Tuesday, February 27, 2007

Abrupt market correction

The unsettling abruptness of the market correction may lead to some unpleasant surprises. Virtually everyone expected a correction at some point, but unfortunately this one doesn't have a manageable feel to it. Now everyone will be looking for the wounded. Who got hurt, and how badly. Are any significant counterparties to equity or credit derivatives in trouble? It can become a shoot now and ask questions later environment until the facts are sorted out. The market hates uncertainty, and uncertainty is what we have.

There were a couple of issues that haven't helped calm things down. First, the NYSE's systems somehow got behind on trades and switched to a back-up server, which led to a radical one minute drop in the afternoon. Traders, at least ones not on the floor of an exchange, were in a sense flying blind for an hour or so. Second, bond mutual funds strangely took on average an hour longer than usual to report their results for the day. This is a different issue and had no trading effect, but one can't help but wonder why---just the volume or something else?

This could be an ultimately healthy market event but it's unlikely to feel that way in the morning. Volatility is back and regardless of the near term trading action, this stings in a way that will linger. That said, it is still certain that buyers are lurking, and will likely attempt to lead a rally soon.

Monday, February 26, 2007

Gridlocked blog

In a journal of opinion that has no real subject barriers the danger seems to be gridlock. At times it happens. There's so much to comment on, but what is really important, what is worth the 30 minutes or more to get a comment into readable shape, who cares about anything forced. The thoughts keep coming but nothing goes into the outbox. So here are some of the notes on the desk that did not become posts over the last ten days:
---A comment on the uniqueness of Iran relative to most of the Middle East in terms of its political system, ethnicity, culture, education and recent history---tentative title would be "The Real Reason Iran Terrifies Saudi Arabia".

---Reaction to the following comment by Lawrence Summers, former U.S. Treasury Secretary and a smart man, "It's worth remembering that markets were very upbeat in the early summer of 1914"---the message being that overvaluation or economic mismanagement do not necessarily need to be in place for the market to take a serious tumble.

---Comment on the impending resignation of Vice President Cheney and why it will happen, with timing being the only issue.

---Reflections on rereading Cheever's short stories and Styron's "Darkness Visible".

---The irrepressible vibrancy of small to mid-cap value stocks, especially in sectors like industrial materials, commercial electrical system design and maintenance, heavy equipment production and maintenance, infrastructure construction, and industrial and construction
project management. There's an overarching idea underway here, at least for now.

---A review, of sorts, of the exceptional essay "The Past Conditional" by Julian Barnes that was in the December 25/January 1 double issue of The New Yorker.

---The possible meaning of the current VIX index(a gauge of stock market volatility produced by the Chicago Board Options Exchange) which shows that the concern about a fall in equity prices is at a 13 year low.

---Oscar comment: Tom Cruise's long hug; Ellen DeGeneres's slow start turned out cool; a windfall for Al Gore's tailor; Melissa Etheridge's in your face comment; Alan Arkin looked like Rob's father, Jack Nicholson gets old in more ways than one, and more.

So be forewarned. If a lane opens some of these thoughts could be developed, or new ones could be forthcoming.

Friday, February 16, 2007

Today's Wall Street Journal and recent ENS posts

Today's WSJ has several articles that relate to recent posts, as follows:
---The front page column five title is "Democrats Focus On Tax Relief For Middle Class, Bush may acquiese to higher levies on rich to pay for curbing AMT". This issue is described in the ENS post "Bush's attack on the middle class" of 2/6. The WSJ article documents an AMT penalty reaching as far down as someone making $75,000 a year. It states that Democrats argue that many middle class families haven't benefitted from the Bush tax cuts because of the AMT. There is no argument at all here. It is a fact. The issue now is whether Bush can convinced to comply with a rule reinstated by the Democrats this year that requires new tax cuts to be offset by tax increases or spending cuts. Let's hope that this issue is not one in which the middle class gets sacrificed on the altar of politics, with the Democrats blaming the President for preventing an AMT change and the President pointing the finger at Democrats for wanting to roll back his tax cuts. Stay tuned. A change in AMT is absolutely needed.
---An opinion piece entitled "Putin and Progress" by Padma Desai, a Columbia professor, gives a different perspective on Russia than the perhaps alarmist comment in the ENS post of 2/11. Citing the 70% approval ratings that Vladmir Putin receives from the Russian people, the author justifies Russia's aggressive political approach to nations that were formerly part of the Soviet Union, sounding like the "spheres of influence" arguments from the Europeans in 1900's China, and saying that it is what the Russian people want. The article provides reassurance about the fate of democracy, stating that "the transformative changes in Russia... are phenomenal. Russians are acquiring private housing, automobiles, and telephones at dizzying speed. The overall poverty rate has declined from around 35% in the mid-1990's to about 10% today, and 70% of college age youngsters receive a higher education". If accurate, these are impressive statistics and based on this the writer makes the case that a market economy and democracy are an inevitable outgrowth of an educated and prosperous citizenry. That should still be open to question if there is no independent judiciary and an erosion of a free political process is underway. It is presumably possible for a prosperous majority to accept a limitation on freedoms to preserve their way of life and nationalistic pride.
---An editorial today, "Iran's Smoking Guns", asks the question "is it too much to expect American journalists and Members of Congress to devote as much skepticism to Iran's motives and behavior as they do to Mr. Bush's?" Of course it's not too much to ask. Yesterday's ENS post focused on the differences of opinion between Bush and his military commanders(not the press or Congress) and, admittedly, expressed frustration with the President's cavalier responses to important questions. Is it too much to ask that the President of the United States have a statesman-like demeanor and respond to questions in a way that not only addresses the important issues and the American political debate, but can also be understood and respected by the broader world community?

Memorial procession

I walked to the small center of this surburban town today to stand with hundreds of others as the funeral procession of a young man killed in Iraq passed by. Schoolchildren and townspeople stood in silence, many holding flags, as the hearse, family cars and following vehicles moved at a good pace up the street. This was not a celebration. There was no waving or clapping. It was a moment of respect, recognition and dignity.

The young man killed was 26, an honors graduate of Duke University and a lacrosse star there. He postponed a career in business to join the Army Rangers, motivated by being from a town that lost over 20 people when the towers fell on 9/11. He served two tours in Afghanistan and was on his second tour in Iraq when his vehicle was hit by an IED.

He leaves behind his parents, three sisters, fiancee and a hometown, all heartbroken over his death.

Thursday, February 15, 2007

Disturbing Bush news conference

It is entirely possible that President Bush's comments at yesterday's news conference were alarming to almost everyone across the political spectrum. They should be. His assertions about the Iranian government's role in supplying lethal weapons to the Shiite militias in Iraq for use against U.S. forces were too extreme to be credible. The news reports don't need to editorialize to tell the story. The NYT reports that "Mr.Bush dismissed as 'preposterous' the contention by some skeptics that the United States was drawing unwarranted conclusions about Iran's role". Among those preposterous thinkers yesterday were General Peter Pace, the Chairman of the Joint Chiefs of Staff, and Major General William Caldwell, the chief American military spokesman in Baghdad, who both said that there was no proof of a linkage to the Iranian government or its top leaders. Caldwell did explain that information about the weapons and the link to the Iranian Qud force was based on information obtained from people, including Iranians, that had been detained in Iraq for the past 60 days(is this a reliable source of information given the conditions we have seen in Iraqi prisons and U.S. detention centers and the "interrogation" techniques supported by Cheney/Rumsfeld and of course Bush).

When the linkage to the Iranian government was questioned Bush responded, "What's worse, them ordering it and it happening or them not ordering it and it happening. That's my point." There's in fact a big difference and Bush's childlike simplification is stunning.

It is of course entirely possible that some weapons used against American forces in Iraq by Al Qaeda, Shiite militias, Sunni militias, and anarchist bandits have some Iranian origin just as it is likely that there are weapons that have come from Syria, Saudi Arabia, Russia, China, Pakistan or other countries with arms producing and trading capabilities and in some cases groups within that are allied with the insurgents. But Bush's direction is disturbingly transparent in his answer to a question about meeting with Iran's leaders at some level in his administration. The NYT quotes him as saying, "This is a world in which people say 'Meet, Sit down and meet! And my answer is, if it yields results, that's what I'm interested in." Does this statement have any meaning at all.

When the President insults his top commanders' word and they stand up to him, does he just dismiss his heretofore vaunted "field generals" or is impeachment now an open question.

Monday, February 12, 2007

Grammy Awards

The Grammy Awards program has now been reviewed completely on all media outlets. Whatever one could say, the show's redemption is the live music performances. Despite the low points, the pandering to supposed taste, and the long commercial breaks, a chance for real live music performances trumps any hour of 24, The Closer, or Lost. Briefly, a few comments:

Good things:
---Mary T. Blige, especially the performance with Ludicris
---Gnarls Barkley, strange costumes all the better
---Justin Timberlake, didn't overplay his cool
---Shakira and Wyclef Jean, so at ease, when Wyclef came strutting across the stage toward Shakira mid-song it was so casual and spontaneous one could only laugh in recognition
---Christina Aguilera, great performance by the best female vocalist and performer today. Having the bad luck to be paired with Britney Spears at the beginning of her career and the supposed good fortune of being so attractive that no one listened to her, she is just beginning to get real recognition for her amazing talent.
---Stevie Wonder, just being real
---Ornette Coleman, baffled maybe, but an almost strange and dignified presence

Things that can't be explained:
---the Lifetime Achievement Awards or whatever the heck they were, maybe they're just getting around to the Greatful Dead and Doors because they were on steroids, who knows about Maria Callas and Bob Wills
---Tony Bennett, he really did plug Target
---Red Hot Chili Peppers, much heralded performance is ho hum with embarrassing rain of white confetti in still cocaine addled L.A.

Things that just are:
---Carrie Underwood, cute but what does she add to anything
---Dixie Chicks, enough already, that one song is terrific
---The Police, what company paid for this promo

Sunday, February 11, 2007

The international scene: harbingers of hope and portents of problems

Alliteration aside, there were notable developments on the foreign affairs scene this week:

---Talks with North Korea in Beijing, with the U.S., Russia, South Korea, and China are in their fourth day. There is no agreement yet and there may not be given North Korea's negotiating position. That the talks are being held in and hosted by China is positive. While North Korea's demands will perhaps be unacceptable at this point, the fact that they have put a nuclear freeze on the table is progress. The Bush administration seems to be letting South Korea and China take the lead, and that's good news.
---The rival Fatah and Hamas political factions in Palestine signed an agreement to form a government of national unity. The accord for a coalition government was signed in Mecca, Islam's holiest shrine, and was facilitated by Saudi Arabia. This agreement provides the slightest glimmer of hope that there can be a basis for an eventual accord with Israel that will calm that region. While it is absolutely certain that the Bush administration was aware of this at every step of the way, they let events play out without seeking any participation, credit or knowledge. This is good news. The troubling aspect is the choice of Mecca as the geographic source. On the surface it sounds like an idea that would insure a real commitment to the agreement. Given the way things go in the Middle East, however, if the agreement falls apart in some way the Islamist fundamentalist Hamas could declare a Holy War on Fatah for violating their "sacred" word.
---The NYT reports on page one that the most lethal weapon directed against U.S. troops is made in Iran and supplied to Shiite militia. The device, "explosively formed penetrator" possibly becoming the acronym EFP, produces more casualties than previous roadside bombs. This information comes to the NYT from administration officials who noted that their track record of reliable intelligence may be spotty but this is real. Is it really real, with a trail back to Iran, or is it like the sociopathic brother-in-law who uses past indiscretions as a lever to support current ones. This is not good news.
---"Putin Says U.S. is Undermining Global Stability" reads the NYT headline. What was said was far worse than that. Putin has in progress a de facto nationalization of Russia's vast natural resource reserves, he has eliminated regional autonomy to the point of removing electoral choice of leaders, he has made the judicial system a proxy for his agenda, and he attacks dissenting citizens across national borders. It would be ironic to some extent if the issues with Iraq, Iran, North Korea, and even Al Qaeda were overshadowed by the emergence of a new Russian totalitarian state. This is not good news.

Saturday, February 10, 2007

Campaign trail update

In a bold move, Republican Presidential aspirant and former Arkansas Governor Mike Huckabee came out today against the intense media coverage of the death of Anna Nicole Smith. Running thus far on a platform of weight loss and marathon participation, Huckabee obviously sees an opportunity to be a first-mover on this issue. In addition, having already been referred to as "Huckleberry" in the Iowa press, this timely move could underscore the seriousness of his campaign.

Rumors that other candidates are now developing their Anna Nicole Smith positions have not yet been confirmed.

Friday, February 09, 2007

Market tumbles on talkers' heads

Today the U.S. equity market took a sharp turn down. During the course of the market day on CNBC, Bloomberg radio, and various market websites many reasons were given for the decline by people with authoritative voices and nothing better to do during the market day than flack for their firms. Some of those reasons were:
---MasterCard said that it would not raise interchange fees again anytime soon and the MasterCard stock decline was leading the market down--- Hmm. MasterCard was up over 200% since its IPO in March, it was trading at a 27 p/e, and it doubled street estimates for the quarter. They will not raise fees soon and the stock was down 7 or 8%, but it was priced for perfection and some. It had absolutely nothing to do with the broader market.
---Micron Technology reported that their semiconductor chip prices would decline dramatically in the coming quarter due to market conditions, and that was driving technology stocks and the overall market down---They did say that, and it likely did have some impact on technology stocks, especially semiconductor stocks. While saying that pricing was a "disaster", the Micron spokesman also said that Micron boosted production during an industry glut. On top of that Micron has always been focused almost completely on the commodity end of the chip market that is most vulnerable to any slowdown or pricing pressure. This is an issue but it is a semiconductor industry issue and in many ways a company specific issue. It doesn't tank the market.
---Oil prices are up on Nigerian unrest and colder weather and that's pushing the market down---Oh come on, oil prices are still 25% below last year's highs and everyone expects some volatility there. Oil and oil service stocks needed a little bump anyway. That's not it.
---The Dallas Fed Governor said in a presentation that the Fed "would not rule out rate hikes if inflation gets out of hand", and the market is in free fall on rate concerns---What else would a Fed Governor say. Of course the short term message in this is that there is now almost no chance of rates being cut in the coming months but that's modestly incremental news. It doesn't push the sell button on the market.

I'm sure that there were more of these insights during the day that I missed. While on a negative day any negative news counts so in a sense each of the above reasons has a little validity, with little being the operative word. When the people doing the work, managing portfolios and manning the trading desks were finished for the day, the primary reasons for the day's action surfaced. They were:
---Concerns about the subprime mortgage market, any contagion effect on prime mortgage or credit card portfolios, and the overall effect on financial firms. Financial firms represent over 25% of the S&P 500 and over 20% of the Wilshire 5000. Uncertainty in this big sector is not welcomed by the market, and yesterday's post here on ENS gives more details.
---The market is ripe for a correction(see 1/20 ENS post "Can't get any better"). Bob Doll, CIO of Blackrock, said tonight on Bloomberg that "we have been through the longest time in 50 years without at least a 2% pullback". So that is what it has felt like since July and he would know the statistic. The consumer credit issue is front and center, and it raises uncertainty. Investor expections are high and any miss of an earnings estimate by a company, even if the analysts had become overexuberant, is punished severely. Look at AOI and ENG today, two small caps that missed by a little and fell by a lot.

What's the message. Those are the two main reasons that there is pressure on the market and intraday chatter is just that.

Thursday, February 08, 2007

HSBC and subprime mortgages

HSBC has reported a significant deterioration in its subprime mortgage portfolio and its stock price is falling. Finanical companies who have any exposure to this segment of the mortgage market are also under pressure and, given the importance of the securitized mortgage market to the overall financial market health of investors, it has led to a down day in the market despite decent retail sales data. A few comments:
---Less than ten years ago it would have been amazing to even think of HSBC being in a pickle like this. A Scottish bank that was started in the 1800's in China and eventually developed into a global bank with its headquarters in London, it was for its entire history viewed as conservative, with the strictest of standards for credit and the appearance of integrity. It was bizarre to many when in 2003, in order to expand their U.S. retail presense, they bought Household Finance, a downmarket lender on many fronts that was even in midst of settling regulatory issues related to predatory lending practices. Not only did HSBC acquire Household, but once in the business they actively sought to augment their earnings by buying portfolios of subprime loans originated by others in areas where Household did not have branches. No doubt 140 years of flinty Scottish bankers were rolling over in their graves.
---HSBC does, however, have that tradition of a credit culture and cultures do not go away in a few years. They believed that they had the systems and the mathematical talent to analyze this business on a risk/reward basis that made economic sense. It is also likely that with this culture, in which at least 90% of the top management was raised(it's one of few companies today that still has great pride in the number of lifers in the company, and it touts the average number of years experience in the executive ranks), that HSBC is addressing the problem as quickly and as forthrightly as it can. So if this presumption is correct, the question is how much more serious will this problem become and where will the problems surface. Some smaller subprime focused firms have already gone under and inevitably more will, so the bigger mortgage players are where the next important negative news could arise.
---The industry subprime default rate in November was just over 10%. In 2006, 15% of all mortgages originated were subprime, triple the level of seven years ago. On the back of the run-up in housing prices until recently, there is reason for concern about how this plays out. The bigger concern, however, is whether what we're seeing in subprime today bleeds into the lower segment of the prime market tomorrow. The prime market with its higher loan to value ratios and creative products like interest only loans could be just as ugly as subprime at its lower end.

Enough cheery speculation.

Follow up to prior post

The prior post, "Bush's attack on the middle class", focused only on the upper segment of the amorphous middle class. The purpose was to discuss a story that is overlooked to a large extent by mainstream media, as it primarily focuses on the struggles of the lower middle class and the growing disparities in income in our society. A majority of the middle class can only dream of having the problem of falling into the AMT trap or as a senior having to pay additional premiums for medicare. The plight of the lower middle class is a serious societal issue and, relative to the issue of unfair taxes for those that have a better lifestyle, it is bigger news. That being said, for those who do rise within the so-called middle class to a level of security it is a discouraging experience to see that the President and until recently the Congress have chosen this easy target to fill holes in their budgets, and it is also a story worth telling.

Tuesday, February 06, 2007

Bush's attack on the middle class

Bush's just proposed budget is an insult to the successful middle class. The successful middle class could be defined as those families who have worked to earn a reasonably comfortable lifestyle and have been prudent enough to save for their retirement. They are not rich. Depending on the area of the country they live in they could be viewed as upper middle class or as just smack in the middle class. They are the living example of what this country has stood for in the world. This is really what the "American dream" has long meant as opposed to the perverse view that seems to be taking place now which suggests that it is having $100 million in the bank. That could be called the "banana republic dream".

The Bush Administration budget seeks to perpetuate all tax cuts that have been enacted in his administration. It does not address in any way the Alternative Minimum Tax(AMT) and it raises medicare expenses. The AMT was originally approved to corral the wealthy who were paying little or no taxes through the use of trusts, non-taxable investments, and other means. Since it was never indexed to inflation and because of its inexplicable rules, it now affects millions, possibly over 20 million, of taxpayers and no longer touches the really wealthy. It is especially onerous in states with high tax rates and for families with children. The effect is to tax the "successful middle class" at a higher rate than the wealthy. This is unconscionable and it is well known. Both political parties have preferred to bury their heads in the sand on this issue in recent years, while both admit that it is bad tax legislation. The Democrats are now finally bringing the issue to the table and the Bushies readily admit that it is bad tax legislation. Their rationale for its exclusion from the budget is that they are putting a "patch" on it, which until this year is what Congress as a whole was comfortable with as well(a patch means a one year fix that only partially eliminates the problem in the year they are patching). The Bush budget is a 5 year plan, but they are excluding AMT because it has a one year partial fix outside of the budget. The truth is that they want the money and they see this bad rule as an annuity that they can continue to milk. Bush will leave it to the newly converted Democrats to fix the rule for good two years from now, and fill the gaping hole in tax revenue that it creates.

As for Medicare, Bush's bill will raise the Medicare payments for retirees with income over $80,000 a year. That $80,000 includes of course social security benefits, retirement plans, and 401K plan drawdowns, the money people have saved, all before tax. Like almost all government cost programs under either party, once in place it will never be indexed so the economic impact will dig deeper into the middle class every year. $80,000 may sound like a lot today, but see if that still rings true ten years from now. And even today, the elderly at that level who live in major cities with high tax rates and high apartment costs are far, very far, from being well-to-do. The idea of raising rates for some may be sound, or necessary, but the threshold should be much higher.

There are solid theoretical and practical arguments that can be made for both higher or lower tax rates, more progressive or less progressive tax rates, and the possible benefits of a greatly simplified tax code. This post is not about that. It is about a Bush budget that perpetuates an assault on the middle and upper middle class and that has no basis in logic or fairness. And it is about Bush putting in place additional costs for health care at a threshold that could over time be severely punitive to the middle class.

It is difficult not to be disheartened by this cynical and politicized administration. The sugarless icing on the cake last night was listening to the Democrat's designated responder, Senator Kent Conrad, already have his PR scripted buzz words in place so that as he made some adequate points about the proposed budget he repeatedly said it's a budget of "deception and debt deception and debt deception and debt". It would be refreshing if the Democratic Party would follow Barack Obama's lead and start speaking in English.

Monday, February 05, 2007

Super Prince

Accounts of Prince at the Super Bowl last night are all positive, and they're right. It was an exceptional performance. It was a well thought out, one could say artistic, series of musical and lyrical juxtapositions. The dancers didn't hurt things, talented, attractive, but not overwhelming. Apart from the fact that he didn't just play a few hits from the past or present, his presence, or charisma, was focused on the performance and not on himself. Whether intentionally or not, Bono's fist pumping, McCartney's accomplished maturity, and Jagger's narcissistic prancing were different. Prince was better.

The unscripted additive dimension of this performance was the weather. The windswept rain, despite not being purple, provided a tangible backdrop that overwhelmed the lasers and staging. I've seen that happen before. At a music festival in the '60s the band Iron Butterfly, a one hit wonder that I viewed with disdain, began their set in middle of a huge Florida storm. The safety of the musicians and the crowd should have been in doubt, but the local authorities were probably hoping for the worst. In-A-Gadda-Da-Vida began at massive volume with thunder in the background. They played that one song for the entire set, jam and refrain, over and over. It was huge. And the weather did that for Iron Butterfly. With more talent, the weather does even more.

As Super Bowls go, it was a more interesting game than usual. The halftime show was better.

Sunday, February 04, 2007

Treats from Trillin, and not food

Looking at the local library's computer index about a week ago, I typed in Calvin Trillin thinking that I might find one of his books of essays about travel and food that I had not read, or read so long ago that I could read it again. Doing so I noticed that he had written more than that. I had read his recent essay "About Alice", now in book form, several months ago and found it to be compelling and inspiring. So why not try more. On the shelves I found two; "Tepper Isn't Going Out" and "Remembering Denny".

"Tepper Isn't Going Out" is a short novel that led to a couple of very pleasant round trip commutes on the LIRR. Probably novella is the right word to describe it, but I don't recall ever using that word myself. It's an amusing New York story that doesn't strive for too much but is perceptive in many ways. The main character is normal and understated with the exception of one quirk--he likes to spend time every day sitting, legally, in coveted Manhattan parking spaces and reading the newspaper. To say more would be like one of those Amazon reviewers that seem to take great pride in pretty much telling the story, so I won't.

"Remembering Denny" is an investigative memoir about a college classmate in the '50s who was seemingly the shining star of his class. Over time "Denny" lost contact with, or avoided contact with, most of his admiring classmates and killed himself in the early '90s. I know that doesn't sound like a book to go out and grab right away, and there are of course disturbing aspects. It is, however, incredibly well done or as a review excerpt on the back cover says "a superb portrait of an individual, a group, and a vanished sensibility".

It was just good fortune to have chosen to read both in the same week. One was light, one was not, combined just right.