Friday, February 29, 2008


From novelist Jess Walter:
"I keep a writing journal full of notes and observations that often find their way into my novels. In these journals I record the reflexive highs and lows that most writers suffer, alternating between thinking a piece of work is brilliant and that it is unreadable, mood swings so drastic that they seem like the diary of a man living on the coast who has no understanding of tides ('The water is disappearing!' or 'My God, it's a flood!')".

Walter is the author of the intensely chaotic, edgy and at times insightful novel "the zero", a tale of 9/11 post traumatic stress in individuals and organizations and a country. Good, but DeLillo's "Falling Man" is the benchmark for this topic, an austere but humane story with absolutely no resolution, the perfect ending.

Thursday, February 28, 2008

That tyrant Putin and more...a ramble through Russia and China that eventually gets to Obama

The presidential candidates seem to be unified in their opinions about Vladimir Putin. He's consolidating power like a tyrant, he will stay in control, he is completely undermining democracy, and he is an out and out bully. That may all be true but during his nine years of power the Russian economy has expanded every year, personal incomes are up sixfold, and the country now has $500 billion of currency reserves after defaulting on its debt in 1998. Russia still has big issues with corruption, infrastructure, healthcare, and distribution of wealth but some reports suggest that there is even some improvement on these problems given the natural resources windfall that has been the wind behind Putin's back. Putin does seem to be a brute that is in pretty much total control of a country that has only known czars, bolsheviks and communists for the last few hundred years. Democracy is not a tradition there and may take a back seat to nationalism, pride, and economic opportunity.

A comparison could possibly be made to China today. While very different, they both have strong single party governments that can and will stop any capable dissent and that's combined with a market economy that is allowed to flourish as long as the leaders of finance and industry tow the party line. Both have significant issues with corruption and pollution. In both a new business class of immensely wealthy individuals has developed. Both countries are building their military power and both have huge currency reserves and robust economic growth. Both countries get their share of criticism from U.S. politicians, but those politicians are accustomed to China's lack of democratic ways and pretend to see progress there while Putin's step backward and independent ways really piss them off.

This is no defense of Putin. It's just looking at perspectives. It's unclear that the U.S. media is especially balanced on the issue of Russia. By most accounts outside of the U.S. press, Putin and his handpicked bureaucrat Medvedev would have easily won election with at least 60% of the vote if Putin had not crushed most opposition with various "legal" ploys. Now they will get 75 to 80% and no other candidate will get more than 15%. Putin seems to be passionate about domination rather than just winning, and that's unsettling. The hope is that bureaucrat Medvedev can be the operational good guy while Putin sits on top as the KGB control guy to keep everyone in line. Apparently the majority of Russians will accept that as long as economic issues continue to move in the right direction. Currently inflation is the big risk there.

With all that said, what's the Russian man on the street to think of the United States presidential candidate's attacks on their leader, criticizing him for aggressively consolidating his power and staying in control after stepping out of office. Yeah, the USA, they don't have that kind of thing. Right, you have Bush, then Clinton, then another Bush, now maybe another Clinton, and if the Republican loses in '08 there's another Bush, Jeb the so called "smart" one, waiting in the wings for 2012. Looks a little fishy. The perspective on all of this from a country with almost no experience in democracy might be different from that here in the land of the free.

Maybe that's even what makes Obama a candidate of change here. For some folks, consciously or subconsciously, it could appear that the U.S. is in some kind of deja vu all over again rut, a political "Ground Hog Day". Obama is not a Clinton or Bush. He's not aligned with any of the major political personalities in most people's minds, notwithstanding some late to the fray Kennedy support. Let's face it. Who really knows whether his policy ideas will work and if he has real ability to facilitate change. HE is change, he smiles like Kennedy and Reagan did, he speaks well, he's quotable, he's confident, he's new.

Wednesday, February 27, 2008

Citigroup's unusual analyst meeting

Yesterday the Wall Street Journal reported that Citigroup was having a meeting with 15 to 20 analysts and investors last night. It was described as a cocktail hour to meet with new CEO Vikram Pandit. On the surface that sounds like an innocuous meet and greet. From an SEC perspective it will be open to an instant replay to see if someone hit the chalk line.

Regulation FD has for six years required that all material statements, or possible material statements, that a company makes be held in a public forum, with broad access for all investors and analysts. For a company like Citi that has had more than its share of legal issues in recent years, so much so that they named an attorney with no real banking experience as their previous CEO, it's an unusual risk to take.

Another big New York financial services firm held a similar meeting in the late '90's. That was before Reg FD existed, and even then there were mixed opinions within the firm as to whether it was a wise idea. A Vice Chairman and the CEO were in favor and the General Counsel fell in line. It was unequivocally viewed as a strategic discussion, not one to discuss anything like expected financial results. It was different from the Citi meeting in that it was a dinner so the setting provided for a broader discussion. In addition the 20 or so analysts invited were all from the sell-side, or brokerage firm analysts. The firm's executives were careful, as planned, to keep all discussion on a strategic level. At the dinner table a question was asked about whether the firm was willing to entertain a merger. The answer, entirely truthful and said in a low key manner, was "only if the merger was transformational". The well-fed analysts then beat the word "transformational" into the ground as the discussion progressed, and by the next day it was news, big news. A major merger was at the least a possibility and perhaps imminent. The market thrives on this kind of speculation. Needless to say major investors were truly ripped as they didn't want to hear this type of commentary second hand.

As stated, Reg FD did not exist at the time, so there was no regulatory fall out. Not immaterial, however, there were big mutual fund and pension fund investors who openly wondered or complained about why they, who had as much as billions of dollars invested in the stock of the company, heard about this discussion from salary and bonus analysts with no real stake in the company.

There is no news visible on Citigroup today. The stock is trading in line with the market. It was likely just a gathering to shake hands, smile, listen, and exchange platitudes. It was still a risky move, and not a good idea.

Friday, February 15, 2008

Credit market anecdotes and observations

With credit markets this week going into the third round of freeze up since August, there are plenty of observations from the securities dealers, bankers and asset managers about the problems that the market is facing. Here at in a 1/16/08 post, an opinion suggested that until large and liquid securitization markets were functioning again, most political and governmental efforts to improve the situation would be only marginally helpful at best and at times potentially harmful. That's all top down stuff. From the individual level, the so called man or woman on the street, here are two anecdotes.

------The $360 billion auction-rate securities market became dysfunctional this week. The financial press is all over it, and its a big and disturbing deal as another example of a previously investment grade liquid market in the process of closing down. In this example I'm the man on the street. I generally avoid writing about what I actually do as an investor but this example may just be too good to pass up, if somewhat tedious. Last week, on 2/6, I looked at the money market positions that I have as part of portfolios at two discount brokers. The money that I had allocated to money market funds in recent years has almost solely been focused on muni funds, as the tax advantage led to a higher effective yield than taxable money market funds. When I looked last week, however, I saw that the muni fund at one broker was yielding 1.7% while the taxable fund was yielding 3.9%. At the other the muni was 1.5% and the taxable was 3.7%. The tax benefit was no longer there. The effective yield of the taxable fund was over 60 basis point more than the muni. What happened.
My guess is that with the dislocation and the uncertainty in the muni market as a result of the troubles at MBIA, Ambac, FGIC and other insurers, the muni funds had become extremely conservative and moved their portfolios to the shortest maturities and the highest stand alone ratings possible. They could not take any risk of "breaking the buck". That had pushed down yields as demand for this quality of investment in the funds increased. The funds raised in the taxable corporate commercial paper markets did not have the same dynamic.
What did I do? With no transaction costs for moving between funds, the munis at both were moved to the taxable funds. It was the obvious rational move. While I am just a grain of sand on the beach of financial markets, it seems logical that the same action would have been taken by many institutional and individual markets participants. If this hypothesis is correct it would have led to signicant redemptions in the muni money fund market universe.
Get to the point. Muni money market funds are major buyers of the heretofore presumed 30 day paper produced by the auction rate securities market. As the demand declined the market became weaker, and funds that were experiencing redemptions could no longer risk buying 30 day paper that now had the risk of being turned into long term paper. This inclination escalated into a panic, and the auctions began to fail. One domino hits another.

------An acquaintance from the lunch counter at the local diner needed to buy a new car. His 12 year old minivan was both unreliable and costing more in unpredictable repairs than was justifiable. While my acquaintance would certainly characterize himself as middle class, my guess is that his income and asset level would have him barely hanging on to that category. He is a long time social worker with a steady job, likely with half decent benefits but a relatively low salary. He is divorced with three kids in their late teens to mid-twenties. I don't know his financial circumstances but he does seem to live paycheck to paycheck. Sounds tough, but he's a pretty happy guy.
He decides to get a new Hyundai Elantra, their least expensive model. He can put up only a very modest downpayment and his trade in is worth little. He agrees to buy the car and the dealership begins the search for financing. He sweats through a week long wait. They finally come through, and from what little he told me, and I don't pry, it seems that the rate was around 12% and that there was some sort of condition that prevented or penalized any type of refinancing for three years on a five or six year loan. He needed the car, he has a steady work history, a less than perfect credit rating it seems but no history of default on anything ever.
At street level, this is the consumer finance market without easily functioning securitization markets. He's looking forward to the Bush and Congress $600 but what does that solve really. He felt lucky to get any loan at all. He also now has a date with a receptionist at the car dealership. A couple of years ago, however, my guess is that he would have had the loan in a day at around 7% and with minimal conditions. That's a huge additional cost.

That's it from my desk and the diner.

Thursday, February 07, 2008

Opinionated political notes

---The debate between Barack Obama and Hillary Clinton on the subject of health care is often pointed out to be one of the few domestic policy areas in which they have substantial differences. Why would one candidate, Obama, choose a position that is hard to explain in a sound bite setting, and seems to fall short of the ultimate goal. Strange as it might seem, it may be because it's what he believes is the right approach, and more importantly the approach that can achieve meaningful progress in the near term without creating yet another coercive government bureaucracy. Clinton has said that government garnishment of wages is an appropriate, if necessary, way to achieve her mandated program. Clinton accuses Obama of being outside of the Democratic mainstream for not proposing an absolute system of universal health care. Clinton's base now is, if analysis can be accepted, individuals or families with incomes of $50,000 or less, and Hispanics. Her goals may be laudable, but her political promises may not be possible, and worse may not be wanted even by her base if delivered upon. Her political use of this in debating points could be called cynical manipulation of her support. Obama may not beat her, but he cannot be accused of manipulating this issue for political appearances to the Democratic primary voters.

---Romney stepped out today. He was not an attractive candidate, generally speaking, despite the fact that his experience and accomplishments were a matter of record. He got stuck on the conservative values issues from the get-go and that diverted attention from his potential capabilities, that and his perfectly wooden persona. Today, however, was an interesting measure of the man. He had the money to stay on, and he certainly wanted to keep asserting himself. He wanted to be perfect. Stepping down to open the way for unification of his party may be seen by some as a graceful way out, but it is something that I did not expect from him, and I think more of him for it. It certainly differentiates him from Mike Huckabee whose agenda all along has been self-aggrandizement and who has used his considerable speaking skills to go far beyond what anyone expected. Hopefully Romney's move somehow puts Huckabee in the perspective that he deserves to be seen in, another attention deprived pilgrim from Hope, and that any consideration of him for a V.P. slot can be quickly put aside.

---The news that Hillary Clinton funded her campaign with $5 million of her own funds is an issue that is of concern, or should be. Edwards did it, Romney does it, Bloomberg could if he wanted to run, what's wrong with it. What's of concern is that the Clinton family wealth is derived almost solely from the exploitation of the Bill Clinton presidency in an absolutely unprecedented manner. No prior sitting President has remotely approached what he has done. Yes, she has the advance and royalties from her book, which after tax may amount to about $5 million, so it might be her money. The family fortune, however, has been made by Bill Clinton selling off the Presidential imprimatur to commercial interests around the globe. A Canadian businessman wants to trump major energy consortiums to obtain uranium rights in Kazakhstan, so give Bill Clinton $30 million of stock and take him along to praise an iron fisted dictatorship. Want a high profile private equity fund, pay Bill $20 million. Want to get out of jail free, as in Marc Rich the tax evader and profiteer trader of Iraqi and Iranian oil, backchannel millions to his library and foundation. Have some clients that want to be treated special and stay up all night playing cards with the verbose and articulate ex-President, pay Bill $100,000 for a dinner presentation. Obama is raising money, by any accounts available, from a broad base. To see Hillary Clinton fund her campaign with this kind of money does not feel right. We are diminished by this.

Tuesday, February 05, 2008

Virgin Banking

The Virgin Group is the last private bidder standing in search of a path forward for Northern Rock, the troubled British mortgage bank. With multiple enterprises including its iconic airline, The Virgin Group could bring a refreshing and even irreverent approach to English consumer banking, which is admittedly not much of a stretch. Northern Rock focuses on mortgage lending, secured small commercial lending, and consumer finance. With roughly the equivalent of $200 billion in assets Northern Rock at the moment is, for all practical purposes, being run by the U.K. government as a result of their role as guarantor. Virgin proposes investing $1 billion and raising another $1 billion in a share issue to take over the bank.

There is no certainty whatsoever that their bid will be accepted. If by any chance it succeeds, it could be a treat to watch. With their Chairman combining the swagger of a rock star and the risk taking of 007, and having a track record of aggressively spending to introduce new ideas to old industry models, who knows. Staid signage, reassuringly conservative decor, obtusely worded forms to sign, understated advertising, banker's hours, oligopolistic product offerings, I think not. And if he's successful, has Virgin ever stopped at the U.K. border. It's not the way Branson thinks. What franchise in the U.S. fits their product line, has made efforts to break the traditional model, but has never had enough of the financial and intellectual capital to get their big ideas over the top. It's those ever optimistic strivers the Wamulians. Just think about it. Northern Rock and Washington Mutual becoming the foundation of a new global consumer banking power, Virgin Banking. Virgin is unequivocally a global brand. Why not financial services. Who says the world must cede global consumer banking dominance to Citi and HSBC.


I may be getting a bit ahead of myself.

Monday, February 04, 2008

Diverging Emerging markets

The Giants inspiring win did not buoy U.S. markets which were down 1% today. Maybe the New York traders were tired and hungover, and traders elsewhere had no inclination to celebrate. I sometimes wonder if less than serious comments here are taken seriously. Anyway, Europe was flat overall with the exception of German and Italian markets which were up 1/2%. There was stronger performance in other regions, however, as Japan and Singapore were up 2%, Mexico and Brazil up 2 1/2%, Hong Kong up 4% and Shanghai up 8%.

Excluding G-7 Japan, these stronger performances could indicate a potential rebound in the growing emerging markets that in some international quarters are viewed as being significantly oversold. With strong growth, low corporate debt, growing consumer capacity and new infrastructure, the emerging markets are viewed by many as an ongoing opportunity.

Two anecdotal examples, for what it's worth.
---Traveling last week I changed planes in El Salvador. The airport there was by no means extensive, but the terminal that I was in could have been in any mid-sized American city. It was a standard new airport with duty free shops, newstands, Salvadorian fast food delicacies, attractive bars, restaurants and even a faux English style pub. In theory it makes complete sense. The emerging country world is building or rebuilding infrastructure. I was at first surprised and I bet most Americans would have been as well.
---On the transfer to Peru I sat next to an American businessman from the Washington D.C. area. He immigrated to the U.S. from Peru in the 1960's and worked laborer jobs in the construction and maintenance business, often double shifts, for 15 years or so before starting his own company. He now employs 110 people as a subcontractor for finishing the interiors of new homes from drywall all the way to paint. He also builds a few homes on his own each year. Three of his five children work in his business and the other two are in graduate professional programs. He was going back to Peru not to visit family, although he has some there, but to expand his business there. He doesn't see any opportunity for further investment in the U.S. area that he knows. His view is that even when the current residential real estate market woes subside in the next two or three years, and "that's a long time", the opportunity for return on investment is so much greater in Peru that it makes sense regardless. When I of think Peru, I think of an unruly political process, Shining Path, danger for lone Americans, with the biggest legal business being tourists heading to the Inca ruins. Maximo does not think that way. He is enthusiastically optimistic.

Investing in emerging market ETF's in Asia, Eastern Europe, and Latin America has been rewarding for sure in recent years, but for many who went through the '80's bust in emerging markets to the '94 Mexican peso devaluation, the '97 currency crisis in Asia, the Russian bond defaults of '98, and to the woes of Argentina just six or seven years ago, it's easy to be skittish about these type of investments. In the back of my mind there lurks a notion that they are just trades. Perhaps they really are an important long term component of the asset allocation mix now, which is something that many leading investment professionals seem to already believe.

I've got to get out the house more.

Amazing game = Amazing market?

From this New York perspective an amazing football game was just played. It was almost unbelievable. Can Monday's markets not help but follow.

Sunday, February 03, 2008

"The Namesake", Jhumpa Lahiri

Picked up this novel in an airport bookstore last week. I had read Jhumpa Lahiri's award winning book of short stories as well as her periodic pieces in The New Yorker. In the tradition of that magazine, perhaps, her writing is stylish, at times elegant, understated and observant. Published in 2003, "The Namesake" has the sensibility of writers like John Updike or Anne Tyler, depicting everyday life in a way that flows easily. Like good literature it opens itself up to interaction with the reader's own experience as well providing insights to culture, times and places that are unique to the story itself. This tale of a nostalgia that is an ever present force brings to mind Damon Runyon's line that "I came to the conclusion long ago that life is six to five against". Appreciation of the present and the dignity of perseverance sustain. A goal, and this book is a keeper.

Saturday, February 02, 2008

Back on track?

Lifting off at JFK on Thursday morning the 24th for a hastily arranged but necessary trip to Peru due to a family situation, I was of course unaware that my departure would be coincident with the beginning of the recent market recovery. Should it be a matter of concern now that I have returned?

The modest but welcome improvement may be the beginning of a trend, but it is certainly fragile enough to be vulnerable to any bad news. Looking at the stocks followed here, the most distinct rebounds have been in small cap and mid cap value stocks that had been clobbered over the last three months. Their lack of visibility and lower liquidity compared to the large caps, combined with the gains that investors could take in the event of their own lack of liquidity, seems to have made them sitting ducks for the downturn even if they had strong balance sheets and no involvement whatsoever in the subprime issues. They had room to pop, at least for now. Some financials that have been soundly run but had been painted with the subprime brush nevertheless have come back to life in a significant way as well. International stocks too have begun to rebound but they have some distance to go to pick up the run they had experienced over the last three years. In the aggregate tech stocks improved as well but it seems that sector and company specific gains pulled the averages up rather than a total group move.

It's all nice to see, but I'm back.