Friday, June 10, 2011

Economic Denial

Despite recent anemic GDP and net job growth, the administration uses terms like "bump in the road" and "a blip" to describe the continuing lack of robust performance of the US economy.

I found the president's remarks concerning the economy while at a press conference with German PM Andrea Merkel to be particularly galling and condescending.

For a guy with little background in any productive line of work, to use the term very loosely, and absolutely no knowledge of economics, he's hardly one to set expectations or characterize the failure of his 2 1/2 years of expensive, failed Keynesian policies.

Then, yesterday, Robert Schiller warned that average housing prices could fall by another 25% in the next 4-5 years.

I don't think "bump in the road" or "blip" describes what the effects of that prediction coming true will be.

New Publicity Tactics in the Blogosphere

There must be some new wave of thought and/or practice sweeping over the business blog environment regarding use of them for free publicity.

A few weeks ago, I wrote this post concerning David Einhorn echoing my long-held position on the need for Steve Ballmer to be kicked out of the helm at Microsoft. Regarding Einhorn's fame and my comparative anonymity, I wrote,

"Does it matter that someone with billions to invest decides on publicly stating the same sentiments I've written for a few years?

In some ways, it does matter. For instance, I don't hold Microsoft, and, even if I did, I wouldn't own as much as Einhorn's fund probably does. So I wouldn't have the investor influence that Einhorn does.

But, in another way, it doesn't matter that Einhorn has now agreed with a position I've held for years. The facts of the case should be based on their merits, not simply on who is voicing them. In fact, sometimes you should assign more credibility to someone who is objective. Someone like me who doesn't own Microsoft shares, but simply observes real performance and comments thereon.

Of course, another reality is that I can write about Microsoft's, Ballmer's and Gates' failure over the past decade all I want, and I'm not going to get the coverage on CNBC, Bloomberg and in the Wall Street Journal that a wealthy hedge fund manager like Einhorn will receive for pithier comments at a much later date.

Is it gratifying for me to see business media embrace Einhorn's views on Microsoft and Ballmer, which are, essentially, my own for years? Yes.

Is it frustrating to know that I can write the same conclusions as Einhorn, for years, and garner no media attention? No. I'm sanguine about having one of millions of blogs. Mine is neither famous nor, on a traffic basis, very heavily read.

However, that said, a series of equally-candid posts about GE earned me an appearance on the most-watched cable news program, O'Reilly's Factor on Fox News, a little over three years ago. And that appearance got the attention of GE's headquarters staff.

Years ago, when the Wall Street Journal featured blogs which discussed topics appearing in the paper, I routinely saw my blog posts featured, driving readership of my blog up over 100 daily visits. Even now, I have about as many daily RSS feed readers as I average in direct readership. And it's fairly common for me to see IP addresses from companies like Goldman Sachs, Lehman and other well-known firms, as well as the US Senate, House and other government entities and universities visiting my blog.

The truth, however, is that I write the blog for two reasons that have nothing to do with other people. The first is to provide myself with ongoing anecdotal reinforcement of the key proprietary research findings which drive my equity strategy. The second is to compile a library of my own thoughts and observations, the better to use to build upon those prior recorded impressions and advance my own ideas about business, finance and economics."

These days, my average direct readership is about 70 readers, with about 40 more reading via RSS feed. As I noted above, a fairly modest, unassuming little business blog.

So imagine my surprise to receive two emails in the last two days from other business people pitching me on topics.

One evidently represents new media approaches to book publishing. Here's what the email contained,

"Can we interest you in a feature story, a review or an interview with the authors of ___________________? Two of the nation’s top financial experts are available to make financial statements easier to understand and more powerful to use than ever before.

If you’d like to see their book, please verify your best street address and let us know how we can help you.

Paul Krupin, Publicist for William S. _______, Ph.D. and John _______, MBA"

Note the funny block character in the email. Very impressive. And these two guys, of whom I never heard before, are apparently "two of the nation's top financial experts." Wow! If they want me to review their book, does that make me "one of the nation's top financial experts," as well?

I had no idea.

I skimmed through the rest of the email and found it to be completely uninspiring. But it says something if this guy Krupin felt it was worthwhile to find, contact and offer me an apparently(?) free review copy of his clients' book.

Then there was the email I received the prior day from some guy out near Santa Barbara. He felt compelled to inform me personally of his views on Netflix and Cisco, despite my own considerable posting about both. Then he directed me to what apparently is the URL of an audio of a radio program he hosts on which he recently discussed some forgettable energy company out west.

He has a website which links to writing he does for SeekingAlpha. I investigated that site years ago, when my erstwhile partner suggested I write for them. Trouble is, SeekingAlpha is one of those idea-of-the-day sites. Hardly appropriate for a buy-and-hold-for-awhile style of equity management. But apparently right up this other guy's alley.

Finally, yesterday, after I'd finished composing this post, I received yet another unsolicited, unwanted, pain-in-the-ass email regarding somebody's report or newsletter. A guy named Eric Mangan wrote a canned email with absolutely no reference to my blog, extolling the benefits of his clients report on commercial real estate.

Did I write a series of posts suggesting an interest in this sector? I did not. Not content with one unwanted email cluttering my inbox, Mangan sent another on the pretext of correcting some trivial item in the first. I replied in no uncertain terms describing my disdain for his unwanted invasion of my privacy and his client's report, explaining that if I received one more communication from him which failed to cite specific posts from my blog, he'd be blocked. All of the sudden, Mangan assumed a puppy-dog demeanor, replying that my attitude wasn't appreciated and all I had needed do was politely ask to not be contacted.

I beg to differ, and did, in my email reply to Mangan. If nobody objects to this tide of eflotsam from purveyors like him, they'll continue their noxious, unsolicited and unwanted communications. Evidently some blunt words get their attention. Point delivered, if unacknowledged.

Again, why am I so blessed with this unwanted attention?

Mangan's exchange, besides being the last straw of the week for me on this topic, also suggested in more detail the new media approach. Basically, survey anyone with a business blog, get their email, and sell it for direct email prospecting to people publicizing books, reports, what have you. These emailers exhibit a shocking lack of personalization, with salutations like, 'Mr. Neul, Blogger.'

Then there are the occasional requests I get from people to guest-write on my blog. Or to be featured on theirs if I write on topics they prefer.

My head fairly swims with all this new media attention. But, of course, there's no money in any of it. Mostly people wanting favors to access my blog's comparatively light daily traffic. It suggests a surprisingly primitive attempt to emarket to business bloggers with no segmentation or market targeting whatsoever, not to mention a complete failure to comprehend the motivations and mindsets of such bloggers.

Thursday, June 09, 2011

The Fed's Proposed Large Bank Regulatory Capital Increase

The banking community is shocked- shocked!- at the Fed's proposal to add about 3% to required regulatory capital for the 'too big to fail' crowd.

One large bank CEO, Jaime Dimon of Chase, went so far as to try to embarrass Helicopter Ben during the Q&A after his speech in Atlanta yesterday. I just saw Bernanke's reply on CNBC a few minutes ago, after having to endure senior economic idiot Steve Liesman's attempt to restate Dimon's comments. Fortunately, though, there was audio of the native New Yorker's signature accent delivering his diatribe.

Much was made of how great Chase was, how it was a lower-risk bank during the financial crisis, and how important a CEO Dimon is. The implication being that since Jaime asked these questions and pointed out various facts, well, they must be important.

What Dimon asked, to summarize, was why, with SIVs gone, CDOs moribund, some banks gone, and most housing finance excess gone, there was now a need to raise capital requirements on large banks? And did anyone study the potential effects of such increased regulatory capital on interest rates, loan volumes, economic activity and- hold your breath, because Dimon gets positively statesmanlike on this next one- JOB GROWTH!

My God! Raising capital requirements must be un-American!

Well, not quite.

I've written in a post some years ago that banks want to portray themselves as competitive companies in terms of equity values and growth, even though the business in which they are in doesn't lend itself- no pun intended- to such dynamics. And the traditional nosebleed level of regulatory capital/risk assets doesn't really matter once risk becomes loss. Which happens in as little as one or two days, if not overnight. Ask the former executives of Bear Stearns.

Although banks like Chase have been forced to lessen their proprietary equity trading, their business is to hold financial assets, some of which have values which can change rapidly and, at times, in unexpected directions.

Current capital levels don't begin to cover what can occur on a large bank's balance sheet. Never mind, now that Dodd-Frank is law, what the geniuses at the banks will invent next, now that they have a fixed regulatory target around which to maneuver to evade capital requirements and other nettlesome regulations.

Former Goldman banking analyst Bob Albertson was on CNBC as a follow-up to the Bernanke-Dimon exchange to shill for the banks. He sagely intoned that nobody in government knows what the effects of their regulations will be.

True enough. And Dimon's question regarding research into said effects was simply theatrical. Everyone knows that such research wasn't and won't be undertaken. From a statistical sense, it's likely far too complicated, with too many variables for which to control, and too many to study, to ever develop sufficient data to draw conclusions.

But after you get by Dimon's- and Albertson's- smoke and mirrors, remember that this sector ran amok only a few years ago, with the help of Congress, sleepy Fed and FDIC regulators, and Fannie and Freddie buying off overseers and most of Congress. Collectively, the American taxpayer and the economy footed the bill for these excesses, next to which an added 3% of risk assets is a pittance.

Will BofA's equity be diluted nearly 50%? Maybe so. And maybe Tom Brown will have second thoughts. He was on Bloomberg yesterday morning singing Dimon's praises- no surprise there, eh?

The reality of large bank equities, however, is that they are timing plays. These companies don't typically exhibit consistent behavior. So once you acknowledge that to buy and sell them is to engage in market or sector or even company timing, surprises like added capital requirements are just part of the risk of playing that game.

From a historical perspective, however, it's hard to argue that having large, nearly-unmanageable and uncontrollable financial institutions which are slated to be taken over by the government after their next series of lethal mistakes, hold some added capital, is indefensible.

Wednesday, June 08, 2011

Invisible Economic Red Tape

I've read and collected several recent editorials from the Wall Street Journal which, taken together, provide a clearer picture of how our government is strangling the US economy and perverting energy policy in ways which aren't hitting the front pages of the nation's newspapers, nor the headlines of the conventional broadcast network news programs.

Item One
A Journal staff editorial from the Memorial day weekend contends,

"The regulatory tax on Americans is now larger than the income tax."

It cites two Lafayette College economists, in a study "sponsored by the Small Business Administration" as finding that federal regulatory compliance costs the US $1.7T annually. So much for Cass Sunstein's little piece claiming that regulatory burdens are shrinking.

In one incredible passage, the editorial notes,

"In one case, the (CTFC) lawyers even insisted that the only costs they needed to count were what a company would have to spend to find out if a rule applied to it, but not the costs of actually complying with the rule."

Item Two
Nick Schulz of the American Enterprise Institute reviewed the book Great Again by Henry R. Nothhaft.

Schulz writes,

"Nothhaft is not one of those professional declinists.....a veteran Silicon Valley entrepreneur who is the CEO of.....Tessera."

The review describes one California company being forced to pay a state 'use' tax of $1MM on top of the $10MM it paid for the German production equipment.

Nothhaft recounts how a prior startup which he took public spent $3MM on Sarbanes-Oxley compliance, far in excess of the bill's average estimated $91K.

America's tax rates are also excoriated. With reductions in many European national rates and the Chinese competing aggressively with low tax rates, including special low rates for semiconductor manufacturers, one venture capitalist explains that his firm won't even bother trying to start those kind of ventures in the US anymore. They'll choose China instead.

Item Three
Yesterday's lead staff Journal editorial detailed how the current administration is implementing a sort of 'pocket veto' of Alaskan oil exploration, production, and usage of the North Slope pipeline.

What the average American doesn't know is that, once the pipeline no longer pumps oil, it must be dismantled. Well, the original North Slope fields are aged and pumping about a third of their peak production. This results in slow-moving oil that causes damage to the pipeline.

Meanwhile, although the Bush administration auctioned leases for one section of the North Slope expected to contain more oil than the original find, the Obama administration has allowed green anti-oil lawyers to block development of the leases, leading to Shell to shut down said attempts at development. ANWR remains off limits, as does at least one other large block of almost-proven tens of billions of oil reserves.

The net result is to silently shut down Alaska's potential oil production and, in the process, force the owners of the pipeline to dismantle it, making subsequent construction in this age of greater environmental obstructions, nearly impossible.

So much for government's solutions to spending hundreds of billions on Arab oil. And for removing regulatory constraints on the American economy.

Tuesday, June 07, 2011

Austan Goolsbee- Exit Stage Right

It seems that the last of the economics gang that couldn't shoot straight has announced his imminent departure. The administration's chief economics advisor, Austan Goolsbee, fell on his proverbial sword for Friday's poor BLS numbers, the latest in a string of anemic monthly employment reports, and announced his resignation, effective this summer, as head of the Council of Economic Advisors.

It's quite a list of luminaries who've been tarnished by association with this administration's failed economic policies- Larry Summers, Christina Romer, and now Goolsbee. I guess you could also add Jared Bernstein, also recently departed, who had been attached to the hapless Joe Biden.

Goolsbee is returning to the University of Chicago to resume teaching, although it's difficult for me to imagine what credibility he would now retain after speaking so forcefully for so many years on behalf of economic policies which aggravated the consequences of the financial crisis of 2007-08. One would think the same of Romer, whose prior economic research actually contradicted policies she espoused while in the administration.

Perhaps this late in the president's term, we'll get lucky and nobody will fill Goolsbee's post, thus reducing the potential for more economic harm through 2012.

Monday, June 06, 2011

The May BLS Employment Numbers & Economic Forecasts

By now the business press and pundits have thoroughly treated the dismal 54,000 net employment increase in May and the rise in unemployment to 9.1%.

The usual suspects claim it's transitory- simply the result of the Japanese earthquake aftermath and Midwest tornadoes. Or that at least it was a positive number.

Get real. An already-anemic average of some 200,000/month for a few months has turned down as the bottom dropped out of housing prices- again.

Housing price declines spark increased probabilities of defaults, as more current homeowners experience negative equity. Such disruption of households bodes ill for consumer spending. Lower consumer spending leads to fewer net jobs created.

What was unexpected, at least to me, was the number of Keynesian pundits who came out of the woodwork, amidst the debt limit standoff and the end of the Fed's QE2, to call for more federal stimulus.

You can't make this stuff up. We've seen 2 1/2 years of wrongheaded economic policy by two administrations fail to simply let the economy naturally bottom out and return to expansion.

Instead, we had about a trillion dollars of wasted stimulus, illegal takings under the guise of auto and insurance company bailouts which did nothing that constitutionally-provided normal bankruptcy wouldn't have accomplished, sans the extra tens of billions of spending, and failed attempts to prop up home prices via foreclosure moratoria and threatened equity write-offs.

As I paraphrased Michael Steinhardt in this post from early 2009,

"The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive."

He was correct. By most measures of economic activity- housing construction and pricing, job creation, GDP growth- the US economy continues to be troubled.

The Wall Street Journal took the opportunity to make Bob Doll, BlackRock's equity investments chief, its weekend interview. The piece noted that BlackRock is now the world's largest investor.

Hhhmmmm.....I wonder what Bob was going to say amidst all the gloomy data.

'It's time to sell?'

Hardly. Bob Doll's number one job right now is to talk BlackRock's book, in order to let the firm reposition without calling attention to any sales it may be conducting. The very last thing you would expect to see- and he didn't disappoint this weekend- is Doll yelling to head for the exits, causing a stampede of retail and other institutional investors that would destroy the valuations in BlackRock's own funds.

At times like these, the last people you want to listen to are those with the most to lose by publicly admitting how bad current economic statistics are.

That said, my own signals don't indicate an immediate need to go short. And Doll's taking a longer term perspective is not necessarily bad, either. But being a Pollyanna isn't believable, either.

Perhaps the most interesting thing Doll said was an almost throwaway comment about technology having raised the unemployment level associated with full employment from 3% thirty years ago to something north of 6% now. He blithely said,

"And that has political and social consequences that I don't think we even know what to do with yet."

Indeed. And what a time to realize this, eh? When the housing sector, traditionally an important driver of the US economy, is dormant, housing prices continue to weaken, and net job creation is nowhere near the necessary rate to attain full employment for years.