Monday, January 30, 2012

Does anyone think Greece hasn't already defaulted? I define default as showing up at the bank and not getting the interest or principal you are owed. In the immediate future there is no chance of showing up at the bank and getting all your money for Greek debt, what is being negotiated now is just how much of your money you won't get. Current estimates are for 30 cents on the dollar. All parties to the deal are acting like they still have a choice as to whether or not they will do the deal. The reality is simple, the deal must be done and all they are arguing about now is price.

Other considerations in the European situation are the credit default swaps (CDS). US banks with exposure to Greek, Spanish, Italian etc debt will hedge their long position by buying credit default insurance which would pay them if there is an event of default on the underlying sovereign debt. The ECB and the EU countries are trying to work out the Greek situation voluntarily which means these particular hedges are worthless as protection for the banks who own them. The financial industry has fought any attempt to centralize the tracking of CDS and consequently nobody has a handle of this side of the equation. This is AIG all over again.

Under the Heading of "Same old same old" the following;

Moody's admitted this morning, according to the Financial Times, that it "did not have any understanding" that MF Global , the failed futures broker had placed a $6.3bn proprietary bet on the debt of European sovereigns until a week before it failed.

According to the Wall Street Journal today, the regulatory authorities say they might never know what happened to the money at MF global. We are three years after the financial meltdown caused in large part by regulatory incompetence and the people who are supposed to enforce the rules to protect the public are still clueless. Bernie can you hear me?

Facebook is cranking up for an IPO which would value the company between $75bn and $100bn. It is an advertising delivery system aimed at people who find every detail of their own life fascinating. I know the business model works for Facebook but does it work for the advertisers? Tech bubble anyone?

Wednesday, January 18, 2012

Why do S&P and Moody's rate sovereign debt? Do we need these people to tell us about the US or any other major country's financial picture and assign a rating? The short answer is no. They are in the news recently announcing rating changes in a desperate attempt to prove they still matter. After their complicity and culpability in the 2008 financial meltdown it is a wonder they are still in business and not in jail. Congress is continuing to investigate their role and far be it for me to expect Congress to do anything constructive, they might just get this right by accident.

It is bonus season on Wall Street and the news is not happy for the employees. The good news is for the shareholders. Certain firms are beginning to fundamentally restructure their approach to compensation and are putting in mechanisms that allow the firm pay out some comp over a period time. This will align the traders and the stockholders interests. By putting a larger component of stock in the overall compensation and deferring the cash payout for a time the employee will have very real interest in building the franchise and working for the long term. People on Wall Street work hard and expect to be paid well. Most of us went into the business because we felt there was a greater chance to be overpaid than in other industries. This is still true but it will be over a longer time than previously.

States continue to lead the fight for fiscal responsibility. Look at NJ, NY, Wisconsin, California etc and you will see the Governors fight the same battle;to rein in public spending, get control of the education budget and reform the tax code to make the state more attractive to businesses. This cuts across party lines and I believe enjoys wide spread support among the voters. The lesson to be learned from Scott Walker and Wisconsin is to make headway on the problem but don't overreach and spike the ball for ideological victories. Do what needs to be done; the public will accept the austerity measures but understand everything will affect people in a real way and there is a human cost to all policies.

Tuesday, January 10, 2012

Things that seem obvious to me:

The purpose of Private Equity companies like Bain Capital is to make as much money as possible in the shortest amount of time for themselves and their investors;

The country can’t continue to keep borrowing and spending forever, eventually the accounts must be balanced;

Rich people should probably pay a little more in taxes;

Entitlements could be cut or means tested without harming the economy or the people who need the support;

The housing market will be weak and sluggish for another five years;

Government’s investing in the infrastructure of the nation is a good thing for both the country’s future and the current economy;

The defense budget is too large and could take reductions without ever affecting national security;

The fiscal measures implemented by the various states which bring public employee benefits more in line with the private sector enjoys wide spread support cutting across party lines;

Three years after the financial meltdown there are a lot of settlements between banks, Insurance companies, mortgage servicers etc. every day, which is how the system eventually resets itself;

Economic activity will be lumpy in 2012 with strength in consumer discretionary spending and weakness in all things housing related.

The economy will be some variation of OK going into the November election.

Wednesday, January 4, 2012

As we enter the silly season of political theater it is good to remember that there are only two ways the government can create jobs. Draft everyone into the army or stimulate the economy by spending. All the noise about tax breaks and budget balancing giving the business owner confidence to hire people is nonsense. The business owner will follow economic opportunity and if the economy is expanding business will expand along with it in an effort to make more money. If you want to shrink government spending you will curtail economic activity. I am not arguing for either course but pleading for the idiots in Washington and the news media to at least use simple accurate economic concepts. If you believe that balancing the budget right now is the absolute best thing we can do for future generations that's fine, just admit it will increase unemployment in the short run and prolong the current slump. If you think job creation is most important please recognize that at some point the debt will need to be addressed either by lower government spending including entitlements and / or higher tax collections.

Ten years ago the tech bubble broke causing untold damage to the investor. I have always contended that the investing public has a 10 year memory. As I see increased IPOs for companies like Groupon, Pandora and Zinga it seems like the lessons of the late 1990's and 2000 are being forgotten. The investors seem to be infatuated with companies that have a suspect business model or an interesting way of looking at earnings. "Beware of Geeks bearing gifts."