A time to make money again?

This equity market has been impossibly frightening.

Do those descriptive words work together. They feel right. The attraction of nibbling at incredibly beaten down stocks has been, as they say, a fool's errand. There has been no way for someone other than a professional trader and, to be polite, professional "networker" to do well, unless just by luck. Maybe, that is, until just recently.

At this point there are many stocks at levels where the only pertinent question is whether they will survive outside of bankruptcy. If the answer can be at least 50% yes, then the risk reward could be huge. Buying a stock that traded for $50 18 months ago for $1 today does carry the risk of losing all of one's money. If the company can survive, however, it's reasonable to assume that the stock will be at $3, $5, or $10, maybe higher, over the next three years. Or in the next six months. This short term game is fascinating. AIG traded at 36 cents at the beginning of March and by March 20th it was at $1.52(now it's back down to 99 cents last I looked). That price shows that the company is still sick as an old dog but for investors going in at 36 cents, an almost what can you lose proposition, it was a 300% return at the high and still a large one today. Citibank was at 98 cents a few weeks ago and rose as high as $3.75 in no time before falling back to around $2.50 now, another tidy return at that price and much higher for anyone who decided to trade out at its peak. Are AIG and Citi too big with too many tentacles in the derivatives and trading markets to go under. If so and they have a few years are they worth jumping on now. Is Etrade too minor from the Fed's point of view to survive another market meltdown should it come, or are they interconnected with too many customers for the government to want the intensity that would boil over to come about. What about the gambling companies like Wynn and Las Vegas Sands with their huge interests in Asia. These stocks traded well above $100 over a year ago and they now are around $15 and $3 respectively. It's telling that I mentioned the gambling companies isn't it.

This is just interesting to me. Are tech stalwarts and leaders in their fields like Akamai, Sycamore, Ebay, EMC and others going to be around in what will almost certainly be a more technologically intensive future barring some type of complete market and societal meltdown. Wait a minute, I forgot, have we already had an almost complete market meltdown.

It's easy for anyone to find their own examples of stocks that fit their criteria of "are they going bankrupt" and if probably not is it worth the risk and the anxiety. Peter Lynch, the former Fidelity star and low key pundit when he infrequently speaks or writes, said the other day that in a market with so many stocks beaten down severely "you feel like a mosquito in a nudist colony". It would be nice if the patience and former wisdom of Lynch, Buffett, Grantham, Bogle and others would begin to carry the day.

"Terribly hard" says Geithner?

The Secretary of the Treasury said today that it would be "terribly hard" to separate out the riskiest credit default swap trades from other transactions. While wanting to be a supporter, this statement just suggests that if the job is too hard, he should resign. With $60 billion of CDS positions against $2 billion of issued securities in the subprime market, how "hard" is it to identify the great majority of naked speculative trades. He said, "My own sense is that banning naked credit default swaps is not necessary and wouldn't help fundamentally. It's too hard to distinguish what's a legitimate hedge that has some economic value from what people might just feel is a speculative bet on some future outcome".

"MIGHT JUST FEEL"? To say that Geithner has a difficult task is an understatement. When an obvious need, however, is described as too hard, it makes one wonder if he is up to it. I hate to agree with his generic detractors on this, but for totally different reasons I do.

From the recession front

We may or may not be at some cusp of a recession becoming terrible to less terrible. That translates into more job losses in the coming months and then relief by the end of the year. Barring a disaster, what will happen, as carmakers are producing now half of the just the replacement number of cars and trucks that are projected to be needed, deferred durable goods replacements must eventually be addressed, and houses need to be repaired and junked, all of which is spending, is that 2010 is the year that year over year increases in spending, housing starts, and used house purchases will expand as well as all house productive goods, because 2008 and early 2009 numbers were so terrible.

The recession now is producing on the ground changes. My local plumber, a family owned business, got a call this morning, from me, a customer of at least 15 years, concerning a potentially serious but not short term problem. Accustomed to two or three days delays for such a request I was asked if an hour from when I called was ok. YEAH. Everything fine, as always dollars for the plumber were more than I anticipated(as was another legal bill today that was jaw dropping on another subject---why do attorneys fees somehow act like college tuition payments, up and up), but we got what was needed done. Despite that, however, the young and seemingly honest plumber was telling me that they only worked every other day now, that people in general were taking into their own hands or getting unlicensed workers to do work, the price did not drop, just like the attorney whose price rose 25% for less work 6 six years ago.

Am I imagining this, or is this all just chipping away at the prosperous portion of the so-called middle class as it is taxed away(including sales tax, property tax, state tax), undermined away eventually in means payable adjustments to social security and medicare, and undone by a system that supports escalating costs that do not adjust with any downturn for education, healthcare, and many professional services from legal to home repair.

That said, it was a productive day some might say, one of the best as I found the finest Manhattan low key Szechwan restaurant possible near 5th west of 40th, inexpensive and elegant and spiced food that is done stand up and right, no good words to describe this place because so many other Chinese eateries follow some standard script. Eight giant shrimp in multiple peppers and asperagus, hot, white rice, hot and sour soup, $10.95 in midtown.

Back to the plumber, which along with the lawyer is not a financially thumbs up story. The plumbing business we have worked with for so many years is, as mentioned, a family owned business with four trucks that services an area between the just barely middle class Mineola and Hempstead to the affluent North Shore and Garden City communities. They are now down to just working every other day. In response they are not cutting rates but in fact seem to be raising them for people that can afford their service. They said that many people are deferring maintanence, deferring new installation, and even putting buckets under problems in houses that are in ostensibly affluent areas.

George Soros op-ed WSJ

There is an op-ed today by George Soros in the Wall Street Journal that is an almost perfect, succinct, understandable by me, and correct version of the financial devastation and why that Credit Default Swaps( reason for the caps) and the elimination of the uptick rule created a disaster that did not need to happen, and why correcting that is so much more important than all of this bs spending. See post here on March 7. I wish that my writing skills were as strong as whoever took Soros's thoughts and penned them into this short piece.

Look now. From what I can see it is not available to non-WSJ subscribers, but if there is still one on the newstand this eight paragraph piece may be worth two dollars.

The perils of red meat

A CNN news reader reported this morning that people who regularly include red meat in their diet "have a 30% higher chance of dying" than those who don't. That is definitely news. Prior consensus was that the odds were the same for all, 100%.

Pelosi's agenda jeopardizes White House recovery efforts

Speaker Nancy Pelosi continues to be an out of control troublemaker for the White House. Her whack-a-mole performance at Obama's quasi state of the union address notwithstanding, she is no different from her Republican counterpart John Boehner. Their intensely partisan behavior has nothing to do with getting the right things accomplished and everything to do with old style petty pandering politics. Maybe that's why they so obviously detest each other; too much alike.

Leading the 90% bonus tax bill with zealous vindictive rage, Pelosi has once again created a difficult situation for the White House and Treasury. The bill itself is ridiculous and if it becomes law it will sabotage efforts at all major banks to work through this difficult environment. As for the primary target, AIG's key businesses that had nothing to do with the losses incurred will lose value and when and if sold will return far less to taxpayers than otherwise would have been possible.

The problem now is that the program to deal with "toxic assets" on financial firms' books is just about to be launched. This program is designed to restore some measure of liquidity to the securitization markets and to relieve capital adequacy pressures on some financial institutions. Will it work --- probably not to the extent hoped but a beginning of stabilization would be an achievement. This program is built around two actions: first, attracting private equity partnerships to invest in pools of toxic assets that will be heavily financed by Treasury, 85% is the latest number and, second, selecting five or six premier investment management firms to manage and eventually liquify toxic assets that are bought directly by Treasury. The question now is why would any firm want to agree to any involvement with the government when Congress can change rules and mandate management actions at their whim?

TARP has already been a disasterous example of this. Can you believe that in the fall when firms like JPMorgan and Wells Fargo were politely coerced into taking the money they did so willingly in order to stabilize the entire system for the benefit of all concerned. They made supporting statements. Many small banks who were asked to join and take money were actually honored to be included as it was deemed then to be for banks who were healthy enough to receive and make good use of it. With the continual attacks by members of Congress on TARP recipients and the retroactive rules that have been applied, banks that have TARP money are now reviled and handcuffed. They can't appropriately reward their employees, they can't have conferences with their clients that are not held in some spartan environment, they cannot have employee conferences that are meant to reward top performers, they can't hire the best and the brightest from around the world in this global industry, they are accused of hoarding money and not lending enough, why would anyone choose to do business with a government ruled by this bankrupt Congress led by Pelosi and company. What private equity firm or asset management company would put themselves in the postion of being second guessed, attacked and even legislated against if their subsequent actions were not in line with the latest whim or could serve some political purpose beyond their scope. This risk will now already be priced into any deal the administration is able to make, and will be less cost effective for taxpayers. That's what a market does.

This is a big problem, discussed much here, and the absence of intelligent Congressional leadership seems only to be getting worse.

"Employee Free Choice Act"

Even supporters of this proposed legislation must wonder about the Orwellian title. Eliminating secret ballots and the name of this bill is a combination that defies logic.

The current practice, in place since the Roosevelt enacted National Labor Relations Act of 1935, gives workers the right to organize and build consensus based on the card-check method. This leads to a secret ballot election run by the National Labor Relations Board. The current proposal lets the card-check method alone certify a union. If someone thinks that this is not subject to coercion that is at least as significant as what companies are accused of, then they have no view of union history. If the current rules have flaws why not refine rules, step up enforcement, and raise penalties for impeding the current secret ballot method. Mandate equal dissemination of information between union advocates and management. Give the National Labor Relations Board more supervisory responsibility prior to as well as during an election.

The proposed bill as currently structured, at least based on googling efforts here, has no provisions dealing with the responsibities of the unions and requirements and penalties for abusing this system if it is put into place. While today many unions focused on private sector business are apparently reasonably responsible and nowhere near as corrupt as unions of old, in the public sector, especially at the state levels where patronage is afoot, often unions are every bit as actively corrupt and inflexible as ever(there are always so many examples of this, everywhere around me in New York, but my recent favorite was the discovery that 97% of Long Island Railroad unionized employees retire on disability despite the fact that the LIRR has one of the best safety records in its industry). There should be no presumed saints here, business or union, and any proposed changes to the law should address both sides of the equation.

Near unanimous support among Democrats for this bill is a result of three factors: union members tend to be reliable Democratic voters; unions themselves are reliable Democratic contributors; and, maybe most importantly, despite the current rules on secret ballots, according to an MIT study unions are successful in organization efforts under current rules only 20% of the time. The reasons for this could be made more transparent if the current rules were significantly strengthened before ditching what seems like a fundamental principal of democratic governance.

If any reader wants to explain this in a better way, please hold forth.

Tax on employee bonuses

Is this possible? The House of Representatives overwhelmingly passed a bill levying a 90% tax on all bonuses given by banks who took TARP money even if they took it as forced by Treasury. In hindsight this may be an equivalent to Smoot Hawley, different completely, but an insular reaction to populist sentiment. The financial centers could now transfer to London, Hong Kong, Singapore, and Tokyo.

Spitzer and AIG

It is beyond bizarre to see that Eliot Spitzer, as reported in the New York Times, is weighing in on the AIG controversy. Apparently he is now concerned about payments to counterparties.

Eliot Spitzer, and his confidante and Harvard roomie Jim Cramer, are more than anyone responsible for the demise of this formerly great U.S. based insurance giant. Spitzer wanted attention. He destroyed the securities firms research process and he destroyed any vulnerable company in sight. AIG was one of his targets.

He forced Maurice "Hank" Greenberg to resign. All charges have now been dropped as unsupportable. Anyone who has spent time with Greenberg knows that he had his hands on every aspect of that company. Ask him about the company books, he would bore you with his knowledge of every nook and cranny. Ask him about some obscure subsidiary, you could not surprise this man in any way. He could stand in front of hundreds of securities analysts and hold them in awe of his knowledge of his company.

Eliot Spitzer forced him out. In Greenberg's place came his Brit #2 Martin Sullivan. As an aside, in business there are often situations where strong managers have a #2 that is never meant to be #1. That was AIG's situation. All of the CDS losses that sunk this formerly well managed company came from a group of traders in London that Sullivan could have overseen.

Greenberg could have seen this. Spitzer was elected governor. Who cares whether he gets off on keeping his long socks on while having sex. He destroyed a great company, AIG, and an important industry that could have been more of a beacon for today's plight, the research business, and now he is giving out his opinions on the blog Slate.

No shame.

Taxing issues

It was reported yesterday that Madoff victims would be allowed to report their Ponzi scheme losses as theft losses in their tax returns. What was surprising in this was that they would be able to report their "phantom losses" and receive credit for returns that never existed.

The media has highlighted people who are in the terrible situation of having all of their wealth tied up with Madoff. That sad story told, most of the Madoff investors were people of considerable wealth who did not sock everything away in one place. They are people of who had the capability of doing due diligence on the absurdly high and consistent returns of their investments with Madoff LLC. That Madame Bettencourt, reputedly the richest woman in the world, will get tax credits on returns that never existed seems inappropriate. This is 2009! There are easy computer programs that could give Madoff investors relief based on the S&P 500's return over their years of investment, or ten year treasuries plus two, or some other measure. To give tax relief for lost opportunity cost seems fair. To give relief based on fantasy seems like favoritism for a mostly very wealthy group of investors. Chuck Schumer is happy, having delivered for his constituency.

Put that against the absurd IRS practice of limiting total capital losses for individual investors to $3000. This has not been inflation indexed or looked at in light of equity market involvement for, well, almost forever. If the IRS wanted to provide some tax relief that would jumpstart consumer spending in the middle to upper middle class, raising this loss limit would have been the place to start rather than offering gifts to the wealthy of Palm Beach, Paris, and New York.
There is no defense for this $3000 capital loss limit except, as with the AMT, Congress and the White House can't face the loss of tax revenue from these unfair rules that penalize a key demographic for this nation's economy.

Credit card business under credit pressure

On Monday American Express announced that its net credit card charge off ratio for February was 8.7% and their delinquency rate was 5.3%. These were significantly higher than expected. The charge off ratio is an annualized number, taking one months performance and projecting that same performance for a 12 month period. The delinquency rate is a point in time assessment of cards more than 30 days past due. For that reason the delinquency rate and trend are generally viewed as the more informative number because it is not a projection and it is not an indicator that can be managed by a firm's policies, aggressive or not, on charge-offs. For the overall U.S. card industry the delinquency ratio in January, the last number available overall, was 5.9%, which is the highest level since 1992. In the near term all signs point to more charge-offs ahead.

While this will put extreme pressure on the earnings of credit card issuers, it is unlikely to be even close to the kind of debacle that the mortgage business has become. For the overall consumer economy, however, it's a big problem. In recent months the consumer asset backed securities market has been nearly dead. With these types of numbers, there little likelihood of card securitization issuance opening up. While card securitizations have thresholds of performance that allow a put back to the issuer if the pool of securitized assets deteriorates to pre-agreed thresholds, that is of little comfort now to investors as the bond ratings of the issuers are in flux, as in in flux with downward pressure. What this means is that in order to expand consumer credit with this most popular vehicle, banks would need to absorb all growth onto their balance sheets at a time when the Fed is "stress testing" those same balance sheets. With that dynamic banks will be, are, working to restrain or even contract their credit card receivables through decreasing lines and raising rates.

The TARP money does not solve this dilemma. Banks, especially credit card issuers, ultimately want to lend money and build their business. No one with a mailbox could think otherwise. At the moment, however, working through this crisis of illiquidity in the credit markets is essential to building the banks ability to lend. If they ignored their inability to distribute originations and loaded up their balance sheet, it would not be long before they needed much more than what is available under TARP. Members of Congress can scream about the banks as much as they want. They should instead take a few minutes to study the issue.


Note: From this perspective the continuing lock-up in the securitization markets is indicative of why Paulsen's first proposal was the best and boldest approach offered to date as its goal was to recreate liquidity in the secondary markets, which is generally necessary for investors to have any appetite for new issuance. With that door long closed, regulation of credit default swap trading, as discussed here last week, is the next opportunity to do something constructive.

NCAA basketball time

Once again it's happened. During the regular season I rarely watched even part of a college basketball game. Within the last week, however, the fixation on the NCAA tournament has returned. Watching Syracuse and the charismatic Jonny Flynn during the Big East tournament got it started. Reading a newspaper story about Utah State and watching their determined style was inspiring. Louisville, a passion that bordered on obsession in the 1970's, has emerged as the overall #1 seed and it looks as if they are playing more like a team than they have at any time in recent memory, a tough team. I'm into it, so much so that I'm genuinely looking forward to the Alabama State vs. Morehead State game tonight. Single elimination in this sport always gives a chance for excitement.

This interest is not isolated. In town today doing some errands, I had two conversations, detailed conversations, about the tournament with folks that I know in only a passing way. The first was at the local frame shop as I brought in two paintings to get framed. My salesman had the News open to the brackets, and he sees Pittsburgh as the favorite, with Oklahoma as the spoiler. A healthy North Carolina also intrigues him. Over at the Getty station run by the Fitzpatricks, Boston College is clearly the favorite, on this their special day or any other day. They came within one point of Duke last week and they're on a roll. Asking for some non-partisan choices Connecticut and Xavier were mentioned. From this perspective, if Ty Lawson is healthy North Carolina has to be the overall favorite. Memphis could surprise as when they're hot games are not remotely close. Michigan State is another team with the strength to win. Louisville can do it for sure, but that 63% free throw shooting for the season does not augur well for the kind of close games that the tournament usually brings about.

This will be a nice distraction.

Pakistan situation tense despite concession

Tonight's concession by the Pakistani government of President Zardari may at first appear to have defused a crisis. That is not yet clear. It's good news but it would have been far better outside of a crisis. Now, by reinstating Justice Chaudrey and lifting all restrictions that had been put into place over the last week, Zardari walks a fine line between compromise and vulnerability. The barricades are being removed but the marchers may still be coming. In the cutthroat world of Pakistani politics, will opposition leader Sharif pull his caravan to the side of the road in cooperation with U.S. diplomatic efforts or push his advantage now with a rally of victorious supporters. What's better, a protesting crowd hemmed in by barricades and troops or a jubilant crowd without control. What will happen in the next few days remains uncertain.

China's treasury bluff

Premier Wen Jiabao made headlines yesterday with his comments on the "safety" of China's investments in the U.S. government securities market. These unusual remarks from the leader of the capitalist communist political dictatorship are attributed in the press to both genuine concern about the economic policies of the repostitory of almost $1 trillion of China's reserves and to China's sensitivity to its marginal role in shaping the G-20 meetings. One could ask what safe haven China might divert those funds to in this truly global crisis, especially in light of the seizures of Madoff LLC and the Stanford Group.

From this perspective, the Premier's comments are part of the dispute now taking place over the South China Sea. Last weekend's confrontation there between an unarmed U.S. Navy surveillance ship and five Chinese ships has not been resolved. The U.S. is sending armed escorts to the area now to protect its routine surveillance efforts in international waters. China is more or less claiming soveriegnty over much of this vast area between the Chinese mainland, Taiwan, and the Phillippines. This is an ongoing issue and China is playing the economic card to seek a compromise in its favor.

On that sunny thought, it can also be noted that the head of Russia's airforce suggested yesterday that they are considering basing long range bombers in Cuba and that discussions are underway. In any event Venezuela has already offered an equipped island to Russia for its use as a base in this hemisphere.

The Obama administration is being tested.

"Walker Evans and the Picture Postcard"

This exhibit currently at the Metropolitan Museum of Art is in three small gallery rooms. The exhibit may have something for everyone, but for those who have a fascination with americana and twentieth century history it's a gem. For those whose experience reaches back to a different era, one before texting, e-mail, and the accessible and affordable long distance phone call, it can recall the excitement of a postcard. That's a trifecta here.

Postcards once represented a pride of place. They were a kind of dispeller of cognitive dissonance to proud citizens everywhere. They were special. Any travel to a new place, an unexpected place, to the West, or overseas, or basically any place that wasn't part of an expected routine, was an opportunity to send postcards as almost a matter of historical record. Sending them was a ritual. Receiving them was like a gift, the chosen picture and the brief note open to interpretation and discussion.

This small sample of Walker Evan's apparently massive collection of postcards and his related photographic work shows the confluence of that iconic greeting and his artistic approach. Evans saw in postcards what he saw in his work which, in the words of one of the curators, was "being able to see the present as if it were already a part of the past".


Note: Busker afficionados alert --- Jeremiah Lockwood was in the Grand Central subway station today, near the boarding area for the shuttle --- well worth it for anyone.

Obama speaks to the Conference Board

Today President Obama addressed the Conference Board, an organization of the CEO's of the largest and most prominent companies in the U.S. On the elliptical trainer at the gym I caught a few minutes of his opening remarks and that was the most important part. He recognized the importance of their companies in employing millions of people, in maintaining the economic strength of this country, and in generously supporting civic and charitable organizations in their communities broadly. He was reaching out and saying the right things to a group that has been badly bruised by many politicians in both parties. It was the right thing to do, and a breath of fresh air to hear, but it was also an effort to pull this group into a coalition to support his proposed reforms in health care, energy, and other areas. Off to the machines, I didn't hear the body of the presentation, but understand from news reports that the majority of the follow-on questions related to the administration's health care proposals, as that is an area of vital interest to this group that is always working toward the dual and interlinked goals of having a motivated work force and acceptable profits.

Even with only a quick viewing, there is one thing that I know for sure in the winter of 2009. That conference room was not in the beautiful Greenbriar Resort in White Sulphur Springs, once one of the Conference Board's favorite retreats.

Obama attention diverted --- Pakistan crisis

It is a certainty that this morning White House attention is taking a break from the economy, but it not a break that refreshes. Pakistan is in an escalating political crisis the immediacy of which cannot be underestimated. With its nuclear arsenal and pivotal postion between the middle east and southeast Asia, Pakistan is the linchpin of, understatement coming, a volatile region.

Yesterday the government banned meetings of more than four people in the two most populous provinces of the country. If levels of absurdity are indicative of the level of a crisis, it's a big one.

A Crisis of Competence

As we look at and experience today's almost unprecedented economic and financial challenges, what is often said is that there is a Crisis of Confidence, consumer confidence and business confidence, that is cascading ever downward. In coming to grips with these problems and solving them, what we face more urgently is a Crisis of Competence in the "leadership" abilities in Congress, in our business and financial world, and in many of us, the American people. This is not to paint each of these segments with a broad brush, although with Congress it is tempting.

What is needed now is a sort of call to arms to work responsibly to understand these challenges, the roles each of each player, and above all the need to pull on the oars in the same direction at the same pace. This theme was emphasized today in a speech by Jamie Dimon, CEO of JPMorgan Chase, to the U.S. Chamber of Commerce. Dimon's stature has grown during this last year such that Bloomberg Radio broadcast his entire speech live plus the Q&A uninterrupted(except for one three minute break in the feed) for almost forty minutes. It was a sensible and comprehensive discussion of what lies before us, some suggestions on a new regulatory framework, an overview of incremental regulatory "fixes" that need to be addressed, and above all the plea that everyone, business and political, Republican and Democrat, work together, and his strong belief that not doing so would be at the peril of extending this crisis for years. That Dimon made this presentation in an impromptu style with occasional humor made it that much more effective.

Congress is playing a game of who can blame whom with the most self righteous indignation, apparently either to mask their inability to understand and work on what is going on or to simply pander to the lowest instincts of their voters. In either case, hiding their incompetence or just playing politics, it will simply extend this downturn. Case in point is the earmark issue. After their six years of larding every bill with earmarks when they controlled Congress under Bush, they are outraged to see $8 billion out of a $410 billion bill in earmarks. The Democrats, on the other hand, hide behind that $8 billion number, as in it's only, but the other side of that coin is if Pelosi and Reid had just played it clean since it is only that much, they wouldn't have put the President in the position today of announcing his signing of the bill with remarks basically apologizing for the flaws. That was upbeat?

Both parties love ridiculing banks and any corporation that encounters trouble. What is this all about. A dialogue would be fine. Mistakes and misjudgements have been made on all fronts. This outright hostility at the congressional panels, Senate and House, Republican and Democrat, in which each member in turn gets the chance to show how clever they are at humiliating people who work hours that they could not conceive of and who know more than they could imagine in most cases.

As Thomas Friedman points out in his column in today's New York Times, "Economically this is the big one. This is August 1914. This is the morning after Pearl Harbor. This is 9/12. Yet, in too many ways , we seem to be playing politics as usual."

Thoughtful people are speaking out. Is it possible that Pelosi, Boehner, Reid, McConnell, Frank and the rest can listen. Is there the possibility that too many people in Congress and elsewhere have enjoyed our prosperity for so long that the competence to rise to the occasion simply isn't there. That's a distressing thought. It's not an excuse for giving up.

Note: Webster's defines "competent" as "properly qualified" and "adequate for the stipulated purpose". That is interpreted here as being able to accomplish what needs to be done. Competence requires some intelligence but intelligence does not equate to competence.

"King Creole"

In the mood for an Elvis movie. Take a chance on "King Creole".

This 1958 film, set in New Orleans, is directed by Michael Curtiz whose other films include "The Adventures of Robin Hood" and "Casablanca". All songs were originally written for the film. Based on a Harold Robbins novel, the story line itself has a contrived and predictable quality, schmaltzy, maudlin, and ultimately redemptive. It was an Elvis movie and it was 1958. Don't be deterred by that. The attitude conveyed by Elvis's character is a perfect example of what that devil music can do to a young man, and an artifact of the era. The black and white cinematography of the French Quarter and environs works. Walter Mathau, Dean Jagger, and other cast members are a cut above the usual. The music and that voice are exceptional, and then there's the inimitable Elvis shaking, posturing, and smirking stage presence.

Why not.

Market rallies

Today in the equity markets felt so good, so unusual, that it began to dust off a word not seen in recent weeks, "hope".

It came as liquidity in the interbank markets had become, in recent days, more restrained with rates rising again and as spreads on financial company senior debt were hitting highs not seen since the Lehman and Bear Stearns collapses. The rally was led by, believe it or not, financial companies after a comment by Pandit that Citi was looking at a profitable quarter. If this is not an indication of an oversold market, what is.

Looking at recent 13-F data on fourth quarter investments by major institutional investors, which today's action gave me the courage to do, it was fascinating to see that many of the big players continued to add to positions that they already favored. Some were building new positions in "values" at that time. At this point in March all of those investments are under water big time. It is encouraging that the professionals saw value 20% higher than where we are today, or is it. Data on overall equity holdings of companies, including retail and everything not visible in the big firms, indicated that no company of the ones I researched had net positive inflows in the fourth quarter and it was not even close. Retail, high net worth, and small institutional were right, in the aggregate to run then, but longer term they generally aren't the lead steers.

A word of caution --- during the steep decline that began in October there have been eight one day rallies of 5% or more. Is this just another one day wonder, or could the market finally be at some kind of base.

The demagogue Senator Richard Shelby

In times of extreme stress an environment exists that is conducive to the rise of harsh demogogues that exploit popular fears. In the 1930's we certainly had our share, some of more substance than others, and now we have wannabes like Rush Limbaugh and the real thing like Senator Shelby of Alabama. There can certainly be differing views on the challenges that face us, but can anyone possibly suggest that Shelby's bombast and venom is remotely constructive.

In the early 1990's I had a business relationship with nice fellow who was a hard and fast conservative Republican in every way. He had useful connections in Congress and had once worked on Capital Hill as head of staff for a Senator. One day we were having a discussion on politics, disagreeing in a pleasant way that is almost hard to imagine now. I mentioned Senator Shelby to him as a counterpoint in our discussion and my business friend's face contorted in a way that made him look like he was about to spit. He then said, "he's a bad person, an ugly person, he can't be trusted". That comment was so out of my friend's staunch Republican character and his usual unwillingness to bend in the slightest on any argument that it has been with me ever since.

Brother, do we see that today. Let me step on the chalk line of political correctness and say that we are not only dealing with Senator Shelby's character or lack thereof, his strong "conservative" views, his intense resentment of anything related to the northeast or the west coast, but also the relevance of the fact that we have an African American President. Senator Shelby has no interest in being constructive or contributing to a solution. He would rather bring us down than show any sign of cooperation.

"August Heat", Andrea Camilleri

Andrea Camilleri's Inspector Montalbano mystery series has been mentioned here before. "August Heat" is the latest in the series to be translated into English, just published last month. Last night it came to the rescue.

To explain, after dinner last night I rechecked the last post here for any typos or grammatical errors which are almost always there to be found after the initial spontaneous writing. Looking at recent posts as well, what became clear was more of an obsession than usual with opinions about the financial markets. Give it a break was the thought that came. So I sat down with "The Ascent of Money", midway through this recent book by historian Niall Ferguson, put my feet up and began to read and relax. Wrong book at that moment, the relaxation did not come and the market obsession intensified in an unpleasant way. "August Heat" had arrived from Amazon the day before. Thank God.

Camilleri writes with an easy flowing and wry touch. His translator must be excellent but the few bumps in the prose are likely accounted for by a challenge in recreating the vernacular. The story lines, the mysteries, are written at a pace that keeps the attention focused and this reader turning the pages. There is always a second story line that is coincident with the mystery and that is the thoughts of a man in his mid-fifties, Inspector Montalbano, and his interior monologue about aging. "August Heat" was no exception to these observations. In fact, it was perhaps the best of the series, or at least it seemed that way last night as I stayed engaged until the end. What a relief.

The Credit Default Swap dysfunction --- Santoli agrees!

Michael Santoli of Barrons, a sister publication to the Wall Street Journal, has a weekly column on the equity markets that is often insightful on trends, often wrong on stock picks, and always a believer in the wisdom of the markets absent regulation. Today's column caused me to sit up straight in my chair and read again, and slowly.

Posts here for over a year have criticized the elimination of the short sale uptick rule in the summer of 2006 as throwing out a regulation that worked for almost 60 years. In the absence of this rule it was much easier for short sellers to gang up on a stock at any given point in time and create almost risk free gains. Almost I say because there is always a last trader to cover that gets hit. Without the uptick rule it was easier to take advantage of "planted rumors" and do damage to a stock that could be viewed as vulnerable. These short attacks, with no pause for the stock to refresh, could have nothing to do with the economic performance of a company but only with a competition and some would say collusion among traders to make money. Michael Santoli always unequivocally supported the elimination of the uptick rule because in his view it had no impact on the longer term performance of a stock.

Here at ENS there was also an obsession for perhaps two years about the flaws in mark to market accounting rules in illiquid markets. There is no question that under many circumstances mark to market is a best practice. In illiquid markets, however, it allowed small trades by speculators and by panicked or deeply troubled investors to set required prices for an overall security. This created a downward spiral of panicked selling among the stressed and the need for large financial institutions to write down parts of their portfolios significantly, irregardless of the economic value of the security. Michael Santoli always supported across the board mark to market accounting --- the market always knows best.

The latest intense focus here has been on the credit default swap market and the fact that there are no required linkages to the underlying securities. The subprime mortgage securities market was deeply flawed but when all was said and done there were at least $60 billion of CDS's written against $2 billion of subprime CMO's. A fair market could have unwound this in some type of orderly way but with the massive CDS bets it was chaos. That pricing chaos now infects virtually all consumer asset backed securities. I could keep going on this issue but much of my commentary has been recently posted here. Shock of the day was that Michael Santoli, of Barrons, agrees. He writes today that "curbing CDS purchases by investors with no economic exposure to a company", or sovereign I would add, is like establishing the infield fly rule in baseball 100 years ago. By that he means that it is such a completely obvious opportunity to violate fair play that it should be banned. You can see his column at http://www.barrons.online/ today.

Others with broader platforms will hopefully write about this and the SEC will hopefully pay attention. It's so simple and it could do more almost immediately to put some order into these markets than any amount of bank bailouts and popular handouts. Santoli would probably not make a statement that aggressive, but even he agrees that the need for change is obvious.

The problem is ZERO

There are still regular equity market commentaries about patience, having a longer term time horizon, and waiting for the shorts to cover and the huge amount of cash earning almost no interest to begin to edge back in. I would like to believe these views, and share them to some extent, but the problem is that equity prices continue to decline.

Patience is not well spent on a stock that goes bankrupt. Zero is final and if the majority of the market eventually comes back, a zero stock never does. Bankruptcy is one way that this is happening, and more and more companies are on that precipice. Forced mergers of troubled companies at historically low prices is almost as damaging, wiping out most equity of the company acquired. This has happened obviously with Washington Mutual, Bear Stearns, Wachovia and other financial companies. It will soon begin to happen in the commercial and industrial sector, not likely to be forced by the government or regulators, but as a decision by managements that the last chance of survival for their communities, employees, and what they have created is to accept a low low offer from a stronger company. A final way to get to almost zero is what we'll call deconstruction. AIG and Citicorp are financial examples and Ford as a survivor is an industrial one. Looking at AIG, it has many sound insurance businesses in the U.S. and in Asia. If the company can ever get to the bottom of paying off counterparties in the CDS market(and if they have stopped making markets in the CDS market, which is a bizarre thought but no longer beyond impossible), they will be so indebted to the government and so damaged in image as a corporation that a sale of assets is highly unlikely to reward current shareholders at all. If Citi keeps surprising with its unending trove of bad assets and Merrill continues to undermine BofA, there is no reward. They can continue as ongoing concerns, they can be broken up into smaller pieces of their finest assets, but the chance for current shareholder reward is almost zero. It's strange in the extreme to be now thinking thoughts like "if Citicorp gets to 50 cents is it time to step in?" or "if Ford breaks a dollar is it a worthwhile bet?"

Bankruptcy, forced combinations, and deconstruction, all ways that an equity investor can lose all of their money. Patience is not rewarded in these cases with recovery. This real point of this comment, however, is not about the companies mentioned or those that may be on the verge of some type of zero resolution. This is about companies that don't seem in trouble at all but whose stock prices slip most days. It's about comparing those companies to ones that were no cause for worry at all just a few months ago and are now slipping toward a possible financial crisis. Is patience a virtue or an attack of vertigo. Are comments like this indication of a market bottom finally arriving or an indication that market adages of the post WWII years are evolving into myths.

One thing is certain. This time it's different. The folks in Congress who badger, ridicule, and verbally torture corporate executives today will likely be staggered in a couple of years when they see the billions made by a relatively small group of hedge funds on the short side of everything, who are using the CDS market and other tools to propel everything downward. They are going to look back at those bank executives, auto executives and others in traditional market segments and wish that they were back making their millions and employing hundreds of thousands of people, rather than seeing firms with 10 traders around screens making billions.

That's enough of this rant. Almost time for dinner. What a decision, do I go pick up a couple of burritos, or fajitas, and a salad at Gonzos, a two shop "chain" nearby that has reasonably priced great food and a personable owner to boot, or do I scrape up some leftovers for everyone here and instead buy 30 shares of the largest retail financial services franchise in the world, operating in over 130 countries.

Interesting news

Two news items today caught my attention, one in a positive way, one negative.

First, the consensus market gain from today's S&P level that a group of eleven market strategists at the major firms are predicting is 46% by year end. Their companies businesses are dependent on some recovery and some return to a new level of "normal" so it's not really a surprise that they would be looking for this horrible negative trend to break. That considered, it's still good to see that this group of leading strategists are able to muster some hope.

Second, the credit default swap market is still alive and active in the area of soveriegn debt. There are CDS investors that are required to hedge exposures to other countries debt holdings and there are also, apparently, plenty of investors simply using CDS's to bet on continued declines in country creditworthness. From this perspective it would seem unlikely that most financial institutions would continue to write these swaps after the debacle of the past year. Do they think that this product is fine now because it's not connected to subprime mortgage loans. Anything can go down in a panic, ask Iceland, and the CDS market will by its nature accelerate any such decline. This is disturbing.

Indiscriminate selling

Across all markets today's selling was a capitulation that sends the message that the days of making money off of money are over. Even gold was down. Trying to call a bottom to this market has been a fools errand, one that has been almost impossible to ignore given the basics of market psychology over this lifetime. The mythology of markets appears to be changing.

A friend says buy the SSO on days when the market is down, and before days when there is no significant market data to be reported. Even that seems bold now. Buy and toss into the wastebasket was once the test of a market bottom. This seems more serious.