Saturday, November 28, 2009

Abu Dhabi will step up

The Dubai debt crisis is serious. It is likely to be solved soon. The UAE is a confederation of seven dictatorships aka sheikdoms that run roughly with a Jeffersonian vision of a Constitution(not of rights), states have more power than the central government. They are joined in a way that gives the whole much more power in foreign economic and political affairs and Abu Dhabi is the center and the greatest source of oil wealth.

To let Dubai precipitate another round of the global credit crisis would be catastrophic for the grand plan already well in place. Dubai aside, there are smart investors with great influence in the UAE. They know the risk/reward of this situation. Abu Dhabi will bail out Dubai, and this will be the opportunity for the head of Abu Dhabi to reign in the profligate sheikdoms and go Federalist. There will be a price for the bail out, and it will likely be the end of the unchecked power of the Dubai Prince who reveled in the attention that his grand plans attracted. He was outside of the norm of immense Arab wealth and simply acted like so many of those mid-level Saudi royal family members in London, unattractive attention seeking spending.

With Dubai resolved, if this perspective flows, the problem will be that the market's short antenna has been raised to focus on other emerging market countries with debt that may be edgy and who have no daddy like Dubai's Abu Dhabi.

If there had been any regulatory effort to deal with the naked short capacity of credit default swaps during the global economic crisis of the last two years this would not be a big issue. Now nations are not exempt from short attacks on their debt and if this kind of chain reaction starts it will be dicey for awhile. The outcome will be uncertain but maybe naively I think that the more aggressive buyers of credit default swaps will get burned this time, or maybe I just hope so.

Once again the question is raised. Why no regulatory action on this toxic security. Who is behind this. I wouldn't ask the question if I didn't have a point of view.

Friday, November 27, 2009

Seamless sell-off

Maybe it's the shortened holiday or maybe it's a rational response. Today's market reaction to the Dubai debacle was seamless, selling across the board with little sector bias except the predictable one toward downgrading emerging markets. We will know nothing until Monday, a full day of liquidity and market attention. With that thought under our hat, overall it was a pretty good day, no panic, no scapegoats except the deserving Asian banks.

Thursday, November 26, 2009

When it seems to good to be true...

Dubai Fantasy World is collapsing. Carry trade bets on emerging markets are rapidly retracting, sending the yen spiraling. European and Asian markets, especially Asian banks, are seeing as much as 5% haircuts. And we're eating turkey.

We may as well be. If everyone could just sit back and reflect on the fact that Dubai was such a bizarre phenomenon perhaps we could put this in perspective. It's not that easy, however, since once again the whole world, bankers almost everywhere, except perhaps the U.S., took big bites of this hook. The media completely bought in with "60 Minutes" leading the way with their adoration coverage. This should be a contained event but if it expands into a "we no longer trust ourselves syndrome" this could be a longer lasting follow on of the global credit crisis. It shouldn't be a major event, but this weekend will be a head scratcher and a shirt sweat in the financial markets.

There is nothing like Dubai anywhere. There are the random magnificent towers in Malaysia or Taiwan and the long built glamorous hotel glut in Thailand but they are not systemic to the region. China of course has overbuilt in maybe a spectacular way but most of it was for a reason, that reason being the expansive growth in the country's economy. If there are, and there will be some, adjustments in China it will be like the see throughs in the U.S. in the '90-'91 U.S. recession, meaning they will all be filled in three or four years.

Dubai is different. It seems to have been built for excess, wealth, pleasure, pride, and grandeur and for no other reason. Of course it aspired to life as a financial and banking center as well. It was built as an oasis for Arab wealth, an alternative from London, Geneva, and Zurich, post-modern splendor, a Las Vegas without gambling or overt sexual attraction, a worldwide travel destination for conspicuous consumption.

The architecture is indeed intriquing and the vision spectactular in some ways. Built on the backs of almost slave labor from throughout southwest Asia and the middle east it still provided "send home" wages that were attractive to the workers, not unlike China and the workers from the provinces. The Chinese, however, are making saleble goods and building offices and factories as well as hotels, and Dubai was building nothing with long term productive power for an entire country. Las Vegas is not the United States, Dubai was becoming the United Arab Emirates.

It is likely that this has been the reason for the continued decline in U.S. Treasury rates in recent weeks. Hands on people in the markets know what's in the works and accepting no interest on short term U.S. treasuries was a fine deal if the credit markets were going to be under attack again. The radar here at ENS was good, the information was not available.

Has some major European or Asian bank written excessive credit default protection against Dubai World debt. Have some powerful and aggressive investors bought that protection as a bet well beyond their holdings. Is there an important financial company - bank, insurance, or investment - that decided to hold significant Dubai debt that accountants will haircut. All of that will be sorted through in the next few weeks, and with a lot of luck the immense wealth of the U.A.E. will somehow come to the rescue while the markets will see Dubai as a unique and relatively contained painful event.

Tuesday, November 24, 2009

WSJ's disturbing mortgage stats

Today's mortgage statistics in the Wall Street Journal saying "1 in 4 Borrowers Under Water" is disturbing, no doubt about that. The article does note the number of owner occupied homes with no mortgage, which factored into the equation would put the overall number of underwater homeowners at slighty less than 10%, and there is no ability to calculate total homeowner equity from the article. That's not the headline, but it's important. That the stats quoted are significantly less than the actual picture, however, does not change the fact that this still represents a troubling picture.

The most relevant comment in the article appeared absurd at first. A mortgage broker in Scottsdale, AZ is quoted as saying "The only way we will make headway is if we allow for a streamlined refinance where the appraisal is irrelevant". Anything in the past and present would suggest that his comment is somewhere between bizarre and insane. How could the system work. Looking at the huge amount of mortgage backed securities that for all practical purposes are completely illiquid suggests that his comment has some merit.

When there is almost no market, there is no real price. Some say that "time will heal all wounds" but how much time do we have. Institutional investors on the hook for long term mortgage security positions with amazingly generous valuations by the brokers may be able to wait but homeowners don't have that luxury. That many investors, brokers, adn homeowners made bad decisions is no longer the issue. Still being in a priceless market, in the bad sense, is a terrible situation.

Saturday, November 21, 2009


That's the 3 month Treasury bill rate as of yesterday. The two year was down to .67%. This "why bother" interest rate policy of the Fed is driving more money into riskier assets and at the same time driving any other money into safe havens that have no yield. Another conundrum, a reflection of uncertainty and a mindlessly wimpy Fed policy. This is becoming a seriously out of balance situation.

Friday, November 20, 2009

The conundrum that no one seems to see

Fed and treaury officials are examining banks, once again, to see if capital levels are high enough to deal with an asset bubble. Further restrictions may be required.

It is an obvious wisdom that by holding rates so absolutely low the Fed could be causing an asset bubble in securities ranging from U.S. corporate debt to emerging markets equities.

Treasury officials, the Obama admin, and other politicians accuse U.S. banks of not lending enough to build their credit book and expand their capital needs, therefore impeding a recovery.

A conundrum is, of course, a riddle.

Finney of Evermay says "So What"

In a comment this afternoon, Kizziah Finney of Evermay Securities expressed no concern about the market sell-off of the last three days. In predictable fashion, he viewed the decline in stocks as a major positive. Quoting Finney, "Stocks can't just go straight up. If they do they will go straight down. That's just market psychology, not that I understand it. There has been no news of consequence. There are profits to be taken. Let 'em take 'em. The market may be fairly valued at levels well below 2007 but it's one of the only games in town, and the U.S.A. is one of the most reliable games on the planet, which says something about the planet. So maybe in a day or so after the profit takers and transparently sly traders have their say we can look around and buy again, pick up some bargains that have been stuck on this media hyped plateau of huge market rebound, huh, compare where you are today to a year or so ago, the U.S. equity market will have life. Life is not a definable comment so I'm safe on the downside and a savant on the upside."

Finney concluded his comments by saying that anyone who watches CNBC for long periods of time may as well be watching Sponge Bob but that Melissa Lee is certainly more exciting than Mr.Crab.

Tuesday, November 17, 2009

Target's telling comment

Today Target reported good earnings based on expense control and on a modest revival in consumer activity. The company is downplaying prospects for the holiday season just as any sane company would do in this uncertain environment. One comment on their conference call stood out---they are seeing much more traffic through their stores but much less buying by those coming in. Are consumers scouting out their holiday buying or just glad to be in a nice building that is heated or cooled, well organized, and staffed with well trained employees. Is the higher traffic a sign of sales to come or a somewhat depressing indicator of the lack of buying power. Here's a bet on the former, knowing too that the latter has some truth to it as well.

What's Janet Yellin'

Federal Reserve Governor Janet Yellen said today in Hong Kong that "U.S. stocks are not massively overvalued". She seems to be expressing a point of view that stocks are overvalued. Why would the Fed get into the game of stock price commentary? In the same speech Yellen defended the Fed's posture on low, or no, interest rates in the forseeable future, suggesting that this approach is not spurring speculative capital activity.

Monday, November 16, 2009

The Dollar, Gold, and the stock market

The dollar weakens, gold rallies, and U.S. equities continue to light up. In a global economy it all makes sense. The value of large cap U.S. equities with their mulitinational exposures just reprice on a weighted currency value known in the minds of investors but not explicit on any exchange. Gold rises in some non-investable way as the financial crisis of '08-'09 didn't exactly find the U.S. currency as the usual safe haven, safe but not without some questions. Gold finds what may be viewed as irrational buyers in some huge emerging market economies that have personal biases toward tangible wealth, bars of it. The U.S. equity market benefits from a huge amount of frustrated liquidity that may just be finding the way back in.

If the holidays turn out to be the days that folks have been saving for, as suggested here a month or so ago, the equity markets may slow down the gold rush.

Tuesday, November 10, 2009

Raise rates?

Reports indicate that the Fed's decision to keep rates at these extremely low levels was a result of their concern about the continued tight commercial lending policies of banks. Do they really think this way.

Do they really think that holding rates this low will spur bank lending or that, on the other hand, raising rates 25 basis points to send a signal to the market would cause lending to contract further.

The opinion here is that this is flawed thinking. The contraction of credit markets is a global event. The secondary market for commercial loans and the securitization markets for consumer loans radically contracted last year and the appetite for risk at those prior levels is bust, does not exist, over. The decision to expand the loan market is not made in the executive offices of large U.S. banks and their reaction to minor interest rate changes.

A small rate hike would: give a directional touch of support to the collapsing dollar; be a glimmer of hope to savers living with almost no return on their money market funds; begin to help avoid another speculative bubble in some area that benefits from a necessary search for yield; and be a downpayment on the eventual inflationary pressures that will arise as global commodity inputs eventually force a decline in dollar purchasing power.

View here---the stock market would like it. The traders would choke on it for a day or so but after that it would create a stronger foundation for the longer term.

Monday, November 09, 2009

A health care folk song


Medicine's a business just like everything else

Doing good for others, don't kid yourself

There's what people think, there's what we know

We save some lives and the shareholder's dough

Now we work for our patients all over the land

But in the end their outcome is in God's hands

Keep costs down, keep employees in line

Focus on getting the patients last dime

Now that's what I call a business plan

Taking one last test on a dying man.

Quick morning comment

---Now that the tentacles of the Galleon investigation have reached SAC Capital, the giant short term trading hedge fund run by Steve Cohen, things could really get interesting.
---Tim Geithner's criticism of banks for not making commercial loans(he said they should take a bet on the U.S. economy like Warren Buffett) is disingenuous. Banks are conduits and have been since the late 1980's. They can't possibly hold massive amounts of loans on their balance sheets and meet capital standards. Banks' ability to lend reflects investor demand for those loans. The banks would love to lend more, that's how they make money, but they need more liquid credit markets to do so in a responsible way. Geithner's smart and he obviously knows this, so this politically motivated posturing to shove blame on an easy mark is pretty pathetic.

Saturday, November 07, 2009

The demise of E-Trade?

Having a small account at E-Trade plus being a shareholder at recent levels(a small mark loss already however), this is not a comment with an agenda, just an observation. Noticing yesterday that while my user name and password led to my account appropriately, within 10 seconds the "operation aborted". Another E-Trade account that is partially managed here had no problem. Today same problem, so why not worry in this age of computer piracy. I did.

Calling E-Trade and finally convincing the robot to find a representative, I explained the problem and did confirm that my account was still intact and untouched. That's good and prompting the service rep, I suggested that the technical problem still needed to be solved. He said "tech support does not work on weekends"! Hmm, so why not request that they get back to me on Monday. The answer, "it's better if you just call back then so you don't get put at the back of a line requests". Wouldn't a Saturday request put someone at the front of the line. No answer. Goodbye E-Trade.

Here's the concern. On a weekend when this online brokerage is paying for their cute baby advertising to be on major sports events, E-Trade clients who have technical problems have a 48 hour hiatus from support. So what happens when the markets open on Monday. Are all problems solved instantaneously. For a firm whose raison d'etre is efficient online capability this doesn't seem to make sense. Are expenses being held as lean as possible to build some earnings and give an irrational buyer the cover to relieve hedge fund Citadel of its major headache.

Delinked in Danville - Market Comment with Mute CNBC

With limited online access and in a town where the nearest WSJ or NYT is at least 40 miles away so even print media is minimal, perhaps a generous adjective, a market comment here may seem to be a stretch. Admittedly there has been quite a bit of CNBC on mute, for the most part a far better experience just as with some sports events.

So the opinion here at the moment - while volatile, the financial markets today are a jumble of competing interests that are more or less zeroing each other out. Interest rates, equity valuations, currency prices, gold, industrial and agricultural commodities, and unpredictable government policies, all on a global scale are the relevant factors. There are a reasonable number, is reasonable the right adjective, of market participants who are experts in and know how to exploit an individual factor's trading volatility for financial gains. There are few participants that can put all of the factors together into a coherent viewpoint, fewer still that are prescient enough to have a vision that could actually be right. Would these precious few take time to be on CNBC, or even care to be well known.

Mute CNBC is farcical. The practiced charm in the facial expressions of the glib hosts, the serious glares of the authoritive well coiffed experts, the self regarding devil may care mirth on the face of the known provocateur, the we're brilliant shared egotism on the faces of those panels of stock experts - why not another spin-off of the Daily Show for business news. Colbert certainly worked. Sometimes it looks as if Jon Stewart is so depressed by the news these days that he's having trouble with the humor but he's stuck and can't leave his own show, so why not John Oliver. The U.S. financial world adores a British accent, and there would be so much to work with. "Market Beat with John Oliver", Michael Jackson's song pulsing as the camera pulls into focus - beat it, beat it, beat it, "and with co-host Samantha Bee" beat it, beat it, beat it.

Monday, November 02, 2009

Obama admin supports restraint on Sarbanes Oxley

The Obama administration support for limiting the Sarbanes Oxley requirements for small business is wonderful news. As apparently promoted by Rahm Emanuel, this would eliminate huge costs from small businesses and encourage risk taking which is fundmamental to new enterprises. Sarbanes Oxley requires that CEO's and CFO's take criminal liability for a company's performance, a boon for the trial lawyers, but for small tech companies, biotech companies, nano companies, etc. this is a disincentive to being a U.S. based company.