefore, what Tuesday's Fed policy actions really tell us is that the world is falling off of a cliff and desperate times call for desperate measures. In other words the Fed is desperate. The massive price declines and collapse in demand we are seeing around the globe has the Fed worried about deflation and depression regardless of the public remarks to the contrary. Remember, a cornered animal is extremely dangerous. Even though it appears the world is coming to an end, with significantly declining prices (increased purchasing power), an enormous energy tax removed from the economy, a planned trillion dollar stimulus package and the Fed's recent actions, for the time being I don't think it's a good time to play chicken with markets.
Tuesday, December 16, 2008
Is The Federal Reserve Actually Destroying The Banking System And Other Remarks On The Banks
Sometimes I think people spend more time seeking their certification or degree than actually trying to determine what truth lies behind the regurgitated data of textbooks, lectures or assignments. This is most definitely the situation with many aspects of modern finance. Many of the mistakes today are greater than at any time in history. To a certain extent, we have destroyed ourselves with a combination of our knowledge and our beliefs. Technology (knowledge) has allowed many of the outcomes associated with economic miscalculations (beliefs) to be magnified to levels that threaten our future in ways that were not historically possible.
There are certain experiences in life that we never forget for whatever reason. One was a conversation with a good friend while still in school. I asked her about how she had come to a particular conclusion on a project we were working on. She said that she didn't really know but indeed her work was accurate. When I asked if that bothered her, she responded that the only thing she cared about was getting her degree and finding a good job.
My point is we can put a lot of rigor into ignorant arguments or conclusions and even have minimal intellectual depth to thoughts that formulate our conclusions. In other words, humanity often becomes enamored with our own baloney. If it is well written or well argued or is backed up by some supporting evidence and someone with a degree or certification or some social status is behind it, it surely must have validity. While we are talking about banks, let's look at an example written by a certified financial professional near the peak of this cycle. You'll understand why I shared that college experience when you read the linked text below.
At Morningstar, we've long recognized the moats of banks, and it's nearly impossible to understate their importance. Without a robust analysis of a company's competitive advantage and the sustainability of that advantage over time, investors run the risk of buying one-hit wonders that burn out fast…along with shareholders' money.
At Morningstar, we begin each new analysis with the idea that a company has no economic moat until one is proven. But our financial services team believes that the banking industry offers an exception to the rule. We would argue that every bank has, at a minimum, a narrow economic moat.
Regulation played a more important role historically, and we believe that the industry will continue its long-term trend of deregulation.
Over the decades, of course, things have changed. Banks can apply for a charter to operate in any state and can engage in many nonbanking businesses, such as investment banking, asset management, and insurance brokerage. But the foundation upon which the industry was formed is still present. The banks that dominated certain cities 75 years ago remain (in various forms) today. Think of Wells Fargo (WFC) in San Francisco, Fifth Third (FITB) in Cincinnati, and Washington Mutual (WM) in Seattle. We believe that this stems from banks' integral roles within their respective communities: In assessing risk, they must know a borrower well, and in making loans, a bank is essentially financing the growth of a community over time.
Banks have moats? And, what would that moat be? Government bailouts? I just have to giggle when I read some of the generally available perspectives out there. Given what you know today, how unbelievable is this? Yet, as unbelievable as it is today, it was equally believable by most when it was written. This was obviously someone who was enamored by baloney. A well presented and supposedly intellectually defended position. How much of what we absorb on a daily basis is undeniable truth?
I've remarked before that I model bank liquidity. This has allowed me to confidently remark time and again that the bank bottom callers relying on their gut-feel, seances and Ouija boards were wrong. I won't share the models by which I perform any analysis because frankly, it involves a lot of hard work and learning that has developed over countless years of effort. Work that isn't even generally understood by finance industry professionals. Additionally, some of my posts are well off the beaten path in topic and content as I try to keep this blog's scope relatively unique. Yet I see very similar perspectives, including remarks I can't find anywhere else but here, that often show up elsewhere. That's fine but it tempers any desire to share specific details. Were this simply average folk wanting a better explanation, I might oblige but beyond that I don't plan to enrich finance professionals with intellectual property that has value.
That said, I will show you the chart below which adds validation to the perspective that I shared on here some time ago - that I believe the Federal Reserve and Treasury's scatter-brained plans to save the mega banks are actually killing the healthy banks and by conclusion the American economy. There are a half a dozen reasons why I make this statement and there are many contributing explanations for the chart below but I'm going to share a potentially unique perspective on one in the next paragraph. Before I do, again, I support the Federal Reserve's macro attempts to stabilize the banking system. I just disagree with the lack of planning and lack of well-thought policy that has developed. But, I do have hope they are learning through the process.
So, let's continue by looking at short term Treasuries and a potential explanation, or partial explanation, for their bizarre actions. Short term Treasuries are hovering right at zero percent interest. The only explanation I have seen for this involves people being so panicked they are willing to irrationally forgo any return for safety. I find this position very dubious on many levels. At least as a full explanation. A more plausible explanation may be that financial firms are willing to buy Treasuries at zero percent or, if possible, even marginally negative rates because the Federal Reserve is now paying interest on required and excess bank reserves. Were this the case, the explanation for zero percent rates on notes would have nothing to do with panic or fear. It would be a calculated action of insolvent banks attempting to rebuild their balance sheets. Banks that would be willing to add Treasuries to their reserves at zero percent return rather than lend for profit. In other words, the Fed (via the Treasury) would be issuing Treasuries to the market to prop up the bank balance sheets and the banks would be adding the Treasuries the Fed is issuing to prop up the very banks that are then acquiring the Treasuries issued to prop them up. Huh? It's a mouthful. I do have limited data confirming this perspective but it is a more plausible than any other explanation I have seen as banks hoard cash and seek safe short term liquidity with the benefit of earning a return.
This is the ultimate implementation of circular logic. The Fed is bailing out the banks and the banks in return are bailing out the Fed (Treasury). Not specifically but on some level there is truth to this statement. That's a little like using one credit card to pay off a second credit card. Then using the second credit card to pay for the first. Then concluding the world has become a better place.
All the while, the insolvent banksters getting handouts from the Fed are unwilling to extend credit because comparatively they get a guaranteed return on Treasuries, even if minuscule. Regardless of whether this scenario is happening exactly as I have outlined it, refusal to extend credit creates a recursive impact of taking more and more money out of the economy that eventually makes it economically impossible for more and more debtors to repay their obligations to the heretofore healthy banks. Thus, tighter credit, fueled by insolvent banks the Federal Reserve is attempting to save, starts destroying the balance sheet of healthy banks and their customers. This could lead to a self-fulfilling prophecy of an ever larger banking calamity. And, if there is any legitimacy to this scenario, and I believe there is some evidence therefore, it is likely happening, in a great irony one of the Fed's primary tools to save the banking system would actually be destroying the healthy banks and the economy. So, the Fed could lower short term rates in an attempt to deter this banking behavior but this would limit an unhealthy bank's ability to take advantage of the Fed's paid reserves program. I expect the Fed will lower rates in an attempt to force unhealthy banks to lend their way to health. Will it work?
As I've said before, the Fed should remove the sick banks or risk destroying healthy banks and possibly even contributing to a depression the Fed's policies are ironically meant to avoid.
Remember, we have talked about this concept in literal terms but let's make this simple point again. The Fed and Treasury cannot remove risk. There is no way to remove risk. All one can do is transfer risk and potentially relieve some of the time value of its impact. The crisis before us still remains and nothing has been done to resolve anything that caused it. All the government's plans have done is transfer some of the risk in the banking system to the U.S. government and the buyers of its debt. That's it. Nothing more, nothing less. If the economy does not stabilize, and it won't without first experiencing substantially greater pain, and/or plans are not instituted to stimulate market-based and private sector growth, the government's monetary policies will eventually fail on some level.
Capitalism is a bad word right now due to the behavior of the elitists who created this mess, but capitalism is the only way out. Government can play an important role in our recovery but nothing being discussed right now will move to recovery. Assisting those who are on the verge of losing a place to live or providing some type of unemployment benefit is a role government can play but a government works project is not a plan for recovery. I'm not saying rebuilding or building infrastructure is not important. But, were recovery so simple as embracing the Soviet planning model, we'd all be Bolsheviks. Or Europeans. Instead, we must repudiate the European style of colonial capitalism that has recently come to define our society and the European style of government involved capitalism that is now encroaching into our society. Government involvement in capitalism may be necessary short term because, paradoxically, government has not been constructively involved in capitalism for some time. But long term, we must return to the American style of capitalism that created the most dynamic and wealthy society the world has ever seen. And, the only people that will make that happen reside outside of the bureaucracy. That would be you.
There is no free lunch. That is, unless it's a holiday lunch with friends and family.
Monday, December 15, 2008
President Has First Hand Experience With Our Theme Of Volatility
Saturday, December 13, 2008
Congress To Auto Workers - You Need To Cut Your Wages
I have used this quote a few times over the life of this blog and I'll be using it again in the future because the asshats who have the microphone are so frigging stupid.
"We are justly proud of the high wage rates which prevail throughout our country and jealous of any interference with them by the products of the cheaper labor of other countries. To maintain this condition, to strengthen our control of home markets and, above all, to broaden our opportunities in foreign markets where we must compete with the products of other industrial nations, we should welcome and encourage every influence tending to increase the efficiency of our productive processes"
---Henry Towne, President of the American Society of Mechanical Engineers, 1911
Hey asshats, as I've stated as fact before, real productivity enhancements are not measured by lower wages. For God's sake, does anyone understand economics? And, if anyone deserves a pay cut, it's the cretins in Washington who created this mess.
Wilbur Ross On The Autos
Friday, December 12, 2008
Do We Stand For These Values?
Should Cerberus Chrysler Get A Bailout Without Transparency?
I watched former Treasury Secretary and current Cerberus CEO John Snow a week or so ago when he coincidently showed up on CNBC at the same time Cerberus was groveling for a Chrysler bailout. His less than forthright answers to questions about Cerberus's financial position left me very disappointed. It is clear Snow is more beholden to his financial keepers - the Cerberus partners - than to transparency and honesty with the American people. I don't necessarily fault Snow for this position but I do fault CNBC for even putting him on the air without any pre-airing debriefing. In other words, if these guests aren't going to be transparent and forthright, why even invite them?
Congress is readying a bailout for Chrysler but we don't even know if its parent company Cerberus needs any financial assistance. Cerberus hasn't disclosed its financial situation unlike Ford and GM which are publicly traded companies. Wouldn't it be nice if Congress would demand Cerberus disclose its financial position or take a hike on any loans?
Another story shows how Cerberus has literally bought favor by hiring politicians to lobby your government. Who lobbies for you?
This brings up an interesting side story. When the rumors of a GM/Chrysler merger were circulating in the press, I kept wondering to myself how anyone with an ounce of business acumen could even remotely entertain such a death wish. There is not a management consultant worth their salt who would support such a move given the circumstances. The only potential pluses for GM were that it could raid Chrysler's cash and kick a competitor to the side of the road. In other words, remove competition from the market place. But, trying to integrate a business that completely overlaps with GM and a product mix that is the worst in the industry would likely destroy GM. That is, unless it quickly wrote off and closed down Chrysler. That would create such a backlash in the market that no competent CEO would ever consider such a vile move. Now we see while under the gun GM is recommending what we have long said - GM needs to cut brands. So, tell me again, how would a company now acknowledging it has too many brands benefit by picking up more brands with Chrysler? It's funny you would ask.
Low and behold it has now leaked that there was a presentation circulating on Wall Street that made very dubious claims of what great benefit would be achieved by combining the two companies. Dubious is another word for deceit in this situation. I wonder why? Come to find out, it appears that some firms on Wall Street were loaded up with Chrysler debt taken on with the Cerberus purchase of Chrysler. Debt that Wall Street was unable to pump and dump before the credit markets started collapsing.
What better way for all of the banksters to make off with the cash and dump Chrysler regardless of the consequences to its employees than by Wall Street and Cerberus concocting some scheme about how great a GM/Chrysler merger would be then pumping it in the press. Maybe even get a few supposedly independent lackies to say some supportive words. Maybe throw a few bones to GM. Bada bing and Cerberus is free of Chrysler and the banksters are free of a large load of toxic debt. Now, of course, I'm sure Cerberus and Wall Street would never do anything like this, so it's simply a little exercise in "what if" fun.
So, do some of the richest people in the world deserve a bailout from us average slobs because their personal investments went south? Especially without sharing their financial situation?
Dow Chemical Defines The Word Trough
Dow Chemical starts to shutter plant capacity -- June 24, 2008
Dow Chemical pays $15 billion for Rohm & Haas at a 74% premium. Very possibly near the peak for deep cyclicals. A potentially major gaffe. -- July 10, 2008
Dow Chemical (DOW) will eliminate 5,000 full-time jobs, or 11% of its global workforce, close 20 facilities and divest several non strategic businesses due to poor market conditions. Dow Chemical will temporary idle 180 plants and reduce its contractor workforce by 6,000. -- Dow Chemical's announcement Monday.
From a prior post highlighting CEO hubris at the peak global economic growth for possibly decades or longer......Impressive commentary back in January by Mr. Liveris. But extremely improbable statements. .......... Liveris was extremely confident in this interview. In the past year or so Liveris has become a regular on financial television. In fact, he's probably become the most publicly available CEO on the financial media circuit. That to me is an anecdotal sign of trouble. ............. Liveris has been so bold to say Dow is investing $60 billion over the coming years and none of it is in the U.S. Some of the markets Dow is investing in are historically the most economically and socially unstable on earth. We shall see how much of that $60 billion gets deployed, how much gets written off as bad investments and how much has a subpar return on investment.
So, how many billions in shareholder value has Dow's CEO effectively destroyed with his hubris? Additionally, Dow paid an insane price for Rohm & Haas at the peak of the largest bubble in history. Given the implosion of Dow's stock price, we can surely assume Rohm & Haas would have seen a similar drop based on shared fundamentals. Dow could have more than likely bought Rohn & Haas for 50-80% less today thus saving shareholders as much as $12 billion on this mistake alone. Hindsight might be 20-20 but we wrote that the Rohm & Haas deal was a gaffe a month after it happened as we wrote about the other ridiculous gaffes involving deep cyclical mergers this cycle. And, they were indeed absolutely incredible gaffes. These CEOs cannot claim hindsight. They should understand the cyclicality of their businesses. It's incompetent leadership.
Thursday, December 11, 2008
CNN's Planet In Peril
Digital rendering courtesy of Ogilvy.
"We do not view lower product cost as a margin expansion opportunity."
Kroger makes it clear they are going to mercilessly drive name brand product prices down with a surge in their private label business. (A little known fact is that Kroger is also one of the largest food and consumer products manufacturers in America. Something that has served them well as a competitive advantage in the private label business.)
Anyone who has ever worked with a grocery or discount retail chain knows these are probably the world's most brutal negotiators. Margins are pennies on the dollar and they typically don't miss a penny. Because of that, they are also the world's most efficient allocators of capital. No spending without a clearly quantifiable return on investment. Maybe a committee of grocers should manage the TARP program and the auto bailout. For that matter, maybe they should run the government. That's only partly a joke.
I remember reading some time ago that a few in the financial community were stating that cheap food prices were gone forever - citing examples of sky high prices at grocery stores. I don't know about your experience but many grocery items have already dropped substantially in price. Name brand consumer product and food companies can expect to get taken to the wood shed on price by Kroger, Wal-mart, Safeway, Target, Albertsons and other retailers as input costs moderate. In other words, the price increases rationalized by rising commodity prices are going to be taken back. That is bad news for the defensive consumer staples businesses.
What Do You Do When You Have Oil Coming Out Your Ears?
Wednesday, December 10, 2008
China's Economy Implodes
Still want to join Jim Rogers and move to China? Still believe the Yuan is undervalued? Still believe oil is going to $200? Still believe the world is flat? Still believe in the commodity supercycle? Still believe in the Asian century? Still believe in central planning? Still believe China is run by economic genius? Still believe the remarks that China is going to save the world? Still believe the chatter about inflation? Still believe Thomas Friedman's best-selling book? Still believe Fareed Zakaria? Still believe the thousands and thousands and thousands of magazines, media reports, news articles, books and investment reports pumping China from every country on earth? Still believe every international CEO investing in China? Still believe all of the bears who loved China? Still believe China is going to be increasing its gold purchases as the gold bugs would tell you? Still believe China is going to keep funding U.S. Treasury purchases? Still believe every single global economist with an opinion on China? Still believe every single Wall Street personality? And, I do mean every single one of them in reference to the last two. Still believe all of the lies, lies and more lies?
Here's a better question. What exactly do you believe anymore? I'll ask that question again at some point in the future.
As we wrote years ago, Japan is the dominant economic power in Asia and will remain so for the foreseeable future.
Auto News Links
Daniel Howes has an excellent story on the government bailout. A few very interesting remarks from the article.......
No question. Each step in this process feels more strange than the last -- a first round of congressional hearings that gave new meaning to the term "clueless Detroit," a second round long on detail and even longer on groveling, stunning ignorance in Washington of an industry that accounts for millions of jobs, an uninterested White House and, now, a bailout bill that reads as if is was drafted by Greenpeace and Soviet central planning.
None of that broaches the hypocrisy. The congressional committees that wrote a $700 billion financial bailout package, lent $150 billion to AIG and pumped $20 billion into Citigroup demand detailed plans from the automakers and four days of hearings for what's shaping up to be $15 billion in loans.
Or the chairman of the Senate Banking Committee, Chris Dodd, D-Conn., suggests Sunday that GM Chairman Rick Wagoner should "go" and make way for new leadership because the current one led GM off a cliff.
This from the senator who blocked reform of Fannie Mae and Freddie Mac three years ago, was their top recipient of campaign cash, pocketed more than $300,000 in contributions from PACs and executives tied to Citigroup and then spearheaded the legislative effort to craft the financial rescue package.
Yet in the world where Detroit's future lies, such irony doesn't matter. Perception, politics and calculated remarks masquerading as offhanded ones do, such as Dodd's "Face the Nation" ode to resignation.
Business icon Lee Iaccoca, who has been critical of the economic policy and corporate governance over the last decade weighs on on the Big Three CEO debate.
Bailout plan takes shape.
Car czar to steer restructuring.
Summary PDF of auto bailout plan.
UAW may seek stake in GM.
Chrysler abandons plans to outsource development of a small car to China with nationalism on the rise.
The debate over the GM CEO heats up.
Just a handful of the hundreds of articles available daily from dozen of pages of auto reporting at the Detroit News.
Tuesday, December 09, 2008
Fannie Mae's Damning Document
Courtesy of broader investigatory reporting at ProPublica.
Senate Banking Committee Chairman Dodd Tells GM CEO To Move On. Maybe Dodd Should Move On.
It might seem totally implausible today but without cash injections there could come a point in time where auto makers must sell excess auto capacity at losses of some substance simply to free up the cash flow they need to keep the doors open. That capacity could be inventory or it could be brands. You remember the game?
Since Senator Dodd has served on the Senate Banking Committee for quite some period of time and oversaw the deregulation and resulting collapse of our banking system, Dodd has substantially more direct responsibility for this crisis at GM than Wagoner. Maybe Senator Dodd should do the right thing and resign since he is calling for Wagoner's ousting. In fact, I vote that the banking and finance committee membership in both houses of Congress resign.
Oil Shock And Awe. Excuse Me While I Take A Nap.
Here's something to think about. OPEC is a cartel that is completely toothless. How can I say that? What power did they have to stop oil from sliding to $10 a barrel in 1998? And, they continually claimed, and rightly so, that they had nothing to do with oil going to $147 this cycle. Similarly, Wall Street is also a cartel. They have monopoly access to capital from the Federal Reserve. Now tell me again, how was Wall Street able to translate that power into pricing that benefited themselves? They weren't. In fact, Wall Street has literally collapsed.
The moral of the story? Both cartels are along for the ride. Neither have the type of power or control associated with their bureaucracies. But, it makes for good photo ops when the OPEC ministers all meet for tea and crumpets.
Bill Miller Calls The Bottom After His Mutual Fund Implodes
Bill Miller became almost legendary over the last twenty years by beating the S&P's returns more consistently than any major fund manager. Of course, throwing darts for much of that time produced outstanding returns. In 2006 Miller bought a yacht rumored to cost nearly $100 million - a little known anecdotal indicator of great hubris.
It's really quite amazing that a hired steward managing wealth created by other people could bamboozle society into charging such outlandish fees to buy a $100 million yacht. Or what ever the purchase price was. Especially given the people whose money he is managing are told by Wall Street that they should race to the bottom of the wage barrel by competing with the lowest global bidder in what is now coined free trade. But, these are the values our elitist leadership has decided for society and we have allowed it. At least until now. Pandora's box is open and there is no way to close it again.
I hope Bill is enjoying his yacht as his clients lose their jobs and he loses their hard earned wealth. It's quite amazing that clients have to pay for Miller's yacht given his fund has crashed. How does anyone lose 70% of a client's money in one year? Money that has often taken a life time to accumulate. One year. Its' gone. I can't even fathom such incompetence.
Now Bill tells us the stock market has bottomed. Is that the same crystal ball he used to divine his investment strategy? Is there a conflict of interest in that statement? Fund outflows hurting the life style of this self-appointed king?
Monday, December 08, 2008
Thain Denied King's Ransom.
Modified Housing Loans Are Failing At An Alarming Rate
The fact that we still have most everyone still focusing on housing both as the problem and fixing it as the cure for this environment is very disappointing. It leaves me very worried that we aren't going to get out of this environment for quite some time.
At some point, I'll lay out a high level perspective on what I think needs to be done to get us out of this mess. If you live in the real world, you likely know what the answers are. It's common sense. Most of it has been discussed on here anyway.
Merrill's CEO John Thain Has No Shame.
We've highlighted Merrill's CEO John Thain on here a few times. Mostly that he didn't have the experience to turn around Merrill and that his $80 million compensation package, or whatever it was, was ridiculous. Thain's time at Merrill has been suspect at best. He told investors quite a few times that they were done taking write downs and they weren't.
Today Reuters reports Thain is recommending that he only receive a $10 million bonus this year. A bonus that is paid directly by American taxpayers because Merrill would be gone without our support.
Two or three hundred years ago, investors might have demanded Thain's life. Or he may have been challenged to a dual. Ha! I think Mr. Thain ought to consider what the CEO's of the auto companies have agreed to - $1 compensation packages if they take taxpayer money. What in God's name is our government doing? How can this be happening? (Well, I have a post on this I'll get up after the new year. You won't like it.)
I have already written my Congressional representatives again and I would encourage everyone to do whatever they can, obviously within the limits of the law, to force change where ever and when ever they can.
Crude Oil's Implosion
That was taken from a post on this blog back in September of 2006. Well, I was wrong. It was a little more than twenty four months. But, then this economic cycle lasted substantially longer than the economic realities. I am extremely confident the peak in U.S. equities and oil would have been May of 2006 were it not for exogenous factors including all of the money coursing through the global economy. Anyhow, how's that Peak Oil theory working for you? On an inflation adjusted basis, gasoline is now the cheapest it has been in my life time. At least it is in Missouri. Long before oil peaked we wrote that we were awash in oil. More so than at any time since the generational lows seen in 1998.
There is substantial support for oil at $38 (why that data point was chosen as a possible down side target on here back in late 2006) and equities are trying to hold the 2003 lows. We might finally be entering a period of price stabilization for stocks that could last months or could even see a sustained rally develop within the next month or two. The fundamentals show no signs of stabilizing yet so my position is relatively neutral here. Yet, the massive burden of high energy prices has been lifted from the American economy and the impact is much more substantial than any stimulus package both in psychological and real dollar terms. And, the Fed's policies are having some impact, even if temporarily. This environment isn't even close to resolving itself and stocks are NOT cheap but money, not fundamentals, moves markets -a major reason why bears are often caught off guard. The bulls only need a reprieve from the selling pressure to ram stocks higher for some period of time. I am still concerned shorter term about a drop from 600-724 on the S&P given there appears to be tremendous Wall Street enthusiasm building for a rally but it might be getting close to time to take a break from being bearish on stocks and other assets for a while.
In the mean time enjoy gasoline at $1.29 a gallon. ( 90 cents before gas taxes) And, enjoy the Peak Oil books, blogs and prognosticators. A lot of people made a fortune off of people lapping up this notion - even hypothesizing we were at peak commodities. More like peak insanity.
Trichet Under Pressure To Outline Plan For Deflation
The Fed's quick action also allowed the U.S. to raise substantial sums of money from investors and countries that were unaware of the shifting earth beneath their own feet. Money that is now unavailable to anyone. Money, that were it to be repatriated today, would be at massive losses. Can you say sovereign wealth funds? Don't worry. In time most of those sovereign wealth funds will likely be selling their investments back to us at a very lucrative price when their forced selling begins.
Wrong way Trichet has damaged the reputation of the ECB and has significantly contributed to harming the European economies. More than ever, I think there are reasonable probabilities the ECB will not survive. If they do, they are going to have to modify the membership requirements. Downward, that is. There goes that race to the bottom of the barrel again. I never underestimate the ability of a bureaucracy to survive so even though the ECB has been a failure and will continue to earn that title, it won't go quietly. It will take political will from sovereign countries. And, that political will will only come from the people. Just like in China. Just like in the Soviet Union. Just like in the USA. The people drive change. Not the bureaucracy.
Trichet is now under the gun to prepare a plan to fight deflation. Trichet's bias will die a slow death. That will very likely continue to economically damage member countries.
Saturday, December 06, 2008
What Rhymes With Ruble?
Ancient Rome 3D - Modern Rome Virtual Reality Or Virtually A Reality
Was that enough of a break from the world economy? I'm going to end this post with a little less sanguine perspective. A friend of mine who runs money for one of the largest financial institutions in the solar system just sent me a document titled The Case for Global Equity Diversification. It is from their Strategic Thinking series. (The same strategic thinking that ran the company off of a cliff.) He wanted me to see the quality of their research. Or lack thereof. What really caught my eye was the report's introduction by Fareed Zakaria. For those of you who don't know, Zakaria is a media talking head. In the report Zakaria is introduced as one of the 100 leading public intellectuals in the world. That's news to me. But in today's world, we have a systemic issue with people making claims of their abilities only to be found out as being quite fallable like the rest of us.
Zakaria's introduction to this 'invest globally' pump centers around his perspective that a great tectonic shift is taking place in the world economy. Only the third such shift that the world has seen in the last five hundred years. (I think the first two were the advent of the chocolate chip cookie and the invention of the Xbox 360. Notice advent was used to describe chocolate chip cookies because they are a holy experience. Feel free to email me your favorite recipe.) The shift he writes about is taken from his book The Post-American World. It's basically a thesis for economic decoupling. And, just like the research it introduces in The Case for Global Equity Diversification, it's equally fallacious.
I could have saved Zakaria a lot of wasted typing and the buyers of his book a lot of wasted reading. Here's a more accurate portrayal of reality. And, since we are talking about Rome, we will use it to make our point.
Rome did not fall at the hands of its citizens but instead at the hands of elitists who cared little for society. Elitists who robbed Rome's citizens and society for personal gain. Of course, they robbed Rome by legal means. And, it was most assuredly called free markets backed up by laws of the state.
Rome was every bit the equal of the United States today. It was a symbol of incredible human achievement. It was the most far-reaching and impactful economic civilization the world had ever seen. At least one credible analysis concludes global wealth peaked for over one thousand years with the fall of Rome. Think about that. One thousand years of no net new wealth creation. Even if it were only five hundred years or fifty years it would be a very significant statistic. The economic impact that Rome had on the rest of the world was obviously beyond comprehension and staggering. Zakaria has written an intellectual thesis at the exact moment it has become a complete untruth. It is akin to buying internet stocks in March of 2000. So, the case for global equities is what? China, India, Dubai and Russia are screaming buys just because their stock prices have collapsed? How often have we heard that one in the last year? What quantitative data supports that their economies are recovering? Please, do tell. And, where is the book of truth that guarantees their economies will recover?
I'm not predicting one thousands years of economic malaise as happened with the fall of Rome. Not even in the same galaxy. What I am saying is that 'emerging markets' is a marketing term coined by Wall Street so that we would feel comfortable putting our investments in the shithole economies of the world. Economies that are opaque, corrupt and repressive. But economies that offered Wall Street outsized profits.
Here's something from a little different strategic thinking series. It's not based on happy hopes, conflicts of interest and fantasy. It's based on a hard reality. As much as 50-60% of the global GDP is directly tied to the United States economy. 75% of global debt lies outside of the United States. That equation does not compute. That is, unless you studied the same new math Wall Streeters studied to create Frankenstein finance. Emerging markets are likely to be mired in the same mess they were mired in before they were coined emerging markets. What were they called before emerging markets? Undeveloped economies? High risk economies? Dictatorships? Economies unwilling to embrace reform and transparency? Because that is what they are likely to be called again.
The Case for Global Equity Diversification is based on opinions and not on sustainable measured data. And, so is Zakaria's book. How ironic one is used to introduce the other.
Friday, December 05, 2008
The Posse Comitatus Act Is Officially Dead
First The Circus Was Implicated. Now Its Charles Ponzi.
I have a really good (and serious) post on this topic but I don't want to put it up until 2009. Hang tight. I don't think you will be disappointed.
You Want Your Money Back? Ah, Ah, Ah. Not So Fast.
$30 to $1 and change. Now, that's one hell of a great investment. There goes some of your pension, university endowment, state retirement or whomever else decided to invest in many of these schemes. As we have said since starting this blog, financial markets need to be highly regulated.
Thursday, December 04, 2008
Goldman Sachs Wealth Management Loses 55% Of Wealth In One Year
Ford's New F-150 Ad
Peter Osnos On Sam Zell's Dismantling Of The Tribune
Peter Osnos is vice-chairman of the Columbia Journalism Review.(Home page) Tuesday he wrote a scathing editorial about Sam Zell's dismantling of the iconic Tribune. At some point in time, this country needs to demand serious journalism again. Part of that should be freedom from ownership that represents such glaring conflicts of interest and a return to investigative journalism. I realize making money isn't a dirty word but media should first be conscious of their constitutional duty to inform the American people or they should lose that privilege.