Wednesday, January 23, 2008

New York State steps up

How about this... The market in general and fixed income investors in particular have come undone with the MBIA and Ambac issues. Who steps up to the plate but the New York State insurance regulator, someone we have never heard of, creating a back up plan with supporting New York banks to deal with the bond insurance industry. Details to follow, but this is so welcome from out of nowhere given the federal government's tepid approach to everything and the politicians delight in using problems as fodder for their campaign rhetoric.

Tuesday, January 22, 2008

Fed uses an arrow

Today's interest rate cut saved the U.S. equity markets from a stupendous downturn. It is likely that they may also have helped a couple or three financial institutions live on to another day. Losses of 1% to 2% in U.S. markets look healthy compared to European and Asian markets that lost over 10%, some over 12%, in two days while we holidayed. The follow up in those markets is now critical and nothing less than a decidedly robust bounce sustained over several days can validate the Fed's action.

Quiver one down.

Monday, January 21, 2008

"Red lights flashing through the windows in the rain"

Global equity markets are in free fall. On Monday German, Indian and French equity markets were down 7% and U.K., Hong Kong, and Singapore were off 6%. Halfway through the Tuesday market day in Asia equities there have generally fallen another 5%. Forecast for the U.S. opening Tuesday morning can only be grim.

The subprime straw has unleashed a domino effect of global imbalances. Giving $800 to every American taxpayer in a few months seems sort of silly at the moment in light of what is unfolding. Listening to Hillary Clinton use this debacle to make some "savvy" point brings a new dimension to political superficiality. With the global financial leaders in Davos jockeying for position to demonstrate how astute and somber, or maybe just sober, their pronouncements can be, we can expect no leadership forthcoming. We have now been pushed into what might be a rational market adjustment with an associated panic, or perhaps it's a calamitous market panic that will unwind at levels that would not currently be viewed as rational.

All together now

"Don't let it bring you down. It's only castles burning..."

Sunday, January 20, 2008 revives

As a follow up to last Tuesday's post, is posting again. The "thoughts and comments" section has it first commentary in six weeks and the weblog spewed out eight posts in two days.

Friday, January 18, 2008

"A Guide to Recognizing Your Saints"

Not exactly being au courant about films can be an advantage at times. Like with "Children of Men" a few weeks ago, again I was mesmerized by a movie tonight, this time on the Sundance Channel. "A Guide to Recognizing Your Saints" was met here with no preconceived notions, no expectations, no stored one liners from Roger Ebert, Peter Travers or A.O. Scott. Walking into a novel and sitting on a stoop in Astoria, Queens observing, that's what it was, except the story was real and it felt like it. Dido says at the end, "I left a lot of people behind but nobody left me". In the context of the film those words are just right.

Thursday, January 17, 2008

A market so bad that even Cheetos don't help

After noticing tonight that almost all of the gains from full year 2007 have now vanished in the first 17 days of 2008, I decided to turn on the television, slouch back on the sofa, and open a big bag of Cheetos. I've been doing Cheetos for at least 3o years so knew to have a couple of paper towels by my side. The bag pulls open. Anticipation and then the first crunch and that familiar orange stain begins to coat my hand. I eat a second, a third, then two at time, then three, they're not working. There's no relief. The crunch, the mess, it's all there but there's something wrong. They don't taste good. They're not the same. I look at the package. "0 grams trans fat". That was the secret ingredient. Whatever trans fats are, that was the flavor. And I'm still stuck with this damn market.

Wednesday, January 16, 2008

How to stimulate?

With everyone in the market focused on the possibility of a coming recession, the question in the air now is how to stimulate the economy. It's clear from history that one thing that doesn't work is scaring the consumer so much about the state of things that they pull back their spending well beyond what their financial condition warrants. With an election season on, however, some politicians can't help themselves. With many media outlets like CNBC that weren't of any consequence in 1990 when things looked like this, there's a significant media element that can't stay calm either.

Real actions being considered revolve around tax rebates, tax cuts and direct subsidies of varying types to create an immediate jolt to spending and pep business up again. Then there's the probability that the Fed will significantly cut interest rates at the end of January, and one could guess that the biggest impact would be if they surprised the market and made the move a week early. These short term solutions may be necessary or helpful, but they may have too much to overcome.

The biggest issue today is that the consumer credit securitization markets are barely functioning. The Wall Street Journal reported today that auto securitizations today require 4% more interest spread today than six months ago for good rated paper. That's a massive cost increase and essentially shuts down a large part of the car loan market. The economy has become accustomed to the efficiency of credit distribution which has created significantly deepened markets in auto, mortgage, credit card and student loan lending. The supposed stimuli will have little chance of any even medium term success until the credit markets regain liquidity.

What can be done about this credit gridlock? This may sound simplistic but part of the answer is to let the markets heal themselves. What that means is refraining from regulating rigidities into the market for political capital, refrain from setting up the securities firms as the deep pockets for the trial bar to attack, and don't legislate retroactive changes in the paper that already backs up asset packages. The securities firms are obviously absorbing serious losses due to excesses in the markets, but they are not asking for bailouts. They are engineering their future capacity to move the markets back to normalcy through obtaining private capital. The market is punishing them big time, but if the government undercuts the fundamentals of the system's liquidity process, recovery will be a long way off.

It may be necessary to cut interest rates to improve basic short liquidity between financial institutions in the short term. Cutting rates may make consumer credit slightly more available for those with solid credit, but without large liquid markets it won't significantly help those who actually need the funds now. Cutting rates will debase the U.S. currency further and be one more hurdle to rebuilding the deep global securities markets that had fueled the consumer economy. Rate cuts, unfortunately, may be necessary but they are not a long term panacea, quite the opposite.

You know, it may seem bizarre that such complex and multi-faceted issues are being addressed in this blog. These comments are superficial and they are simplistic for sure, but they also may be as close to being correct as any of the other opinions that many of the newspapers, bankers and pundits throw out there. Well, that may be a stretch but I just have to get these thoughts out of my system anyway.

Tuesday, January 15, 2008

Second Curve Capital---a victim of the credit crisis?

Second Curve Capital, a hedge fund focused on financial services stocks and run by the highly regarded Tom Brown, may well be in trouble. The fund has a stable of close and loyal investors, almost all with some links or former links to the financial services industry. There is no public information available on its current condition and no commentary that can be derived from the usual searches. But if Second Curve is troubled, it is truly a sign of just how difficult this market has become and how the collapses in financial services have defied traditional analysis.

What's the cause for alarm? One major reason is that Brown's website of banking commentary,, has not had a comment since December 3 and the sidebar weblog's last comment was on December 7. This has been a regularly functioning website since 2000, and has a significant following in the banking community. That's a sure sign of a distraction for Tom and his team, at a minimum. And then there are his holdings, which tend to be only around 15 to 20 stocks at any one time. Some major ones, almost surely in the top five, have been Capital One(down from the low $70's to 40 in 2007) and First Marblehead(down from the $50's to 14 in '07). Regulatory filings show that in the third quarter Second Curve tripled its position in Indymac Bank at prices in the $20's and today that stock is trading below $5. With the entire financial services industry down significantly combined with Second Curve's predilection for stocks that are off the beaten path, and therefore with less liquidity, it is unlikely that the funds under management are doing well.

Like any hedge fund Second Curve can and does at time short stocks. From reading Tom's comments on during the year, however, it is clear that his analysis was saying that the impact of the mortgage mess was being overblown. He may at some point be proved right, but will it be a year too late.

Tom Brown is a terrific bank analyst. From the late 80's and into the 90's he was the number one regional bank analyst according to Institutional Investors poll for eight years out of nine. He went on to Tiger Management and then simultaneously started Second Curve and He worked hard, did thorough analysis, loved his job and enjoyed sticking up for his positions, sometimes inviting controversy which his hockey player mentality enjoyed.

What can be said, let's pray for rain.

Thursday, January 10, 2008

BofA, Countrywide soon

Last post suggested that BofA would take over Countrywide. It seems to be in the works, and the follow on is whether the much more out on the edge suggestion that a JPM/WM combination will happen. Competively speaking, if the BAC/CFC news is right, the JPM/WM combination becomes a greater possibility. Financial services mergers tend to happen in short time frames, as one move creates others.

Tuesday, January 08, 2008

Stressed financial companies?

With today's market stress the ante is raised for a few. Financial companies are crushed by liquidity issues. It's not brand, market strategy or even market leadership unless they're the biggest of the big. It's whether the spigot is open. Arguably in 1991 Bank of New England was a viable bank with a great franchise and a manageable amount of real estate issues when regulators drove it into the ground with the jobs of thousands of employees. Now the market generally does the work that the government formerly did. On the radar are the current market suspects:
---Indymac Bank---IMB--formerly terrific Alt-A lender in California. Strong management, previously viewed as having conservative balance sheet but any further downturn or pressure and it's gone.
---Countrywide Financial---CFC--- The leading mortgage lender is not likely to go down, but may be forced to be subsumed by its minority investor Bank of America if its access to funds really does dry up as was rumored today.
---Washington Mutual or as they renamed themselves WAMU---WM---this is the big one. The Fed really cannot let the 7th largest financial institution in the country fail. Even thinking that they could fail may be a far fetched thought, but it is not beyond the pale of market speculation . Could it be a forced marriage with JPM? Given the West Coast branch system which JPM covets, if WM is forced to write down the mortgage business enough it could be a done deal. Overlaps in the northeast, midwest and Texas as well as in the mortgage business could lead to a meaningful expense reduction number. It should be noted that JPM's large mortgage business did not go so far into the hysteria of subprime so the knowledge is there to manage this, especially on the hedging side. Alternatively a large foreign financial institution could see WM as a way to establish an immediate large footprint in the U.S.

All speculation here.

Short seller ambush

Today's massive late afternoon sell-off in the equity markets was an orchestrated event by short sellers. It was classic and unmistakable.

The set-up was right. No question that this is a nervous market with a bias for the downside, a necessary situation for this trick. Randell Stephenson, CEO of ATT, was scheduled to be the keynote speaker at the Citigroup 2008 Entertainment, Media and Telecommunications Conference, an event for institutional investors in Phoenix. The time was 12:15pm Mountain, 2:15 EST. With only a few months in the CEO chair, Stephenson with his core career background in accounting was perhaps the perfect foil. No investor could have expected ATT to come out with all good news in this consumer stressed environment and ATT did not. On top of that Stephenson apparently ad-libbed that he "hoped" they would be able to get through this period(the wireless and business sides of ATT are doing fine, as ATT overall is, and this is simply poor communication). To sum up, weak market, planned event, inexperienced CEO, expected negative commentary, short short short, ask some tough rhetorical questions in the Q&A, and then get on the phones and scare the market to death. BIG Gains on the short side.

And that's the way it is.

Campaign notes

---On Saturday in the debate and in his many speeches in the last few days, a stock line for John Edwards has been "I've never taken any money, any money, from a Washington lobbyist or special interest PAC". For a man whose largest contributor by far is the trial bar, some of whose leading lights are under indictment for good reason, this appears to be just transparently "clever" and self serving litigator semantics.
---In the last two days Bill Clinton has been given or has assumed the role as attack dog on Obama. He claims virtual sainthood for himself and his wife, while attacking Obama for rewriting his record on Iraq and spreading false comments about Hillary, and chastising the press for not critically examining Obama's candidacy. This is beyond unattractive.

Another decison day, and the Clinton drama unfolds

An interesting day is ahead in New Hampshire. The biggest event going is the verdict there on Hillary Clinton. Echoing the media angle of the last few days, her campaign seems to be in disarray.

Until just a few weeks ago the Clinton campaign was being run with a sense of entitlement. With her knowledge, preparation and competitive edge backed by the pink faced bonhomie of her celebrity husband Bill and the arrogant confidence of her campaign strategist Mark Penn, the campaign expected to use the required rigors of the primaries to lay the groundwork to be anointed in November. At a minimum, the game plan has some problems now.

Clinton herself seems rattled and the campaign message is stressed. Is it just a week ago that Clinton's mantra became " the real candidate of change", lifting in whole cloth the Obama campaign slogan of the past six months. And yesterday, bizarrely, the NYT quotes her as saying "This is very personal for me -- it's not just political, it's not just public". Isn't that exactly what John Edwards was promoting as his claim to authenticity in Saturday's debate.

LSU won the college football championship last night. They started out the season ranked number one but during the season there were multiple number ones and number twos, with nine teams laying claim to one of those spots during the season. LSU ended up where they started, becoming the first team to win the championship while having two losses. Now it appears that the Clinton campaign needs to hope for the same scenario in the Democratic primary. Hold it together, regroup, hope for others to make mistakes and get to those big states with the more entrenched Democratic machines. It will be a long season.

Sunday, January 06, 2008

Behind the curtain in New Hampshire

New Hampshire is different from Iowa. Clue. The biggest difference may be that the election is a vote and not a caucus. A vote is a private matter, pull the lever and you're on your own. A caucus is an event with friends, neighbors, fellow church members, and maybe even your banker or boss.

An individual can have biases related to gender, race, or religion that would not necessarily be expressed in a caucus setting. Could a person be pro or anti Iraq war and live in a circle of friends where their real thoughts are out of step? If taken to an Iowa caucus by a neighbor who sends her teenager over to babysit the kids, then goes early for the free pizza, does the beneficiary then have a tendency to go with her neighbor's flow. In the same circumstance in New Hampshire, well, it's live free or die behind that curtain.

What impact will this have? It's, by definition, impossible to know. One could speculate that the possible beneficiaries would be the two candidates viewed by many as having the most unattractive and polarizing personalities, Clinton and Romney, or is that too counterintuitive. Behind that curtain, no one gets to know.

Saturday Night Debates, a brief comment from ringside

The media coverage of last night's debates have for the most part said it all. A few brief comments follow that reflect thoughts beyond what appears to have already been said:
---Guiliani seemed to be directionless. He postured as usual as an expert on terrorism and the Muslim world but had nothing new or interesting to say. Other candidates even patronized him, by referring to their agreements with him rather than entering into any challenges of consequence. He may end up just having been a celebrity attraction rather than a real candidate.
---From this perspective, Clinton made one comment that was way out of line. She said that we were "in" a recession. Notwithstanding the weak jobs report and other negative trends, the verdict on that, statistically and opinion related, is not in yet. While maybe this is an overreaction, it is very troubling that one of the leading presidential candidates and the wife of one of the most well known politicians on the planet would make such a statement. Asian markets open and close before U.S. markets start the week on Monday. What's a Japanese investor to make of this pronouncement tonight?
---While touting her record as a candidate of change, Clinton's tactics were those of an old style pol. She attacked with exaggerations and half truths as well as some respectable self defense. It's the only game she knows and maybe her best tactic at this point, but how in the world does this make her look like a possible uniter, a possible candidate of change. Actions speak louder than words as she ironically reminded us about 20 times last night.
---Everyone on the Republican dais detests Romney. It appears to go beyond disagreements about policy or political tactics.
---Charles Gibson did a good job. Can anyone imagine any of the other major anchors even beginning to measure up to his performance.

Saturday, January 05, 2008

Financial market comments

Before settling in for football and debates, different games, here are a few brief thoughts on the uncertain financial markets:
---Over the last six months the equity markets have been characterized much more by volatility than any aggregate negative performance. Volatility, however, can make investors accident prone, and has created significant losses in certain sectors and for certain investors. Especially with the recent economic news flashing yellow on recession, the overall tone of the market has become more negative than recent performance would dictate. That being said, markets look forward.
---The trade-off between the equity market and other markets, fixed income and short term cash, is increasingly leaning toward equities. Money must flow somewhere and piling into money markets and bonds does not look promising. Thank God for the squeeze on bank credit, as CD's are outpaying almost everything, but institutional investors can find limited liquidity there.
---The distribution of debt into all segments of financial markets, instead of just being held at banks, had been viewed as a great way to mitigate and spread risk as in reinsurance within the insurance industry. With the prevalence in recent years of mark to market accounting in all securities, however, the credit market issues have become more like a virus that infects everyone instead of a flu that a few wait out until it passes. This has exacerbated the downturn in all markets, but could it also jump start the upturn when the time comes. These changes, plus the elimination of the rules against shorting on downticks in July, are the reasons for the heightened volatility.
---There is a kind of general feeling in the markets among commentators and technicians that there is a prevailing equilibrium nudged up and down by statistics, so we hear the talk of markets being oversold or overbought. It's a kind of faith based approach to investing that happens to be very American(and I'm not talking Huckabee). The markets have been down but they'll turn soon enough. On the other hand, one could have the view that at the end of every market week investors have spoken and what you see is what you get. Anything, absolutely anything, can happen next. That could be called an existential based approach to investing that is susceptible to a bigger market picture that is more psychology driven, and it is much less reassuring.

Go Redskins.

"Children of Men"

This film from last year was on HBO last night. I somehow didn't expect much, but was completely taken in. What a treat, which may be an odd thing to say about this not too futuristic depiction of post industrial post modern post almost everything societal despair that follows a few individuals attempts at attaining redemption and restoring hope.

Friday, January 04, 2008

Iowa reality show concludes

If we are on the cusp of a recession, Iowa might be the place to see it hit harder and faster. Without the benefit of the millions being spent by candidates, news organizations, and volunteers from other states, a changed economic picture could be more apparent than in most places. With ample opportunities for free eats four years away, not to mention free entertainment if politics have any interest, it's back to normal, whatever that turns out to be.