Sunday, May 23, 2010

Finney is concerned

Kizziah Finney, senior stock strategist at Evermay Securities, tends to be optimistic and risk tolerant. Yesterday found him somewhat restrained. While he is still in the camp that sees long term values aplenty in the market, his view of the near term is tempered by market statistics that are in many ways negative. We met at a bench outside Strawberry Fields in Central Park, myself toting sandwiches and salads from the 57th Street Mangia. Finney talked pretty much non-stop as is his wont.

"Good food. This roast beef on French bread is terrific. Could use a few gherkins or something but otherwise just right. And this lentil salad may be good for me but it's also perfectly tasty. Thanks. Now we need to get down to business as my clients are crying and cringing at every market turn in these all of a sudden volatile days. What's happening, the big event, is that credit markets are showing sign of seizing up, liquidity and interbank trust is under pressure. The foundation of equity markets is a functioning liquidity mechanism and what's going on today is a mini late 2008. All in one frigging week or two."

I asked Finney if he dared make any equity market projections near term.

"NO, I have no idea where this is heading near term. Friday's late short covering rally meant nothing except that big money wanted to spend their first great Hampton's weekend without worrying about open exposure. There are enormous values in small cap and mid cap land today and great plays in large caps with solid dividends that you can't match in any fixed income security. That's the truth, but you can't go there until underlying liquidity is assured. Europe is a mess, our Congress is a mess, North Korea is not a small distraction, and China is a wild card of overbuilding and uncertain market regulation. Tell you the truth I started nibbling at some small caps Friday. I already had positions in four companies with no debt and promising products so I bought more. Who knows if that was wise but there is something in the American genetic make-up that believes in the future so there I go."

I thanked Finney for his time as he was anxious to get back to his desk and clients at Evermay. We stood and he added,

"What's happening in today's market should be a minor interruption. Problem is that we cannot predict the harm that the U.S. Congress, or Angela Merkel, or other political players will inflict. Uncertainty kills markets in the short term, and that's what we have. Thanks for lunch. Next time add a raspberry tart to your order please. Let's catch an espresso as we walk down Fifth."

Thursday, May 20, 2010

Market reacts when financial reform bill clears Senate

It was a terrible day in the market, with European and general capital markets uncertainty and some disappointing economic statistics for the U.S. economy. At approximately 2:50pm it was announced that the Senate had passed the financial reform bill for all practical purposes. The market then dropped another 200 points in the last hour. Is this a coincidence, not likely, and where is this reported as a reason for half of the day's swoon.

The bill passed by the Senate still contains the Blanche Lincoln led complete break of the derivatives business from all banking institutions. This remains insane. Derivatives should definitely be regulated and traded transparently to the extent possible but to divorce this financial tool from all banks makes no sense, as detailed here several weeks ago. That a Senator with no knowledge of finance or apparently current day business, from a state where the Democratic primary attracts only 220,000 voters in total, can force this through the Senate is a joke, but unfortunately all too real. The bill also still contains the most onerous limits on proprietary trading. Prop trading should have oversight but separating simple balance sheet management from what is actually prop trading is difficult at best, and applied by regulators in a rigid way could create far more risks for banks if their balance sheets cannot be hedged due to interference by bureaucrats with a limited understanding of risk management.

These two aspects of the bill are why the market reacted. For those who say, "get over it, the financial industry needs to be regulated harshly, this will pass", the answer is "not so fast". Large corporate America depends on its banks for financing and myriad services. When their banks lose earnings power they lose their ability to build capital, thus losing their marginal ability to finance. When their banks lose their risk management capabilities, financing cannot be appropriately hedged. The point is that this regulation is not limited to an impact on banks. It will have a meaningful impact on corporate America and eventually on capital investment and job creation broadly. That's why it was a broad market reaction to the Senate bill, not just a sell-off in banks.

There remains the House and Senate conference to reconcile the two bills. If the Congress keeps avoiding the issue and passing the buck to avoid any political risk, these misguided provisions could improbably become law. If so, historians looking back will mark this bill as the point at which the Great Recession took hold again and led to the unknown. That may be too dramatic, but it's true in my head and my gut today.

Tuesday, May 18, 2010

Cross purposes

Remember the comment made here several times that expressed frustration about the administration blaming banks for not lending more and at the same time sending regulators out into the field with greater and greater demands for pristine balance sheet quality and ever higher capital levels or else. Can't have it both ways.

Now we have this dilemma on both a national and global scale with higher stakes. As central bankers, treasury officials of governments, some leading corporate citizens, and the IMF work intensely to maintain stability in once again fragile markets, politicians and government prosecutors(is there any difference) at all levels are working at cross purposes with those constructive players, acting unpredictably and at times incoherently in their bids for attention.

Various government leaders and politicians either can't stop the scapegoating and finger pointing that has become their raison d'etre for the past year or they are doing iconic Al Haig imitations, singularly losing their minds in public with inane announcements or actions. Government prosecutors in many countries and of course states in the U.S. see a big green light from the politicians and public to go after any actor that has participated in the financial crises of 2008 and 2009, benefitting from all the intellectual firepower of 20/20 hindsight. As this current crisis unfolds prosecutors are dredging up and threatening liabilities, civil actions, and even now criminal actions that have the potential to cripple, or at least maim, those that need to be in the forefront now with all attention looking at today and ahead, not to the past.

This storm should pass with some damage left behind but no disaster. If it doesn't, serial dysfunction will have won again and no doubt will strike again.

Sunday, May 16, 2010

St. Clair McKelway

The recently published "Reporting at Wit's End, Tales from The New Yorker" has been my introduction to St. Clair McKelway, a staff writer at the magazine for three decades from the 1930's to the early 1960's. This compilation of 18 of McKelway's essays, reporting, and personal stories is incredible stuff. It's a combination of stories of New York crime, con-men, eccentrics, and murderers which represents at least half of the tales, and the balance are from McKelway's personal perspective, whether purely personal such as the story of his dropping out of school and running away from home in D.C. to Key West at age 15(he never went back to any school) or historically personal such as that related to his service in World War II.

McKelway was a classic New Yorker writer despite his lack of any formal education. The style is precise and understated, literate, and powerful when the time is right. It is personal at times like a conversation with an old friend or a letter home. More than that McKelway's writing occasionally ventures into the metaphorical and even metaphysical in a way that would be unlikely to make its way into to the space conscious(as in length and thought) New Yorker of today. On top of that there are episodes of startingly honest non-judgmental personal insight that are absorbed fully only after the reading is complete, as perhaps in the unusual puzzle "The Edinburgh Caper".

McKelway is described as being such an accomplished editor(not his job really) that he is credited with saving A.J. Liebling's career, sort like the Yogi to Don in his perfect game. With all of that, he was a man of many minds and moods. In one of his unsettled periods he thought of the possibility of being a preacher like his late father but was uncertain as in his only attempt at public speaking,

"I had keeled over backwards in a dead faint the one time I had tried to, at a small banquet at the Waldorf. I was inclined to stick with journalism. Ross(H.W. Ross, his editor) said I wasn't cut out to be a preacher; he claimed the only trouble with me was that I was under the impression that all money had to be spent before dawn or it would be called in, and that I believed all women had to be courted as a result of pretty much the same fallacious reasoning." (page 273)

This bon vivant of the New York literary scene entered the service in an unusual way. In 1942 he wrote a Talk of the Town piece(always unsigned was the protocol at that time) that criticized the Army Air Force's handling of public relations related to Doolittle's successful first bombing of Tokyo. The head of all public relations for the Army happened to be a devoted New Yorker reader, used his strength to determine the author, and offered McKelvey an immediate commission as a Captain, with apologies that it couldn't yet be Major due to some administrative details. McKelvey felt that it was his duty to accept, went to Brooks Brothers to get his tailored uniform, and headed into the Army Air Force, spending his three years working in India, then China, and finally the Marianas from which the fire bombings of Japanese cities were launched. He reported directly to General LeMay and was a Lieutenant Colonel by then. His military career ended abruptly when he covertly cabled the Pentagon accusing Admiral Nimitz, commander of all Asia, of high treason. This has not been a spoiler, just the template from which several terrific tales are born.

This book is like a box of nice chocolates. Pick and choose, move about the box, go for what you think will be the best ones first and be surprised with what you find later.

Friday, May 14, 2010

An unreported participant in today's market sell-off

Today's across the board sell-off in equities everywhere was the result of the crisis in European captital markets and it hit almost all U.S. markets, led by declines in the energy and financial sectors. Beneath that reasonably accurate story line was a scene of significant give-backs among stocks that had surged in March and April and had led any of you who owned them into doing fist pumps at your screen, by early May risking a case of fist pump elbow.

A phenomenon mainly related to a select group mid-cap and small-cap companies that had lagged the 2009 rally but that had decent businesses and balance sheets, the March/April increases in many cases were easily 50% or higher. This related to no one industry, but technology, infrastructure related, and materials stocks certainly participated. The event was seemingly just individual stock related, overlooked, undercovered companies with low volumes that caught a wave and went right on up and up.

Today was give-back time in some of these stocks. Whether profit taking, margin selling, the double edge sword of low liquidity or, unlikely on a day like this, a realization that valuation had moved ahead of itself, there were some big hits taken in many, if not all, of stocks that fit this description.

The catalyst for this was the broad market sell-off. In a one day event, it has no meaning to the market and shouldn't to the unmargined investor. That's easy to say.

Thursday, May 13, 2010

Eyes Not Sold regroups

It's been eight or nine days since a post here. Everything was getting too serious and too critical. I was serious and had plenty to criticize but stepping back and looking at the last few months writing about the financial "reform" bill, it was becoming too intense. I did think that my "sample sale" piece was lighter and just making an economic point, but the last three were just all angry. Time to take a break.

First thing I'll do is make brief comments on those three in the order of most recently published. On the first,Bloomberg is the best financial news network there is and Tom Keene is one of the most esteemed financial commentators in my opinion. I have never been a fan of Bove, not at all, but somehow he has found away to get his mug on television while working from Lutz, Florida, something he could only rarely do when he worked from New York, so I guess good for him. On the second, no major change of the overall point but instead of "corrupt bureaucrats" in sentence one try "entrenched, rigid, and at times corrupt bureaucrats who more often than not seem to enjoy showing what power they have in petty and unconstructive ways". For the third, "Scapegoating Goldman" the modification would be in the last sentence, change the word "raise" to "raise the appearance of".

With that taken care of what do I write about now. The national news networks solve the problem, in this era of intense serious issues all over the world, by taking the last quarter of their 30 minute newcasts for happy human interest stories, elderly man gets hole in one at 101 or 7 year girl with some terrible disease sings the National Anthem at a ball game. Maybe I should go to the local humane society and write about sad dogs. Can't do it, because I can't and because I might come home with one and that would definitely not work here.

Here's some good news from this afternoon. To quote Bloomberg, "Bernanke today said that the Senate's proposal to separate commercial banks from their swaps trading desks would weaken both financial stability and the regulation of derivatives activities." Maybe this will relieve me of beating that drum every other day.

Tuesday, May 04, 2010

Bloomberg's lack of insight

Bloomberg regularly highlights Dick Bove as an authority on banking, an analyst at whatever small firm he ends up associated with from year to year. Bloomberg's excuse may be that, since the awful Eliot Spitzer(a man that the New York Times is trying to revive) destroyed the public financial research industry, there are few financial analysts willing to talk. That's true.

Problem is, Bove is an attention seeking toxic guy. Well mannered and manipulative he finds his way on CNBC and Bloomberg, a sociopath of financial commentary. His call yesterday for the resignation of Goldman executive management is one of his attention seeking ploys, and it worked, headlines on Bloomberg.

Tom Keene, you seem like a really smart guy, but when Bloomberg facilitates Bove you lose your integrity.

The ugly New York state

There is little that you can do in New York State without the rigged system of expensive attorneys and corrupt bureaucrats. Insult to injury, I received today a letter from the New York State Department of Taxation and Finance with, in giant bold letters, NOTICE AND DEMAND FOR PAYMENT OF TAX DUE.

My taxes were paid on time, not a small amount, and this bill for $22.84 comes in an insulting way. Why not, thanks for being a good citizen and paying your taxes on time, or you made a small error and here's your taxes due. Now even the mail person can see that I'm a tax cheat. I'm not.

Scapegoating Goldman assault backfires

The assault on Goldman Sachs by the Obama administration and its minions is facing principled resistance. Just two weeks after the President's Cooper Union address in which he quoted a Warren Buffett comment on derivatives with a preacher-like heavily paused double comment, "yes he did, yes he did", Buffett and fellow market seer Wilbur Ross have voiced their support for Goldman. This may not sway the American people as a whole, but it certainly dents the case that Obama is making, and could even raise an anti-Semitic context that is troubling.