Friday, June 25, 2010

The FINREG Bill Disaster

Well, as we awake to the last day of this week, we can all thank a clueless Democratic Congress and a spineless Republican one for passing the most misguided and ineffectual financial regulatory "reform" in years.

As I've written in prior posts on either this or my companion political blog, a country that allows bribe-taking, retiring Senator Chris Dodd (D-CT), in collaboration with Barney Frank (D-MA), the Congressman who rewrites history in an attempt to hide his gross failure to oversee Fannie and Freddie, to author such sweeping, flawed legislation gets what it deserves.

First, the regulation omits any mention of the two most egregious sources of financial excess in the past few decades, Fannie Mae and Freddie Mac. Prior posts have spoken to their immense lobbying clout, which has bought these two horrors the votes of hundreds of elected members of Congress.

Second, nothing in the FINREG bill will or can prevent yet another financial crisis of the type experienced a few years ago. Larding up ineffectual regulation of commercial and investment banking and consumer lending with yet more layers of ineffectual and confusing regulation won't solve anything.

Third, the so-called Volcker Rule got watered down and loopholed, so that deposit-insured commercial banks can still do some derivatives activity on their books.

There was a long discussion of the technical aspects of the loophole this morning on CNBC. In short, the law is vague on how and when a commercial bank's derivatives positions are part of servicing a customer's position, or part of its proprietary book.

The on-air anchors and reports argued that this is a tough call to make.

It's not.

In reality, it's incredibly simple. Put any derivatives activity in a separate subsidiary which is 100% equity-financed and unable to be "bailed out."

This notion that somehow a bank can't figure out if its derivative position is on behalf of a client, or not, is nonsense. Client funds and positions are in client accounts. Bank positions aren't.

Got it?

Once again, Congress gave in to big banks and let them have a loophole through which they will, in time, exploit subsidized risk-taking in proprietary derivatives activity.

The larger issue here, however, is that the US economy and nation has been, once more, ill-served by a supine Republican party in Congress that is afraid to take the real issues to the public and stop bad legislation, while the Democratic party in Congress continues to believe that the same inept regulators, given more pages of obscure law to interpret, will do any better in the future without a fundamental reform of the GSEs and the belief that the federal government will bail out excessive risk taking by sufficiently large private sector financial companies.

This legislation will only harm the financial sector and the US economy over time, if for no other reason than it continues the state of denial by government concerning what really drives financial crises.

GM's Continuing Mistakes

I read with disbelief a headline in yesterday's Wall Street Journal, GM Is Seeking Partners for Car Loans.

Since selling off half of it's old GMAC unit, stuffed with subprime housing loans, GM has had to focus on actually making cars people want to buy.

The second paragraph of the article brought a chill to me. It read,

"The car maker has had trouble providing loans to more consumers, particularly those with weaker credit history, and views this as a barrier to winning back U.S. market share."

Have we, as a nation, and GM, as a company, learned nothing from the past few years of financial excess?

HOw is anyone well-served by GM seeking weaker, less capable borrowers to buy cars they cannot truly afford?

Sure, a car that can't be afforded doesn't represent quite the same amount of resources as an unaffordable house. But it's still a misallocation of societal resources.

Further, it's yet another clear example, after so many of the past few years, of a company deliberately pursuing marginal business which isn't sustainable.

This time, however, US taxpayers own this problem. Literally.

Not only is GM government-owned, so we own the losses that will come from this unsustainable strategy. We own the economic seeds of damage such a strategy is sowing. Spreading unaffordable cars throughout the country, creating bad loans and over-stretched consumers.

Have we learned nothing from the financial excesses of earlier this decade?

Evidently not.

Thursday, June 24, 2010

The iPad's Success Affects Amazon's Kindle

Back in early April, I wrote this post upon the iPad's introduction. Specifically, I opined,

"I don't think there's any question that the iPad will be significant in its category. Some claim that, at least initially, it will also increase volume of ebook sales at Amazon. Perhaps so. But I continue to believe it will marginalize the Kindle, relative to its prior market position."

How much more marginal can Kindle get, than to have to cut its price from $259 to $189, as it did earlier this week?

The e-reader functionality is quickly moving toward a razor-razor blade sort of dynamic. Much more quickly, one suspects, than Amazon expected.

Perhaps, in time, an e-reader will be priced and marketed like a cell phone, with an upgrade included if you buy some sort of volume purchase contract from the vendor's site.

Of course, the gorilla in the room that isn't just an e-reader, the iPad, will continue to affect the lesser-functioned competitive offerings. And as I have written in a prior post, the fact that Apple controls the design and manufacture of the iPad gives it a tremendous advantage.
Over the past five years, as the nearby price chart for Apple, Amazon and the S&P500 Index displays, Apple has outperformed Amazon.
Currently, both firms are in my equity portfolio. They are two of the very few S&P500 firms which have consistently outperformed in the past years. As well as Amazon has done, it pales in comparison to Apple.
The two firms are structurally very different. Apple is essentially a producer of a family of specialized digital applications devices and associated content and advertising systems. Amazon is an online general merchandiser, book and music seller, and vendor of cloud computer.
Still, whether it's due to growth rates or business mix, Apple has been viewed for some time as more valuable than Amazon. You have to wonder, with Amazon having so much less control over its Kindle development than Apple does over the iPad, if that difference will have ramifications for its content sales in the years to come.
One thing is sure. The Kindle is in a direct fight with the Nook and other e-reader-only devices, while Apple's iPad floats above them, offering a different set of features which clearly differentiates it and commands the typical premium Apple price.

Wednesday, June 23, 2010

David Faber's Program- Another New Low: Steve Liesman

I wrote here yesterday that David Faber's newish CNBC noontime program, Strategy Session, seems to be losing momentum. Its guest list has declined considerably in quality.

Now I know Faber's new program, and, sadly, Faber himself, is in trouble. Real trouble.

Today, as Faber and co-host Gary Kaminsky discussed this morning's new housing sales slump, the worst monthly numbers, they contended, since 1963, guess who they turned to for 'expert' economic commentary?

None other than CNBC senior economic idiot, Steve Liesman.

As if that wasn't enough, Faber introduced Liesman as a sage on economics and the bond market!

News to me, and all the other CNBC viewers who thought that the network's anointed bond market guru is the guy who reports from the Chicago pits on a daily basis, Rick Santelli.

Liesman is only a reporter. He's got no background in economics and, according to his bio, has no operating experience in the fixed income markets.

Has Faber lost his mind? It's bad enough that Faber is stuck with colleague and notable idiot Liesman as a 'guest' on his program.

David Faber didn't have to compound this unfortunate development by attributing knowledge to the CNBC economic moron that he clearly does not possess.

Housing & The Infamous "Double Dip" Recession

Kelly Evans wrote her usual interesting piece in the Wall Street Journal yesterday. The topic was housing, published before the dismal existing home sales data which came out a little later in the morning.

Evans points out that new home sales declines, after some earlier increases, are less troubling than they might seem at first glance. She mentions the now infamous "double dip" term, applying it to housing, but suggests that a dearth of new home sales isn't a bad thing, as it will help trim inventories, leading more quickly to eventual price firming.

That term, "double dip," is about as overused and nauseating these days as "green shoots" was last year at this time.

The other day, on CNBC, Maria Bartiromo, with that distinctive, distracting lisp of hers, was yammering away at everyone in sight about "a double dip," as well.

To me, whether there's a technical negative quarter or two of negative GDP growth in the near future, or not, is probably less relevant than whether the best quarterly rates of growth will ever get to the levels typically associated with vibrant, robust recoveries of prior decades.

Then you have Art Laffer, in a Journal editorial about which I wrote this post two weeks ago, predicting an outright US economic collapse next year, thanks to tax rate increases and additional taxes, too.

One thing Evans did mention, toward the end of her piece, was the role employment and wages play in a housing recovery. How's that going, do you suppose?

Last I recall, the president was in front of cameras after the latest jobs report, trying to explain why a pathetic 41,000 new private sector jobs in the prior month was a good thing.

Let's be honest. We don't want housing and housing finance to ever return to the level of economic importance it possessed during the 2002-2007 period. In the wake of that disastrous period and the excesses which drove it, lenders will understandably be focused on more verifiable, dependable employment in order to judge housing loans as of reasonable quality. I don't think we can count on home loans to temporary census workers or newly-minted federal government hires to drive US economic growth for the next five years.

If private sector employment isn't picking up, housing isn't going to, either. And yesterday's data suggests as much.

As it is, a CNBC report described how some homeowners are simply choosing not to pay their mortgages anymore, thus driving retail clothing, appliance and dining sector growth.

Housing growth depends on employment growth. Employment still isn't growing sufficiently to suggest a robust, healthy US economic recovery right now.

Meddling with housing finance assistance programs may paper over short term valuation issues, but it can't make the US economy grow in the absence of the growth of well-paying, long term private sector job growth.

Double dip or just anemic economic growth, it sure doesn't look, yet, like the US is in the process of enjoying a snappy, sharp economic upturn.

Tuesday, June 22, 2010

David Faber's Program Running Out of Gas

I happened to catch today's edition of David Faber's noontime CNBC program, Strategy Session. The effort to present Faber, begun a few weeks ago, seems to be losing steam.

For example, one of today's special guests was a guy named Rob Cox. Cox used to co-write a daily piece on the back of the Wall Street Journal's Money & Investing section, as part of a feature called, I believe, Breaking Views. At the time, Cox and his colleagues were part of a boutique analyst group in which the Journal had a minority interest.

I've written some posts on a few of Cox's pieces from that period. His work seemed to be uneven, at best. Certainly not extraordinary.

Today's topic was GM's imminent IPO. Cox was there to tell us that the company isn't really healthy yet, so the only way the government can sell this pig is to underprice it, thus losing taxpayers even more money.

Thanks, Rob. I couldn't ever figure that one out for myself. Thanks, David, for underestimating your audience- such as it may be.

Faber began his inaugural week with John Mack, among others whom I can't even now recall. I know I saw Sirius' Mel Karmazin on one episode.

Today's marquee guest was some housing guy who I confess to not recognizing.

Of course, Faber's challenge is identical to that of, say, Jay Leno or another David, Letterman. His bookers have to run a full court press every day to line up guests whom people will feel compelled to see. That's got to be easier in the general entertainment field than in the business world. Especially when the show's set wants you to think it's primarily financial in nature, although the program's title leads you to think otherwise.

As I mentioned in my earlier post, I like Faber. He's a capable, intelligent, likable analyst. More candid and direct with his interviewees than many others on CNBC.

I don't know what his ratings numbers are looking like without the first week's A-list guests. It would be unfortunate for him if his network once again showcased him in an unworkable format.

New-Style Regulations' Effects On Business

Gerald O'Driscoll, a senior fellow at the conservative Cato Institute, wrote an editorial in an issue of last week's Wall Street Journal entitled The Gulf Spill, the Financial Crisis and Government Failure. The theme of O'Driscoll's piece was government regulatory failure.

He wrote,

"There are two major reasons such efforts fail. I have already discussed the first: regulatory capture.

The second source of regulatory failure is the knowledge problem identified by Nobel Laureate Friedrich Hayek. The knowledge required by regulators is dispersed throughout the industry and broader economy. For regulation to work, that dispersed knowledge must be centralized in the regulatory agency. To successfully accomplish this requires central planning of the industry, if not the economy. But the local knowledge of specific circumstances of time and place cannot be aggregated in one mind or agency. We know that is impossible, and that impossibility was the reason for the collapse of the Soviet Empire and the transformation of the Chinese economy."

The rest of the article provides more detail in how the increasingly granular and detailed regulation of industries such as financial services and oil exploration have only led to more regulatory failure.

O'Driscoll ends the piece citing University of Chicago law professor Richard Epstein, who has noted that

"we need simple rules for a complex world. The complexity of rules is self-defeating because that complexity requires more knowledge than can be acquired."

Thus, the current FINREG bill, which will be a disaster the moment it ever becomes law. Much like the vaunted omnibus healthcare overhaul bill.

Along with these increasingly microscopically-controlling regulatory bills/laws is another new approach to regulation/law that I suspect will chill economic activity in the US.

It is the open-ended nature of these laws which leave the actual details of regulation to various commissions, boards and agencies to be established and operated later.

As bad as some of the 1930s-era regulations were, at least they actually specified what rules and regulations were to be. ERISA legislation was very specific, too.

Now, however, we have healthcare, energy and climate, and financial so-called "reform" legislation which each run into thousands of pages, without definitive rules. Instead, industry players are invited to lobby and bribe various agency and commission officials to write detailed regulations in their favor.

Of course, what an agency write today, it can rewrite tomorrow. Witness the current FCC chairman trying to singlehandedly overrule Congress, the courts and public opinion, never mind his fellow commissioners, by subjecting the internet to the restrictions of the telephone industry in the Communications Act of 1934.

Is any of this even Constitutional?

Whether it is, or not, it must be chilling for businesses and investors to contemplate risking their capital under rules which may be changed at the literal stroke of an unelected, bribeable Washington bureaucrat's laptop.

Vigorous, robust capital markets and economies like as much certainty of environment and frameworks of rules and regulations as possible, in order to leave the remaining business operation uncertainties as the major ones.

Instead, we are now embarking on an era of explicitly-vague federal regulation and legislation, leaving businesses to wonder just what the rules are, or will be, and for how long.

This cannot be good for the US economy going forward.

Monday, June 21, 2010

New Growth At Starbucks?

Last Monday's Wall Street Journal featured an upbeat article concerning Starbucks.
According to the piece's author, John Jannarone, writing for Heard on the Street, the Seattle-based coffee giant is poised to display strong sales growth in the near future.
Jannarone provided a sketchy analysis to demonstrate that Starbucks has already successfully fought upscale coffee competition from McDonalds. Rereading the evidence, I'm personally not convinced of the conclusions. More likely than stealing Starbucks customers, as Jannarone seems to believe was the point of McDonalds' efforts, I suspect McDonalds is enjoying coffee sales growth that just won't now accrue to Starbucks.

The article concludes by observing that Starbucks has a 19 P/E multiple, which, while judged expensive, is teasingly hinted at being too low considering the potential ahead for Starbucks.
Being inquisitive, I constructed price charts for Starbucks and the S&P500 Index for the past 5 years and the term of Starbucks' public listing. They appear nearby.
Not surprisingly, the past five years have been tough on the coffee roaster. Exhibiting more volatility than the index, which isn't news, it ended up about flat with the index for the period. So the recent past doesn't suggest Starbucks is poised for a breakout due to suddenly-inspired management.
I've written a handful of posts since Howard Schultz returned to the firm as its CEO. Overall, he hasn't had much impact on the firm's performance in terms of leading it to consistently superior gains over the index.
Looking at the two price curves from Starbucks' public trading debut in 1993, the recent five years looks even more significant.
Prior to that time, the firm displayed consistent superiority over the index. I personally held it in equity portfolios in the past, so exceptional were the firm's fundamental and technical performances.
Viewing the firm's share price over such a long period, the recent stall looks more telling, at least to me. It fell precipitously during the recent economic turmoil. Weakening in a time of economic trouble is one thing, but Starbucks' share price did much worse than just that.
My own suspicion is that, like other growth firms, such as Dell and Intel, Starbucks has experienced its days of steady, long periods of consistently superior growth. I think investor expectations and competitions have both affected the firm's share price for the foreseeable future.
Being priced so apparently richly for such average recent performance suggests more wishful thinking than good sense. Sort of like those investors that still feel obliged to stuff Microsoft or GE in their portfolios, in the vain hope that, somehow, those aged, overly-diversified firms will somehow recapture the performances of their much earlier years.