Tuesday, June 30, 2009

Kirkuk bombings

The much publicized withdrawal of U.S. troops independently controlling major cities in Iraq was met by a major blast in the city of Kirkuk in the north of the country. Ten days ago there was another huge bombing in Taza, just outside of Kirkuk. Is a new more active front of the Iraq war beginning as Americans pull back.

During much of the last six years of war and internal turmoil the northern area of Iraq that is a multi-ethnic mix of Kurds, Turkmen, and Arabs has been at times almost a semi-autonomous regions. It has stood apart from much of the Sunni and Shiite rivalry and the attention of outside insurgents. The most powerful group in this area is the Kurds, an Indo-European ethnic group that for centuries has worked for and fought to establish an independent territory in an area that covers parts of Turkey and Iran as well as Iraq. In some ways the U.S. invasion and occupation diverted attention elsewhere to some extent and after years of attacks, forced relocations, discrimination, and even poison gas attacks under Saddam Hussein, the Kurds were given some measure of self-rule as well as a mandated participation in the U.S. dominated Iraqi government. They as well were given roles in the management of the massive oil fields near Kirkuk, damaged and underutilized but still with huge potential. This may all now change and these bombings are a terrible sign.

Under the Sunni governments the Kurds were targeted for persecution. Shiite Iran has centuries old enmity toward the Kurds, and now Shiite Iraqis, a majority no longer dominated by the Sunnis, can begin to exercise their historic biases that are shared with Iran. Turkey has long fought border wars with Kurds, and Kurdish guerilla groups and civilians are a constant and despised presence on their borders. The fact that Kurdish areas have benefitted to some extent in recent years and have become more organized as a political force in northern Iraq has few supporters. In fact it is likely seen as threatening to all that surround them. This could be ugly.

The two bombings in the Kirkuk area over the past two weeks represent almost half of the deaths during the recent upsurge in terrorist attacks in Iraq that have seemingly in anticipation of this U.S. first step back. In the chaotic atmosphere of Iraq this may have little meaning, one could hope so, but one could also have reason to expect that this is the beginning of another dark time for the Kurdish population of northern Iraq.

Monday, June 29, 2009

Summer crime

Reading that is.

As an entertainment, as a diversion, or as a sleep aid or stimulant, crime and mystery novels are a part of the reading repetoire for some. With summer underway and the opportunities to take a break from self-improvement, or undergo self-improvement that just means letting go into relaxation, the crime and mystery genre is a place to look. Some of the writing is not bad at all, many of the plots are repeatable templates but comfortable in their own way, and a few a just fine.

Some of the favorites here are based in Italy: Donna Leon, an American who has lived in Venice for many years, Andrea Camilleri who lives in Sicily, and Gianrico Carofiglio from Rome. They generally have a touch of humor and a sense of civility not found in American crime fiction. Unfortunately I have read everything published or translated into English that this group has written so it's just wait for the next from these folks.

That leaves the American writers who are mostly old stand-bys. Donald Westlake and Richard Stark, one in the same, died earlier this year but left behind a huge catalogue of books beginning in the 1960's. He is viewed by some as the master of "stark" straightforward crime writing, admired by some literate types that one would not expect, such as Michael Ondaatje who praises him in "Divisadero". His books are really like extended novellas, and with their crisp style are generally no more the four hour diversions. They are distinctive for their characters and the human flaws that undermine each of them, and not in the whack you in the head with a baseball bat style of some crime, romance, and suspense writers.

Other half decent and diverting writers are Laurence Block, who has been around for a long time, and Jason Starr who came on the scene in the early 2000's. Both spend most of their time around Manhattan and occasionally the outer boroughs, Block with an ethos of New York styles and behaviors over the last 50 years and Starr with a current take on the way people live and the quirks they have. They both make occasional contributions to the Hard Case Crime series, but their stand alone books published by others tend to be more polished, if that description can be used here. For another setting, there's James Lee Burke whose fairly grim crime novels set in New Orleans, Cajun country, and Montana, with some Texas always thrown in, have some flair and the stories develop at times in unexpected ways. The downside is that the bad guys, and gals, are always really evil, and the good guys are often not much better. Burke at times writes well, with some humor and colloquialisms thrown in, but he overwrites as well with descriptions that are an over the top effort at literate fiction. At least he makes the effort but it doesn't quite work some of the time.

Elmore Leonard and Carl Hiassen, favorites of many it seems, are not included here as their characters are generally repetitive and unattractive. Leonard is seen as the best at dialogue and unlike the work of many writers, screenwriting has made some of his stories stronger over the years. Each to his own.

For a different genre adventure, the espionage writing of Charles McCarry is not so well known today but it's worth checking out. He did venture out of retirement four or five years ago with "Old Boys". His writing draws well developed characters, more so than LeCarre, and his plots are less byzantine. The knowledge of history that he weaves in is exceptional. As a former CIA officer and traveler to many places, his settings evoke place in a way that makes them familiar.

And now to find something redeeming to balance out the diet.

Saturday, June 27, 2009

Infrastructure spending

Despite the hoopla around infrastructure spending that accompanied the various stimulus plans, it has been reported that only $72 billion has been allocated to that effort. The majority of the money has been allocated to shoring up local and state governments who simply do more of the same. As David Patterson of New York said when allocated $4 billion for education, "now I don't need to change anything", that in a state with inflexible teachers unions, custodians unions, you name it.

China spends almost 10% of its federal budget on infrastructure development, India almost 9%, and of course the reaction is that they need to do that. The U.S. spends 2% on an overall infrastructure that is running out of time in the northeast, mideast, midwest and west coast. It was an amazing accomplishment in the last century but it needs reinvestment. Under Roosevelt, to get the economy going, admittedly with many missteps, the part of the federal budget dedicated to infrastructure was 13%.

From highways to water systems to dams to electric grids to bridges the infrastructure in many parts of the U.S. is in disrepair. Several months ago, riding in a taxi from the airport in Paris it was immediately apparent how up to date, nice and clean everything looked, the expressways, the off ramps, everything, compared to a trip from JFK or LGA in New York. Paris is not exactly a new city, but they seem to be staying on top of investment in a way that we in the USA do not.

Wednesday, June 24, 2009

More from the saintly George W. Bush years

We already knew that more than 130 graduates from Pat Robertson's Regents Law School were placed in the Justice Dept. during the Bush administration and that one 32 year old from that suspect school reached number 3 in the department and led the firings of U.S. attorneys that became a scandal.

We have learned that Defense Department head Rumsfeld laced his war recommendations to the President with Bible verses in order to get approval.

Now we learn that we are stuck with a military chaplain corps that is two thirds evangelical and pentacostal Christian while only 22% of soldiers profess that religious approach. It's further been reported in Newsweek that these chaplains see their main role as one of distributing Bibles in U.S. occupied territories as a way to spread the word. They boast that as many as 500,000 Bibles translated into Arabic have been distributed in one year.

Onward "Christian" soldiers, the George and Laura Bush legacy lives on.

Elizabeth Warren

It is postulated that Elizabeth Warren, a Harvard Law School professor, should become head of any new consumer protection agency mandated by Congress, but she is not fit for broad public powers. She already has these powers in some sort of powerful oversight role for Congress of the TARF and TALP plans. She simply has an agenda that is vindictive and is not based on facts. She is a visibly self-righteous attention seeker, and we do not need more of these in the public arena.

Why this today. She attacked Citicorp today for their plan to increase some salaries by 50% by saying in a big public way "they don't get it". Like Sheila Barr of the FDIC she thinks personal attacks are the best approach to governance.

Here's the deal. Even in big multi-product banks the normal protocol for even middle management employees had become that a base salary was supplemented by a bonus and by stock awards. Experience here, not a trader or merger guy, was that salary increases stopped in 1997 and all increases in compensation depended on bonus and deferred stock awards. In 2009 that no longer works. Bonuses are eliminated or contained and regulated and the stock awards of the past worthless. Just to retain valuable employees and give them the basic money to pay their bills in high cost environments justifies Citi's action. From this perspective the bills could not have been paid on basic salary at this point.

Elizabeth Warren, smart as she is and with all the academic accolades, knows this. One could only guess that she is just looking for attention and looking for the opportunity to ridicule when she says that Citi "just doesn't get it". There is no place for her in a constructive role in our government.

Tuesday, June 23, 2009

The FASB is wrong---not unusual

The Obama administration has made a giant step in addressing the mistakes of the FASB(Financial Accounting Standards Board), this somehow previously sacrocant but flawed group of experienced accountants and narrow minded bureaucrats, by recommending that the loan-loss provisioning standard be revised to a sane one. The standard set by these inexplicable quasi-regulators was such that bankers could only reserve against current non-performing loans to determine what their loan loss provisions should be. Under the Clinton and Bush administrations the SEC would indict banks for managing earnings if they appeared to be too conservative in their reserve for loan losses policies(too conservative?). Obviously, when times are good, capable bankers do the work to determine how much should be aside to protect the bank against future loan losses. The FASB did not allow it, and the SEC agreed.

For example, the credit card business is a hugely quantitative business. They know everything about aggregate groups and sub-groups. They know and price in the fact that loan losses on a prime based portfolio might, for example, be between 3.5% and 6.5% depending on where we are in the economic cycle. When they are at the lowest level, they should be reserving more but the FASB and the SEC would not allow it. Scratch your head and figure out who could benefit from this---bureaucrats just covering their jobs or hedgers setting up a fall---take your pick. Members of the FASB should be audited for lunches, trips, loans, etc. Bet you that there will be something there.

As Jamie Dimon of JP Morgan Chase said, "I find it absurd that loan-loss reserves tend to be at their lowest point precisely when things are about to get worse". But that's the effect of the FASB. No one should think that they are anything but a group of challenged accountants and lost souls from the investment community who are terrified by what happened in light of Arthur Anderson's demise after Enron, and who have no understanding of corporate finance or capital markets. That the Obama administration recognizes this is just fine, and it should play over into the issues of extremes on mark to market accounting which are beginning to be well known and all parts of the accounting code. Using the FASB as some sort of intelligent backstop is a joke---just look at this loan loss provisioning issue as an obvious example.

Lucas Glover, another golf man

That's all you can really say about Lucas Glover, the U.S. Open winner, another golf man. He's polite, not outspoken or out of line, they say he likes to read one book a week, he likes Manhattan and he and his wife spent their honeymoon here doing the tourist things. Based on that he's just fine, and his family is fine, his grandparent's are fine, everything is just fine. What's not to like. That's perfect golf mythology.

That's why the John Daly's and David Duval's are so appealing to some. They're different, their personality shows through, and it's not all on the straight and narrow. There is still the occasional Rocco Mediate and Anthony Kim who don't mind mixing it up with the crowd and being animated. On the whole, however, the golf tour is dominated by a focused and fairly uniform group of relatively uninteresting players. They are led by Tiger Woods and Phil Mickelson, seeming gentlemen both, who make fortunes and donate money to causes that their tax advisors and publicity agents suggest but have no passion for anything but golf and their families. That's it. Golf personalities in general do not project any personal qualities outside of a narrow range of possibility and they are not expected to have opinions on anything outside of the condition of the course on any given day. They are just golf people. That their sport creates a massive waste of water and enviromental poisoning by fertilizers and other toxic agents worldwide is no concern of theirs, they have no knowledge and no opinions.

I like golf. It's a great game. Play it in Scotland and see what it's about, and it's not environmental destruction, it's the opposite. Learn to play the game on many of the hardtack public or small private courses around this country and it's the same. No pro golfer talks about this, they just "appreciate" the differences in links golf when the British Open comes around or some have distant memories of those less privileged days.

You must admit that many of these golfers are good examples of steady lives, at least it seems that way, not so interesting but fine. In an earlier era golf was a game of real characters, Walter Hagen, Sam Snead, Arnold Palmer, Lee Trevino, and then came the more low key but still animated Gary Player and Jack Nicklaus. On the whole, however, today they're just a group who in a broad sense are risk averse, put all their effort into their game, and want to live a comfortable life. Nothing wrong with that, I guess, but it doesn't put any of them on any kind of pedestal, except of course in their discreet game of golf.

Lucas Glover, you're a true golf man of today.

Monday, June 22, 2009

Ugh --- Jolt down

Jolt up? jolt down? has been the market outlook here for a few weeks as the malaise lingered. Today the answer arrived in the form of an across the board sell off of equity markets. Less liquid stocks were clobbered. Big liquid stocks dropped sharply. Europe down, Russia collapsed, and now we await Asia and the reverberation there.

In most market commentary the leading cause of this sell-off was a revised forecast from the World Bank projecting that global economic output is now expected to contract at 2.9% for the year as compared to their March forecast of down 1.7%. This is interesting, a demonstration of the hair-trigger mentality of that first line of market response, the traders. Robert Zoellick, President of the World Bank, initially made these comments in a World Bank press release and on their website on June 11 saying "according to the latest Bank estimates, the global economy will decline this year by close to 3%, a significant revision from a previous estimate of 1.7%". Today in a detailed report on their website, the World Bank refined that decline to 2.9% as part of major report of recommended prescriptions for mitigating the impact of this on poor countries and a list of their own active initiatives.

While the World Bank is intensely focused on how to avoid calamity in the developing world as the world economic crisis pushes more people into poverty and hunger with less access to health care, the traders in the developing markets focused on the World Bank's projected growth numbers that had been disclosed and were available, but obviously not widely published, for the previous seven market trading days.

What this all suggests is that this information was in the market hands of knowledgeable people with more than a one day perspective, but had not reached the hands and heads of the broad trader market that reacts with viral ferocity to news that can be tradeable, or can make them money. Bloomberg and other sources led with this World Bank "news' this morning and the frenzy was on.

This commentary does not mean this is a short lived bit of market weakness. Now confidence has been shaken and it's wait and see time. This commentary does suggest that there has been no major economic change in the last day or weeks. The World Bank's outlook reflects the ebb and flow of working through serious financial and structural problems that led to extreme crisis and having for now survived, those problems are mostly recognized but certainly not all cured. In Zoellick's June 11 press release he said "some of the main risks still remaining include the need to clean up the balance sheets and recapitalize banks, address the unique financial risks in Central and Eastern Europe, guard against a rise in protectionism, and roll over large amounts of private sector debt in developing countries".

Still a lot to do but that big picture is well known.

Saturday, June 20, 2009

Market torpor continues...

Just ten days ago a brief post here commented on the "Directionless market..." that we are in an "unusual vacuum", that will eventually lead to a "jolt up, jolt down". In financial markets that once seemed to mark time by nanoseconds we have moved to one that has, for the moment, all the time in the world. Ten days, no change, nothing has really happened apart from a gradual sapping of energy in the equity markets, one that has reduced the VIX, or volatility index, to a healthy level not seen in months but for the wrong reasons.

Investors see no real opportunity. Equities have moved up but there is not a catalyst for the move to continue. Short term safe havens pay nothing, medium term fixed income plays are there but the winning move is over, longer term fixed income looks like a loser's bet. Everyone talks about commodities but in the short term they have been punishing anyone looking for easy money. The hedge fund, private equity, and venture capital worlds are all on hold, not wanting any attention that would attract the Feds and hoping to find discrete opportunities, giving up for the moment on any broad based bets on financial engineering schemes or sector moves.

The summer solstice arrives and may offer a change in the atmospherics of the market's mind. That's the best one can say based on the last two weeks. Yet one could still wonder whether the ravages of the last 20 months, since August of '07, haven't dulled the senses to possibility. There has been a massive amount of stimulus to the U.S. economy. Is it not entirely possible that despite the expected rising unemployment that the stimulus money is just beginning to work its way into the system. Shovel ready projects mean you still need to hire the contractors, employ the people, lease the equipment, buy the concrete, cable, steel grids and bolts, and whatever. Shovel ready is still a few months away. Job security bought with Federal money to local governments is "we'll spend it when we see it" money based on what happened and how terrified everyone was. That's just the U.S.

China, India, and Brazil haven't vanished and appear to have life, ready to slowly step back out again. Little old Peru is cranking, but most of Europe is still cranky. France and Germany could still lead the way out while England, Italy, and Spain deal with devastated property markets. Global credit markets are functioning more smoothly with the most rational spreads since before Lehman, not great but that's a big statement. They are not deep or robust credit markets but the pricing mechanisms are functioning. Equity markets globally are still focusing on short term p/e ratios and not on longer term competitive advantage, not on any real hope for what was once seen as just reasonable growth rates for the many countries with an expanding middle class.

Jolt up, jolt down, maybe, little opportunity near term, lanquid times these. Don't discount the future, or maybe that's the opportunity --- corporate finance 101?

Friday, June 19, 2009


This film starring Liam Neeson is not the type usually eyed here, the action thriller violence type. It did not seem to have an especially long run in theaters and, while I haven't read any reviews, I doubt if it was reviewed especially well. Directed and written respectively by a French team, Pierre Morel and Luc Besson, and set partially in Paris, it's the tale of an ex-CIA "preventer" living in L.A. who goes into trained rescue mode when his 17 year old daughter is kidnapped by human traffickers in Paris.

Since anyone who had seen the trailer, which was widely aired in television adverts, knew what was to come, the fairly lame opening set-up worked because we knew what it was up to. As the plot evolved the film began to click, the Parisian search had an air of authenticity, and then the mayhem began.

The film did not strain for political correctness or sensitivity, at all. It was a reminder of 1974's "Death Wish", a classic of this genre that remade Charles Bronson's career. That film opened two months after yours truly experienced a fairly rough and terrifying mugging on a visit to New York, and I fully understood the huge success of that film, in fact I enjoyed it despite thinking that it was blatantly crude. Neesem's character in "Taken" is unforgiving in his at all costs search and destroy mission. He's like a Bruce Lee in his B movie days who annihilates everyone in his path, no matter how many and how unlikely. No effort is made to balance ethnic issues. The Albanians are all heinous and despicable gang members played by actors whose facial appearances, snarls, and brutality would never be mistaken for good people. So we don't find a sympathetic Albanian here who is the good informer or some such thing. The end buyer of the best girls as the film rushes to its climax is an aging and overweight Arab sheik on his luxury Seine River cruising yacht. No good Arabs either, just rich procurors, protectors, and users. It's an unusual approach for today's movie market, but what's wrong with it. In the context of the film it's the only approach that could work. While these ethnic groups are of course not all cut from the same cloth, Albanian gangs are well known as particularly ugly and in New York today it's written that as they've gained critical mass they're even worse than the Russians or the Fukien Chinese. Arabs broadly have a gracious culture when not seen at its extremes, but anyone who has been around the block in London has seen the crude and arrogant behavior of many hugely wealthy Saudi or other royal family low life who make Dodi Fayed look like a Boy Scout. These folks are around and "Taken" did not bother to dilute that fact.

After killing at least 30 or 40 villians and being the general cause of a new wrecked car lot on a few acres in Paris, the next and final scene shows Neeson's almost unscathed man arriving back at LAX with his smiling relaxed rescued daughter, looking as if they have actually been on a vacation in Paris. No accountability, nothing post-traumatic, on to the promising next phase of their lives.

All that said, I enjoyed it. No one could have carried the film like Neeson, there were some scenes that were perfectly set-up and filmed, and it was nice to see something straightforward, despite being completely improbable.

Senators accept no responsibility, but politick for more

In reading and hearing the members of the Senate banking committee comment on the Obama administration's plan for financial regulation, one could be excused from coming to the conclusion that they are all freshman senators having entered Congress as the extreme financial crisis was already underway and unavoidable. Democrats and Republicans alike act as if Congress has no power and had no complicity in the regulatory choices and administrative laxity that led to the crisis. Somebody should add up the dinners, favors, sponsored speeches, campaign contributions, and general ass kissing that this group received from the financial services industry in the years leading up to the disaster.

Leading the charge of amnesia is Senator Dodd, Democrat and Chairman of the Banking Committee, undercutting his administration's efforts in a completely transparent effort to save his own political life in Connecticut. Shelby and Bunning, each with their own unique undercurrents of nastiness, are the most quoted on the Republican side. It was a surprise to hear Democrat Mark Warner of Virginia immediately voice negative concerns about the proposal.

This is not to say that there should not be a thorough discussion and debate about the Administrations proposals. Once a plan is passed it will have staying power and a long term impact. It is, however, disappointing to see such initial bias given Congress's general blind eye or contributing one (as in both Democratic and Republican initiatives over 12 years to mandate that Fannie and Freddie expand dramatically their lending to borrowers who were not credit worthy) to what occurred. The fact seems to be that Congress sees the Obama plan as one that will limit their power and legislative authority and they want no part of that.

If bills are ultimately put forward that give Congress a greater position of power to regulate our financial system there is no recent precedent that suggests that it would be a good thing. None. As recently as the last few months we have seen the TALF proposal to liquify credit markets sabotaged by Congressmen asserting regulatory power over any participant in the public/private partnerships envisioned by that creative and needed plan. So no go for that, of course.

Maybe this is just initial sparring and something constructive will come out of it. If not it will at a minimum be a wasted opportunity for needed change and at worst a guarantee of another financial crisis within in a few years.

Thursday, June 18, 2009

"Jeff in Venice, Death in Varanesi", Geoff Dyer

When it comes to books by Geoff Dyer I am so completely biased that what is written here may be unreliable. Whether it's his novels, travel writing, essays, war history, or his perspectives on jazz, painting, photography, or literature, everything he writes is read here.

"Jeff in Venice, Death in Varenesi" is his latest novel, published in April and somehow unknown to me until last week. This novel is really two novellas joined at the hip by one main character. The first is set at the Biennale, Venice's every other year indulgence in some of the most entertaining and bizarre "art" displays possible, or improbable. As a journalist taking in the scene in the day and participating in its seemingly incestuous celebrations each night, our jaded protagonist Jeff is revitalized, or is he drained of his last strength. The second story sets Jeff in Varanesi, called India's holiest city, on a spur of the moment brief reporting job that extends into weeks and months. The chaos and unpredictability that ensue make this city a tableau for a Dyer tour de force of writing.

Yeah, I actually wrote "tour de force" like some formal book reviewer. This is just an appreciation.

The two tales in "Jeff in..." are completely different but at the same time one in the same. Jeff leads a middle-aged muddled life in London, going through the motions of a reasonably successful free lance journalist career, churning out work that he no longer cares about and not getting any psychic charge out of seeing his name in print as he did in his earlier years. His Biennale and Varanesi experiences are both serious and almost ludicrous breaks from his stagnant London routine, and he immerses himself completely in them, or literally almost immerses at the close in Venice and completely does so at the Varanesi conclusion. Both trips are a purge of a life that he fell into and now is stuck with, a home that is simply a consequence of birth, a mordantly repetitive set of activities, and a future that is completely unclear.

Friday, June 12, 2009

George Soros calls CDS "instruments of destruction"

That's a headline today on Bloomberg video. It's amazing that there is even a debate about this. Credit default swaps created a downward spiral in the market for the benefit of closeted traders to the tune of billions which had nothing to do with the overall economy. That Aunt Mamie refinanced her house to pay off credit card bills and buy a Cadillac, that Golden State invented the most risky mortgages and then sold the book off to Wachovia's mindless Ken Thompson at a premium, that WAMU's strategy of a bait and hook mortgage book plus de novo expansion never made any sense at all, that Lehman and Bear both lived off of the CMO market, all, yes all, of that pales in comparison to the damage done by this derivative, the CDS's. Now it's as if we're on CNN where no matter how ludicrous the issue they feel compelled to have two panelists who support it and two who are opposed. Balanced idiocy, which is the case here now. The CDS market has a purpose as a hedge for held debt, but even now it is being used to gang up on soveriegn debt as a naked bet. It seems fishy that in an issue so obvious that big political contributors like SAC who live off of these regulatory anomalies somehow prevent any serious examination of the issue. George Soros is no wallflower, and he is no saint. That he would step out, as he did a few months ago as well, and condemn this market says more than we need to know about the evolution of this market in the hands of an incestuous cadre of traders and Steve Cohen --- this is not a very attractive group of people. That they pay millions for art is no redemption.

Thursday, June 11, 2009

Directionless market with no leaders

There is no leadership in the equity markets up or down now. This is an unusual vacuum. Activity in the bond markets, commodities markets, and CNBC blabber markets aside, equities have been in a trance. It's a stalemate between the obvious screaming values of well financed companies with distinct market advantages and the fear that inflation, a declining dollar, and a second round of consumer stress related to mortgage and credit card debt is set to take hold in 2010.

Mid-market and small cap companies are vulnerable to extreme buying and selling, seeing them both here on a daily basis, but the big steadies are just hanging at 20 to 25% below any "normal" calculation of value. After GE, or as more extreme examples after AIG and C, what's "normal" and when will the normal investor return. With the role of securities analysts neutered and the rating agencies completely discredited, when will a leader emerge. The nitwitisms on business televison are just distractions.

Jolt up, jolt down, we're due for one or the other.

Fidel seen on Lexington

Walking up Lexington Ave. today at about 36th there walked a man in his mid-30's, big stogie in his mouth, a tall trim man, bearded, jeans and a Euro style yellow and black track warm up jacket, walking a dog, who was an image of Fidel Castro. From a distance he looked like the man from some old Life magazine photo. Up close as I passed the youth was there but the identity traits were the same. Only then did I realize that the Cuban mission to the United Nations, always guarded, was one block away. A nephew, great nephew, grandson, a diplomat or an entitled Cuban flaneur just passing time in New York like the chosen few from ostracized countries do, or someone from Queens or Indiana just walking the dog. What I think is clear. The truth is completely unknown.

Wednesday, June 10, 2009

Cleaning up bad assets

From then Treasury Secretary Paulsen's doomed initial proposal in October '08 until today there has been talk of government sponsored programs to buy distressed "bank" securitized assets to create more liquid and functional fixed income markets. The TALF plans passed in early spring of this year envisioned public/private partnerships that would manage the acquisition and reliquification of these assets. It's never happened, even though it continues to be an exceptionally good idea as a way of restarting the quality tranches of the securities markets.

Why does this continue to be a good idea? A first clarification --- taking this action would have the intention of creating better functioning markets that are still damaged from the credit crisis and an overhang of illiquid assets. It is not a bailout of banks but since banks are the largest repository of these assets both for their own account and for the accounts of retail investors, pension funds, institutional investors, and high net worth individuals, that's where you go to find them. Second thought --- it is a basic principle of managing a portfolio of assets, especially trading assets, that you must take your losses and move on. The purpose of a program to buy these assets would be to liquify the entire market for these assets at levels that not only reflect their impairment but also their future cash flows. Stop the bleeding and allow the healing to begin.

Why hasn't this happened? First, there is a general perception that this is just another bank bailout effort, instead of it being a salve for the overall securitization markets; second, with the positive yield curve giving financial institutions breathing room and the recent ability of firms to raise capital in private markets there is now a false sense of security that suggests to some that a program to buy up and reliquify these assets is no longer necessary, or helpful; and third, the Obama administration, led by Obama himself in a major way, and Congress have consistently villified financial institutions and corporate America in general in ways that suggest to both banks and investors(Pimco, Blackrock, many other major fixed income players that would have been candidates to participate on the private buy side of the equation) that any involvement with the government is to be avoided at all cost.

To the potential investors the word from Congress, and subsequent silence from Treasury, suggests that participation in the public/private program would put these firms under the umbrella of regulation and management intervention that the banks are already under. To the banks who in the same breath have been told by Treasury to reduce leverage and lend more, which makes no sense at all, it is just another mile down a path that they are trying to get off.

A more constructive approach by both Treasury and Congress could still make this happen, relieving bank balance sheets of the need to take on more assets at an inappropriate time as securitization markets would again facilitate credit extension, and allowing those with these assets, the previously mentioned retail investors, pension funds, institutional investors, and high net worth individuals to make rational decisions about selling these assets into more liquid markets, taking reasonable losses, and getting on with their lives managing portfolios by choice instead of being stuck with essentially a dead part of their book.

Cleaning up these assets would still be a very good thing for the market.

Monday, June 08, 2009

Yield curve steepens, banks should benefit

Today we have an interest rate environment that banks should like. If history means anything, they will make money and recaptilize themselves further through profits. The Treasury yield curve ended the market day with a one month yield of .o8%, six month of .35%, one year of .62%, two yer of 1.42%, ten year of 3.91%, and thirty year of 4.65%. That's a steep yield curve, on an absolute basis and even more so on a relative basis.

Talk of foreign institutions not lining up to buy Treasuries are, at the moment, untrue. They are simply doing the majority of their buying at the 3 to 5 year part of the curve and significantly moderating their focus on ten year or longer. That's what's shaping interest rates, no grand Treasury scheme, just investor demand. In the long run who knows where this leads. In the short run plain old retail and small commercial banks have just what they like, a market where they pay little for their deposits and get multiple times more interest on their loans. Bigger banks get their take from the retail side plus a trading market in fixed income with volatility but the safety of the steep yield curve, barring some excessive and misguided risk taking.

This can give a cushion for the expected growing losses on credit card portfolios and an increase in commercial real estate delinquencies and charge-offs. Get that rat through the snake and profitability will rise sharply. It would be wishful thinking to expect this to be imminent, but the scenario is currently a good one, on the interest rate front, for putting the banking system on solid ground as capital strengthens through rising revenues and profits.

Sunday, June 07, 2009

Improving markets while more are left behind --- the challenge to come back in Danville, Virginia

Wednesday's post, "The Uncertain Case for Job Creation", had as a primary focus those areas that lose a significant number of jobs and are not big enough or well diversified enough to recover in any reasonable time frame. This does not mean that the overall economy or the financial markets will not recover over some period of time. Under the most likely scenario it appears that unemployment will peak in the area of 10%, a startling number, but then will begin to move back down over several years in the aggregate economy as it goes through the final cathartic shift from an industrial economy to a technology and information based service economy. The overall economy could do well but, as has often been the case, that does not mean that everyone will and now is no different.

For 30 years this transition from a manufacturing based economy has left certain areas around the country with a limited capacity to rebound, chronic recession towns and cities, and the number of these could now grow meaningfully. The challenges of rebounding are significant. Why is that. Why do they not in a reasonable period of time go through a cyclical renewal. It's not impossible, a few do or certainly will come back, but the odds are against recovery in any reasonable time frame. Reflecting on the experience of Danville, Virginia, often mentioned here, the following are a few of the issues that make a comeback challenging.

The first one is an issue that has always been around. As an industry or industries in an area go into decline there is a gradual impact over a period of years as the industries downsize, shed jobs, and decrease or eliminate investments. At the end of the process the industry shuts down. Gone. The jobs are gone as is a significant percentage of the tax base, charitable giving, and community depth in the middle and upper middle class. Just as the community has reached a point in time when social services and investments in health care and education are most needed, the capacity to address those needs is diminished. As this impact takes hold, the attractiveness of the community to outsiders, corporates, entrepreneurs, individuals seeking jobs, diminishes as well.

So why does some industry not sweep in and benefit from an area with eager job seekers, a ready labor supply. That's the past. The economic paradigm now is weighted toward that technology and information based society model, not the industrial one. That model is built around areas that have pools of talent that have been building for years around those skills. Raleigh/Durham/Chapel Hill flourishes seventy miles to the south while Danville, or Martinsville and South Boston for that matter, languish. A few fortunate communities around the country have had foreign car plants parachute in with decent jobs that are manufacturing based, but with the "new" car market more of that seems less likely. The new economic model jobs don't parachute in and create wealth, they go to places with the intellectual capital already in place.

The third issue is another one that wasn't around thirty years ago or so. In those days many of a communities needs were met by people that lived in the community. Restaurants, hardware stores, clothing stores, just about everything had a significant local component of entrepreneurs who made money in their business and reinvested the excess wealth created either in their business or in lifestyle enhancements in the community. That is largely not the case anymore. Almost all retail activity from clothing to hardware to drug stores to you name it is no longer locally owned. The jobs working at these stores are there, not especially high paying, but the excess wealth created goes to Atlanta, or Bentonville, or Minneapolis and countless other places, that's to be reinvested elsewhere for those national companies needs and to be distributed to shareholders and managers primarily elsewhere. The ability for a depressed area to pull itself up through local wealth accumulation and investment in new opportunities, however difficult that may be, is much less of a possibility.

So how does such a community attract whatever new jobs it can to get things moving in the right direction. These days they compete with other communities and states all over the country to grant tax abatements, subsidize initial costs, cut utilities rates, and offer ready made industrial parks and shell buildings to anyone willing to come in. While this does attract some businesses, as examples a call center, a highly automated(i.e. less people needed) manufacturer, or a small labor intensive low tech assembly plant, the price paid by invested state and local money plus the tax holidays that are given significantly dilutes the long term benefit to the area. As with the national chains that dominate retail, these arriving companies send the excess wealth created to other places while getting a pass go free card at the outset.

None of this is revelatory, but in summary form it is clear that these challenges put communities looking to revive themselves from an industrial past into a real bind. They are dealing with forces much bigger than the communities themselves, macroeconomic business trends that have been washing away their underpinnings for years. Real turnarounds may need to come from within communities as they somehow find the ability to build something of value that can create a new base of wealth to grow on. What a challenge.

Reflecting on Danville, a city with many good and willing people helping each other out and looking for an opportunity to do more, it's easy to see this as a national issue that will only grow in size. Danville is just the example that I know, and care about.

Saturday, June 06, 2009

Forte dei Marmi

Walking into the kitchen this morning the received greeting was not "good morning". Instead it was "our cover is blown - Forte dei Marmi". And there it was, on the front of the New York Times Sunday travel section, a major story on the less traveled Tuscan shore with a full page photograph inside of Forte dei Marmi's beautiful beach overlooked by the marble streaked Apuan Alps.

This is not a matter of not wanting to share. It's simply a desire to return to the site of one of our most amazing family vacations and not run into a rush of New Yorkers. Our first visit there in 2001 was one of almost feeling like an interloper into a neighborhood Italian beach scene for the overworked or rich of Milan. As described in the article, Forte dei Marmi is geared toward the affluent who have their red tile roofed walled in beach houses there, and its main village street could at times be mistaken for Madison Ave, that's the upper East Side shopping part of the street. What is not mentioned in the NYT is that there are plenty of family friendly reasonably priced open air restaurants with remarkable food and a pervasively friendly atmosphere. There's a town square with two adjacent cafes that could remind one of Deux Magots and Floré. The fine white sand beaches are backed by small thatch roofed lunch spots that serve impeccable pastas and sandwiches, reasonable and the ultimate in casual, no shirt or shoes required.

The article did mention that the Russians oligarchs and their underlings have discovered the area and that's a disappointment. Nothing against the Russians in general but these types can be garish in their behavior and extravagence. A wave of purse lipped New York investment bankers and their hyper-entitled spouses would not help. Fortunately the town overall is not that big, populated mostly by the mentioned urban Italians with their villas and hideaways, and run by efficient, observant, easy going locals, so visitors could never overcome or come close to outnumbering those who create the town's charismatic charm.

On top of that, no visitors that come from those upper strata would even think of staying in our pleasant perfectly located but not so aptly named Grand Hotel with its little rooms, tiny balconies, exploding light bulbs, and no flat screens. We can still hope to go back.

Friday, June 05, 2009

Old cards and letters

Rainy gray day here, one for staying inside and, for me, not one for being inspired. That led me to the basement, to a room referred to as the library room or the red room interchangeably, for some needed sorting and throwing out work.

It's called the red room because it is painted a definite red, my idea, and it's called the library room because one wall has floor to ceiling built in bookshelves. Another side of the room is lined by file cabinets. It could actually also be referred to as the ancestor room as the other useable wall is covered with framed family hierloom photos of sorts, grandparents, great grandparents etc, this over time having become the room for their collection. The most notable aspect of the room, however, has become the role as repository for everything that has no place else to go but that we, or I, don't want to throw away. It should be noted that there is a large walk in closet in the basement so full that it can't be walked into and I have only three or four jackets in it, so there's more than one pack rat here.

So on an afternoon when I was stalled out and didn't want to go out, it was time to do some needed work on the red library ancestor junk room. Today's chore was primarily going through 12 years(the time in this house) of Christmas cards, birthday cards, congratulatory cards, some postcards, and just a few letters as those are no longer sent. These cards and letters were piled on a desk and in three large woven baskets, gifts from a relative who actually took a basketweaving class in the eighties.

This was not going to be random. One by one I sorted through each piece of mail and thought about whether it should be kept. The great majority fondly headed for the trash pile but a precious stack, including all postcards, will be archived, for lack of a better word. It was a two and a half hour trip through our recent lives, and those of friends and relatives. It was fairly mesmerizing, like reading a good book. The feeling was not sentimental, not maudlin, not inspiring, not invigorating. It just was. It was a time of being thoughtful and maybe a cleansing experience which makes sense as I was cleaning.

The task finished it was time to go upstairs for a Coke and a look through today's mail. Sitting down in the reading chair, putting my feet up, it became immediately apparent that I was exhausted. Old cards and letters can do that.

Wednesday, June 03, 2009

The uncertain case for job creation

Unemployment is rising as in any recession, more so than most for sure, as jobs are lost in recessions. What's different this time is that many of the jobs being lost are ones that will not come back when the economy begins to revive. The process that has been experienced in some areas of the country over the past 20 years has now radically accelerated such that it will have serious impacts on areas with a history of prosperity. What has been experienced in the towns of the mid-south that relied on textile mills, furniture factories, and tobacco merchandising, or the towns of upstate New York and western Pennsylvania that were once a core of heavy industry will be learned in spades elsewhere. That lesson is that all of this talk about retraining, new green jobs, and creating diversified knowledge based economies in a sustainable way is pure pie in the sky for the majority of the current generation. Retrain an auto worker or parts fabricator for six months to competently sit at a computer and then they can go out and work at a call center for $12 an hour with minimal benefits if they are lucky.

That sounds like a negative scenario. Overall many jobs will come back in the aggregate although there is now talk by Bill Gross and others of the "new normal", referring to a sustainable level of higher unemployment as we revive, something like 5.5 to 6.5% which is not exactly the kind of sustainability that the word of the year is meant to refer to. While some places will again prosper as before, more areas will be left behind and any revival will be in the distant future if at all in the most affected locales. When the major employers shut down in moderate to small size towns the impact reverberates in a way that over time impacts almost everyone's pocketbook and eventually core services like schools and health care. The way back becomes unclear.

The way back for any place and the country in general is characterized by the words entrepreneurship and innovation. There are some bumps in the road for this vision. First there is the access to credit as, while consumer credit has eased up modestly recently relative to the freeze of winter, commercial credit for small and moderate business is still in short supply. Banks simply could not rationally expand their balance sheets while experiencing ham handed regulation and waiting in the dark for the stress test results to be announced, and now when some financial leaders try to exit TARP funding new capital demands come from nowhere, actually from Treasury and the Obama administration, as if the stress test results meant nothing. How can banks get excited about new lending to entrepreneurs and innovators when any expansion of the balance sheet could lead to more Federal control that it is obviously impossible to predict. It's just not rational that they could. Second, venture capital is all but dead. The money has dried up because of investor risk aversion and because of uncertainty, or perhaps certainty, about the Obama administration's tax policies, regulatory approach and their obvious distaste for people who have made large amounts of money in businesses like venture capital. Third, like it or not, some of the Obama tax proposals, especially related to corporate taxation, are wrong headed and simply will discourage some entreprenuers from investing their time and money. Fourth, and there are more but this is it for now, the absurd visa restrictions that have cut many industries off from the world in the name of U.S. jobs exclude smart and motivated people from other countries similar to many who in the 1990's participated in creating thousands upon thousands of jobs for Americans in Silicon Valley and other technology centers("your passport, yes Mr. Einstein, the purpose of your visit, vacation, business"?, what type, scientific research, this could be done by one of our citizens, visa denied.").

So to those newbies in the midwest who will join the chronic recession cities of other parts of the country, good luck. The scenario does not look good. What the big picture economists don't ever seem to acknowledge is that in this type of city many people, many families, just can't afford to move for the opportunity to look for another job. They don't have the money, they don't have the support system, and they don't have the confidence to pick up and leave. They are stuck with limited opportunity and a week to week lifestyle. In truth, what really ended the Great Depression was WWII, when the huge factories were set up around the country to make war equipment and munitions. Virtual shantytowns developed around these factories as people knew there were certain jobs there and there was decent pay. That was the needed incentive to create real mobility, to get people to leave deadend lifestyles.

It would be tempting for anyone reading this to suggest that the view is too bleak. Americans historically rise to the occasion, band together, and pull themselves up by their bootstraps. Entrepreneurship is in the American DNA. In fact some have suggested that this is just what the country needs to reinvigorate itself, to break down the bad habits and leadership of the past and become a "new" USA, sort of like a "new" GM. That's an attractive thought, perhaps naive, maybe right over a long time frame, but getting from here to there may not be a pleasant ride. It is, however, likely to be in a hybrid for what that's worth.

Tuesday, June 02, 2009

Economic news improves ever so slightly

Recent economic news has been fast and furious, such that every time a post comes to mind it has been trumped by more news before I touch the keyboard. It is still an almost absolute certainty that the unemployment numbers will continue to rise, but it does seem like credit markets for the consumer are beginning to loosen up. When the banks received "bailout" money, they were criticized almost immediately for not putting the taxpayer's money to work.

It doesn't of course work that way. What took months to turn into a virtual consumer credit freeze also takes months to work its way back. Banks needed to rework so called "value propositons" that had obviously failed, consumers with acceptable credit scores needed to come out of hiding, and the whole process needed time. While there is still more pain in credit card portfolios, the dire period of October to February seems to be behind us. Nothing is robust, just no longer in free fall, which is good news for the market.