Stocks, Bonds & Beyond

2012-02-22T10:22:00.000-08:00

It is fitting that there is an announcement in the papers about an upcoming auction of Edvard Munch's painting "The Scream" because as one looks at the financial state of the world we all want to scream.

Greece has managed to force the Europeans to loan that country enough money to pay back what Greece owes to the Europeans. As the head of a reporting government dealer trading desk told me "It is a liquidity solution to a solvency problem". Greece is like your brother-in-law who always needs money. He keeps borrowing from everyone and promises to do something different but never does. All you hope for is that the latest loan will last a few months longer than the last one. One thing is certain, Greece and your brother-in-law will be back!

The governor of NJ Chris Christie has put forward his new budget. The Governor is predicting revenue growth of 7% to pay for increased spending. The latest six months of NJ state revenue has been $326 million below expectations. Also included is a predicted return on the state pension funds of 8.25% when the return for last year was 1.7%. This proposal is being used to justify an income tax cut. The George W. Bush administration showed us that if you cut taxes and increase spending the economy will respond in the short term, but you will be presented the bill later. We are still paying the bill presented in 2008 and most states including NJ have taken significant steps to improve their long term projects. Now is not the time to back slide into feel-good economics. Chris Christie has positioned himself as a tough guy. Now is the time to be a man and do what is right in the long run rather than what is politically expedient.

Another rating agency (Fitch) has sprung into action, they are concerned with the situation in Greece. They announce today a "default" was highly likely. Can't fool those guys. Since the current loan is predicated on a write down of holdings of Greek bonds of 50%+ I am pretty sure the investors in Greek bonds already knew that.

2012-02-17T06:16:00.000-08:00

Congress seems like it is breaking its deadlock of not being able to agree on anything. This is a good thing. We need the give and take of different ideas to make progress in dealing with issues. Unfortunately the current agreement to extend the payroll tax cut is ill conceived. The $20 per week benefit offered by the payroll tax cut is unnecessary. The cost of this tax cut / loss of revenue versus the stimulus benefit to the economy is mismatched. One of the ways to address the deficit problem is to use any increase in economic activity to withdraw any tax break or special program and let the economy absorb the hit. Twenty bucks a week does not mean much to most working people but the cost is almost 100 billion to the deficit. I know some people will be affected, but by and large most wage earners will not. We do not need it and it should not be extended. Yes this will slow down the recovery a little but we need to look at both spending and revenue to correct the deficit problem. This is a perfect place to start.

Other countries can provide a real time demonstration of how our current options will play out. Look at Portugal. The country accepted funds and agreed to austerity measures. Certain people seem to be surprised by the fact that their economy is slowing down. Of course it is slowing down. Once the government stops spending economic activity will slow down. What the politicians should tell the Portuguese people is the truth; that the austerity measures will suppress your economy for years. Getting their fiscal house in order will benefit the Portuguese economy in the long run but in the short run it will prolong their current slump. This is true everywhere, so when a politician tells us cutting government spending will create jobs what he is carefully omitting is the job creating is in the future not the present. Again I have no problem with this debate, I only think we should be more willing to have it honestly and not pretend there are no economic consequences to our choices.

Lastly, why is Moody's still in business?

2012-02-08T10:11:00.000-08:00

Groundhog Day 2012

In the movie Groundhog Day, Bill Murray kept reliving the same day. As I scan the news around the world it seems we are caught in the same loop;

Everyday the financial press reports we are getting closer to a deal on the bailout for Greece. The bondholders are resigned to a haircut on their principal and interest, the government is looking at austerity measures, the northern Europeans are not happy but will agree to the funding, etc. And everyday the people of Greece indicate they will not go along with any of it. They want the money but are not willing to pay the price necessary to get their fiscal house in order. We are no closer to a deal today then we were last year at this time. In March of 2010 I wrote an article about the Greek crises and near as I can determine the people of Greece are not on board in any way at all and never have been.

The US Congress is talking about the extension of the payroll tax cut, the extension of unemployment benefits and a continued level of Medicare / Medicaid payments to doctors. This is the same piece of legislation they passed in December for two months because they cannot agree about anything. Today the same old arguments and accusations are flying around the halls of Congress. Why aren't the members of the House and Senate embarrassed about how dysfunctional they are? Don't we the people deserve better? In business everyone makes compromises all day long in order to get something done. All these politicians talk endlessly about the private sector. If any of them actually had to work in the private sector they would starve to death.

2012-01-30T07:41:00.000-08:00

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?

2012-01-18T07:08:00.000-08:00

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.

2012-01-10T11:05:00.001-08:00

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.

2012-01-04T11:13:00.000-08:00

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."

2011-12-29T11:34:00.000-08:00

2011 draws to a close and these are some expectations and predictions for the new year.

The European crises is not over and will continue to rise and fall during the first half of the year leading to appreciation of the dollar over the euro;

The US economy will do surprisingly well despite continued high unemployment and a slow real estate sector;

There will be evidence of manufacturing moving back to the US because of lack of quality controls in Asia and a repriced US labor market;

There will be enough pressure from loan demand to move interest rates up in the middle of the year but not significantly;

Municipalities will continue to get their fiscal house in order, the US government will not;

The Occupy Movement and the Tea Party will realize they are both upset about the same issue;

The US consumer will change their behavior to spend at decent levels but be more selective about what they spend it on.

I expect blue chip stocks with dividends will continue to increase the dividend.

I expect municipal bonds to have another good year in response to improving credit numbers

I expect the first level of below investment grade taxable bonds to perform well as the economy improves

I expect President Obama to be reelected in a close race with Mitt Romney

Happy New Year!!

2011-12-19T06:41:00.000-08:00

Over the last few weeks there has been a lot of chatter from the "big" three rating agencies. Moody's, S & P and Fitch have been making pronouncements about the state of Europe and the US; threatening to downgrade every government in the world. These are the same incompetent people who bear a significant responsibility for the financial meltdown of 2008. 25 years ago these companies were rightly regarded as competent and professional. Their view was regarded as an independent evaluation of the financial aspect of various borrowers and issuers of financial instruments. During the late 1990's and the first decade of this century they changed into companies whose primary concern was making money. They did this by selling their former integrity for cash. The history of the 2008 collapse reveals that the rating agencies, in pursuit of money, rated anything that moved a triple A because Wall Street wanted it that way and would pay handsomely for that rating. Today there seems to be no material change at the companies, they assure us they have changed their business model and this time they know what they are doing, etc. The markets are beginning to devalue the ratings and with good reason. The recent behavior of these companies is nothing more than an attempt to preserve their franchise and not any resurgence of competence or insight. Any investor that trusts or relies on the rating of a security by these companies is asking for trouble. It is like asking Newt Gingrich for marriage advice..

2011-12-14T07:19:00.001-08:00

December 14, 2011 thoughts;

The European financial crisis continues to bubble along. Yesterday there was a weak auction for Italian bonds and a strong one for the US 10 year. The euro has dropped to 129+ vs the USD this morning. The EU seems to think they have time to solve their problems. I do not believe that is true. Bloomberg radio reported this morning that the Italian Government needs to finance something like 350 billion Euros of debt coming due in 2012. If you believe as I do that the Euro is on a march to parity with the USD, who would buy Italian bonds for any reason? As a matter of fact there should be a massive liquidation of all things Euro and a corresponding purchase of all things USD. I think this trend is beginning and will be the single biggest driver of all the markets in 2012.

The January reinvestment is in full swing in the US Municipal bond market. As I have stated before states and municipalities have been working on their financial issues and even though people will argue about the solutions the local politicians at least are doing something. The average Governor or Mayor has to deal with the fiscal realities and must either cut spending, raise revenue or both. Investors are responding to this by purchasing municipal bonds. Additionally the municipal market is a domestic US enterprise and should not be affected by any international crises.

2011-12-06T05:45:00.000-08:00

Three thoughts for this week:

The US economy is poised to have a good year in 2012. As I have mentioned before business owners and managers have been working hard to overcome the current economic slump. Over the last few years industries have cut capacity, laid off workers and generally contracted plus we are beginning the fourth year of extraordinarily easy money. It is beginning to pay off. The people who are still in business are there for a reason; they have adapted to the changing economic realities and found a way to continue. Washington and the economic press have not figured this out yet; I believe the markets have, judging by recent behavior.

Everyone expects too much from the announcement at the end of the Euro zone meeting on Friday. There is no way these expectations can be met. The euro zone has serious issues that will take time and effort to solve. The world is looking for some sign that there is a plan or a way forward that can address these issues that is acceptable to the various countries, a very tall order.

Why would anyone put any faith in anything Standard & Poor’s says? S&P was one of the major reasons for the economic meltdown in 2008. They failed at every level. Now in an effort to prove relevance they are firing away at every credit in the world including sovereign debt. They are acting like they have some credibility about financial matters. In the mortgage scandal S&P was motivated by money and nothing else, now they are desperate to stay in the game, the business press is acting like there is a reason to listen to them this time. What’s next Alan Greenspan for head of the FED? Caveat emptor concerning the rating agencies.

2011-11-28T07:07:00.000-08:00

The Egyptian public is in the streets because they suspect rightly that nothing has changed in the government. The military has made some cosmetic changes but the same people are in power and they are doing the same things.

The picture in Washington DC seems to echo the concerns of the people in the street in Cairo.

The leading Republican candidate at the moment is a former lobbyist for Freddie Mac;

MF Global went out of business and customer funds cannot be located while all the regulatory authorities seem paralyzed (again);

The Senate is already trying to exempt defense contractors from budget cuts (again) set in motion by the failure of the "super committee" and

The Europeans are willing to pursue a liquidity solution to a solvency problem (again)

The encouraging news is that the holiday shopping season is off to a good start showing the consumer is feeling a little better about the economy. The average American businessmen does not stand still; he /she will respond to economic challenges by working harder, trying different approaches and keeping the overhead in check while they rebuild their business. All this is good for the economy. Most people are not concerned with global issues, what they focus on is the immediate problem at work or business. The US economy is always changing and the American people accept this fact whether it is working for or against them. We deserve leaders who have faith in us and recognize we can take bad news, we can take hard times, we will work our way out of it and what we really need is government to do is get their house in order and address the budget gap from both sides of increased revenue and lower spending.

2011-11-21T06:51:00.001-08:00

Fasten your seat belts; it is going to be a bumpy ride. The markets are poised to sell off this morning for various reasons. I believe the main reason is lack of any political leadership in the US Congress. The Congress has shown no ability to get anything done and the failure of the “super” committee is another demonstration of this. I believe the markets will interpret this failure correctly as one side of the aisle will not / cannot compromise and that party is willing to do nothing rather than seek a middle ground on certain issues to get the country and the economy moving again.

Things to watch for this week:

1. Continuing search for money at MF Global. I expect it to only get worse.

2. New Government in Spain. This will be a test because an already weak economy has elected a government pledged to austerity measures believing this will create jobs in the long run. The question is how much more short term economic retrenchment the Spanish people are willing to endure.

3. Continued cut back of the Wall Street firms willingness to trade credit and the increasing volatility in prices of taxable fixed income bonds.

4. US Stock market as more market participants are giving up the ghost and looking for safe havens over the near term. I would expect commodities to rise as a safe haven trade.

The news from Washington will disappoint the market all week. To paraphrase someone “nobody will ever go broke underestimating the US Congress”.

2011-11-14T07:48:00.001-08:00

Last week I mentioned three things to watch in regards to the fixed income markets. A brief recap of these situations should shed some light on what to expect over the near term. The first item was the referendum in Ohio in re public employee’s rights. The voters in Ohio rejected the Republican Governor and Legislature program to strip the unions of most of their powers. I agree with the FT this morning that it was a question of Republican overreaching rather that any mandate for the Democrat Party. As I mentioned previously the American public understand the new economic realities in re retirement costs and health insurance. Most people will accept an adjustment in paying for the programs, what happened in Ohio was the Republicans wanted to enforce a radical agenda in addition to necessary financial reforms. The unfortunate part of this is that no progress has been made on the issues that need addressing.

This leads to the second item which is the “super committee” and their inability to reach any type of compromise in re spending cuts and tax increases. Again this is a case of the Republican members of the committee looking to enforce a radical agenda rather than take steps to solve the country’s financial issues. The country is ready for the adults to assume control of the government but there doesn’t seem to be any one on the right who has the courage to do what is necessary for the country and not just toe the line outlined by FOX news. Once again the American public is further along that our “leaders”.

The final issue is the search for money at MF Global. How in the name of everything good and holy can the regulators (CME, SEC, FINRA, CFTC etc) allow this to happen post 2008? Have they learned nothing? An overleveraged brokerage house seems to have no internal controls and cannot get financing goes out of business. After the company closes nobody seems to be able to identify where a significant amount of client money resides. This company has been subjected to regulatory audits where the regulatory authority comes in and verifies the financial health of the company. Does this make any sense? How can people not lose their jobs at the SEC, FINRA, CME, CFTC etc? How can the Administration not demand Mary Shapiro’s resignation from the SEC?

This is one more in a string of institutional failures by the people who are paid to enforce the rules and protect the investor.

This Week

2011-11-07T10:43:00.001-08:00

The things the bond markets need to watch this week are;

1. the referendum on public employee’s rights in Ohio,

2. the report of the “super committee” in the US Congress on budget reduction and

3. The whereabouts of the customer funds in the MF Global bankruptcy.

Each is important for what they will tell us about the financial landscape over the near term.

The vote in Ohio is to restrict the collective bargaining rights of public employees unions and make the state workers contribute to their health insurance and pension. The governor pushed this law through the legislature and the opposition collected enough signatures to force a vote in a referendum. The financial problems facing Ohio are the same ones that face a number of states. This vote will serve as a proxy for the rest of the country as we try to put our financial house in order. Most rational people will agree the work place now requires employees (both public and private) to pay some portion of health insurance and make a retirement contribution. The Ohio law also restricts collective bargaining rights of the unions. Perhaps if the legislature passed a law just dealing with the fiscal issues and not the negotiation rights of unions there would not have been such an effort to overturn the entire effort.

The “super committee” in Congress is supposed to report on ways to cut spending, raise revenues and balance the budget. One side of the aisle refuses to accept a compromise in re revenue generation (higher taxes) and because of this it looks like nothing will be done by the committee. Across the board cuts in all areas of government might not be all that bad.

The bankruptcy of MF Global and the possibility of customer funds being missing will presage the regulatory environment going forward. The entrenched banking and Wall Street interest have been successful in preventing any restriction on business as usual. If anyone doesn’t understand that a business with 2800 employees just disappeared because they were allowed to make the same reckless bets that led to the 2008 financial meltdown and that once again the regulatory authorities who are supposed to protect the investing public have failed miserably they are just not paying attention. Maybe this will wake up the idiots who believe that “Wall Street will regulate itself” and force them to join the reality based community.

Throw in a few European crises and it will be an interesting run-up to Veterans Day

2011-11-02T07:11:00.001-07:00

MF Global is exactly how Wall Street is supposed to work. After the report of quarterly trading losses, investors were no longer willing to lend the company money and without sufficient liquidity to fund operations they were forced to file for bankruptcy. After initial reports of client funds missing they seem to have found the money and the firm will cease to exist. This is the free market in its’ purest form.

The promise of Wall Street is that you can make decisions and investments and if you are right you are free to make as much money as possible. The ugly flip side is you can also lose big when you are wrong. That is what happened here, MF Global took trading positions based on expectations of future events and they were wrong; consequently 2800 people will be unemployed, bond and stock holders will lose their investment, creditors such as banks will probably receive some money back but not 100 cents on the dollar and life will go on. The good parts of this event are that the system is not threatened because MF Global is not a bank, customer monies seem to be intact, investors everywhere will question their investments and counter parties more closely and Wall Street firms will examine their own risk assessment procedures to make sure they have control over their exposure to the markets.

The broader lesson is we should make sure the system is protected by separating the banks and brokers. Capitalism is a harsh system because failure is swift and brutal and people get hurt both by losing jobs and losing money. We cannot have it only one way; if you want to succeed you need to be allowed to fail no matter how painful. Welcome to the big leagues.

2011-10-25T08:35:00.001-07:00

Everyone relives the last crisis. In 2008 it was the banking system which melted down. Today the banking system is better although not all the way back and the trouble lies elsewhere. I believe the general economy is just OK. Most business people I speak to say business is still not where they would like it but it is better than last year. Business people do not sit still, when a recession hits they change their behavior by working harder, trying new approaches, restructure pricing and try to take advantage of missteps by the competition. All these steps are beginning to pay off a little. There is no way the economy is going to roar until the housing sector works through all its issues. This will take 10 years which started in 2007. As long as the weakness persists in this sector inflation and interest rates will remain low. So where does the current concern in re the economy come from? I believe it is the public sector. This is true in both the US and Europe and Asia, it is true for countries, cities, states, towns etc.

Meredith Whitney in an effort to publicize her new firm made a wildly inaccurate prediction of billions of municipal defaults in the US. What she should have said was the key to the recovery is dependent on fiscal policy at every level and the strains under which the public entities are struggling make this almost impossible for the economy to expand. They will have trouble meeting their current obligations over the next few years. This second statement has the advantage of less hyperbole and also it is true. Examine the State of Rhode Island, the country of Greece, the city of Harrisburg and you will find a laboratory to study the financial troubles affecting every public subdivision in the world. Again it is a moving target and public officials have to respond to the new realities. You see this in California, Wisconsin, NY, NJ, hopefully Italy and Greece. It will cut across all party lines because there is no choice. It the end we should have a different concept of Government responsibility and services and people will adjust. Stayed tuned to the public sector for keys to the economy , the banks will weather the storm

2011-10-24T08:00:00.001-07:00

The economy is beginning to show the effects of the public sector cut backs. It does not take a Harvard PHD to understand that when states and municipalities cut back the amount of money they spend it will slow down economic activity. Every talking head on TV who is surprised at a possible second leg to the recession has just not been paying attention to fiscal policy. In addition the reluctance on part of Congress to stimulate the economy will add to the downturn. This is a deliberate policy choice and there are people who believe reining in government spending is the most important priority for the US.

One of the benefits of a recession is it will highlight problem areas in the economy. The country has the opportunity to take corrective action to set our long term house in order. States are mandated to produce a balanced budget and many have responded by cutting spending, decreasing employment and employee costs, redoing benefits for future hires and upping user fees. The part of the budget which lends itself to abuse is estimating future tax receipts. This area has shown weakness in recent weeks. Tax collections are below what states have anticipated because the economy is slow and this is leading to revenue shortfalls in the current fiscal year. The bright spot is that tax collections are ahead of 2010 but not at the level predicted for 2011. Clearly the estimates are off base but they provide a cheap political fix to pretend the budget will be balanced. The exposure of these gimmicks is a benefit of an economic slowdown. We need clear, realistic and frank discourse concerning public finance and government spending and because there is no place to hide we are finally getting it.

RANDOM COMMENT: The trouble with Washington is personified by Eric Cantor. Eric was scheduled to make a speech at the Wharton school but cancelled because there might be Occupy Wall Street protesters present. Instead of presenting his ideas to people who might disagree; Eric skipped the speech and posted his speech on line. This is not leadership it is cowardice.

2011-10-17T09:09:00.000-07:00

On May 25, 2010 I wrote the following:

It’s all Greek to me

In a past column I discussed the crisis in Greece as a proxy for a wider problem in the world economy. Current headlines bear out this prediction. The point I was trying to make is that there is nothing unique about the Greek financial situation. We now see the Spanish Banks are in play soon to be followed by the Italians and Portuguese. The second point I believe bears repeating is that the same situation exists in the United States in re municipal finance.

The bond markets are skittish because 2008 has proven that we cannot know how and where the crisis will manifest itself. From January 2007 through the fall of 2008 the talking heads on TV assured us the “crises” was over about 18 times until finally they threw in the towel and declared things would be bad forever.

Currently money is flowing into short US Treasury bonds as a “safety” trade and there is selling pressure on the stock market. What is an investor to do?

1. Accept reality: the country is in a serious recession and even though there are some signs of life it is going to take time until the problem is solved and sustainable economic growth can resume.

2. Understand that not everything about a recession is bad. The country has financial problems that need to addressed like run away employee benefits in the public sector, complete lack of regulatory oversight, no viable risk management on Wall Street and wasteful government spending at all levels. The country is ready to attack these issues in a real manner. It will be difficult but necessary.

3. Don’t Panic: Not every company or household experiences an economic downturn the same way or at the same time. There are investment opportunities created as companies respond to the economic challenges facing them.

4. The US economy is a powerful force that continually reinvents itself. Look at the major companies which did not exist thirty years age (Dell, Microsoft, Google etc) and realize that there are opportunities every day.

5. Take your time; the economic slowdown gives the investor more time to research investments and makes a rational decision, the smart investor will use it.

I do not mean to suggest that the economic pain is over. Many households and businesses are going through an extremely difficult time and it is going to be a while before it ends. Capitalism is a harsh system because the creation and destruction of enterprises does not happen in a vacuum and the impact on the people involved can serious. The smart investor will understand the current downturn is ongoing, significant and creates opportunity, all part of the economic cycle of capitalism.

Still valid 1 1/2 years later

2011-10-12T11:24:00.001-07:00

The current slate of potential Republican candidates for the nomination is a “Confederacy of Dunces” to borrow a phrase from John Kennedy Toole. The gibberish they feel necessary to spout on economics is embarrassing. Is it too much to ask that one of them shows some backbone and stands up for something that makes sense or is actually good for the country? Some want to jail the Federal Reserve Chairman, some want the banking industry to be allowed to gouge the consumer, some want the banking industry destroyed, some want no regulation on Wall Street, some want no taxes on our most fortunate citizens, some don’t want to improve our infrastructure. This collection of idiots has not produced one workable idea concerning our economic problems. This is especially true of Romney who as Governor of Massachusetts showed promise, innovative approaches and flexibility. Lost in all the over the top babble from this group is the needs of the country and the citizens who are affected.

College kids cannot find work, laid off workers cannot get rehired, China and the Far East are becoming larger and larger economic competitors, we are still dependent on foreign oil which tortures our foreign policy. Why don’t they care? Why don’t they have any ideas? Why do they advocate the exact same policies that produced the economic malaise? Why don’t they deal in reality? Is there some IQ test to run for the Republican nomination that eliminates all people who score over room temperature? What happened to the Grown-ups in the GOP?

Every instance when a potential candidate has shown some moderation the far right attacks and the candidate retreats faster than a speeding bullet. Rick Perry felt it was unfair to children of illegal immigrants to be charged out of state tuition at Texas schools. He reasoned it was not their fault and getting a good education would ultimate make them better citizens, yet he couldn’t backtrack fast enough when the wacko’s attacked him. Mitt Romney worked out a health care plan that benefited the citizens of his state when he was governor but has gone to great lengths to deny it even exists. If you are trying to get a leadership job (President of the US) shouldn’t you show some real leadership by stating what you believe, acting on it and standing up to those who disagree?

2011-10-03T13:19:00.001-07:00

One of the lessons we should have learned from 2008 was that the crises and financial meltdown was a true systematic failure. Currently the banks are fighting increased oversight and any attempt to reign in their risk appetite. One of the most powerful tools when someone wants to rewrite history is nomenclature. If you follow the business channels, the Wall Street Journal and other media outlets you will notice a subtle shift in references to 2008. Now everyone is talking about the Lehman collapse as if that was the major problem in 2008. This trivializes the event. Lehman was a major firm and part of the problem but it was not the only company to collapse. The list includes, Bear Stearns, Wachovia, Fannie Mae, Freddie Mac, Washington Mutual, Merrill Lynch, AIG, CIT, General Motors, MBIA, and AMBAC. Companies that came close to failing include Morgan Stanley, Citibank, Goldman Sachs, GE Capital, and a host of commercial banks to numerous to mention. Along with these failures or near failures there was a steady stream of hedge funds and special investment vehicles that disappeared also.

The cause was a reckless use of leverage for short term gains with a complete disregard for the longer term consequences. Now Wall Street is acting as if Dick Fuld and Lehman Brothers was the only problem. One hears constant references to “worse market since Lehman collapsed” “not since the Lehman collapse” etc. Beware this line of thought, it will lead us right back down the rabbit hole. September of 2008 was a disaster but it was not caused by one firm but rather the entire industry who are now trying to pretend they had no hand in the debacle and it was the responsibility of one firm.

This is the banking equivalent of the Wizard’s “Please ignore the man behind the curtain”

2011-09-26T07:41:00.000-07:00

The country has two current problems. First we have too much debt and the budget deficit keeps expanding with no end in sight. Second the economy is weak and unemployment is too high. Monetary policy has done all it possibly can to avoid a deeper recession than we currently have. Any further monetary policy steps are just rearranging the deck chairs. The next step is for fiscal policy (Congress) to address these problems.

The solution to either of these issues will by definition make the other problem worse. The question facing policy makers is it possible to stimulate the economy without increasing the deficit. (NO) or can we cut the deficit without hurting economic growth (again NO). Congress needs to pick its’ poison and try to craft a consistent approach. We are already seeing the effect of Federal, state and local government spending cutbacks as the economy heads toward a double dip. Neither of these problems exists in a vacuum. Each side of the aisle needs to acknowledge that both of these issues are a concern and there must be a compromise to get started on a solution that is good for the country.

Personally I find it difficult to address the deficit first because suppression of the economy could lead to a deflation scenario which would be very difficult to correct. I believe we need to stimulate the economy and hope that increased economic activity will allow us to pay down our debt. Increases in income, business spending and tax receipts are necessary to give us the breathing room we need to put our fiscal house in order.

The only other issue for Congress is to“stop threatening to shut down the government” over every little thing. Grow up, shut up and get to work.

2011-09-19T05:48:00.001-07:00

Ronald Regan was elected in 1980. He immediately implemented an economic agenda that consisted of less regulation of the financial industry, tax breaks for the wealthy and massive increases in government spending. This led directly to the Mike Milken / Drexel junk bond scams, the destruction of the saving and loan industry and the stock market crash of 1987. The economy and the taxpayer paid a heavy price for these reckless policies. The US had to make good on all the CD’s issues by the S & L’s and the country had a ten year recession in the housing industry.

George W Bush was elected in 2000. He immediately implemented an economic agenda that consisted of less regulation of the financial industry, tax breaks for the wealthy and massive increases in government spending. This led directly to the subprime housing disaster, the almost destruction of the world financial industry and the credit market meltdown of 2008. In 2008 we found out that Bear Stearns, Lehman Brothers, Merrill Lynch, Countrywide, Washington Mutual, Wachovia, and AIG to name just the larger companies were insolvent and went out of business. The country is now mired in a ten year recession (if we are lucky)

Today John Boehner and Eric Cantor are advocating an economic agenda that consisted of less regulation of the financial industry and tax breaks for the wealth. They are giving lip service to less government spending but one suspects it’s is only because they don’t have control of the entire government yet. Recent history leads to the unavoidable conclusion that neither party shows much spending discipline unless they are out of power.

Stop the madness. Is it too much to ask that an elected Representative from Ohio will care more for the workers in his home state than the hedge fund managers in the Hamptons? Apparently it is.

2011-09-12T07:39:00.000-07:00

The early part of the 20th century saw the “Progressive” movement in the US. Men like Robert Lafollette and Louis Brandeis were it most notably adherents. As I understand their philosophy the Progressives thought that if society is to make progress it must address its problems. In the early part of the 20th century this focused on the social disruptions caused by the industrial revolution. Today one of the issues that must be addressed is the high cost of health care and the effect this has on our economy, consumer spending, job creation and general economic well being of the US economy. As every business owner knows the cost of health care has been rising between 15 and 30% per year for the last fifteen to twenty years. Business’ response is to push more of this cost onto the employees. This means that an increasing part of discretionary income is being used to pay insurance companies, drug companies and doctors.
Every year business waits in dread fear for the insurance renewal quote from their health insurance company. Every business wants to keep this as low as possible because the increase in premiums will pressure business costs and employee expectations in re compensation. The medical profession, tort bar, drug and insurance companies seem to be happy with the current system but it cannot go on forever.
There is intense debate about the Obama administration’s recent health care reform plan. From the standpoint of the business owner I don’t know whether this will be a good or bad plan but at least someone has started to try to address the issue. As a country we can no longer pretend that this is not a pressing issue. To date the only plan we have had is to force people without health coverage to the ER, prohibit hospitals from denying care and ignore the fact that the more charity care the hospitals provide the greater tax on those of us who have insurance. Congress can no longer act as if nobody has to pay for this service. Insurance rates and hospital rates have to rise to cover this care and we all pay.
As more of our discretionary spending goes to pay for the one specific area (health care) the less is available for other areas of consumer activity. You cannot leave health care out of the national discussion about economic recovery.

2011-09-06T06:13:00.000-07:00

Hurricane Irene / Stimulus Package

One of the side effects of the recent hurricane on the east coast will be the economic consequences. On the national level there is a debate about fiscal policy and the deficit. One party wants to keep revenue the same (no tax increase for anyone) and reduce spending. The other party wants to increase revenue (tax the wealthy) and stimulate the economy with a jobs or infrastructure spending package. The first group maintains that the over spending of the last decade is the greatest threat to the long term economy and must be reined in this second. The other side contends that with massive unemployment we need to get people to work to stimulate the economy first and the subsequent growth will create the additional revenue to reduce our borrowings in the long run. This is why Hurricane Irene becomes so interesting.
The storm caused enormous damage from North Carolina to Vermont. The near term economic effect will be to increase spending at the state level to repair bridges, roads and other infrastructure. The states will be forced to borrow and increase their budget gaps in the immediate future to fund this. The second part will be increased jobs for electricians, carpenters, plumbers as people need to repair their homes and businesses. The money for this will come from insurance companies which serve as a proxy for the wealthiest Americans. Insurance companies have saved or stored money in their investment portfolio and the size of the claims following the storm will recycle their savings to people who must spend the money immediately. The storm will force investment money into the economy at a fairly rapid rate. This will enable us to measure whether the stimulus theory is valid or whether the deficit reduction party is right.
Over the next ten to twelve months look to the economies of the affected states as to retail sales (Lowes, Home Depot, etc), state tax receipts both income and sales, and housing activity one year from now.

2011-08-30T06:58:00.000-07:00

August 29, 2011

“Dumb as a Tea Party Republican”
This is the new and somewhat frightening phrase currently making its way across trading desks on Wall Street. What it means is that US fiscal agenda is being driven by people with no understanding of economics wrapped with the certitude of perfect ignorance. It is a legitimate debate to have about government spending, deficits, job creation etc. It is quite another to continue to try to spin that white is black and vice versa. Three weeks ago Congress passed its spending cut legislation as a compromise in re the debt ceiling increase. What I think John Boehner is trying to say is that this would create jobs because small businesses will feel confident in the government’s policy and therefore go out and hire people. John proving once and for all he hasn’t got a clue about fiscal policy impact or business in general. I know he gets weepy at a Chevrolet commercial but he need to understand what he is doing to the economy. Any cut in Federal spending will increase unemployment and suppress economic activity and growth. Again I am not arguing for or against lower spending but when the leadership of Congress wants to play “let’s pretend” all Americans of either party should be scared. If you think the deficit is more important than job creation then you should stand up and be counted.
One of the Tea Party Republican candidates thinks God is sending natural disasters to the east coast because He disapproves of the US Deficit. When called on this her spokesperson said she was only joking. The best she can come up with is changing the theological basis for recent weather to a joke about an incident where people died, lives have been disrupted, homes destroyed and misery visited on her fellow citizens. How Christian of her.
The economic situation of the US needs serious people with serious ideas. We have had enough of the nut cases and the people who cater to them. Stop the Madness.

Aug 22 2011

2011-08-24T10:17:00.000-07:00

August 22, 2011

Some unborn sorrow, ripe in fortune's womb, Is coming towards me

The above quote is from Richard II, act 2, scene 2 and describes the general feeling of fixed income traders on Wall Street this morning. The activity of the last two weeks has been volatile, irrational, and emotional out of all proportion to the current news. At times like this, if you believe the markets are efficient (and I do in the long run) there is an implied warning to be careful. Markets are the collective judgment of millions of individual decisions reflected in current prices. Clearly there is lurking something that is creating unease. In August 2007 we saw the start of the financial meltdown which turned the US Securities markets into a Salvador Dali painting. There was a year of uncertainty and confusion while half the world thought everything was OK and the other half felt we were headed to the end of times. September 2008 showed who was right. Personally I believe the driver for the next crises is the condition of the banks in the US and the continued deterioration of the loan portfolio. Combine this with a lack of desire in Washington to address unemployment and it points to sluggish perhaps receding economy for the next couple of years.
We remain constructive on the bond markets. We are continuously looking for good opportunities and ways for our clients to improve returns. During times like this bond investors should look for every opportunity to upgrade their portfolios. Stay tuned