Friday, April 30, 2010

The frightening financial reform bill

A thoughtful and constructive financial reform bill is needed. What's now in the works as it has evolved can no longer be described in that way.

In an April 21st post here the misguided measure requiring the spin-off of derivatives businesses from major institutions was discussed. That remains intact in the bill as drafted 11 days ago, two pages in what has become a 1588 page document at last count. If it stays as is, these two pages will have a huge impact on the structure of our financial industry and the U.S. position in the global market. There have been no hearings on this measure and no studies of its impact by any supervisory agency. The Fed is apparently against it, the White House financial staff as well, but Congress has not yet touched it. Could this actually be passed.

In a bill this extensive no one really has a comprehensive grasp of what is in it and what the impact of all aspects will be. As an example, in the jobs bill passed two months ago, Senator Carl Levin and his staff had a short insert that requires any bank worldwide that has accounts of expatriate Americans to report in detail all inflows into those accounts or the account owner would face a 30% withholding tax on any transfer(this information and detailed follow up courtesy of a friend who chose to retire overseas). What makes sense perhaps as a rule applied to the extremely wealthy class that has used tax havens to hide money is simple harassment for many ex-military, ex-overseas corporate, or social security recipients looking for an affordable lifestyle in Costa Rica, Panama, southeast Asia, or wherever. Foreign retail banks will generally be unable or unwilling to comply with the onerous documentation requirements, so many expats are looking at life ahead with no banking services and wondering how that will work. No one saw this coming and it was likely rubber stamped by a congressional committee and passed without any substantive discussion. Since the jobs bill was obviously not a financial services bill, God knows what "gems" of dysfunction are hidden in 1558 pages of financial reform.

With that example of what can happen, here are two more items that are in the bill currently and not widely known.

First, any financial firm selling derivative products to municipal, pension, and retirement plan funds will be required to have a fiduciary duty related to the performance of that derivative. Plain vanilla hedging of bond sale proceeds, future payment obligations, or future income streams is a useful tool, but as in all hedging the outcome will not always be profitable. If the fiduciary duty is mandated that means that any derivative that does not function exactly as planned will be the responsibility of the financial firm that sold it. If passed, that could essentially be the end of any availability of these products to municipal entities, pension funds, and retirement funds except at extraordinary cost. How else could a provider price a derivative that has no downside for the buyer who chooses to take the risk implied in the transaction.

Second, as currently written there will be a national consumer financial protection agency, the overall scope of which is unknown. This could be a constructive agency if it does not become a competitor with other regulators and does not become another unwieldy bureaucracy. The bill also currently allows each state to set their own consumer protection rules above and beyond the national regulator such that states could dictate rules for national banks, something which has never explicitly been done. Providers of credit cards, mortgages, auto loans, and consumer finance may well need some clear limits and supervision at a national level, but if all 50 states add their own rules as well the efficiency of delivery becomes much more expensive. States that get extreme in their regulation would simply find that their citizens have little access to credit. Consumer finance providers in general would become much more conservative due to the fear of retroactive regulation in multiple jurisdictions. This would be chaos, and it could limit the availability of consumer credit broadly.

Admit it, most of us, myself obviously included, know very little about what this bill might contain. Every time I learn more I get frightened. Too many rules impairing the availability of credit, the use of mostly constructive financial tools, and leading to the diminishment of the U.S. as a world financial center could push us right back down to where we were 18 months ago, or worse.

Wednesday, April 28, 2010

Borden's Sample Sale Indicator

Today I went to a sample sale. "Sample sales" in Manhattan are quality branded and designer merchandise heavily discounted to clear out seasonal inventory. Over the last six years these shopper gatherings have been my sole source of dress shirts, casual shirts, polo shirts, sports jackets, and suits, not that my lifestyle requires too much of this stuff. With discounts often as much as 80% or even 90% there's not much reason to shop anywhere else.

The sale today was Bobby Jones sportswear and Hickey Freeman dresswear, sort of mid-range for these types of sales. It was the worst sample sale that I had ever taken the time to visit, mostly unattractive merchandise at prices still 50% of retail. I didn't really need anything so no sweat but it was hardly worth the ten minutes that I spent there before walking a few blocks over to Macy's at 34th to replenish my fraying Levi's collection.

The economic news in this experience was positive in a way that I like to think is far more valuable than any quantitative research or analyst opinion that may finally reach this retail investor. The only explanation for this crummy sale is that a combination of more carefully managed wholesale and retail inventories and the beginning stages of a bounce in consumer spending left little to be sold. Truth be told, most of the stuff left at this sale wouldn't move in any market. The dress shirts, business or casual, have always until today been huge bargains, shirts that retailed at $100 or more selling for $29 in the first three days of a sale and $19 for the last two. Today was the fourth day. Hickey Freeman shirts that retail at $118 were priced at $59.95 and they were ugly from the point of view of my refined fashion sense.?!

So the takeaway here is that the retailers will need to build inventory significantly, that their recent inventory costs have been absorbed by sales, and that consumer spending is definitely on the rise. Whether this thought is already built into stock prices or not in an interesting question but my guess would be not completely. In six years of going to these scrums I've never seen a sample sale remotely so poor. If these observations turn out to be relevant, maybe I should get my wife and daughters involved to cover the entire clothing landscape and launch a sample sale indicator as a new economic data point --- as in the University of Michigan consumer sentiment survey, The Economist Big Mac FX index, and Borden's sample sale indicator, sounds good.

A comment on Goldman and Levin's panel

From previous posts here it is no doubt obvious that I did not enjoy Senator Levin's persistent and repulsive bullying at his panel yesterday. Goldman Sachs is by no means any group of saints and CDO's were broadly a poor product and should without question be regulated if not banned. Nevertheless the unwillingness of the panel, Democrats and Republicans alike, to make any effort to understand the investment banking business, to understand the difference between market making and investment advisory, or between hedging and market manipulation, between short succinct internal statements and those meant for posterity, was deeply troubling. This grandstanding for political purposes with a pseudo populist message based on a lack of any intellectual effort is dangerous stuff that has the potential to be destructive in ways that cannot be foreseen at this point.

Rather than belabor that comment with paragraph upon paragraph of explanation from this viewpoint, this comment will focus on one issue. That's the pervasive suggestion that Goldman somehow hoodwinked investors, had more information than others, and took advantage "of the American people and their clients" by profiting from its hedging activities. The information to understand what was happening in the housing market was all available to everyone and investors chose to make their "bets" based on their particular point of view and desire to profit based on their assessment of risk.

How can I say that. Here at this blogspot creation, a totally independent writer, unconnected to any firm or any network of investors or "insiders', barely able to work a calculator beyond basic arithmatic, and working solely from reading the financial press and insights gained from having worked in financial services prior to 2004(all this describing myself), wrote the following in a post on 2/17/06:

"In 2004 37% of all consumer mortgages were adjustable rate and of that 88% of the lower credit scores were adjustable with predominantly two or three year resets... credit cycles always come around. It's been awhile. They always result from excess. It may be months or it may be a year or more but its hard not to see significant consumer credit defaults in mortgages..."

On 8/24/07, eighteen months later, this blogger wrote:

"Why have the significant issues in the subprime mortgage market been such a shock to regulators, media, politicians, and investors. With publicly available information it was not hard to see that there was danger unless the economy roared ahead in an unprecedented way."

The question is not whether Goldman "tricked" the market but why other investors, and importantly the regulators, failed to acknowledge the likelihood of the coming crisis at that time. While Goldman was far from being the leading underwriter of CDO's, this can also raise the question as to why Goldman continued to play in this market at all and did not take the opportunity to demonstrate the responsibility of industry leadership, pull back and sound an alarm(see prior post). They did not need the money.

Monday, April 26, 2010

Goldman's perfectly hubristic public relations

Goldman Sachs is putting on a full court press of public relations to its major constituencies, primarily its customers, its employees, and its alumni. They offer thorough "evidence" of their appropriate behavior in participating in the mortgage backed securities market in 2006, 2007, and 2008. They point out that:
---they were not a dominant participant in the residential securities underwriting market
---their revenues in this business relative to overall firm revenues were small
---there were no deficiencies in the underlying instruments when MBS's or CDO's were underwritten
---they had no special information on the market, just what anyone else could access
---they did not generate enormous net revenues or profits betting against residential mortgage securities products
---they had significant losses in their mortgage business in 2008, a net loss of $1.7 billion in fact
---the mortgage market losses in general were caused by a broad collapse of the mortgage market

All of this may be correct and all of it is irrelevant. It has nothing to do with the specific charge of fraud in the SEC case, a case that seems, legally speaking, to be tenuously based on the assumption that Goldman is so smart that it could take advantage of other major institutional investors with access to the same information. It should be noted that these other institutions had the choice to be short the mortgage market if they chose to do so, and they made the decision to be long. Regardless who was on the other side of the trade, obviously someone was there who had the opposite point of view. The SEC case is weak.

The information provided could be said to be arming Goldman's stakeholders for the vendetta underway from Senator Carl Levin. It may help some but nothing will stand in the way of Levin's onslaught of e-mail "gems" from the millions provided that "prove" Goldman's position at the epicenter of the entire mortgage crisis. What would Levin have preferred Goldman do, not hedge its portfolio and manage its risk and end up on the chopping block like Lehman, Bear, and Merrill, or even worse AIG, another drain of taxpayer money.

Goldman's messaging ducks the major issues and stays on the "high road" of everything they didn't do. It ends by speaking not only for itself but for the financial community as a whole and saying that "there are valuable lessons to be learned from the financial crisis... we should learn the right lessons to avoid crises in the future", or words almost like that. BAD idea, BAD timing. The time for Goldman to be a financial services leader and an exceptional corporate citizen was when they had the insight to see the dangers, and the financial capacity to forego creating CDO's and just say that's enough, this is crazy, we will not participate. They missed that opportunity and stayed in the game with their sharp elbows.

Now they don't know how to get out of their own way, their culture so imbued with superiority that their message is annoying even to their supporters.

Sunday, April 25, 2010

Reassessment weekend

Saturday morning I was catching up on returning e-mails to friends, and in several I commented on the market, roughly saying "what do you think of this run-up. The last six weeks have almost eliminated the debacle, and in small cap land it's over the top gains. I still think that I see bargains. That may be the ultimate warning. Borden is optimistic."

As the day continued it was apparent that I was not alone in pausing to consider. Almost every commentary in Barron's, from various perspectives, addressed the same concern. How long can this continue? Are we setting up for a quick correction? Are we still in for a short squeeze hyper-rally or alternatively a profit taking sell-off. Other financial media convey the same concern. Is it time to retrench and protect what has been recovered or will this astounding ride of the last eight weeks continue.

There's no answer here. At some point supply and demand, the lack of alternative opportunities, and the vast amount of money still on the sidelines that could come in will all become irrelevant, and VALUATION will be the focus. If corporate earnings growth continues and the recovery begins to sop up some of the unemployed into productive, adequately compensated jobs, valuation today may be fine. The possibility of both of these variables being positive is uncertain but by no means impossible.

Right now, the volatility index(VIX) is well below its historic average and has been declining consistently for the last three months. Having decided it can't go further, about five weeks ago I bought VXX, the VIX long ETF, and have painfully found out that it can. The VIX level today seems so improbable that a sell-off, when it comes, could be too sharp to trade. Barring some geopolitical calamity, however, it would be unlikely to put a major dent in the year's gains. But who knows really. All of this weekend's talk may mean that the rally still has legs.

Equities are always, seemingly, in the limelight, but the biggest market risk that gets less attention is the bond market. The almost certain eventual rise in required yields and fall in prices could be more painful than anything that happens in the stock market this year. TIPS are an annoyance in any taxable portfolio but IRA's, 401K's and any tax-deferred accounts should have a healthy serving of these securities in them as part of a diversified portfolio, that's the one thought today that is said with some certainty.

Friday, April 23, 2010

A perspective on Goldman and the SEC

It is almost a certainty that Goldman will eventually settle its case with the SEC, admitting no wrongdoing and putting the issue behind them. It is also almost a certainty that from a legal and accounting point of view Goldman has done nothing wrong. As in the Enron case there were some, not all, financial firms whose actions were in accordance with all laws, but the court of public opinion, which could be the court of law, was such that billion dollar settlements were accepted. The complexity of the transactions, media bias, and government pressure was such that the right business decision was to settle and move on.

Following all laws does not mean that Goldman's actions were especially noble, far from it. Goldman is a money making machine. This is what they were doing although it apparently did not work for them in this transaction. They are a big target and they were involved in structuring transactions that were legal but served no economic purpose other than to enrich one side of the trade or the other. CDO's turned out to be one of the major products that almost brought the whole house of cards down.

That Goldman is vigorously but politely defending themselves makes sense. To their clients some would say that Goldman provides the most attentive service in the industry, more importantly the most insightful advice, and the best execution when deals are done. To their competitors they are talented and at times vicious adversaries whose desire to win business is relentless, and whose approach is not one of industry collegiality, not even close. To their employees they are, for many, a once in a lifetime financial opportunity and for that the hours worked are often most waking ones, even down into the administrative and clerical ranks. They are an extraordinary company whether one likes them or not.

How the case evolves from here is unclear but the next big day is April 27 before Carl Levin's Senate committee. Historically Levin's primary purpose in these situations is to humiliate corporate officers. Since going before a Senate panel has no right of discovery, his aides will find documents perhaps even unknown to Goldman, take phrases or sentences out of context, and off Levin goes, "proving" guilt as charged. It will be an interesting circus if one can stomach it. What happens in this public forum may have a bearing on any possibility of a near term settlement as Goldman may not want to be seen as giving in to unprincipled tactics.

A few other observations:
---the timing of the SEC action remains suspect, regardless of comments by Obama and Geithner. Washington is a porous place and three days before Goldman earnings, just in time for getting a "financial reform" bill passed, this looks like part of a plan even if no explicit conversations or communication took place. If one more administration official denies it, then that's a certainty.
---the glee with which the enforcement action was received by Congressional Democrats and by Obama's own political operations was telling, and troubling. Shouldn't leaders be at least somewhat cautionary and disappointed when what is probably the most connected financial institution in the world, one of our own, is charged with this type of fraud. Instead they were happy as...
---the "smoking gun" in the eyes of the public as presented by the media and politicians is that Paulson was involved in choosing some or many of the securities that went into the portfolio. That does seem wrong, but there was an independent security underwriter that had final say over the transaction and both a fiduciary responsibility and a financial exposure. The historic role of investment banks is to be an intermediary between issuers and investors. They know both sides and, for example, in an equity transaction will explain to the issuer everything that needs to be done to reassure and attract the interested investors who they actively communicate with. While taking this practice to the level it reached in the CDO business doesn't look good at all, it was industry practice.
---This deal was done between highly trained "sophisticated" institutional investors before, just before really, the market had begun to tank. All information on every security in the CDO was provided to investors and no one's arm was twisted, or at least that's the way it seems from here. This is not mortgage brokers hoodwinking homebuyers and passing the trash on to Wamu or Countrywide who didn't care where the product came from.

If anybody has read this far, the feeling here is just get this behind us, pass a financial reform bill that is reasonable, preserve a strong but leaner financial system that is globally competitive, and stop playing scapegoat.

And hey Mr.Government, what about Fannie and Freddie, your creations that Congress oversees, those companies in the center of regurgitating more than half of the bad product and with executives receiving Wall Street salaries for running a government guaranteed business that was mostly back office operations. They're still standing and you forgot to mention them. And yesterday you bemoan the plight of retirees but fail to mention that government policy has stripped away any yield on their assets with a policy that is ongoing. Congress and the adminstration are right to look at reform and point out errors, but why not be forthright about their own as well. Wouldn't it be cool if they would correct them.

Wednesday, April 21, 2010

Agriculture committee measure for the Financial Reform Bill is MISGUIDED

As reported by Bloomberg News, "today the Senate Agriculture Committee approved a measure that would require U.S. lenders such as JPMorgan Chase and Bank of America to spin off their swaps trading desks." This would impact Citicorp, Wells Fargo, and other large institutions as well.

Anyone who has read commentary on this blog over the last year and a half knows the strong opinion here that naked credit default swaps should be banned and the entire CDS market regulated. They would know the opinion here that CDO's serve no economic purpose and endanger the financial system. What the Agriculture Committee measure would do has no resemblance to anything supported here. This comment focuses on what may be one small, in print space, part of the new derivatives regulation rules, and much of what they passed may be constructive. This one aspect is not, and here's why.

The great majority of the swaps market --- interest rate derivatives, foreign exchange derivatives, and commodity derivatives --- serve a valuable and legitimate purpose in providing economic hedges to support lending, trade, and financial planning in many industries. They represent the great majority, and great as a modifier is too weak, of swaps transactions and have played no significant role in our financial crisis. To remove this function from the leading lending institutions in this country will likely:
---significantly reduce corporate lending by these major banks as corporate lending as stand-alone business is not a business that meets hurdle rates for return on equity because of the capital required to back up the balance sheet positions.
---disadvantage the major U.S. banks against all major foreign banks such that major U.S. firms will be beholden to Swiss, German, Japanese, and other major foreign banks for their capital funding.
---immensely benefit the pure investment banks that were fundamental to the crisis like Goldman and Morgan Stanley. If they had survived, Bear Stearns and Lehman would be happy as clowns, and Merrill, if not owned by Bank of America, would be salivating as well. Recent small new entrants like MF Holdings, run and primarily owned by two Goldman alumni, could have astounding growth.
---impact a basic tenet of business growth for this country as capital formation is choked off due to the leading major banks losing their tools for doing business safely and managing their profitability by doing fundamental hedging for both their own businesses and those of their clients. Community banks and small regional banks are fine and deserve the room to grow, but they cannot remotely match up with the needs of U.S. multinational companies that account for the majority of export growth and are important to the food chain of small business suppliers that create domestic jobs.
---spinning off swaps desks of these major banks will almost immediately impact the new spin offs business drastically. On a stand alone basis, these "swap desks" will not benefit from the capital base of the commercial, regional, and retail businesses of their former parent. Their access to counterparty lines necessary for liquid trading will plummet, their best personnel will head for hills, and as independent entities they will become boutiques if they survive at all. Goldman, Morgan Stanley, Deutsche, Paribas, and others will benefit in a huge way. Is this the intention or, as the tea party activist in my hometown said when he almost had the area congressman's family killed, just "collateral damage".

MISGUIDED is not the right word. This aspect of the measure is just plain stupid. It shows no understanding of today's banking business. It shows a view of banking as it existed in the early 1980's when the old Wall Street reaped all of the benefits of finance and the then clueless commerical banks took all of the risk. It shows a vindictiveness spawned by the Congressional Democrats that prefers ignorance and a political win to constructive legislation.

Is this just a way to get back at Jamie Dimon who has been arrogantly untouchable because of his success in running JPM throughout the crisis, at the same time giving the departed Ken Lewis one last stab in back because he dared challenge the Fed and Treasury over their role in the BofA acquisition of Merrill Lynch, and satisfy the FDIC and Sheila Barr's transparent hatred of Vikram Pandit. Politics is personal and power can be abusive. This paragraph is a bit hysterical but how else can this apparent part of the financial reform bill be explained other than with an extreme explanation.

This an incredibly bad proposal and I hope that "proposal" is an operative word and this measure can be significantly moderated. As it stands what was approved today is so bad that it's almost impossible to believe.

If my position on this is somehow not clear, please add a comment.

"Noah's Compass", Anne Tyler

While the advertising for this novel of course had outstanding comments by others, the two or three reviews seen here were decidedly tepid. While I almost always enjoy Anne Tyler's writing, that was the way I felt about her last book, "Digging to America" which came across as a little bit of a stretch, somewhat complex and maybe slightly out of her talented range of insight.

"Noah's Compass" is a simple story. The simplicity is its beauty. The despair and dysfunction are depicted in an understated way that makes the book a small set piece of a believable life. The moral ambiguity throughout evolves into an acceptance that provides relief and reward to the reader. Certainly not an action thriller or a literary blockbuster, but I liked it.

Tuesday, April 20, 2010

Couldn't have said it better myself

On today's NYT op-ed page there is a piece by William D. Cohan entitled "You're Welcome, Wall Street". While it could just as easily encompass the entire financial services industry and not just the big target Wall Street, everything else in the commentary is just right. The subject is the maintenance by the Fed with the support of the Treasury Department of historically low, or very short term no, interest rates and the damage that is doing to the economy and to middle class Americans. It's a subject that's been mentioned here many times.

This over-extended policy "rewards" conservative savers with no interest income, hits those on fixed incomes, as in retirees, particularly hard, and provides the banking system more profitable liquidity than it possibly needs. It encourages risk taking by those that can least afford it by sending them out looking for investments with any yield or hope of a higher return. When the bond market finally turns these unhedged retail investors will see carnage once again.

The rationale for this policy is that, once so badly broken, the credit markets need a chance to heal to return lending and credit availability to higher levels. That's not going to happen any time soon and it has nothing to do with whether a money market account yields 2% or 2 basis points. The administration and the Treasury department and regulators have pursued a schizophrenic path, demanding that financial institutions provide much more credit to the economy while zealously tightening the screws on balance sheet quality in the regulatory audits. The former approach is transparently political and the latter punitive. Most financial institutions are understandably naturally more cautious in their lending after the 2008-2009 credit collapse, and even more concerned about their legal culpability if by chance their auto loans, mortgage loans, consumer loans, or small business loans are deemed by some federal or state regulator to be misleading or unfair. Why bother, the government gives me access to money at 50 basis points and I can make plenty on that just playing it completely safe, the banks must say to themselves.

Cohan in his op-ed piece takes a somewhat different approach to this issue and does it in an excellent way.

Wednesday, April 14, 2010

CNBC---tea party business network

CNBC is difficult to watch in general except when they have major market player guests to comment. Otherwise the regular commentators struggle to say something relevant during the day, often forced, graciously commenting here, into saying things that are irrelevant or just wrong to fill up time. As in at 3:55pm, on the treadmill, hearing an exchange, "Maria, it looks like we have hit a resistance point at 11,000" --- "Yes, a resistance point, you're right." --- as in any fool would see enough liquidity in the market that late in the day to make any comment. All of this babble just proved that they know the words "resistance point" and nothing more. Just really dumbbells talking.

That aside, and guilty of watching while eating my lunch sandwich most days, CNBC has made a decided turn in the last year. Perhaps it all started with Rick Santelli whining excitedly about homeowner bailouts and mentioning a tea party. Since then CNBC's market analysis must have suggested that this slant gains viewers. Now CNBC is an anti-tax, anti-government, anti-big bank, anti-big financial concern, pseudo populist, and xenophobic network. It is more subtle in many ways than the outrageous radio commentators but it is just as obvious. Interviewers interrupt those commenting to put in asides about taxation, big bank largesse, or government intervention, and when Justice Stevens announced his retirement the doofus with the hair that stands up at midday said, "somebody give me odds that it will be a white male nominated", everybody on set laughed, this is news?

Finney says "Hello 2007"

Following up on our March 29th breakfast with Evermay Securities strategist Kizziah Finney, we called to discuss his optimistic market call of two weeks ago. Finney answered his phone with a "hello 2007". Beyond that he deferred to the market's behavior rather than discuss his prior positive call. "What you've got here is something that's almost too good to be true, so the market will pause soon, step back some maybe. The really amazing thing that's going on is in small cap land, lost in the chaos of late '08 and most of '09, there are stocks in the small cap sector, industrials, rails, materials, that are going up by 50% or even 100% in the last month, not out of line with their earnings or market position, just completely overlooked and presumed dead if banks would not rollover debt. Banks are not stepping up business lending at this point, just no longer retracting. This is better than a Minetta Tavern ribeye if you happen to have invested in this small cap sector, and that's my ultimate statement. Look at Greenbrier, Trinity, Akamai or Brush to see some serious recent performance. Only major position down here today was Las Vegas Sands, but that's up 800% since accumulating a position in March '09 so no sweat. What to do now? There could be worse problems."

Do you see the market selling off now that such positive gains have come through, we asked.

"Yeah maybe, but not in any meaningful way, nothing big", said Finney, "with JPM leading the way banks will stop apologizing and show how much money they can make, and the U.S., deficit spending, strapped states, and all still looks a lot better than most of the globe, tea party aside still having a leader who smiles and works. Money has to find a home, and the U.S. says come to papa despite challenges. There may be some profit taking soon, but the guess here is that the market will prove resiliant and be higher by the end of June than it is today, maybe much higher."

That's a bold statement we commented. Can we quote you.

Finney thumped the table hard enough to be heard over the phone, "Quote me, of course, no harm there, you ask my opinion and it's yours. If I'm wrong I'll still eat dinner so what's the big deal."

Monday, April 12, 2010

The damage done

There was an article on Bloomberg over the weekend that discussed the divergence between the improved trends in the economy and financial markets and the generally negative public perception of the economic landscape. As an example the article stated that "among those who own stocks, bonds, or mutual funds, only 3 out of 10 respondants to a Bloomberg poll say the value of their portfolio has risen since a year ago, a near impossibility given the size and breadth of market gains".

The reporter's opinion seems logical and it would seem to be a perfect example of perception overriding facts. The question here is could the poll counterintuitively be accurate? The poll was broad-based and therefore certainly included many people whose assets were modest, as well as those who have both market experience and excess asset capacity beyond what is needed for a several year horizon and emergency reserves. If the former were, in fact, a majority of the poll, which would likely be closer to a proxy for the American public's financial demographics, then the results could in fact be accurate.

For example, having had the opportunity to look at the financial profiles of several hometown retirees who were interested in advice, their position typically was income streams from social security, small annual distributions from an IRA, and a small annuity from an ESOP rollover at their former employer. This provided just enough to live on in a decent way without frills in an inexpensive place to live. Beyond that one such individual proudly showed me an equity and bond portfolio of $220,000. With that as a cushion perhaps hit by a 30% reduction in late '08 and early '09, would the reaction have been to stay the course or risk more or pull out and go into the safest assets possible. Was there any viable choice to continue to risk what little financial security was remaining?

For many the answer may well have been like the poker player regretfully folding, no longer having the financial back-up to continue to play. If this scenario happened broadly, a possibility, the poll results could be closer to being right than wrong, and indicating locked in lasting financial damage for many despite the comeback that many with more wealth have experienced.

Sunday, April 11, 2010

Quote of the day

"Oh, to be seventy again."

------Benjamin Franklin as depicted in the HBO mini-series "John Adams" only now being watched here via Netflix. Franklin takes the uptight Adams to a garden party in Paris and as he walks into a courtyard filled with flirty young women the aged Franklin makes the comment.

Friday, April 09, 2010

China confirmed

Yesterday's NYT first business page had an article with the title "Riding the 21st Century Rails" that reported on China's potential involvement in bringing their bullet train expertise and technology to the U.S. today. Chinese corporations have now signed a cooperation agreement with the State of California to build bullet train lines in that state. This is a bidding process, not a done deal. Maybe you saw the article.

Here it was a kind of watershed event in accepting the economic power that China has become. The comparison to Japan in the '50's and '60's is obvious to those of us who remember. At first, "made in Japan" meant almost a laughable piece of junk. Then it evolved into some adequate transistor radios and a few tinny looking very small cars. When in 1970 my father arrived home one day in a new canary yellow Toyota with a real wood grain steering wheel it was a "something is happening here" moment. Then came the deluge of high quality seemingly everlasting products. My Sansui receiver from 1975 still works fine while the accompanying Advent speakers and Dual turntable have long been replaced. The Toyota mentioned above was replaced in 1979 with another of the same brand, but a red hatchback, that was sold in 2006 for $1500 when it was no longer needed.

Getting back to China it's apparent that they can make any type of clothing, toy, small appliance, piece of furniture, and multitudes of other products at low prices and mostly reasonable quality, some high quality if, as was the impression, it was supervised and manufactured against high specifications like some Japanese branded cameras. There have been the notable glitches with toxic toys and drywall, and others that one might expect in an at times corrupt emerging economy. We accept too that China has created newly revamped Flash Gordon like cities with stunning skylines if they can be seen through the pollution. Most everyone sees China as an undeniable high growth story, but getting to the point of advanced technology to bid on rebuilding America's infrastructure was somewhat of a revelation.

According the the Times' report, Chinese engineering and construction expertise in building these bullet trains is superior to virtually any country in its environmentally friendly technology and its designs that allow for faster completion of projects. They are linking all of their major cities with these high speed rail lines over the next ten years and will complete a Beijing to Shanghai bullet train in 2011 that takes only four hours between the cities as opposed to 10 hours today. The article states that New York - Atlanta or New York - Chicago are roughly the same distance and both on Amtrak today take around 18 hours of travel time. So I'm just partially repeating the thoughts in the Times article but only because it is so stunning that China not only has this advanced engineering capability but also the capacity to export it at the same time that they have massive projects within their own borders.

China hands, if they were to see this post, would probably say that these observations are old hat, and obvious. Revelations get to all of us at different times so this is just the point in time here that confirms that China has arrived. And by the way they have offered not only to build but also finance California's project, taking a page from the playbook of the old and at one time formidable GE.

Thursday, April 08, 2010

Sanity is a good thing

Part of yesterday's market weakness was attributed by many in our incessant business news flow to the significant contraction in consumer credit in February. The fear was that this was a precursor to a decline in consumer spending. Why is the decline in consumer credit not good? Wasn't a key element of our debacle too much leverage everywhere. If short term worries about pressure on spending are there, so be it. It's something that needs to be experienced to get to the other side of this. Today it looks as if retail spending has not been impacted in any material way. Could consumers actually be spending out of earnings now, and reducing their debt levels. This is all good.

It's similar to those months when the news is that housing starts are down and the market sells off. Oh no, less construction work and less sales of appliances, drywall, carpets, and all that stuff. We have a glut of unsold new houses and condos still on the market and it's bad news that we don't continue to grow new supply? No, it's good news of course. We need to take some medicine if we are going to get well.

Today there's concern as new jobless claims were modestly higher than expected in the week before the religious holiday week. Is that a bad thing? Holiday weeks are often stretched weeks from an employee point of view due to vacations and in a jobs market that obviously has plenty of supply, why would employers rush out and hire new workers just before a week in which processing and training new folks would put a strain on their existing work force. No rush, they can wait a week or two and there will still be workers standing in line to hired. Doesn't that make sense and seem to be the right way to run a business.

A perspective longer than a t.v. sitcom can be worthwhile.

Wednesday, April 07, 2010

Entrepreneurship unpredictable but alive

The Monday NYT had an article in the business section with the title "Anxious App Developers Are in a Scramble to Strike iPad Gold". What was described was the thriving business of designing applications for Apple products and the rush by many, using one example of two brothers, to be among the first to have their products up and running for the iPad. This is a big business that a few years ago didn't exist.

News here was that the Apple online store already has 150,000 applications on sale for the iPhone. The two brothers described had, using some quick math, netted around $2.5 million on a game application for the iPhone that had been up for just over one year. Obviously they wanted to adapt it to the iPad as quickly as possible. That is a staggering number for two guys working in jeans and t-shirts with almost no overhead. As an aside they are from Croatia, one still lives there, and the other in a Chelsea apartment here in New York.

The point of writing about this is to remark on how the opportunities for entrepreneurship that arise from our technology, media, and communications based new world are unpredictable and almost limitless in their differing forms. That the U.S. remains the epicenter of this creativity for now is something that could upend the negativity that pervades our economy today in ways that economists, market analysts, government bureaucrats, and statisticians can't foresee.

The one major impediment to this, widely written about but dodged so far by our dysfunctional Congress, is the need to change some of the Bush barriers to immigration by highly creative people from all over the world. These barriers were put in place in some post 9/11 frenzy as well as in a save American jobs impulse by others. You know, recreating the past, "Sir, you say your name is Sergey Brin and you want clearance to live and work in the United States, but what are you looking to do. You say software engineer and systems development. Well sir, I'm sorry but an American can do that job." And would Google now be based in Russia, France, India, or South Korea?

Two points --- first,that immigration reform needs to be addressed and second, our optimistic side needs to be reminded that the U.S. still has the potential to be the major growth driven economy again in ways that we can't foretell. One certainty is that the growth will not be based on the structural model of the 20th century.

Monday, April 05, 2010

"The Economist" picks up on the transformation theme

This weeks "Economist" has a "14-page report on rebalancing the American economy". The article mirrors the thought of many including the post here yesterday as it reiterates that "this was no ordinary recesssion" and one from which "some of those jobs will come back but many of them will not".

The article suggests that a major transformation of the U.S. economy is essential. To quote, "America's economy will undergo one of its biggest transformations in decades. The macroeconomic shift from debt and consumption to savings and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. This special report will explain that transformation, and explain why it will be tricky."

The report is full of facts and opinions, at times repetitive and at times familiar, but overall it is a provocative piece of reporting relative to anything else published. One thing, perhaps uniquely American, that the report misses is the political and social ramifications of the breakdown of the old expected class divisions, or maybe class expectations is a better expression, as discussed here yesterday. Maybe a British publication doesn't quite see the significance of that, but overall it hits most targets and the idea of structural change is more or less synonomous with their rebalancing. It closes by saying, "Rebalancing may be highly desirable, but that does not mean that it is inevitable. It took a long time for America to reach the debt-laden state that brought on the crisis. It will take time, and lots of luck, for it to recover in full."

Sunday, April 04, 2010

V-shaped recovery?

Reading some financial market commentary this evening, it was surprising to see a trader quoted as talking about the V-shaped recovery that we are having in the U.S. Wait a minute. He must have been talking about equities only, which are 3/4 of the way to making that V, because if he is talking about the overall U.S. economy that's not even close to being true.

Tomorrow the stock market will, at least at the outset, celebrate the higher than expected jobs number released on Friday and Apple's latest coup, and may well have a good week. That jobs number has a long way to go, as the unemployment rate is still 9.7%, it's higher still when people who have just given up are factored in, and then add in the underemployed part timers and statistics get to around 17%. One could wonder what that number would be if there was any way to collect data on people who are working at jobs well below their capability, experience, and education, such as former office or service workers handing out samples of lobster spread on crackers at Costco. This is not an economy yet in any convincing recovery.

Unlike the stock market house prices are showing no signs of any significant rebound, just fairly certain stabilization in some areas and the bottom still being searched for in others. Retail commercial real estate in many exurban and rural areas is still in free fall. There is no yield in the money markets for those who need to play it safe and with that large segment of the U.S. population that owns little or no equities there is no V in sight. Of course the 20% or so who do have the skill, luck, inheritance, or guile to own some meaningful amount of equities are back in the stores and creating some uptick in retail sales from 2009, some increase in investment from 2009, but that's not necessarily much of a treat for most people.

In fact, one could argue that there is something more serious going on than a cyclical downturn or a credit crisis precipitated by excessive risks that built up in the financial sectors. That something more would be a structural problem, one that is based on the great American middle class being whittled down over the last 30years as technology efficiencies and business concentrations have cut reasonably paid employment in manufacturing and agricultural sectors, and even reduced the demand for adequately compensated white collar workers in many areas, especially if you look at workers in call centers making $25,000 a year as white collar.

A structural problem with our economy that has been years in the making is no quick fix and President Obama and his team are right to warn that there is still a long distance to go.

I could speculate that if there was a real recovery in jobs, credit availability, and home prices this tea party movement would lose steam with just the obvious racists, attention seekers, extremists, and fearful elderly left holding the tea bag. With a structural problem they unfortunately could be around for quite a while and may well have surfaced no matter who was President.