Wednesday, December 30, 2009

Equity market on vacation

Light volumes and limited news have led to equity markets treading water over the last few days. Barring some geo-political scare, the year in equities is over and all eyes are now focused on 2010, which may well come out of the gates fast and unpredictably next week. Calls by analysts and strategists for a continued rise in equities in 2010 generally limit themselves to 10% gains or modestly higher while those on the bear side suggest declines back to March 2009 levels. That's a wide divide, suggesting another reason for year-end ambivalance. "Let's just get through this one" is the theme of the day.

Monday, December 28, 2009

Destroyed securitization market still the issue

It was an obsession here six months or so ago to talk about the collapse of the securitization markets and the impact on "bank" lending. It was so true, and it still is. Banks cannot possibly lend at even close to pre-crisis levels with securitization markets for credit card, mortgage, auto, and general consumer loans running at most at 15% of 2007 levels. Securitization allowed the banks to move the loans to other investors. Now they need to hold the loans and hold capital against them. Some may say that's a good thing, but that means that the system contracts because banks must maintain regulatory capital levels.

This week's Barrons lays out that dilemma in an article, "A Flat Dow for 10 Years? Why It Could Happen" that stresses the liquidity function of securitization markets and the impact of their demise. Economists in this liquidity camp view restoring some vestige of functioning securitization markets as essential to growth in the economy.

Things were falling apart with the sub-prime securitizations as early as late 2007. That was normal market business. The turning point for the markets was when Congresss began considering legislation allowing contracts to be abrogated and securitizations to be torn apart piecemeal, an approach worthy of a third world country in the 1980's. That, combined with the realization that securitizations unrelated to subprime were also extremely vulnerable to opaque CDS assault, ended normal. There was no looking back, the markets were over except for the highest rated most completely secured issuance.

Now Democrats and Republicans alike are falling over themselves to blame financial institutions for both the crisis and the lack of a robust recovery. Restoring liquid markets requires the opposite of this hyperbole, a ten dollar word for something else.

Friday, December 25, 2009

"Doing Battle" on Christmas

Merry Christmas.

This possibly may be a Christmas thought. If there is by any chance some kind of intangible guiding spirit, call it kismet, coincidence, spirit visitation, God, or a reason to collapse on the sidewalk speaking in tongues, it found me three times in recent days. Two are thoughts too personal to share, a half waking dream that astonished and a snippet of conversation overheard while walking down Eighth Avenue that cut right through me. The third can be told.

Two days ago I strolled to the local library in desperate need of books for diversion. Often having three or four books in waiting or underway at the same time, an empty unread bookshelf was disconcerting. Looking through the new fiction was to be confronted mostly by the usual drek, nothing of interest there, so escapism beckoned. Back to the mystery section for old standby's like Westlake or his pseudonym Stark, I passed by the biography section and took a quick glance. What stood out was "Doing Battle" by Paul Fussell, a 2003 memoir by the author of "The Great War and Modern Memory". How about that, something likely to be both entertaining and of consequence comes out of nowhere.

The central facts that bind the book together are Fussell's wartime experience as a junior officer in an infantry division in Europe and the serious injuries that resulted. There are three parts to the memoir. First an insightfully written story of his mostly idyllic childhood in Pasedena and his early college years, depicting an era of innocence in a wealthy suburb and the mores of pre-WWII privileged life. Then comes induction into the army, boot camp training, and on to the front lines in Europe with horrific observations and experiences, and eventually consequences. The third section moves into his battles in academic life and the literature - history, essays, fiction, and poetry - that channeled his intense anger from wartime into a creativity that led to a National Book Award among other honors. The first two sections are seamlessly written and the third meanders a bit but the highs when arrived at are highlights of the book.

This was the right book at the right time, a memoir that fit my mood and writing that was worth the time. Fussell is no cupcake when expressing opinions about what he has observed and experienced, and what he has read. A few excerpts:

---Speaking of moving forward with the infantry and advancing against German lines, "As we went on, we became always more aware that the idea of war is synonomous with the idea of moral blunders".

---"Others in the war were learning this new, un-American view of the instability of human hopes and the unpredictability of human actions. A D-Day observer of the surprising sinking of the clever dual-drive tanks off the Normandy beaches, which went down like stones with the helpless puzzled crews inside, said later that for him this catastrophe 'diminished forever the concepts of strategic planning and of tactical order; it provided me instead with a sense of chaos, random disaster, and vulnerability."

---It was unusual for a person from Fussell's background to be on the front lines with an infantry division and his observations reflected that as in, "Those remaining after the Air Corps, the navy, the coast guard and the marines had exercised their choices and were expected to bear the main burden of sustained battle. A hell for the men and a hell for their leaders. I have speculated since why no one at the time seemed to care terribly. Perhaps the reason is that the bulk of those killed by bullets and shells were the ones normally killed in peacetime in mine disasters, industrial and construction accidents, lumbering, and fire and police work. No one we knew, certainly. Wasn't the ground war, for the United States, an unintended form of eugenics, clearing the population of the dumbest, the least skilled, the least promising of all young American males...Their fate constituted an unintended but inescapable holocaust."

---"In 'Wartime: Understanding and Behavior in the Second World War', I continued campaigning against the ignorant notion that the war wasn't really so bad. My adversaries were all those who could see nothing significant in the elimination of the ironic quotation marks around Studs Terkel's title "The Good War".

---In closing he notes that as Professor Fussell he eventually "stopped teaching Herrick because he found it hard not to cry in public when he came upon lines from 'To Daffodils' like:
'We have short time to stay as you,
We have as short a spring:
As quick a growth to meet decay
As you, or anything."

Being familiar with Fussell's work but not with the man at all, it is impossible to know whether this memoir is a full representation of his life, probably not in fact. He frequently admits to being impatient and argumentative, he is unabashedly elitist, and it's clear that he is not one to easily compromise. There may well be different views of him but who cares. His work here is entertaining, informative, well written, and thought provoking.

And I could have been reading a crime novel.

Wednesday, December 23, 2009

Having a nuanced perspective on Obama is a dilemma

President Obama has ambitious goals to address challenges that our country has tried to ignore. He is hard working, intelligent, and well spoken. I want him to succeed and support much of what he does. There are issues, however, on which there is not agreement here so when in the mood it's written. I don't think that's much different from how many folks view things whether they have a small blog or not.

The problem is that The Negative Machine has become so uniformly against anything that the President says or does on any issue. Earlier today there was a minor comment by the President on some issue(wish I could find it now) and there was absolute outrage on the part of The Negative Machine. This coalition of "right wing" outrage, exploitive media, misguided populism, and unvarnished bitterness does not seem to think. They just react negatively and at times viciously to the President on every front.

So the dilemma is---what's a balanced thinking person supposed to do. It feels terrible to express an opinion that is on the surface aligned with The Negative Machine. Not to do so when there's a difference of opinion would be not participating in a national political dialogue that is needed. Not to do so would just further divide the country into extremes. Many of us will continue to have points of view that agree with the President at times, and at other times not. Sometimes expressing the "not" risks feeding the extreme and it sure is irritating.

Sunday, December 20, 2009

Last harsh post seems ok today

Rereading the last post here about President Obama's woodshed tactics with bankers it seemed somewhat harsh. Learning today that during the Congressional debates on financial regulation last week, administration officials were arguing, successfully, against any real regulation of naked credit default swaps and of foreign exhange derivatives that back no finanical exposure, it seems that last post was tame.

Monday, December 14, 2009

Obama's political rhetoric

President Obama's attack on banks may be just parrying for compromise. It's still so off base that it shows what a political jerk he can be at times. Banks would like to lend. It's their business and they are already out there and doing a lot. It is abundantly clear that government regulators are all over banks examining their risk positions and their related capital, as in is it adequate. Are banks smart if they listen to Obama and take unusual risk after all that we have been through. Are smart and capable small business owners actually seeking to extend their credit exposure in these uncertain times with uncertain tax protocols, health insurance costs, and even estate costs.

The consumer protection regulation, if structured sanely without a new massive bureaucracy, has obvious merit. The call for temperance on bonuses also has merit. The call to lend is a complete political stunt, passing on the government's problems once again to an easy target.

Wednesday, December 09, 2009

More time in Danville, the hope and the reality

In September here a post, "A hopeful look at hometown Danville, VA", received some attention. The reality on the ground seems to say, at least anecdotally and with the experience of over a month here recently, that the fulfillment of hope can't come too soon. The will is here but the race is not a long one.

Anecdote: Running around town today, almost literally, I stopped at a McDonalds in one of the centers of this rural city for a quick lunch. Not being a McDonald's afficionado I defaulted when asked what I wanted to "Big Mac meal", a habit dating from 2am's at college many years ago. It took ten minutes to get my Big Mac, a ten second process in Penn Station. In the interim the manager came out and asked me if I was the one who ordered a Big Mac, no explanation just wanted to know I guess. As I waited I watched person after person hit the dollar menu---McDouble and free water---Chicken sandwich and coffee---Cheeseburger and cookies---Chicken sandwich and McDouble, water. Forget the new Angus selection, forget the new stylized coffees, forget as I found out the Big Mac, the only thing in play is the dollar meal. I may as well have ordered Chateaubriand if I could spell and say it. The point is that this is a town with mostly really poor people. The guy that ordered the McDouble and water went out and got into a truck that he drove as the representive of a reputable roofing company so he works and, as I couldn't help but notice standing there waiting for my extravagence, that left one dollar in his wallet.

On this visit the other major head rattler has been the number of Cash Advance, Payday Loan, or whatever all these stores call themselves. They are everywhere, like locusts. On one stretch of a double lane road through a commercial area of fast food, strip malls, tans salons, and video stores I counted eight of these quasi- bank/loan shark businesses in no more than a three mile stretch. There were several pawn shops on the stretch as well not including a sort of megastore of pawn shops soon to be opening in a large space, gates almost installed. Most of these have large lighted signs, a corridor of debt, a sign of our times, not one to be accepted.

Just my opinion, there is great potential in Danville but there is limited time and the people who make a profession of preying on troubled communities must be shut down. Whether the cash advance crowd, bad mortgage broker or disingenuous car dealer in small communities or the CDS vultures in the global economy(see last post for Finney's comment), it's all the same. If conditions are such that predators can exacerbate a decline for their benefit there will be people who do that. Maybe some local governments or state governments can come up with some kick-ass tactics that deal with these scum and show the national and global authorities that it can be done.

Wouldn't that be interesting. Let Main Street set an example for Wall Street and Washington on what is allowed for the general welfare.

Tuesday, December 08, 2009

Finney of Evermay sees holiday cheer

We caught up with Kizziah Finney, equity strategist at Evermay Securities, last night at O'Lunneys on 2nd. Holding a pint of Guinness before his eyes and trying to look through the more than opaque liquid Finney commented that his forward vision was unclear. Then lifting the glass to his lips and quaffing half of it in one smooth drink he smiled, saying that the near term outlook is definitely good.

Finney expects consumer spending to hold up during the holidays and hiring to continue picking up, obviously with both sales and jobs figures staying weak but with the trends showing encouraging improvements in a positive direction. He sees corporate profit growth in energy, telecommunications, agriculture, and materials companies generally, and technology and financials still having some way up to go despite some market skepticism on those two. Finney's big worry is sovereign debt, in his word at O'Lunneys, "Dubai and Greece are no big shakes, or at least they shouldn't be. And Vietnam and one or two of those 'Stans aren't major players at all. Problem is these damn contagion spreading bare naked credit default swaps somehow still exist. Hell, pick and pay or whatever they were called, those worst of subprime mortgages were no more than 2% of the whole mortgage market, subprime as a whole maybe seven or eight percent, but those downward bet CDS securities are like endless shrimp month at Red Lobster. Get started and they can make you dangerously ill. If we are going in the shitter again it will be sovereign debt leading the way with those same CDS derivatives making billionaires out of a relative few while putting the financial world in chaos again. Don't take me seriously on this, I'd bet against it happening, but I don't feel alive if I'm not worried."

Finney reititerated his positive outlook for the holidays and said that "a wall of something is still being climbed and I hope it doesn't get too slippery". While having a tendency to be somewhat obtuse Finney's overall view can best be characterized as not negative enough to dare missing the next big move.

Monday, December 07, 2009

Balancing those gains and losses

We're entering that unpredictable period of the year that adds one more variable to the equity market. That's the tendency of investors to buy and sell stocks for tax reasons as they look to protect gains from the taxman, sometimes needing to sell winners to take advantage of losses and more often selling losers to offset gains. It can go either way.

Fundamental investing, trend investing, event investing, and sector investing have not gone away but most tax authorities live on a calendar year so making the best of it is part of the art in the fourth quarter and more so in the month of December. In big liquid large caps the effect is no doubt muted but moving down the chain of market caps and reaching small caps the impact can be pronounced and completely out of line with the current fundamentals of a company. Deciphering this phenomenon is almost impossible, but for those who happen to follow companies throughly there may be opportunities, opportunities either to buy more or not panic.

Saturday, December 05, 2009

U.S. equity market's strong performance, relatively speaking?

The general wisdom seems to be that the U.S. equity markets have had an exceptionally strong performance in 2009. They certainly have bounced back but the back page stats in this week's "The Economist" had an interesting table. It showed the full year 2009 to date performance of all viable global financial markets on a currency weighted performance basis, that's putting all performances in dollar terms.

On this basis the U.S markets are as stated with the Dow up 19% and the S&P up 23%, all fine at the start. On a dollar weighted basis, however, many other markets seriously outperformed. Looking primarily at some major economies and excluding those like Russia, Venezeula and a few others with serious inflation issues, what we see for 2009 on a dollar weighted basis for equities is Canada up 55%, Brazil up 148%, Germany up 31%, China up 79%, Singapore up 66%, Britain up 39%, the Euro area as a whole up 30%, Emerging markets as an index up 73%, the MSCI(developed world as a whole) up 32%, Australia up 71%, I could go on but you get the picture.

With the dollar declining in value, interest rates at rock bottom, the stimulus effectiveness in question, and growth not yet especially apparent, U.S. equities have broadly underperformed global markets in 2009. Even those in the U.S. with nice gains in their portfolios have been seeing, or not seeing but experiencing anyway, a material decline in their relative performance and purchasing power.

There are so many tangential and derivative points to this thought that saying more would ultimately go nowhere, at least not here. The stats on equity markets by themselves are just interesting, no matter what one's interpretation, and those stats are certainly not present in media discussion or even some serious discussions of U.S. equity market performance.

Friday, December 04, 2009

StubHub airlines

In a few weeks of making flight reservations for myself and others to various locations, some on short notice, it's become clear that the airlines are running the same game as concert ticket auction sites. Two days ago a round trip ticket that I needed was $441. I was kicking myself for having to pay this much for a relatively short flight, looking at the Southern Crescent with its terrible train schedule. I checked the airline again today---$213 for the same ticket. They obviously had some extra seats. Same with another ticket for someone else, a longer trip, $360 two weeks ago, $600 four days ago, $470 when the purchase had to be made today.

This is all legal, and the rationale is obvious. Fill the planes and get as much for each seat as possible based on some completely unstated pricing system run by mathematical models. This consumer can only scratch his head and keep checking prices until it may be too late.