Sunday, August 30, 2009

Zeitoun cracks top 15

Sitting in La Bergamote reading the NYT Book Review pages I spontaneously hooted when seeing that "Zeitoun"(see August 14 post) was number 13 on the non-fiction best seller list. This list is so dominated by hate books, rich books, celebrity books, and Malcolm Gladwell's ever so cute and tightly wound observations that it's a joy to see Dave Eggers break through. Four years ago "What is the What" was in the teens for just two weeks on the fiction list and now is on the suggested supplemental reading list at the local high school. "Zeitoun" as well will have a long life, hopefully longer as a best seller after finally rising six weeks after publication.

Friday, August 28, 2009

AIG, Citi, ramp, Fannie and Freddie do the hustle, could Etrade be far behind

What's going on here. In August the stock of AIG is up 220%, Citicorp is up 80%, and Fannie Mae and Freddie Mac are both up approximately 100% each. Some analysts and market technicians say that it is all a result of AIG's reverse split, a move that squeezed short sellers by reducing the number of available marginable shares. The thought goes that it worked for AIG, so why not for these other scamps.

I have no idea about that thought. Well actually it does seems that could be a very credible analysis for a few days but to be sustained for a month may be unlikely. Couldn't it simply be real news, meaning leading fund managers and market movers taking a new perspective on some of these names that separates themselves from the crowd. Some of the most important people who are market movers assume the numbers, and make their real decisions on their intuitive feel for people, situations, and the market.

At AIG, for example, the stand out Lazarus of the month, a new CEO with both a big track record and major hutzpa has come in. He actually has the guts to say he talks to Hank Greenberg frequently and may bring him in as a consultant(Greenberg the former CEO that was ousted unfairly by the despicable Eliot Spitzer--comment has nothing to do with his prostitute incident). Greenberg was revered like few CEO's by Wall Street and in the extreme by his major shareholders. When he spoke at investment conferences every seat and every bit of good standing room would be taken and no question went unanswered. However much members of Congress want to blame him for the fall of AIG three years after he was forced out, investors as a whole don't buy it. AIG was one of the finest global corporations, brought to its knees by a small group of traders let run wild by Greenberg's clueless successor, and now new CEO Robert Benmosche has the good sense to talk to Greenberg and make it clear to the government that it's his call. There is still value there, and Benmosche is viewed as tough enough to find it. That's a real reason for the stock to be up.

Looking at Citicorp, there has been a refreshing lack of news out of the company lately, especially when compared to BofA. When Walter Wriston left in the late 1980's Citi was unassailably the most powerful and admired banking institution in the world. His successor John Reed whittled that stature away with intense petty bureaucracy, idiosyncratic mandates, and an inability to decide whether they were in investment banking or not from one year to the next(over ten years). Then came Sandy Weill, in to create the final roll up of his dynasty, but he fired his crown prince, Jamie Dimon, who did all of the heavy lifting and brought in syncophants in their mid-thirties. Todd Thomson, incompetent, inexperienced, amazingly arrogant, and well dressed, and Sallie Krawcheck, inexperienced, uninformed about commercial banking, and very well dressed, to replace his lost adopted son. These heir apparents were not capable so Weill left his mashed together conglomerate to Chuck Prince, his long time attorney who fell off a turnip truck into a derivatives patch. Citi as it was known only 15 years or so ago was destroyed. Much of the franchise, however, is still there. Emerging markets are showing signs of recovery, Asia and Europe have qualities that make them look like better candidates for a quick recovery than the USA. Citi's global consumer strengths are in those areas. It's time for Citi to bounce.

Fannie and Freddie, I have no idea whatsoever why they have moved so fast. Are the techs right about fears of a reverse split short squeeze. Is it just a few positive housing market signs of stabilization for companies that have been so beaten down, or is it individual investor enthusiasm for "cheap" stocks now that they have been watching AIG and C pop. No idea.

But what about Etrade. It was shunned by the Feds for any TARP money with no explanation publicly. Etrade's problems are largely derived from their FDIC insured bank(set up before the financial debacle) and the mortgage business of that bank. The reason for the denial by Treasury is without question the fact that Etrade was at the time 15% owned by a hedge fund, Citidal, and the administration would not risk being criticized by Congress for bailing out a hedge fund, no matter how legitimate the claim. So ETFC has been hacking it out on its own and surviving, still advertising, still working with its clients, but without any government liquidity injection during the most critical times. CEO Don Layton presciently addressed some of the worst problems of mortgage backed securities early on, taking losses that would have been much much larger had he procrastinated. If the dollar stock momentum catches on, this one definitely should jump. There's value here, for the company or for a buyer.

The words here are just that, and in a few weeks we may know whether what we have been witnessing is real or fantasy. Fantasy may be more fun but real is more rewarding.

(Disclosure--- the writer owns positions in AIG, C, and ETFC)

Wednesday, August 26, 2009

Cautious market

We often hear reports of and commentary on the volatility index. If there were such a thing as a non-volatility index, today's trading may have been a record. Volumes were exceptionally light, the DOW moved slightly over and slightly under positive 25 times during the trading session, and finding any stock that made a material move up or down was almost impossible. This was a day of caution.

Some say it's the end of August doldrums. The traders and managers are all at the beach. That may be an explanation for any given day, but don't believe it for a second if there's any real news that suggests activity. Those days of a securely lazy market in late August are long gone. Asia news already looks like tomorrow will see more activity. If that news holds commodity related stocks will be down but big strong multinationals could be up.

The curious state of money market funds, or is unsettling a better adjective

Look at these current yields on some of the more popular large money market funds.
---Fidelity Money Market - 0.33%
---Fidelity Cash Reserves - 0.34%
---Fidelity New York Muni - 0.01%
---Schwab Money Market - 0.01%
---Schwab New York Muni - 0.01%
---Morgan Stanley Smith Barney Bank Deposit Program - 0.03%
---Etrade core money market - 0.03%

These funds are huge because they are the most conservative default option for these major retail brokers. These yields are amazingly low. Thinking about the Schwab, MSSB, and E-Trade yields, as well as the Fidelity Muni, one can't help but wonder whether any even short term disruption in the credit markets would put pressure on the "buck", as in "breaking the buck".

Look at this dynamic at Schwab, which charges some of the highest expenses in the money fund industry. It has two money market funds, one for small investors that requires an expense ratio of 0.65% and one for investors who can initiate with $25,000 that has an expense ratio of 0.49%. Both are yielding the above mentioned 0.01% They are both basically the same investments. So the question is, "Is the lower expense ratio fund already subsidizing its stated expense ratio to hold the yield above zero?"

Short term yields across all instruments are historically low, but with these yields and even implied risk, one could ask why not a mattress, a safe deposit box, or a hole in the backyard for cash. It turns out, after 25 years of being outgunned by money market funds, that banks are now the viable alternative. Chase has a premier savings account that has tiered yields of between 0.25% and 0.75%. BofA has a hybrid CD/money market that yields 0.90%.

What does all of this mean? A few suggestions are:
---In these challenging credit markets, money market fund managers have become intensely risk averse, taking only the shortest commercial paper maturities and the most highly rated firms. Managements must be saying to the fund managers that they cannot risk the firm on a "break the buck" situation.
---The commercial paper market is still just limping along and, while not frozen like a year ago, only better issuers are finding a liquid market and they pay the least for their money, even more so as this situation creates competition among funds to access their paper.
---As banks with their FDIC insurance and with their aggressive push to continue raising funds showing success(they'll take as much cushion for any part of their balance sheet that they can get since anything is better than preferred stock with onerous dividends and political control required by the government), their participation in the commercial paper markets has diminished. The tables have turned and they are now actually disintermediating the money market fund industry.

There have been concerns voiced about the money market fund industry raised ever since the industry pioneer Reserve Primary Fund broke and traded at 97 cents on the dollar last fall. There are calls for regulation led by Paul Volcker and a recent industry report described them as having "no capital, no supervision, and no safety net". The fund industry counters with a commitment to supporting the full value of their funds and an emphasis on an almost impeccable track record.

This is a big story. If it takes a wrong turn for whatever unexpected event in the overall credit markets there could again be chaos or panic. If rates begin to move up as the economy improves and the deficit spending makes the market demand higher rates across the yield curve, the issue will be moot for now. Today it is something to think about.

Saturday, August 22, 2009

Small caps jump

After no volume during most of the week small cap materials and industrial stocks went through the roof Friday, posting gains that had been hoped for but not really anticipated. That's a large sector bet here, and it's been an ugly wait, but all of a sudden it's working. Somehow I don't think that this will backtrack.

Wednesday, August 19, 2009

The Anger --- is it about health care---

The anger that we see on live news and the bitter attitudes, uncrossable opinion boundaries, that we see among the health care opponents are, in fact, not about health care. Most people already know this. It's so much bigger, and the radio and media inflamers along with the Republican right wing have lit the match. What's the fuel?

It's undoubtably real! Beyond that it's plain old resentment, the residue of change, and old style exploitation. Isn't it apparent that most of the people filmed disrupting meetings and shouting and crying about their vanished American look like they and their families could benefit from a revamp of healthcare in this country. For manipulators, it's a new twist on the oldest of American games.*

In southern Virginia in the 1950's there were three classes, the white, the poor white, and the blacks. Sure there were multiple classes among the white, the old rich, upper middle class, middle class, and not quite middle class but still educated, but beneath that 70% of the population was poor, poor white mill workers, many illiterate, and poor blacks, many illiterate and scraping by on farming and service, or servant, jobs. What made this society function when the 70% overwhelmed the 30% was that the poor whites felt superior. Why --- because they viewed and were societally reinforced in believing that they were better than the blacks. Simple human nature unfortunately and, I just guess, you always need someone to hate. This is not a Woodstock moment in my writing.

Today we see an outpouring of hatred, no other word for it, in two ways perhaps, One, that reflecting the diminished hopes and opportunities of people that have been left behind in this economy(unfortunately in some cases, unfairly in some) and Two, a residual clinging to old ways of societal hatred as a haven from any change. Both can be intense, but the latter is more likely to be ugly.

Healthcare is for the moment the issue, and the media component that exploits these fears for profit pushes that for now. It could be energy, education, anything, this large group would be against it if their Obama button is pushed. They are mean righteous, attention seeking, and aggressive about their "values". Their issue is not healthcare, unless it's their next diabetes attack. Sorry, good luck with your diabetes and if you lose 75 pounds the VA will pay for your knee replacements.

That's too harsh. This radical righteous group, however, may become either too powerful to be ignored or impotent enough to be ignored. I would like to bet on the latter, but history tells me to be wary of the former.

Heathcare is not the issue. This is something else.

Noon market report --- why not?

The market today is interesting because it's so boring. Until a few minutes ago equities were treading water, generally directionless, and now there's a small spike up. Whatever happens is being done with low volumes and few stocks making any material moves up or down. Volumes are incredibly light in small caps, almost nothing going on, while the big large caps are seeing reasonable activity but the kind that is done so carefully on both sides that there is hardly any perceptible change.

This is August and it's about time for a break. In fact, however, there are no breaks anymore as our telecommunications infrastructure and new normal lifestyles make sure of that. Today is about multiple mixed signals, caution on some fronts as Asia stumbles momentarily and Buffet warns of longer term serious dollar pressures and many reports are somehow simultaneously focusing on the plight of state budgets. Countering that is analysis by a Goldman senior economist that the recession ended in June and that necessary inventory rebuilds will begin to revive the U.S. economy in the coming months, as well as an ongoing focus on so much dead money sitting on the sidelines that is perhaps being forced to think about a little more risk, a little more yield.

And that's it at noon today. Is this anything like what Bloomberg or CNBC or MSNBC or 1010 Wins said? I would hope not. Any more informative or accurate, who knows?

Another new wrinkle in the markets

Proof that there is still a lingering sense of dislocation in the financial markets can now be seen in commodities prices. In recent days oil, lead, aluminum, copper, nickel, and even gold have had pronounced declines after lanquishing or slightly weakening during the last few weeks. How does this correspond to a market bottom, to a recovery that's just beginning, to a leadership role in a rebound by China. It doesn't. Either the commodities markets are giving us a head fake, or there's less incipient recovery in Asia and elsewhere than the data and forecasts of economists show.

Saturday, August 15, 2009

Limiting and trading carbon emissions

Limiting carbon emissions is a well-intentioned goal and a "cap and trade" proposal has already been included in the bill passed by the House. This is one of those major decisions, as in the proverbial "you can't put the toothpaste back in the tube", and it's unclear how many people really understand the ramifications of such a comprehensive change. I certainly don't, I don't know what percentage of Congress does, and that's a concern. "Cap and trade" seems on the surface to be a simple, maybe elegant, idea, but in execution may or will have a complexity like the ever expanding ripples on a pond after a big rock has been dropped into it.

In the Senate there are concerns that are now being discussed more seriously than in the House, is seriously the right word, and it's right to take a pause before this bill gets pushed through. ENS sees two big issues, really big issues. First, is this cap and trade approach the right answer, and second, if passed, how is a liquid and manageable market created for what in fact will be financial instruments that can inevitably be traded globally.

As to the first issue, cap and trade will by necessity create a government oversight and management bureaucracy overlapping several cabinet departments. Just what we need, as bureaucracy can quickly become institutionalized. This one, with this system involving such a major swath of the economy, would be particularly vulnerable to political pressures and corporate gamesmanship, and worse.

An alternative could simply be a tax system. God knows, it's unusual to recommend more power for the IRS, but the devil we know is already in place. Putting in place a tax protocol that penalizes high emissions over a range of levels and provides R&D tax credits for those at low levels or those who improve materially from high levels is an idea worth considering as an alternative to the cap and trade proposal. A tax system does not set up another bureacracy with new opportunities for influence and power, it provides incentives and penalties that can be measured(can't be managed if it can't be measured), and it avoids introducing a global tradeable security for a domestic program that could have significant economic consequences on industry and the U.S. consumer. To be completely cynical, another positive is that the quasi-government of lobbyists and tax lawyers is already in place so a completely new layer of this group that contributes no broad economic benefit does not spawn.

Today, however, cap and trade is the bill, a leap into the unknown with good intentions. If passed, the most difficult implementation issue is creating a liquid market for these pollution rights. Members of the Senate are right to be concerned about the issue but some of the solutions that have been proposed are nuts. Bloomberg reported yesterday that some Democratic Senators drafting the legislation have proposed barring Goldman Sachs and JP Morgan from the carbon emissions market. Why would this be, because Goldman and Morgan make more money trading than others or because they had the gall to pay back their TARP money. Nine Democratic Senators have apparently targeted Wall Street banks in general saying that they would cause excessive price swings in the market. Good thought, let's just let some hedge funds be market makers. Wake up. Now that the investment banks have bank charters there is more Fed oversight power. Oh man, they know nothing but political PR opps.

Perhaps the most remarkable comment was by Senator John Kerry who in a July 29 speech at the National Press Club in Washington said in regard to a carbon emissions rights trading market that "there will be no derivatives, there will be no credit default swaps. There will be a tighter regulatory control so that is will be impossible to play these kinds of games." No derivatives? A simple 30 day FX forward or interest rate swap is a derivative. There will be no market makers, none, if hedging short term inventory is not possible. It's cap and trade, not cap and hold. Perhaps someone has now explained this to the Senator and an aide already has a one way ticket back to Fitchburg, but unlikely.

Despite their awkward attempts to discuss the issue and their dangerous suggestions, the Senators' concerns about such a trading market are valid. Once the carbon emission rights become financial instruments they can plausibly spike like tulips in Holland in the 1600's or oil in this century. The potential for that kind of volatility would be...? what if the Chinese Central Bank decided to bid up these financial instruments... or Dubai... or SAC... or the Phibro unit of Citi. Maybe it's just efficient market theory and the cap and trade promoters that we should trust, I absolutely do not know, but somehow it feels like these issues have not been fully examined.

Take a break Congress, sneak a smoke Mr. President, a window of opportunity doesn't mean jumping from a high floor.

Friday, August 14, 2009

"Zeitoun", a work of non-fiction by Dave Eggers

This is an American masterpiece.

Dave Egger's account of Abdulrahman and Kathy Zeitoun and their children during Hurricane Katrina is a document of our times as well as of a disaster. Egger's accomplished unadorned writing style gives the reader the freedom to think, and as the book develops that freedom evolves into a powerful and troubling experience.

As the storm approaches Eggers weaves present circumstances with personal history, the story of a Syrian immigrant and a Baton Rouge working class woman marrying, raising a family, and building a successful home repair business in New Orleans. The day to day is familiar, the climb up the ladder to middle class and acceptance is engaging, and the personal histories are fascinating.

The story then follows the arrival of the storm, the decisions that need to be made, and the departure of Kathy and the children while Abdulrahman stays behind to take care of their home and rental properties. This sets the table for a tale, a highly researched and documented true one, that is just as much about the precipice this country is on as it is about a personal nightmare in the immediate aftermath of Katrina's landfall. The mosaic of primal cruelty, evil competence, bureaucratic indifference, and the accompanying complicity of those with even the smallest amount of power manifests itself in a way that this reader could even conceive of as the same mindset of 1930's Germany. That's a strong statement but, as I said, Eggers gave me the freedom to think.

"The country he had left thirty years ago had been a realistic place. There were political realities there that precluded blind faith, that discouraged one from thinking that everything, always, would work out freely and equitably. But he had come to believe such things in the United States. Things had worked out. Difficulties had been overcome. He had worked hard and achieved success. The machinery of government functioned... But now nothing worked... This country was not unique. This country was fallible. Mistakes were being made."
"Zeitoun", pages 272-273

Thursday, August 13, 2009

Know your customer

This retailing adage came to mind today in reading reports of Walmart's second quarter earnings. While reporting earnings that were better than analyst's expectations, revenues were slightly below their earlier forecasts. Walmart did say that it had particularly good success luring customers into its stores with deep discounts on products like "Sam's choice black angus beef patties, baked beans, and flat-panel televisions".

---disclosure---the writer is a long term shareholder of WMT

Wednesday, August 12, 2009

Regular recovery --- a gap in the system

Picking up the phone the other day the caller described a situation to me that was troubling, and got me thinking. The story was about someone who had lost a job over the last year and a half, a job that had supported her for almost 30 years, the recession had eliminated opportunity. Educated and talented but singularly independent, without any family support, she eventually found herself without funds or adequate(or any) housing, and going through a sudden run of bad health. I listened to suggested solutions from the concerned caller, all sound ones with great intentions, but my response was "those are all good but right now she needs to be somewhere immediately where she can rest, revitalize, exercise, and get three good meals a day --- institutionalized".

Hanging up the phone I realized the problem. The person in trouble did not have a substance abuse problem, was not elderly, not mentally ill, not in acute bad health, and not in any way financially capable of a spa experience. She is just a person who has run into an exhausting and stressful string of tough life events. She just needs an inexpensive or at least very reasonably priced place to catch up on what a healthy and safe life is and be removed from stress for a month or so while a few friends and acquaintances try to put something stable in place.

Instead of $22,000 or much more for a month of 12 stepping or electroshock or group therapy or relearning to walk she needs a place for, just a guess, $2000 or $2500 a month at most that has spartan but private accomodations, three decent meals a day, a place to exercise and watch television or read or talk with others and a place to walk and be outside. This seems like a missed business opportunity for places that could be located in inexpensive rural areas and could be staffed without on site medical professionals other than a nursing station, without loads of self-righteous counselors, sans yoga instructors.

So we're not talking Canyon Ranch here, that Ritz Carlton of a spa experience for $8000 a week, we're talking Econolodge in the Woods. It's a new market niche, meeting a market need, creating some construction work and modest but responsible jobs. There could be, let's think:

The Mid Life Recharge Center
Recession Revival House
The Take-A-Break Recovery Retreat
Good Eats, Good Rest, Get Better Land

This is not a joke, there is a need for something like this, doncha think.

Elizabeth Warren takes on smaller banks now

Yesterday the Congressional Oversight Panel that is guided by Elizabeth Warren released comments saying that smaller banks are still plagued by impaired assets and would, by their estimates, need $12 billion to $14 billion of new capital. The premise is that the existing capital and reserves of these banks is inadequate to deal with the need to clean up their balance sheets. The comments focused on loans, especially commercial real estate loans, as the core problem.

The Congressional Oversight Panel released little detail on their calculations and focused on the big picture. This is scarily reminiscent of the OCC in 1990 and 1991 when their overzealous accountants destroyed or forced consolidation of many previously well regarded local and regional banks.

If by chance this new study had some commentary on the treasury portfolios of these banks and revealed that they in fact had been relying on now toxic mortgage backed securities to boost returns, it would make some sense. The focus, however, was on loans and that's the problem. Local and regional banks are in the business of making loans to small and mid-sized businesses in their communities. Loans intended to be held to maturity on the balance sheet are not securities. In times like these if they are valued by an accountant as a security they are of course underwater. For smaller banks that's a misunderstanding, or worse coming from the agenda driven Warren, as these extensions of credit are based on local knowledge and relationships just as much as they are on what is going on in the national economy month by month or even year by year.

What will be the result of this Congressional Oversight Panel's report. It is an absolute certainty that it will cause smaller banks to become more conservative and more restrictive in their lending at a time when the overall agenda should be and supposedly is to create a landscape that encourages more credit availability. Smaller banks that went through or are going through the TARP experience feel tarnished by it, and in general want no part of the government's bureaucratic and finger pointing hand.

Like the OCC in the early '90's recession it appears that this report fundamentally misunderstands basic banking. As a career academic and one with an apparent bias for mandating the public utility, as opposed to business, purpose of banking, Warren is once again acting or speaking in a way that will restrain the move out of this downturn. Her intentions may be good, her well known insights and concerns about the decline of the middle class have merit, but her actions are bizarrely misguided. What I mean is, she's dangerous.

Tuesday, August 11, 2009

CIT hangs over financials, and more

CIT's delay in filing its quarterly reports to the SEC and their not reassuring comments about the potential for bankruptcy next week are not good news for financial stocks today, and other sectors as well. Perhaps it's one more bit of brinksmanship on their part but the absence of the 10Q is a bad sign.

"Other sectors" are more of a concern than the financials if CIT files. In recent weeks various numbers have flown around as CIT's share of the U.S. factoring markets from small commercial vendors to merchants, numbers from 30% to 70%. Even at the bottom of that range, it's huge. It has been commented that banks like Wells Fargo, BofA, and Chase would step in and fill the gap so that this fundamental grease to retail trade stays intact. That's unlikely. The gap would be too large and CIT's history suggests that it would be too risky.

CIT has always been a commercial finance company. In competing with major national and regional banks over many years they have always been scrappier and more willing to take risks that the banks would not take, and more willing to be the tough guy if a client didn't pay. They were not out giving toasters away for deposits or burnishing their reputations to consumers with billboards. That meant that if Joe the bridal veil manufacturer on 36th street between 6th and 7th began to get too far behind on his payments, they could just go ahead and take his collateral, which often included his house, as repayment. Their reputational risk to Joe's neighbors in Roslyn was minimally important, in fact in their business it was just as good as a warning sign to other garmentos in his area as it was a negative.

So CIT had a different business model because it was not a bank. In a still problematic credit market that model no longer works from a funding side but it also no longer works from a credit risk and reputational point of view for those that could pick up their business. Unless CIT can get some bulletproof debtor-in-possession financing arranged when it files and therefore keep doing business, there will be a meaningful percentage of their clients who would also be in financial trouble.

Monday, August 10, 2009

"In the Loop", the film

In my usual pattern of going to see almost anything playing at our local old style marqueed theater, I went to see "In the Loop" not expecting much more than a relaxing break and popcorn. While many reviews of the film were positive, they made it seem like a rehash of the entry into the Iraq war, with the kind of slapdash satire that BBC comedies tend to have.

It's much more than that. This film is really funny, in sort of a Daily Show comedy is truer than "facts" sense. Some lines of incredibly well delivered and insightful satirical dialogue had the audience laughing in moments of complete surprise.

Wednesday, August 05, 2009


The first twofor album purchased here ages ago was one by Miles Davis and this is better. Clinton/Clinton, two journalists, take your pick of which two.

The release of the two journalists in North Korea in response to Bill Clinton's visit today extends the idea of President Obama's appointment of Hilary Clinton to Secretary of State. This is an example of President Obama's capability on a global scale. After Bush, we so desperately need that.

I have not been a fan here of older classmate Bill after the early times, but Clinton may begin to demonstrate his bizarre potential after disappointing so many in the White House and fairly consistently after that.

Don't worry, he's no saintly attention seeker like Jimmy Carter, his own arrogant exuberance now could be a positive force. He is what he is, pure politico and smart, but now that he has made a fortune he is doing some good things. The photograph of Euna Lee coming off the plane and moving toward her young daughter is priceless.

Monday, August 03, 2009

Economists debate outlook, what do we know

From this perspective there are now three views on the economic outlook among economists who are "highly regarded".

Door Number one looks for a long slog for the economy, an unemployment rate that will stay stubbornly high once the generally agreed upon 10% area is reached, a multi-year problem with overcapacity in many areas but in particular those that service the retail markets with everything from cars to appliances to clothing, and a housing market that can stabilize at best in certain geographic areas and demographic markets, with downside still in others. This all means sustained low growth and government deficit issues.

Door Number two sees traditional signs of a recovery, not an easy or quick one from such a deep decline, but a real one nevertheless, validated by all of their historical models. With the yield curve winds behind their backs and banks backing off of risky practices they see a banking system that will be significantly strengthened over the next year. With the beginnings of hope in the investment of stimulus money, they see overlooked but still vital businesses in the materials, construction, engineering, and equipment areas. They see a new element not included in past equations, which is the importance of China, Brazil, India, and other emerging markets to propel growth in their parts of the world that could reverberate to the global economy in a positive way. They are cautiously optimistic.

Door Number three finds the big attention getters, some seekers, of the past couple of years, those who rode the economic debacle to glory through intuitive prescience, rigorous research, or blind luck. Having made their mark most are hedging their bets now, seeing some positive signs along with the negative, and carefully refusing to "go long" with any real view.

As it always has been, there are many points of view but, given what we've been through, searching for answers is more crucial than usual. What's going to happen is...

---Unemployment will increase to 10% or 11% over the next year and very slowly decline to the 7% to 8% area by 2012.
---Most retail businesses will continue to consolidate, retrench, or worse, while the few with a long term competitive advantage and a strong capital base will continue to grow and the bottom feeders, dollar stores, will continue to thrive.
---The auto companies have already formed a bottom for sales and will slowly revive through these great difficulties as replacement vehicles are needed and the Ford and especially GM international businesses aren't half bad. That said, Chrysler might slowly go down, with a couple of brands like Jeep and Dodge trucks sold off to foreign or private equity buyers, in fact that's likely.
---Price pressures will stay moderated and deflationary fears will be tested over the next year. Once a real global recovery is in place two to three years out inflation is almost inescapable as input costs like commodities and foreign labor will grow despite what American consumers are willing to pay and as the government deficits almost inevitably lead to an even weaker dollar. This will be generally good news for growth industries and people with jobs. This will be devastating news for people on fixed incomes or without jobs.
---Equity markets will be volatile but will over time advance and economic prosperity will in the aggregate be restored. What will fundamentally be different is the composition of the so-called "new normal". There will be a still highly prosperous top 2% of the country that the media will focus on, an upper middle class in decline, and a bulge in the just hanging on to middle class group, a bulge that is even bigger than the one today. What this is saying is that aggregate U.S. economic growth and prosperity will be there and reflected in equities, but a granular prosperity will be delinked from the financial markets.
---All of this is intuitive postulation or informed blather. What it does not include is any assumption of a new wave of innovation. Will there be some new disruptive and energizing technology that will make all of these attempts at reading the future meaningless. Has the destablization of the credit system, the new xenophobia, and now the open Obama antagonism for corporate America derailed the R&D process of investment in the U.S. Will some breakthrough come from France, South Korea, or India, or any other educated country that still looks to the future. Is Google already the end game, ready to pounce once the dust clears. Will the U.S. be the source of new innovation.
---Will the political world as we know it hold together.

Anyone who has managed to plow through all of this speculation can apply for a free limited edition Eyes Not Sold t-shirt, that's as soon as they are imagined and produced.

Barclays tries again, and it may finally work

Barclays, the U.K. based bank and asset manager, is making another full scale thrust into a broad investment banking franchise. Over the last 20 years the firm has been in and out of strategic and financial attempts to become a significant player in the business. Most recently it abandoned a full scale attempt in Europe when it sold its business to Credit Suisse in 1997, with the intention of focusing only on bonds and loans. That led to a decision in 1999 or so to build a boutique leveraged loan business in Europe and they were back out hiring again only to pare back that investment several years later.

Now, with their acquisition of core parts of Lehman's business, they think that they finally have a platform to build on, and announced today that they are in the process of adding 1000 new hires to the business. This time there is a good possibility that it will succeed.

Corporate cultures are stronger, in good and bad ways, than can be seen from the outside, so why would they be able to reinvent themselves this time around. Three major reasons---first they bought a decent Lehman franchise at a fire sale price and were able to retain a reasonably high percentage of the productive employees that they wanted because they had no place else to go---second, with the brouhaha over compensation at U.S. firms and some disruptive oversight likely, Barclays and other non-U.S. firms have an incredible opportunity to hire quality bankers away from their U.S. employers---third, if many become convinced that this time around it will work, there is, frankly, a slight advantage to the cultural affinity that exists that makes a British-run firm more attractive than a Japanese, German, or Swiss one.

Based on its credit and bond franchise Barclays already is much better positioned today than it was a few years ago. With their new efforts and the changes in the competitive environment over the last two years, this is their big chance.

Saturday, August 01, 2009


It is not unusual to have two or three books going at once, especially if they are a manageable combination like one fiction, one history, and one of short stories. Somehow that's moved out of control recently and, maybe in reaction to one disconcertingly horrible book commented on here recently or whether it's because not one of the current books is overly compelling, I now have five underway, all but one started in the last week. This is really not manageable, but then again how fortunate to have so many choices.

130 pages into "The Polish Officer" by Alan Furst, I'm part of the Polish intelligence office in 1940 Paris preparing to flee as the French government and army have not only abandoned Poland, but Europe as well. In the last two years my interest in this type of historical fiction has been revived, last in evidence in the seventh grade. What that means is not something to dwell on.

142 pages into "In the Kitchen" by Monica Ali, a follow up to the exceptional "Brick Lane", and I'm definitely in the kitchen, not necessarily enjoying it all so much, waiting for bad things to happen, cognizant of the good writing but not yet pulled in by the story and some of the characters. It's too soon to tell.

107 pages in on "Methland, the death and life of an American small town", by Nick Redding, a recently published study of a rural American tragedy through the microcosm of one small Iowa town. I am aware for various reasons of the way that methamphetamines have somehow cut out the heart, geographically and more, of the big rural middle, stuck in the middle James McMurtry would say, and I'm committed to this book. The writing at times has a descriptive style that seems to try too hard, maybe it's great, but to me can be distracting. The reporting, however, is solid.

190 pages now on "The Raw and the Cooked, Adventures of a Roving Gourmand" by Jim Harrison, and this book that has been sitting around unfinished for quite a while. A couple of months ago the first half went in a flash, and then it became more than a little repetitive, probably because many of the chapters are entries from a monthly magazine column. When time decides, however, some of the best is yet to come as we, or the writer and the reader, are moving on to France.

Then came "The Best American non-required Reading", edited by the highly regarded, by me, Dave Eggers, part of the Best American series 2008, but newly a part it seems from prior years, and this is full of reading to pick at. Even great anthologies have stories and articles that don't work for everyone and this one already does, but all of the writing itself seems good and it's a real distraction, including some quirky parts, like Best American---names of champion show dogs of 2007, New York Times headlines from 1907, others, and quotes from Kurt Vonnegut books, of which a very few will be shared here with acknowledgement:
---"You go up to a man and you say, How are things going Joe? and he says, Oh fine, fine, couldn't be better. And you look into his eyes, and you see things couldn't be much worse. When you get right down to it, everybody's having a perfectly lousy time of it. And the hell of it is, nothing seems to help much." The Sirens of Titans
---"We are what we pretend to be, so we must be careful what we pretend to be." Mother Night
---"Maturity, Bokonon tells us, is a bitter disappointment for which no remedy exists, unless laughter can be said to remedy anything." Cats Cradle
---"Another flaw in the human character is that everyone wants to build and nobody wants to do maintenance." Hocus Pocus
---"Guess what? TV is an eraser." Timequake
---"The first remedy for the worldwide epidemic of depression is a gift called the blues." A Man Without a Country

On top of all of this, this week's New Yorker is one of those issues with multiple must-reads that grab attention.

Back to the armchair and footstool.