Friday, March 06, 2009

Have US Commercial Banks "Failed?"

Wells Fargo @ $8.12. Chase @ $16.60. BofA @ $3.17. Citigroup trading @ $1.02.

Yes, you can't even buy McDonalds snackwrap with a share of Citi stock.

Have our largest commercial banks really "failed?" Failed, in the Depression-era sense?

Clearly, they have not. Commercial banks are no longer the same as they were in FDR's era.

In fact, many people mistakenly identify our commercial banks as our total financial system, but nothing could be further from the truth.

First, all of these institutions have, for all practical purposes, had totally-insured deposits for decades. For several months, even their money-market funds have been federally insured, too.

The nation's financial plumbing system- clearing, settlement, electronic cash movement, etc., are separable, if necessary. Loans are made by several sorts of financial service firms, and more could enter at any time.

"Wealth management," a/k/a brokerage and money management, is a sector unto itself, even with the collapse of Merrill Lynch.

Truly, there is little, if any real economic damage from simply letting badly-run commercial banks fail.

From the nearby chart, it's easy to see that, among the surviving large US commercial banks, Vik Pandit, Ken Lewis and the management of BofA and Citigroup should be fired.

Citigroup is, for all intents and purposes, currently a government bank. How can any administration leave Pandit & Co. in charge, when, by comparison, Chase and Wells did so much better, if not so great in absolute terms?

BofA is a wreck, too, now. Lewis has to go.

But there's no actual risk to the economy's health in closing Citigroup and BofA. If anything, as Anna Schwartz noted, that would leave fewer, healthier banks, and opportunities for capital to move into the sector, should it require more lending capacity.

But with two of the largest US commercial banks trading nearly as penny stocks, reflecting investor doubts about the true, intrinsic values of their assets, it's ridiculous to keep them open.

Let's get the thing done, close or nationalize Citi and BofA, bring in new management, and get on with modifying mark-to-market rules to allow for economic valuation.

Thursday, March 05, 2009

Where Will Sovereign Stimulus Funding Come From?

Yesterday's equity market rise was allegedly due, in part, to hopes of China's stimulus plan and news of possible economic near-expansion.

However, I find this confusing.

We have recently experienced significant deleveraging in the private capital markets. Debt and equity prices are far below their year-ago levels. The S&P500 Index has declined more than 50% in the past year.

Now, with the destruction of capital values on a scale not seen in decades, two large governments intend to fund large spending programs with debt.

Who will buy this debt? Where is the money, given the significant capital losses of the past year?

Even my sixteen year-old daughter understands instinctively that if $1T is spent using mostly printed money, the dollar will be worth less. Of course, if buyers of US debt were found, their interest rate demands are almost certainly going to be crippling.

China and the US together tapping capital markets for between 1 and 2 trillion dollars is incomprehensible.

It's the equivalent of these two nations telling the world,

'We don't want our citizens to feel any pain whatsoever right now. So we're going to borrow or print several hundred billion dollars and dispense it to our people, giving them money on which to live, hoping it will restart our economies. Then, later, we'll buy the debt, yuan and dollars back.'

Why would anyone in their right mind by this idea? Or the debt to fund it?

It's ludicrous. Isn't it much more reasonable for governments to be cutting tax rates and letting people retain more of their own money? Perhaps local governments will have infrastructure projects which are economically viable.

But to engage in wasteful, nationwide spending as an excuse to spare citizens the pain of their earlier bad financial choices, on the face of it, cannot work in the long run.

Either the money will be wasted, and/or the immense debt loads, at high interest rates, will result in dampened GDP growth rates for a decade or more.

In the worst case, nobody can buy this debt, the spending is funded by printing presses, and inflation rates on a scale that will make the Carter era look tame may be with us. It would seem that there is simply not enough capital to fund these immense governmental spending plans and provide for private uses of capital at the same time.

Tuesday, March 03, 2009

Personal Music Players: A Retrospective

Much is made these days of the failure of the music industry to fend off piracy and fail to profit adequately from the huge technological advances which occurred with the coming of the CD.

That may be so, but in this era of over-consumption, houses with many large closets and master baths bought on no money down, let's not overlook how the basic standard of living for an average American has improved by leaps and bounds. Sometimes in deceptively small ways.

For example, many years ago, in the age of the audio cassette tape, I used to ski while listening to music. In those early years, it took a fair amount of initiative and a tolerance for some pain to do this.

I vividly remember some yard sales at Jackson Hole, in which my headphones were ripped off of my head- painfully. After my ears had already been crushed all morning by wearing goggles over the headphones, with the metal headpiece pressed into my ears and skull.

Changing tapes and batteries on the slope was not a simple process. Nor was carrying spares. Cassette tape boxes didn't do well in violent falls. The intense cold tended to drain batteries very quickly.

Ski clothing didn't accommodate music hardware. You had to figure out how to either use a pocket for a smaller cassette player, risking damage to the headphone cord as it flopped around outside your jacket, or clip the player somewhere inside ski your suit/jacket, feeding the cord up under it.

I don't think I had skied with music since the arrival of the CD player. With its bulk, sensitivity to jarring, and delicate controls, it was never, at least for me, a favored ski accessory.

All that has now changed. Yesterday, for perhaps the first time in two decades, I skied all day to music with almost no effort.

Thanks to iTunes and a $50 iPod Shuffle the size of a small refrigerator magnet, and a ski suit designed for music players, I had a surprisingly wonderful, hassle-free reintroduction to music on the slopes.

My ski suit features a small hole up near the collar for an ear bud cable to pass from a special, outside-accessed, internal pocket with a purpose-designed, Velcro closed music player pouch. The iPod's earbuds eliminate the goggle-hat-headphone bar problem and attendant pain.

The Shuffle, being solid state, with an internal battery, functioned perfectly in the cold as I skied bumps, steeps and cruisers. Even a fall could not stop it from playing. The small size of the MP4 player made it literally unnoticeable all day.

No tapes or CDs to change. No batteries to swap on a cold, steep slope while exposed to the wind.

And with iTunes, I could literally fill the Shuffle with new music daily, if I so chose. No time spent recording tapes or CDs with my favorite music.

Unlike twenty years ago, personal music for skiing is now inexpensive, unobtrusive, highly customized, and much longer-lasting and easy to operate.

It's a small creature comfort. And it never was a huge expense item. But, for me, it's a milestone of improved living standards. The sort of techno-business advance in hardware, software, and clothing for sport that offers much better value and enjoyment for your money than in the past.

Amidst much economic and business confusion and pain right now, it's nice to savor an example of innovative, productivity- and pleasure-enhancing progress which emerged, unplanned, from several different places in our economy.

No government could have orchestrated such lifestyle and standard of living improvement.

Will The Equity Markets "Crack"?

Yesterday's equity market sell-off has brought us close to 700 on the S&P. My partner and I both feel that, if the S&P closes below 700, a whole new psychology will affect it, sending it down in a near free-fall for a while.

After patiently riding out a negative return to our January puts for most of the past six weeks, they have moved up by 50 percentage points in the past week, resulting in the commencement of selling the better-performing ones for returns in excess of 100%.

It's not particularly gratifying to bet on extreme market declines in order to profit from financial positions. But, as one of my prior research partners, and a fairly wealthy private investor counseled me, sometimes, you have to acknowledge market forces and go short.

Our February put options are now up about 70% for the entire portfolio, with at least one position returning over 100%.

Looking at our volatility measure, we expect this downward trend to continue for at least the next few months. One of the mathematical facts which affect the S&P now is how large a percentage change a given point move represents. Seven points down is now 1% of the index, instead of half of that, only last summer.

I saved an early January piece from the Wall Street Journal in which several market strategists made convincing cases for a -20% S&P in 2009. At least one thing that was prominently mentioned in article is coming true. As the effects of various negative performances cascade, the magnitude of the consequences are outstripping expectations.

Given the losses in the S&P thus far in 2009, a 20% or 30% decline this year in the S&P could easily mean several more months of significant losses, followed by large gains later in the year.

But for now, the various signals which I follow do not seem to be predicting any lasting trend up in the equity or derivatives markets any time soon.

Monday, March 02, 2009

Dell's Failed "Turnaround" Confirms My Prediction

Over a year ago, I wrote this post concerning a Wall Street Journal article about CEOs returning to rehabilitate the companies they founded or led to prominence.

"In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance."

This past Friday's Journal reported on Dell's most recent quarterly results. They bear out my prediction. Profits slid 48%, so the firm is planning even more cuts.

This is what is known as a death spiral.

Sure, Michael Dell returned. He's reshuffled executives and pushed some new products. It's not working.

As I expected over a year ago, many trends are against him and his company. Frankly, it remains somewhat surprising to me that so many observers- pundits, analysts, journalists- continue to expect some sort of resurrection of Dell.

But, as my business partner reminds me, most people are sentimental. They like a good human-interest story. They enjoy the emotions accompanying a would-be come back story. Or the failure of one.
But people continue to expect businesses to live forever.
They just don't. Some die. Others should die sooner than they are allowed.
Would not Dell's shareholders have been better off with an orderly dismantling of the firm a year ago, when more value might have been realized for them? Rather than feeding the founder's ego?