Wednesday, January 27, 2010

Crazy Heart and The Wrestler

"Crazy Heart" is this year's "The Wrestler". Same story for the most part with different endings, "The Wrestler" was harsh, "Crazy Heart" is saccharine. Mickey Rourke did not win the best actor Academy Award but there were many who passionately believed that he was the most exceptional choice by far. Jeff Bridges' performance is on the same outsized path but not as visceral, not as risky, as that of Rourke. If he wins the best actor Oscar it will be a mea culpa by the insiders for not choosing Rourke, whose once in a lifetime gut wrenching performance, as seen by some, cannot be duplicated.

Tuesday, January 26, 2010

Finney of Evermay is perplexed

The loquacious Kizziah Finney, equity strategist at Evermay Securities, for once has no point of view. "I tell my clients, and I'm proud to use the plural, that there are times when no one knows what's going on, or even can pretend to know. That's me now," Finney commented over an unlikely salad and iced tea at Mangia on 23rd. "You know, I need a break, so I internalize that and say the market needs a break, as my wife would say it's all about me, and at the moment I would prefer to accept that. It's not like I'm walking down to Paragon and buying a new ski vest or something, and do you see a pint in my hand, no mate, I'm simply tired of being optimistic and afraid to rest."

Finney continues to see the stock market rising this year, a modest rise as opposed to his more bullish posture in December. His main worry is political, both in the U.S. and in China,as he says, "Now we have a President who aims to help the middle class and in four or five days manages to whack their 401k's and pension funds by 5% or more with his anti-bank mission. What goes here. He is a total wild card and even me on an eighth Guinness thinks twice before making that bet. Then we have China where there is no real rule of law, only mandate or arbitrary party power, and their intervention in credit markets has become totally unpredictable, I mean it's come down to choosing firms and types of lending to shut down while ignoring others. Who can predict this Communist government's motives and anticipate their calumny when the game is afoot. Help me Sherlock."

Absent political concerns Finney sees, to quote him, "dare I say it, vibrant growth. Commodity demand is picking back up but prices are masked by the turbulance in fx markets, emerging markets will still be serving their expanding middle markets plus the U.S. import needs, and multinational companies of all stripes are for the most part lean and looking for opportunities". Finney still has no great conviction one way or the other given the circumstances, but says "if we could eliminate terrorists and politicians there would be no end to the limits of the world's prosperity".

Finney expects to have a committed view to a market call within the next two weeks and he has guaranteed an exclusive for Eyes Not Sold.

Monday, January 25, 2010

Infrastructure spending --- jobs and future growth

Infrastructure spending has been the missing piece of the recovery initiatives. As part of the major stimulus package this type of spending was at most 15% and it is unclear whether any of that has made it to "shovel ready" stage. Whether the issue is jobs or the economic revival of the country this situation is simply a mystery.

Infrastructure construction creates jobs, decent wage jobs. This type of construction creates demand for steel components, for specialized machinery, for engineering contracts, and myriad other goods and services. Infrastructure spending on our transportation system, such as deteriorating roads and bridges and the need for advanced rail systems, the need for airport refinements and modernization, and the need for city light rail are all foundations for the next era of growth if there is to be one.

The logic of this type of spending for near term good jobs and long term economic growth is is irrefutable. If this is not already part of the State of the Union address it should be added. We can run the deficit into the ground with transfer payments, class focused relief efforts, and subsidies for state shortfalls, but none of this creates "new" jobs or builds any kind of platform for future growth.

Sunday, January 24, 2010

Further reflections on the "fighting" Obama

So President Obama looked around after a year in office and here's what he saw. There was no enacted health care bill and the one that finally comes to a vote will be such a mess that, if truth be told, he could not be pleased with it. While the economy has rebounded from near collapse at the time his hand was on the Bible, the financial state of maybe half of American households has shown no improvement or has continued to decline. Unemployment shows no sign of any significant improvement. The housing price declines are perhaps stabilizing at levels that foreshadow no way out for more homeowners on the edge. At the same time a sliver of those in the top tier of wealth are saddled up and riding high again and the press has daily headlines about big paydays for bankers and other executives.

Then comes Scott Brown whose victory puts a double exclamation point on the losses of governors in Virginia and New Jersey. There can be no doubt that there is an electorate that is not just restive but nearing full revolt.

The President has decided to do two things. First, coopt the gripes of the tea parties and the left in a well tuned message that makes an effort to combine as many of the issues as possible and second, remind the political establishment, both Republicans and Democrats, just who he is, that is the formidable political strategist, campaigner, and charismatic force that beat the entrenched Democratic establishment and charmed the broader electorate on a road to the Presidency that was completely unforeseen just 18 months before.

From a political point of view his "fight" may be his best choice. From a policy point of view the benefit is unclear.

His bashing of the banks and his related policy prescriptions may play well to his audience, the intent may be high-minded, but if the result sets the economy back further(as discussed in the the 1/21 post here) more pain will be felt at the kitchen table. Obama could be seen as having nothing to lose. Having already identified the culprits as predatory banks, big oil, greedy corporations shipping jobs overseas, and a wealth class that has no concern for the broader citizenry, he only would need to point the finger back again. Why could that ring true with the voters? Because after participating in an American system that marketed a participation in some part of the spectrum of the great middle class and even held out the possibility of upward mobility, what follows is disllusionment, envy, and bitterness that are particularly strong when things go wrong, and they certainly have for many Americans. Blame needs to be assessed. Obama's challenge is to shape and focus that blame.

That sounds fairly Machiavellian, more than it should maybe. President Obama's intentions have been laudable. He tried to play the bipartisan chip in his first year and was undercut on all sides. His gambit now is a risky one and if it fails his presidency may fail as well. If he reestablishes his power and then uses his more draconian policy proposals as billy sticks to beat out a rational compromise he wins, and maybe the country benefits, maybe the country acquires a better sense of balance.

Some of his statements now, however, will do more to divide than unite. He's willing to take that risk and try to cut the financial and big business powers down to size, and show leadership in forcing a better sense of fairness in our society. How he accomplishes this while espousing expanded federal government oversight(and related bureaucracies) of significant areas of our economy, such as financial services, energy, and healthcare, is a significant question. Finding the money and the talent to accomplish his goals will be an even bigger challenge than reestablishing his political power.

Friday, January 22, 2010


"If these folks want a fight, it's a fight I'm ready to have."

Those are President Obama's words yesterday. There is so much wrong with them. They personalize an important event for the country. They reflect his political anger because he and his party failed on Tuesday. They ignore the "we" and reflect only the "I". They sound immature. He could soon be as alone as President Carter was in the late '70's.

Thursday, January 21, 2010

Obama launches political counterattack

After being surprisingly outflanked in a style worthy of Stonewall Jackson in Massachusetts, President Obama launched a massive frontal assault today in an attempt to regain the higher ground. With talk of senators and congressmen weakening their resolve on the health care legislation for fear that voters will turn them out in November, Obama is going on the offensive with an array of proposed banking legislation that will put that same fear into those members of Congress --- "If I don't vote for Obama's tough talk proposals on financial regulation will my home district or state voters throw me out as a pawn of the 'fat cat' bankers." Republicans will by their historic nature be almost 100% against this bill after running around the country for the last six months talking like Wall Street hating populists to the tea parties. Irony served up for them.

Having listened to part of the speech in a midtown Fidelity office until some laughing geezer yelling "fat cats, fat cats" made hearing impossible, reading Bloomberg reports, and watching a BBC World news program(and avoiding all prime television chatter), I am less than fully informed but somewhat pure from the ranting sensibility of our days. Nevertheless, here are some preliminary observations:

---Some of the proposals are not well grounded and for political purposes only one would hope. The tone of his commentary was inflamatory rather than constructive.

---Why not propose that the government become an effective regulator instead of blaming just banks for everything. Obama proposes limits on bank activity in credit default swaps and other risky transactions. Why not set up a regulatory framework and transparency requirements on these instruments for all financial institutions such that pure invesment banks, hedge funds, private equity funds, insurance companies, foreign banks operating in the U.S. and others are brought into the net. That would be meaningful in dealing with the systemic risk. What Obama proposes is political punishment.

---Markets in many areas are still functioning with limited liquidity that is holding back a rebound in the economy. Securization markets are operating at 20% of 2007 levels, loan syndication markets are lame in many areas with only the highly rated and new issue high yield(explain that) having some realistic liquidity. Proposing to limit the trading capacity of all major U.S. banks has the potential to dampen what liquidity we have overall, and passing such legislation could doom the markets to where we are today unless UBS, CSFirstBoston, HSBC, Deutsche and others come in and make some money. That's an overstatement, but what Obama is saying, again, is for political consumption.

---He proposes cutting back on large banks in a way that suggests that JPM, BAC, Citi, and others would need to cut back on, separate or sell investment banking and some asset management activities. Is this a move to put more power back into the pure investment banks while those pure boys will now have FDIC insurance. It looks like it. Let see, weren't there five major pure investment banks in 2007. Three were the leaders in structuring and distributing mortgage backed securities. What were their names, oh yeah, Bear Stearns, Lehman, and Merrill Lynch. Then there was the market ax in the CDS market, an insurance company AIG. What about the market leaders in bundling mortages for securitization, I remember, Fannie and Freddie, those giant firms that report to and are run by Congress and who trade for around a dollar or two today. Then again maybe I have a bad memory.

---How do you define proprietary trading and with that answer we'll know if what the President said makes any sense at all. Working in financial services in New York for over 20 years one could say I'm biased or one could also say I know what I'm talking about(probably somewhere in between). Banks constantly hedge all of their activities in some way so that they can create huge liquid markets in fx, interest rate derivatives, loan books, and hedge their deposit bases. With these massive market flows they must trade with a point of view. Working in a capitalist society and for shareholders they try to do this in a profitable way. What's Obama talking about. One would be hopeful that he means huge, absurd actually, unhedged CDO books like Citi and Merrill had because CEO's Prince and O'Neal had no clue about capital markets, or the CDS book at AIG that had ballooned out of proportion under the clueless Sullivan, but who knows what Obama means or even what he knows about finance.

We definitely need to reform financial regulation. This kind of knee jerk, almost megalomanic, reaction to an election is not the right approach. There's more to say, but I'm tired.

Wednesday, January 20, 2010


The news from Haiti over the past week has been terrible. A meaningful aftershock today is more horror for the people there.

The significance of this devastation to a relatively small part of a small nation is overwhelming. In 2004 the giant Asian tsunami killed 230,000 people spread over 14 countries. That was a disaster of historic proportions. In Haiti, one small country, the confirmed death toll yesterday, as in bodies that have been counted, was over 70,000 and estimates for the ultimate tally of those killed ranged as high as 200,000. Those many more severely maimed or wounded by being crushed in buildings are likely forever maimed as we have seen in photos. The government infrastructure has been mostly destroyed as compared to the many seaside villages and tourist areas in Asia five years ago.

Both the Asian tsunami and what we are witnessing today are horrific events. Comparing them has no real meaning, a fool's errand as they say, except to underscore the magnitude of what we see in Haiti. Can one even imagine the road back from this.

While the reliably inane Pat Robertson has an answer to all of this, there is none. We can only look for some well run organization and donate money.

Tuesday, January 19, 2010


The Senate race in Massachusetts was so far from my mind that until a few days ago the names of the candidates were not known to me, only recognized in reading from time to time. This could be a phenomenal upset was the thought as I followed the news over the weekend. Then Jon Stewart explained the story last night. There's not much to add.

Listening to some of the post-mortem dicussions tonight, I was disturbed that my strongest opinion about the outcome was mentioned by one of the commentors. Drats, but here it is anyway. The buying off of the Senators, Democratic Senators for crying out loud, in order to get the votes needed to pass the Senate version of the bill without filibuster was, what's a good word, is nauseating strong enough. Harry Reid more or less said that's just the way things work around here, always has been, brushed it off. The blackmailing Senators actually took pride in what they did, bragged about it. What ever happened to those back rooms. President Obama said nothing, just accepted it. If Bush 43, with his Cheney and Rove thugs, had a Republican Senator who threatened to break up a bill like that it was a different story. When the errant Senator got off the phone they would know that any patronage, courtesy, or largesse for him or his state was down the drain, gone for the rest of Bush's tenure unless they joined in. Maybe that's not pretty either, but it was behind the scenes. The Obama pay-offs were right out there for all to see; he did vow to bring about transparency and the whole country saw it. It was disgusting and was, I think, the turning point that sent Scott Brown on his 18% point pick up in 18 days.

What else was it. Has Massachusetts ever elected a woman to be a member of Congress or a Governor or a Boston mayor. It's a liberal state in a union sort of way, but it is a guy's state in a big way. The woman that they were supposed to elect turned out to be a terrible on the ground candidate. Massachusetts loves their big gladhanding politicians and she was not one at all.

My opinion, the health care bill was an issue but not the biggest one. It is for the country, but that wasn't the only issue or even key issue in this campaign. If it is a factor in Brown's election it may be because the state's citizens already have coverage for pre-existing conditions, portability, and broad based insurance. That wasn't their issue unless they wised up and realized that they did not want to take the risk of higher federal taxes to help pay for giving the rest of the country what they already have.

Then there is the economy and jobs. That creates an undercurrent of resentment that can help the underdog, especially if somehow word gets around that the favorite is taking the voters for granted, whether that's true or not(seems to be though). That Brown will likely turn out to be the type of Republican that speaks loudly and carries a little stick when it comes to business is not going to make them happy.

The good news is that this may wake up the Democrats. They have been squabbling among themselves in Congress for the last twelve months with Nancy Pelosi leading the way and a number of Senators like the thankfully retiring Chris Dodd always trying to get their mugg in the picture and upstage the President.

The health care bill is a mess. There is little indication that there is a focus on controlling costs and every indication that it is daunting in its complexity, but the pluses of having the basics like portability, insurability for pre-existing conditions, and widespread coverage make some form of the bill worth passing to get a start on this. Even though a major component of their campaign financing comes from trial lawyers, the Democrats do need to suck it up and add some element of tort reform to any bill if they don't want to be obviously two-faced. It's an important part of cost control(massive judgements, defense lawyer fees, and malpractive insurance costs)as well as controlling the number of unnecessary tests and procedures.

So now we have the first Senator who has been a centerfold.

Monday, January 11, 2010

Hovering market

The equity market in 2010 is trading cautiously. The volumes are far from robust, the price movements are to the upside modestly and in a lackluster way, with most days trades retracing the day before until a slight uptick. The ETF VXX, invested in equity volatility futures, is down 12% year to date. Not a long year, to date.

While I have little idea what these numbers mean I will share them in the spirit of shared intuition. The VIX, the Chicago option exchange volatility index, is today at 16, at least the numbers when low mean low volatility. A long term average for the VIX is above 19. In March 2009 the VIX was 45 and through the summer of '09 it remained in the low 30's. So today we have one highly cautious and completely undecided equity market, and consequently a market that is vulnerable in either direction. When investors perceive neither significant downside risk nor upside potential the VIX is low.

Same dilemma as always, take gains and store up reserves or invest and look for returns. Got to say that after all we've recently been through today's somnambulate results are eerie.

Sunday, January 10, 2010

Yemen and its neighbors

Yemen is a country on the edge of chaos and with the underwear bomber's attempt the world seems to be looking at the country as the U.S. government's problem and responsibility. There are others that should join in. Let's look at a map.

Yemen shares a lengthy border on its north side with Saudi Arabia, on the east a border with the Sultanate of Oman, on the west the Red Sea across from Ethiopia, and on the South the Gulf of Aden across from the lawless Somalia. It is estimated that the Gulf of Aden has approximately 21,000 commercial ship pass through yearly. One could easily suggest that Yemen sits astride an area of economic and political importance for the countries in that region as well as for global trade, notably oil.

With two separate civil wars in its northern and southern provinces and al Qaeda operating there almost openly as well, the U.S. and its allies, primarily Britain, are being asked by the government of Yemen for significant developmental aid as well as the imposition of security assistance. Yemen is the poorest country in the Arab world and has a government that is so fragile that the efficacy of developmental aid would be a big question mark.

Yemen is not just a U.S. and U.K. problem. Why is it not obvious that this is a pan-Arab problem as well and that a pan-Arab solution would have a better chance of enduring. Saudi Arabia is immensely wealthy and its absence in any discussion baffles. Are the profligate entrenched oligarchs there so insecure in their power that they want no association with looking for a solution in Yemen that could be seen as beneficial to the U.S. A Saudi prince was almost assassinated earlier this year by a Yemeni al Qaeda member who had explosives sewn into his body so they could not be detected. Saudi oil shipments could be threatened by an unstable Yemen. Saudi dissidents already use Yemen as a safe haven. As a conduit from the Red Sea and with Yemen on the border of the strait that connects that waterway to the Gulf of Aden, why is Egypt not an involved party as well given the revenues they receive from managing entry or exit from the Red Sea. With the Somali pirates holding hostage ships indiscrimately including those from Iran, China, and Korea, does the trading world in general see the importance not letting Yemen fall into the same situation.

Yemen is not just a U.S. problem. The U.S. presence in Iraq and Afghanistan plus its alignment with Israel makes it highly unlikely that the U.S. can effectively make a difference there other than to perhaps seek out and arrest or kill some members of al Qaeda. That could, in fact, exacerbate Yemen's long term problems.

Isn't it time for others in the Middle East to step up and for the U.S. and the Europeans to encourage their participation.

Saturday, January 09, 2010

Schumer's gambit may motivate Ford

It's widely known in D.C. and Manhattan that if a camera is anywhere in the vicinity of senior New York Senator Charles Schumer everyone around needs to brace themselves for Chuck's lowered shoulders and sharp elbows. It must have been extremely difficult to have the media magnet Hillary Clinton as junior senator, upstaging his need for attention. With the appointment of Kirsten Gillibrand by the hapless Governor Patterson, Schumer rushed to embrace her, seek to convert her to being a real member of the Democratic Party, and secure her tenure as a real "junior" Senator.

Now, along comes Harold Ford with talk of running against Gillibrand. The intelligent and well spoken Tennessee transplant and five term congressman from that state is attracting support, in fact aggressive encouragement, from some prominent Democratic Party powers and fund raisers. There's chatter that Mayor Bloomberg would be inclined to support him. Schumer of course is apoplectic --- a competitor for the limelight is not wanted. He's got every Democratic functionary he can touch warning off Ford, including some apparently from the White House. It's an all out effort to stop Ford's possible ambition to be a new Democratic power in New York.

As a representative in Congress, Gillibrand was often a faux Democrat whose views on many issues were more aligned with the Republicans. With Schumer's counsel on electability, she has repositioned herself but who's to say what course she will take once, or if, she has won a Senate seat in her own right. Coming from a family with a local political heritage, her potential for gamesmanship cannot be underestimated and it makes sense that thinking Democrats would embrace an alternative to this creation of Patterson and Schumer.

With his Southern Democrat background, Ford is no cookie cutter New York Democrat but opinion here is that he has the charisma and capacity to represent the state and the nation with a constructive and creative style. He is capable of being a participant in the legislative process that attracts national attention and has wide influence. No one would say that about Gillibrand, which is just the way Schumer wants it.

Maybe his transparent meddling will fire up Ford and his early advocates, and lead to an interesting primary.

Thursday, January 07, 2010

Hedge fund tax break is an ongoing joke, or obvious corruption

This so-called tax debate about "carried interest"(a misnomer by the financial press), is about the 15% capital gains tax rate that hedge fund managers pay on their take from unrealized gains in the portfolios that they manage. To the best of my knowledge, all other capital gains that are taxed at the 15% rate are realized gains, meaning based on the price at which they actually choose to sell the securities. The protocol in the hedge fund industry, not completely uniform but representative, is that the fund gets a 2% annual fee and a 20% share of paper gains for a calendar year. That 20% share now gets a 15% capital gains tax rate instead of a normal 35% or so income tax rate. It's a giveaway to a powerful group.

The 20% is a fee for performance, part of the hedge fund manager's compensation for work, and many work hard for long hours. Most, if not all, hedge fund managers have a substantial amount of their own money co-mingled in their funds so they can make the choice to take advantage of a capital gains tax rate when they choose to sell securities, just like all other financial market participants. They should pay regular income tax on their work based earnings(the 20% cut of gains) and like everyone else only take the investment gain 15% when they sell.

The arguments against this are specious focused on specie. Suggestions that investment flows into new ventures and restructurings would slow and hurt the economy make no sense. The investors with the hedge funds could not care less about the hedge fund managers tax liability. They have already accepted that they must pay that 2 and 20 fee to play. Their behavior and desire to invest will not change. Will the managers take their ball and go home. They are working a gold mine, and if the giant nuggets get a little bit harder to find there will be replacements rushing in. There is little that is special about these people except in the context of almost all people being special in some way. They will keep working until their dreams or their dreads are satiated and most that leave will be missed for a nano-second by the world beyond their family and friends.

As a matter of complete and obvious fairness, these management fees should be taxed as income. As a regulatory, accounting, and legal issue they should be as well. How they have skirted common sense and ethical tax accounting for such a long time is worthy of an investigation of the politicians who facilitated this and the contributions that they relied upon.

That this is an issue worthy of debate is an ongoing disappointment, a reason to disenchant any serious young person with our system of fairness. Eat your $400 crab for lunch in Palm Beach you hedgies, and preside over the Kennedy Center, the New York Public Library, New York charter schools, and other charities with your contributions to your own self congratulatory applause and that of the New York Times Style Section. Hey, keep giving, but when you manipulate the system to erode any sense of fairness your integrity is in question.

Wednesday, January 06, 2010

"Sea Fights and Shipwrecks"

Browsing a used book stall below 14th street, my eyes found "Sea Fights and Shipwrecks" by Hanson W. Baldwin published in 1954. It's a sturdy but weathered hardcover with that thicker page paper of days past. There is no short bio of the author within the jacket cover as is the norm today, but somehow Baldwin's name resonated and the book came home.

It turns out that Baldwin was a New York Times war correspondant and military editor for 40 years and won the Pulitzer prize in 1942 for his coverage of the war in the Pacific. As befits the topic of this book he was a graduate of the Naval Academy. That helps explain the sense that this book is the result of some adolescent obsession that gets actualized in middle age.

"Sea Fights and Shipwrecks" contains 18 freestanding factual tales of sea disasters and carnage. Like the style of a city reporter of the distant past, the stories are written in such a factual way that the presence of a writer almost doesn't exist. They appear to be thoroughly researched and the drama is maintained by the momentum of the facts rather than any embellishment or theory. On top of that, if one is inclined by nature or profession to be a maritime type guy or gal(I am not) this must be an almost orgasmic read with all of the terminology and references related to boats and the scientific sounding descriptions of the moods of sea and sky.

There are wrecks, disasters, and fights on the ocean here from 1816 to 1945. There's the Titanic and the Lusitania, the first two read here, and the similarities and contrasts are there to see. There are lines like "Then the problem had been the selection of a tasty dessert; now it is survival." and that's speaking of a 22 minute span. Maybe everyone knows this but new to me was the advertisement placed in the New York Times by the Imperial German Embassy on the morning of the Lusitania's sailing that "vessels flying the flag of Great Britian are liable to destruction".

There's the Okinawa "Last Battle" between the U.S. fleet and the Japanese kamikazes, the saga of the U.S.S. Houston, and many more. As occasional one off vignettes the stories are tight and informative but it's hard to imagine this book as a sequential straight through read. We once lived next door to an engineer who specialized in ship building and his daughter is now a Commander in the U.S. Navy so it's highly likely he's one who would go for it. I need to remember his birthday.

Tuesday, January 05, 2010

Emerging markets --- the linchpin of global recovery

Emerging markets represent incremental growth in the global economy. They soak up commodities. Their growing demand for consumer products to some extent offsets declines in demand from the U.S. and European economies and their lower cost exports continue to restrain inflation in the developed world. Just as investors in corporates focus intensely on the growth areas within a company, macro investors seek that growth on a global basis, country by country, region by region. In a period in which 3% GDP growth for the U.S., 2% for the U.K., 1% for Japan, and flat for Spain would be considered heroic, emerging markets are the fulcrum on which global growth sits.

It's true that emerging markets have been notoriously and painfully cyclical over many years. They have been hyper-vulnerable to shifts in global demand and to problems of their own making through currency policies, rigid protectionism, and unpredictable internal political and military turns that can lead to chaos. Now, with the emergence of China as an economic world power with previously unimaginable central bank reserves, with the market renaissance in Brazil, the unsteady but undeniable rise of India, and the relentless competitive striving of South Korea, emerging markets have been building a foundation that is demonstrably different from the past. Using the corporate analogy, the emerging markets also keep adding new products, or success stories. Look at Peru as an example. Ten years ago Peru was generally viewed as a dangerous backwater and an extremely high risk for investment. While Peru today still has somewhat of a wild west atmosphere, there is more stability and an economic growth story is underway that is reflected in a robust stock market. Whether it's Indonesia, El Salvador, Croatia, Vietnam, or many others, there is new incremental growth coming to the world economy from emerging markets. While these relatively small economies can face a volatile road ahead, their trajectory appears to be a zig zag upward.

Relative to the past this thesis may seem like the tail wagging the dog. Near term the solidity of the developed incumbents is essential and will continue to dominate the overall world economic picture. Longer term, the potential for exponential growth of multiple smaller emerging market economies combined with the maturation and significant market shares of the larger emerging powers is what will drive prosperity and the new growth that spurs the developed countries back from near stagnation.

Today some lead investors are looking for a 20% correction in emerging markets in 2010. Others see an early stage investment with some expected volatility which is heavily outweighed by the opportunity. Unlike even a decade ago, virtually all investors agree on one thing --- emerging markets, overweight, market weight, or underweight, are an essential part of any diversified portfolio. As one investor said on Bloomberg today, "You have to be there".

Sunday, January 03, 2010

And now for the 2010 financial markets

There is little consensus on what the financial markets will bring in 2010. The one widely held view is that interest rates on Treasuries beyond the 2 year will rise, prices will decline. It is generally a longer term view that commodities must also escalate in price but there are few that are so precise as to guarantee that for this year. While there is widespread skepticism about the resiliency of the dollar there is a countervailing view that the U.S. currency will strengthen at least in the near term as the economy gets off its back. The view on equities is all over the map. There are those who look for another collapse as a result of interest rate spikes, a continued liquidity squeeze, and the expectation that financial market troubles are far from being over. A majority of equity investors and prognosticators are cautious to the point of having nothing of consequence to say, hedging their words with the trauma of the last two years hanging over them. Those that are viewed as the most bullish look for modest gains after the robust rebound of the last nine months, gains for 2010 in the 10 to 15% area. If there are market mavens that are bold enough to be as optimistic as the bears are pessimistic, they are keeping that thought to themselves.

A few might say that this is the perfect scenario for continued equity gains in 2010 that go well beyond any broad expectations. How could that happen? First,there will be no near term relief for savers who have massive amounts of money in accounts that pay almost no interest, still on the sidelines. Some of that dead money can be pulled back in with any continued optimism. Second, the U.S. over the last 20 years has become much much more of an export economy. That's not just limited to the obvious multinationals. Many mid-caps and even small-caps have taken the plunge into the global market as compared to their postion in the last major real estate driven recession of 1990-91. With the dollar's relative weakness and the ingenuity of many American businesses, 2010 could see a lift in corporate America that is not dependent on the U.S. consumer having a wallet of credit cards to max out. Third, forward multiples are conservative and do not reflect the sustainable competitive advantage that many U.S. companies have over a multiple year time frame, meaning future cash flows are being discounted back into a stock price for abbreviated time frames. Fourth, for the many successful surviving companies(sorry auto companies, Citi, and AIG among others) that are still trading well below their levels before the debacle, with any economic wind at their back managements will begin to do anything legal to work back to those levels. Fifth, in technology and telecommunications the U.S., despite ever growing global competition, remains at the forefront.

That may be far too optimistic but it is a scenario that is worth entertaining simply because so few do. Why so few? There remains a disturbing lack of broad credit availability that Congress, the Administration, and the general public view as unacceptable, but they act as if they are blind to the fact that barely functioning securitization markets have handcuffed financial intermediaries. This will not be solved quickly and will need supportive government rhetoric if not action if it is to be solved at all. Unemployment is high and that too is not a quick turnaround. The expectation for higher interest rates is traditionally a red flag. Nascent global sovereign debt issues are a concern as the CDS vultures can make small problems go viral. Additionally global political issues are far from looking placid. Plainly speaking, there's plenty to worry about.

There is no conclusion to this commentary, no smart forecast or conclusive insight. Few market participants sleep as soundly as they did prior to August 2007 and the beginning of the great unwinding. But hey, the Jets are in the playoffs so anything can happen.