You can't say Art Laffer is ambivalent about his opinions. His editorial in today's Wall Street Journal, entitled Tax Hikes and the 2011 Economic Collapse, holds nothing back.
Despite having been Reagan's economic adviser, Laffer didn't write a partisan piece. While parenthetically noting which administration has chosen to raise taxes, he concentrates almost exclusively on empirical evidence of tax rate increases and decreases, and associated economic activity.
On the strength of just this evidence, Laffer projects the coming rise in existing tax rates, and new taxes, at the dawn of 2011, into a renewed recession. Thus the article's title.
The details of next year's tax rate hikes are chilling. Did you realize that the top personal federal income tax rate rises to 39.6% from 35%, a 13% increase? Or that the highest dividend tax rate rises to the same 39.6% rate from 15%? How about the capital gains tax rate rising by 33%, from 15% to 20%?
These are stunning marginal increases which, as Laffer illustrates, are sure to have compressed economic activity into this year, in order to escape these coming higher rates.
This quote from Laffer's piece puts his opinion right out in the open,
"Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market."
Laffer's observations seem so simple and intuitive, yet don't seem to be generally acknowledged. He writes,
"It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.
If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet."
Nobody can say Laffer hasn't placed a rather large stake in the ground with his prediction of the US economy returning to recession next year, absent relief from the coming tax rate increases.
Monday, June 07, 2010
The New Sovereign Debt Crisis- Hungary
As I write this at 8:15AM this morning, the S&P futures are at 1068, up slightly from Friday's close. Apparently, European equity markets have recovered from some serious declines, thus relieving pressure on the US equity market's open this morning.
The news on CNBC was all glowing about Hungary, seeking to minimize the effects and implications of Friday's disclosure that the country's prior administration had misrepresented its fiscal situation.
I swear it looked like the European correspondent for CNBC behaved like the network had become a paid publicity agent for the country and its new government.
We were told that Hungary's debt/GDP level isn't nearly as bad as Greece's, being only about 78%, and only 4 points above the EU average. It's debt as a percentage of its budget was something like 3%, whereas Greece's was said to have been 9%.
See? Hungary's really okay. You were worried over nothing.
I don't believe it.
To me, the lesson of Friday's sudden, Hungarian-induced selloff in US equities, was about lying. About official governmental misstatements of fiscal facts.
It isn't about whether Greece is only 5% of the EU's GDP, or whether Hungary is as badly-off as Greece. Or, for that matter, whether the source of the comments on Hungary's prior fiscal lies was some administration official speaking to a small group of entrepreneurs in a town of which he was once the mayor.
It's about the slowly-dawning realization by global investors that, unlike private sector companies, whose accounting statements are at least cursorily audited by outside parties, governments can simply lie about their fiscal condition and get away with it for years.
Since governments everywhere printed money and stimulated like crazy in the past 18 months, global investors are now understandably worried about the capacity for those countries to repay their debts. And about the whether they can even rely on stated financial conditions of said countries.
Gone from business news headlines are discussions of the Euro's future. But I don't think the actual crisis has passed.
To me, the fundamental concern is not knowing which country, on which day, will suddenly announce that its prior stated financial condition was all wrong. Regardless of the reason, we'll learn that the truth is much uglier.
This is about confidence. The confidence global investors can have in the stated condition of the finances of many European, and probably other countries.
I doubt we're finished with this topic yet.
The news on CNBC was all glowing about Hungary, seeking to minimize the effects and implications of Friday's disclosure that the country's prior administration had misrepresented its fiscal situation.
I swear it looked like the European correspondent for CNBC behaved like the network had become a paid publicity agent for the country and its new government.
We were told that Hungary's debt/GDP level isn't nearly as bad as Greece's, being only about 78%, and only 4 points above the EU average. It's debt as a percentage of its budget was something like 3%, whereas Greece's was said to have been 9%.
See? Hungary's really okay. You were worried over nothing.
I don't believe it.
To me, the lesson of Friday's sudden, Hungarian-induced selloff in US equities, was about lying. About official governmental misstatements of fiscal facts.
It isn't about whether Greece is only 5% of the EU's GDP, or whether Hungary is as badly-off as Greece. Or, for that matter, whether the source of the comments on Hungary's prior fiscal lies was some administration official speaking to a small group of entrepreneurs in a town of which he was once the mayor.
It's about the slowly-dawning realization by global investors that, unlike private sector companies, whose accounting statements are at least cursorily audited by outside parties, governments can simply lie about their fiscal condition and get away with it for years.
Since governments everywhere printed money and stimulated like crazy in the past 18 months, global investors are now understandably worried about the capacity for those countries to repay their debts. And about the whether they can even rely on stated financial conditions of said countries.
Gone from business news headlines are discussions of the Euro's future. But I don't think the actual crisis has passed.
To me, the fundamental concern is not knowing which country, on which day, will suddenly announce that its prior stated financial condition was all wrong. Regardless of the reason, we'll learn that the truth is much uglier.
This is about confidence. The confidence global investors can have in the stated condition of the finances of many European, and probably other countries.
I doubt we're finished with this topic yet.
McDonalds' Shrek Glass Recall
It's almost too incredible to be true. McDonalds' has had to recall 12 million collectible Shrek drinking glasses because the vendor which the fast food firm hired to manufacture them apparently used cadmium, a toxic metal.
According to a Wall Street Journal piece, McDonalds had tested samples, which were found to have cadmium levels below then-existing federal standards.
Still, in this era, when thrift shops can't even take toys anymore because of concerns over lead-based paint and/or lead, how could McDonalds not see fallout from giving away children's curious containing the toxic metal?
Why do drinking glasses even have to contain cadmium?
I'm just shocked that the fast food giant which does so much so well would stumble over something so simple and obviously troublesome.
According to a Wall Street Journal piece, McDonalds had tested samples, which were found to have cadmium levels below then-existing federal standards.
Still, in this era, when thrift shops can't even take toys anymore because of concerns over lead-based paint and/or lead, how could McDonalds not see fallout from giving away children's curious containing the toxic metal?
Why do drinking glasses even have to contain cadmium?
I'm just shocked that the fast food giant which does so much so well would stumble over something so simple and obviously troublesome.
Sunday, June 06, 2010
Hospital Ships Anyone?
In the aftermath of the recently-enacted healthcare legislation, I've been considering what sorts of unintended consequences will occur.
Of course, everyone with a brain has already identified the phenomenon of corporations dumping their employees onto the federal government, rather than continue to pay for anything but bare-bones health care. So much for that 'keep the plan you like' lie from Congress and the administration.
And it's becoming clear that many older doctors won't wait around to see their incomes slashed as they become de facto federal employees. Thus, just as millions are added, at below-cost premiums, to health insurance rolls, the capacity of the medical field to treat them will shrink drastically.
But I think there will be another, more surprising development in the provision of healthcare. It occurred to me while watching a History channel program concerning 1920s rum runners. The fast small boats ferried loads of illegal alcohol from mother ships hovering just outside the limits of US jurisdiction at sea.
My prediction is that someone will organize a business providing full-service medical and hospital care on ships sailing just beyond the reach of US law. Probably domiciled in a small country where permissions may be cheaply obtained, the services will offer or arrange for insurance policies, the claims on which will be fulfilled on board the medical ships.
Being out of US jurisdiction, but near to the country's shores, retired US doctors and nurses of all ages will staff the floating care centers. Look for regular helicopter services from major US cities to the ships, carrying both employees on rotations of at least a week, as well as patients.
It seems logical that, if the world's ultimate premier medical destination, the US, outlaws private medicine, then the US medical sector will relocate to the nearest unregulated location. And that, I predict, will be the high seas just outside the legal and physical reach of Obamacare.
Of course, everyone with a brain has already identified the phenomenon of corporations dumping their employees onto the federal government, rather than continue to pay for anything but bare-bones health care. So much for that 'keep the plan you like' lie from Congress and the administration.
And it's becoming clear that many older doctors won't wait around to see their incomes slashed as they become de facto federal employees. Thus, just as millions are added, at below-cost premiums, to health insurance rolls, the capacity of the medical field to treat them will shrink drastically.
But I think there will be another, more surprising development in the provision of healthcare. It occurred to me while watching a History channel program concerning 1920s rum runners. The fast small boats ferried loads of illegal alcohol from mother ships hovering just outside the limits of US jurisdiction at sea.
My prediction is that someone will organize a business providing full-service medical and hospital care on ships sailing just beyond the reach of US law. Probably domiciled in a small country where permissions may be cheaply obtained, the services will offer or arrange for insurance policies, the claims on which will be fulfilled on board the medical ships.
Being out of US jurisdiction, but near to the country's shores, retired US doctors and nurses of all ages will staff the floating care centers. Look for regular helicopter services from major US cities to the ships, carrying both employees on rotations of at least a week, as well as patients.
It seems logical that, if the world's ultimate premier medical destination, the US, outlaws private medicine, then the US medical sector will relocate to the nearest unregulated location. And that, I predict, will be the high seas just outside the legal and physical reach of Obamacare.
Friday, June 04, 2010
Ballmer & Microsoft Roasted On CNBC- Herb Greenberg Returns!
Microsoft CEO Steve Ballmer has been in the news in the past few days.
The Wall Street Journal's All Things Digital conference gave rise to an extensive interview of Apple's CEO Steve Jobs by Walt Mossberg. Jobs made some disparaging remarks about PCs and laptops, intending, many thought, to diss Microsoft.
Ballmer shot back with some rather lame comments, to judge by this morning's Journal article on the topic. Essentially, Ballmer's remarks boiled down to, 'oh yeah? Well, we're going to come out with a tablet, too! So, there!'
But I think by far the more interesting treatment of Ballmer was on CNBC yesterday morning.
Herb Greenberg, the very outspoken and independent-minded analyst who left MarketWatch last year, is back on CNBC. In New Jersey, no less, which had to have been tough to move from Newport Beach, California. Not to mention from one nearly-bankrupt state to another. But, I digress....
Spurred on by Greenberg, several guests and co-anchors spiritedly debated the Apple/Jobs vs. Microsoft/Ballmer/Gates topic.
Greenberg was pretty firm in his contention that Microsoft has just gone nowhere. Either he, or another guest, noted, as I have contended in this blog years ago, that Microsoft's biggest disadvantage is a huge operating system business which hinders its ability to excel in entertainment devices, applications and other software or hardware areas. Someone even called for the spinoff of the unit containing the XBox. Just like I did years ago.
At one point, somebody said that Ballmer simply 'has his head in the clouds,' which I think is being charitable.As the nearby price chart of Apple, Microsoft and the S&P500Index for the past five years illustrates, Ballmer's Microsoft has done no better than the index, while Apple has shot ahead with a total return exceeding 400%.
Ballmer has completely dropped the ball for his shareholders. One guest argued that you can't even "bring back" Bill Gates because- horrors!- he's still there in a Chairman capacity.
The most stunning and disappointing element of the discussion was when the CNBC blonde female co-anchor, whose name escapes me just now, argued that it wasn't fair to cast the choice as 'Apple vs. Microsoft,' and why couldn't portfolio managers hold Microsoft as one of many tech issues?
As someone with equity and options management experience, I found that comment to be totally inane. Why would anyone take equity risk on a single issue when it performs no better than the diversified S&P, which one can buy for a fraction of the transaction cost?
Of course, this comment came from someone who works for GE, another equity that managers seem to love to hold, while it either loses money or goes nowhere.
At least it was fun to see Greenberg back and firing on all cylinders.
A New Exodus of Traders From Banks To Hedge Funds
Right on cue, with the recent passage by both Houses of Congress of some form of FINREG bill, traders at publicly-held firms are heading for the exits. The exodus was heralded by yesterday's Wall Street Journal's Money & Investing section's lead article, Hotshot Traders Leave Street.
Seasoned traders at several large commercial banks are now leaving to either start their own hedge funds, or take seed capital from established private funds, such as Citadel.
According to the Journal article, several existing hedge funds have created new structures to fund and, thus, capture some of the newly-fleeing talent from the publicly-held banks.
The only comment I would add is that these hotshots are, in reality, something like a third wave of such an exodus. There haven't been that many stellar performers remaining in the publicly-owned finance sector for some years. What we are now seeing is merely the latest purging of top, young talent following a well-worn path to the shadowy world of hedge funds.
This phenomenon ought to give legislators and would-be regulators pause. After all, doesn't that leave commercial bank trading in the hands of lesser talent? And push the better traders into a less-regulated part of the industry, where oversight is far scarcer, and leverage potentially much greater?
Sounds like a recipe for more counterparty risk and heavy sector losses, as the latest batch of smart young things head off to risk other people's money and pay themselves handsomely in the process, doesn't it?
Seasoned traders at several large commercial banks are now leaving to either start their own hedge funds, or take seed capital from established private funds, such as Citadel.
According to the Journal article, several existing hedge funds have created new structures to fund and, thus, capture some of the newly-fleeing talent from the publicly-held banks.
The only comment I would add is that these hotshots are, in reality, something like a third wave of such an exodus. There haven't been that many stellar performers remaining in the publicly-owned finance sector for some years. What we are now seeing is merely the latest purging of top, young talent following a well-worn path to the shadowy world of hedge funds.
This phenomenon ought to give legislators and would-be regulators pause. After all, doesn't that leave commercial bank trading in the hands of lesser talent? And push the better traders into a less-regulated part of the industry, where oversight is far scarcer, and leverage potentially much greater?
Sounds like a recipe for more counterparty risk and heavy sector losses, as the latest batch of smart young things head off to risk other people's money and pay themselves handsomely in the process, doesn't it?
Thursday, June 03, 2010
Warren Buffett, Moody's & The FCIC- Addendum
In my earlier post today, I neglected to mention one important facet of Warren Buffett's testimony before the FCIC.
To expect Buffett to have uttered one iota of criticism of Moodys, or the current government-sanctioned ratings oligopoly, is to overlook the salient feature of Buffett's appearance before the panel.
Buffett's Berkshire Hathaway is believed to hold a substantial portion of Moodys shares, and is reputed to be the latter's largest shareholder.
That, alone, tells you all you need to know about Buffett's remarks before he even approached the microphone.
Buffett wasn't ever going to say anything which could be construed to damn the current ratings oligopoly or Moodys. That would have likely caused a drop in Moodys' stock price, which would bring substantial loss to Berkshire.
Berkshire probably can't unload too much of its Moodys position now, either. Brokers would eventually leak the source of the sales, and the price would plummet.
As a steward of his shareholders' assets, Buffett was duty-bound to be upbeat, gentle and forgiving of Moodys. And the entire sector.
Don't be fooled by Buffett's aw shucks, grandfatherly demeanor. His main objective at the FCIC appearance was to avoid tanking the price of Moodys' equity. Period.
To expect Buffett to have uttered one iota of criticism of Moodys, or the current government-sanctioned ratings oligopoly, is to overlook the salient feature of Buffett's appearance before the panel.
Buffett's Berkshire Hathaway is believed to hold a substantial portion of Moodys shares, and is reputed to be the latter's largest shareholder.
That, alone, tells you all you need to know about Buffett's remarks before he even approached the microphone.
Buffett wasn't ever going to say anything which could be construed to damn the current ratings oligopoly or Moodys. That would have likely caused a drop in Moodys' stock price, which would bring substantial loss to Berkshire.
Berkshire probably can't unload too much of its Moodys position now, either. Brokers would eventually leak the source of the sales, and the price would plummet.
As a steward of his shareholders' assets, Buffett was duty-bound to be upbeat, gentle and forgiving of Moodys. And the entire sector.
Don't be fooled by Buffett's aw shucks, grandfatherly demeanor. His main objective at the FCIC appearance was to avoid tanking the price of Moodys' equity. Period.
Warren Buffett, Moody's & The FCIC
Watching Warren Buffett's testimony before the FCIC yesterday was somewhat surreal. Called before the panel ostensibly due to his firm's substantial stake in Moody's parent corporation, Buffett did precisely what yesterday's lead Wall Street Journal editorial cautioned against,
"but America's most famous investor won't do his reputation any good if he endorses an oligopoly that has done so much economic harm."
Given the chance to criticize Moody's and its CEO, co-witness Ray McDaniel, Buffett punted rather spectacularly.
He gave the ratings firm a pass, saying that the recent financial crisis involved such a large bubble, in which everyone, even, aw shucks, Buffett, got fooled, that you just can't blame Moodys.
Therefore, it follows, McDaniel, too, is blameless, despite the fact that the ratings agencies were the government-appointed, enshrined keepers of risk ratings.
McDaniels, for his part, showed that, if nothing else, he and his public relations advisers have viewed the videos of various bank CEOs and senior executives testifying before Congress, the TARP oversight panel and the FCIC during the past year or more.
"I care about market share. I also care deeply about ratings quality," was the quote this morning's Journal attributed to the Moody's CEO.
That's pretty hard for me to believe, given what I've read and learned elsewhere about what happened with the rating of structured financial instruments during the housing finance frenzy. For example, there is this post, as well as several others found under the label 'Ratings Agencies,' in the sidebar to the right of this post, and the stories a ratings agency executive of my acquaintance related to me a few years ago. In the latter instance, he portrayed the process of rating structured instruments as one of high-flying, smart guys from investment banks engaging in intimidation, intellectual bullying and the lure of large fees for rating the securities AAA. When the ratings employees would demure, the investment bank staffers would impugn the former's intellect and skills, claiming they 'just didn't get' the nature and risks of the prospective instruments.
Read my post about Terry McGraw's little problem involving a push for growth at S&P's ratings unit. Still think Moodys and/or McDaniel weren't following S&P down a curve of declining ratings quality?
I think the truth of the entire matter was well-captured in yesterday's lead Journal editorial entitled Buffett and the Ratings Cartel.
The agencies' best defense is to claim that what occurred was historically unparalleled and, gosh, they sure are sorry if they were in any way to blame. But, you know, the whole financial universe was wrong about the housing bubble....Warren even says so!
Buffett, for his part, as the editorial contends, wants the legal buffer of inept, corruptible ratings agencies. He and other institutional investors want that government-appointed buffer on which to lean, and behind which to hide, should their own investors or shareholders ever feel like suing them for breach of fiduciary trust.
I particularly enjoyed the Journal's editorial's quote by PIMCO's Bill Gross, from a recent investor letter, that,
"the raters' credit models call to mind "an idiot savant with a full command of the mathematics, but no idea of how to apply them." "
Gross' view is much closer to my own regarding the ratings agencies.
It's very clear from yesterday's FCIC testimony that anyone within arm's length of those agencies, e.g., Buffett, and the agencies themselves, are running for cover, claiming widespread failure of credit quality assessment, and generally ducking all responsibility.
When he wasn't evading any connection with Moodys, Buffett interjected various comments displaying his rapacious desire to make money in any way he could. Remarks like his would have been met with scorn and anger, had they come from, say, Lloyd Blankfein. But Congress and its appointed demi-gods always seem to treat Buffett differently.
Call it, oh, I don't know, crony capitalism?
I wonder how much longer Buffett can gee whiz and aw shucks his way out of these tight corners before he uses up all his cachet?
"but America's most famous investor won't do his reputation any good if he endorses an oligopoly that has done so much economic harm."
Given the chance to criticize Moody's and its CEO, co-witness Ray McDaniel, Buffett punted rather spectacularly.
He gave the ratings firm a pass, saying that the recent financial crisis involved such a large bubble, in which everyone, even, aw shucks, Buffett, got fooled, that you just can't blame Moodys.
Therefore, it follows, McDaniel, too, is blameless, despite the fact that the ratings agencies were the government-appointed, enshrined keepers of risk ratings.
McDaniels, for his part, showed that, if nothing else, he and his public relations advisers have viewed the videos of various bank CEOs and senior executives testifying before Congress, the TARP oversight panel and the FCIC during the past year or more.
"I care about market share. I also care deeply about ratings quality," was the quote this morning's Journal attributed to the Moody's CEO.
That's pretty hard for me to believe, given what I've read and learned elsewhere about what happened with the rating of structured financial instruments during the housing finance frenzy. For example, there is this post, as well as several others found under the label 'Ratings Agencies,' in the sidebar to the right of this post, and the stories a ratings agency executive of my acquaintance related to me a few years ago. In the latter instance, he portrayed the process of rating structured instruments as one of high-flying, smart guys from investment banks engaging in intimidation, intellectual bullying and the lure of large fees for rating the securities AAA. When the ratings employees would demure, the investment bank staffers would impugn the former's intellect and skills, claiming they 'just didn't get' the nature and risks of the prospective instruments.
Read my post about Terry McGraw's little problem involving a push for growth at S&P's ratings unit. Still think Moodys and/or McDaniel weren't following S&P down a curve of declining ratings quality?
I think the truth of the entire matter was well-captured in yesterday's lead Journal editorial entitled Buffett and the Ratings Cartel.
The agencies' best defense is to claim that what occurred was historically unparalleled and, gosh, they sure are sorry if they were in any way to blame. But, you know, the whole financial universe was wrong about the housing bubble....Warren even says so!
Buffett, for his part, as the editorial contends, wants the legal buffer of inept, corruptible ratings agencies. He and other institutional investors want that government-appointed buffer on which to lean, and behind which to hide, should their own investors or shareholders ever feel like suing them for breach of fiduciary trust.
I particularly enjoyed the Journal's editorial's quote by PIMCO's Bill Gross, from a recent investor letter, that,
"the raters' credit models call to mind "an idiot savant with a full command of the mathematics, but no idea of how to apply them." "
Gross' view is much closer to my own regarding the ratings agencies.
It's very clear from yesterday's FCIC testimony that anyone within arm's length of those agencies, e.g., Buffett, and the agencies themselves, are running for cover, claiming widespread failure of credit quality assessment, and generally ducking all responsibility.
When he wasn't evading any connection with Moodys, Buffett interjected various comments displaying his rapacious desire to make money in any way he could. Remarks like his would have been met with scorn and anger, had they come from, say, Lloyd Blankfein. But Congress and its appointed demi-gods always seem to treat Buffett differently.
Call it, oh, I don't know, crony capitalism?
I wonder how much longer Buffett can gee whiz and aw shucks his way out of these tight corners before he uses up all his cachet?
Wednesday, June 02, 2010
Ingrassia On GM's Bankruptcy
On Tuesday, I wrote this post commenting on Paul Ingrassia's revealing book review in the Wall Street Journal. On a related note, yesterday's Wall Street Journal featured a long editorial by Paul, an old squash partner of mine, and Journal veteran, entitled The Lessons of the GM Bankruptcy.
In the piece, Paul wrote,
"Yet there were plenty of warnings. A dramatic one came in a January 2006 speech by Jerome B. York, who represented the company's largest individual shareholder at the time, Kirk Kerkorian. Unless GM undertook drastic reforms "the unthinkable could happen" within 1,000 days, predicted York (who died recently). As things turned out he was a mere 30 days off."
Well, if being early on predicting GM's demise is remarkable, consider this post from October of the prior year, in which I wrote,
"Judging from where GM and Ford appear to be putting much of their energies these days, I’d say we’re going to be shy at least one major US-based car manufacturer before the decade is out. It may involve a merger among onshore rivals, if Congress is afraid to let so many UAW workers lose their jobs at once through a total financial failure of GM or Ford. But I'm willing to bet there will be one less automotive CEO in Detroit when 2010 dawns."
I admit to not having fingered GM by name, but I believe I was more sanguine, earlier, about a bankruptcy of one of the two, with GM the more likely candidate.
Then I wrote this post in July of 2008, in which I penned a sample letter of resignation and closure of GM by then-CEO Rick Wagoner.
It's not clear to me that you had to be Jerry York to see that GM was heading for real corporate death at accelerating speed. I think Ford was right there with them, except that they had the luck and courage to hire Alan Mullaly before they followed GM into Chapter 11.
In the piece, Paul wrote,
"Yet there were plenty of warnings. A dramatic one came in a January 2006 speech by Jerome B. York, who represented the company's largest individual shareholder at the time, Kirk Kerkorian. Unless GM undertook drastic reforms "the unthinkable could happen" within 1,000 days, predicted York (who died recently). As things turned out he was a mere 30 days off."
Well, if being early on predicting GM's demise is remarkable, consider this post from October of the prior year, in which I wrote,
"Judging from where GM and Ford appear to be putting much of their energies these days, I’d say we’re going to be shy at least one major US-based car manufacturer before the decade is out. It may involve a merger among onshore rivals, if Congress is afraid to let so many UAW workers lose their jobs at once through a total financial failure of GM or Ford. But I'm willing to bet there will be one less automotive CEO in Detroit when 2010 dawns."
I admit to not having fingered GM by name, but I believe I was more sanguine, earlier, about a bankruptcy of one of the two, with GM the more likely candidate.
Then I wrote this post in July of 2008, in which I penned a sample letter of resignation and closure of GM by then-CEO Rick Wagoner.
It's not clear to me that you had to be Jerry York to see that GM was heading for real corporate death at accelerating speed. I think Ford was right there with them, except that they had the luck and courage to hire Alan Mullaly before they followed GM into Chapter 11.
Academic Wayne Mascio Confirms My Proprietary Research Findings
Back in early May, the Wall Street Journal published an article entitled Recalculating the Costs of Big Layoffs.
In the piece, a business professor named Wayne Mascio, from the University of Colorado, was quoted as saying,
"You can't shrink your way to prosperity."
Why didn't I think of that?
Wait, I did! In 1996! And published a piece shortly thereafter in Directorship, a magazine for board members. Then I applied the proprietary results in consulting and equity portfolio management applications.
The Journal article goes on to say that Mascio,
"has studied how companies in the Standard & Poor's 500-stock index have performed over 18 years. His conclusion: those who cut deepest relative to industry peers, delivered smaller profits and weaker stock returns for as long as nine years after a recession."
Well, that's nice, but there are so many caveats in the statement as to make it virtually useless for pragmatic management action.
There's another quote that speaks to a nuance regarding layoffs,
"Companies that used the recession to weed out weaker performers and trim bloated bureaucracies will fare better than companies that slashed across the board, analysts say."
Probably true, but how would the analysts know? From my own research experience, that's an extremely difficult type of data element to reliably recover from primary sources.
However, Mascio's work has other significant problems and flaws.
For example, why dwell on a recession? Not every company faces similar market responses in a recession. So measuring based on the admittedly-flexible recognition of a recession's beginning and end will leave the resulting research comparing business performances which aren't necessarily comparable.
For my own work on this type of phenomenon, I took a much simpler approach. Among several basic patterns of performance, I studied companies whose performances had fallen precipitously, with multiple years of bad total returns, then recovered. This not only allowed me to isolate the particular performance pattern, irrespective of the general economy, but also to estimate probabilities of companies successfully returning to consistently superior performances.
Mascio's use of "industry peers" presents problems, as well. In many sectors, competitors are divisions of conglomerates. In those cases, you can't take the top-line profits or total returns of the company and assign them to a particular division. So the ability to use what I believe to be the best metric of business performance, total returns over multiple years, is unavailable.
Many years ago, I was taught by Jerry Wind, a marketing professor at the University of Pennsylvania, that useful research must take account of a myriad of details at the design stage. The availability and reliability of data are paramount, and fudging them will result in unreliable conclusions.
In this case, Mascio's conclusions, as reported by the Journal article, are likely directionally correct. But there's no ability to assign probabilistic confidence levels, or even really compare such results across companies, given the various constraints which, according to the piece, were built into his research.
In the piece, a business professor named Wayne Mascio, from the University of Colorado, was quoted as saying,
"You can't shrink your way to prosperity."
Why didn't I think of that?
Wait, I did! In 1996! And published a piece shortly thereafter in Directorship, a magazine for board members. Then I applied the proprietary results in consulting and equity portfolio management applications.
The Journal article goes on to say that Mascio,
"has studied how companies in the Standard & Poor's 500-stock index have performed over 18 years. His conclusion: those who cut deepest relative to industry peers, delivered smaller profits and weaker stock returns for as long as nine years after a recession."
Well, that's nice, but there are so many caveats in the statement as to make it virtually useless for pragmatic management action.
There's another quote that speaks to a nuance regarding layoffs,
"Companies that used the recession to weed out weaker performers and trim bloated bureaucracies will fare better than companies that slashed across the board, analysts say."
Probably true, but how would the analysts know? From my own research experience, that's an extremely difficult type of data element to reliably recover from primary sources.
However, Mascio's work has other significant problems and flaws.
For example, why dwell on a recession? Not every company faces similar market responses in a recession. So measuring based on the admittedly-flexible recognition of a recession's beginning and end will leave the resulting research comparing business performances which aren't necessarily comparable.
For my own work on this type of phenomenon, I took a much simpler approach. Among several basic patterns of performance, I studied companies whose performances had fallen precipitously, with multiple years of bad total returns, then recovered. This not only allowed me to isolate the particular performance pattern, irrespective of the general economy, but also to estimate probabilities of companies successfully returning to consistently superior performances.
Mascio's use of "industry peers" presents problems, as well. In many sectors, competitors are divisions of conglomerates. In those cases, you can't take the top-line profits or total returns of the company and assign them to a particular division. So the ability to use what I believe to be the best metric of business performance, total returns over multiple years, is unavailable.
Many years ago, I was taught by Jerry Wind, a marketing professor at the University of Pennsylvania, that useful research must take account of a myriad of details at the design stage. The availability and reliability of data are paramount, and fudging them will result in unreliable conclusions.
In this case, Mascio's conclusions, as reported by the Journal article, are likely directionally correct. But there's no ability to assign probabilistic confidence levels, or even really compare such results across companies, given the various constraints which, according to the piece, were built into his research.
Tuesday, June 01, 2010
Why You Shouldn't Trust Journalists As Analysts
Paul Ingrassia, the former Wall Street Journal reporter, senior executive and Pulitzer Prize winner, wrote a candid review last week of Alex Taylor III's "Sixty to Zero," a tale of GM's demise.
Ingrassia's opening sentences say it all,
"Many of the journalists who covered the long decline of General Motors that led to last year's bankruptcy were, in their hearts, rooting for the company. Such reporters- I among them- would seize on the occasional piece of good news about GM to write something upbeat. It would be a journalistic coup, after all, to be the first writer to call the company's turnaround. In any case, no one who grew up during GM's heyday, in the 1950s and 1960s, wanted to see an American icon self-destruct."
There's no reason for me to go further in relating Ingrassia's well-written review. He details various pieces Taylor wrote in his effort to tout the ailing firm, and concludes with this quote from Taylor,
"The United States needs a domestic auto industry for its jobs, technology, wealth creation, trading balances and prestige."
Together, Ingrassia's inclusion of these passages tells us a lot about why we should simply not trust most beat reporting on US companies and industries.
Reporters are not sell-side analysts. And, for that matter, we know from the last decade's dot-com bubble that sell-side analysts are, in reality, marketers for the equities which their firms underwrite and in which they make a market.
You'd ordinarily think that a reporter was more objective than an analyst whose firm clearly has conflicts of interest.
Ingrassia's review tells you different. I am not sure Paul meant to open the media kimono quite so widely, but there it is.
It validates one of my very first posts on this blog, from 2005. In that post, entitled Speaking Truth To Power- the GM Situation, I wrote,
"Truly, as I have written in a prior post, this is simply not the company’s salient problem. GM cannot and does not design and produce vehicles which sufficient numbers of people will buy at prices which will sustain the company’s financial health.
You would not know any of this, to judge from the press’ reaction to the agreement. Or Wall Street’s reaction, for that matter.
I now wonder if GM, even in its last acts as a sustainably profitable enterprise, wields enough financial leverage to silence any significant, honest appraisal of its situation.
Do analysts worry that they will be shut out of conference calls if they point to GM’s revenue problems as insoluble? Do the various media outlets worry that they will have seen the last GM ads in/on their medium, should they report candidly about the company’s prospects?
It’s now beginning to seem to me that all these parties, “stakeholders,” if you will, literally have more to gain from a fatally bleeding GM than they do from a merged/acquired/failed GM."
How can we take seriously the supposedly-objective articles we read in the Journal, Forbes, Fortune, et.al., if their reporters later admit they were rooting for their subjects the whole time? Not just biased, but actually choosing stories to paint better pictures of bad situations?
Could this, in addition to a faster news cycle and internet advertising, be a key reason that old media is dying?
How about CNBC, which so clearly tries to cheerlead the equities market? Such as when idiotic NYSE floor reporter Bob Pisani speaks so emotionally about what 'we' want in the market to see it go higher? As if reality is unimportant, and reporting the likely real trend is less crucial than spending on air time boosting any faint reason for viewers and other investors to buy equities?
Ingrassia's and Taylor's admissions prove my point that it certainly makes all business media coverage suspect.
Ingrassia's opening sentences say it all,
"Many of the journalists who covered the long decline of General Motors that led to last year's bankruptcy were, in their hearts, rooting for the company. Such reporters- I among them- would seize on the occasional piece of good news about GM to write something upbeat. It would be a journalistic coup, after all, to be the first writer to call the company's turnaround. In any case, no one who grew up during GM's heyday, in the 1950s and 1960s, wanted to see an American icon self-destruct."
There's no reason for me to go further in relating Ingrassia's well-written review. He details various pieces Taylor wrote in his effort to tout the ailing firm, and concludes with this quote from Taylor,
"The United States needs a domestic auto industry for its jobs, technology, wealth creation, trading balances and prestige."
Together, Ingrassia's inclusion of these passages tells us a lot about why we should simply not trust most beat reporting on US companies and industries.
Reporters are not sell-side analysts. And, for that matter, we know from the last decade's dot-com bubble that sell-side analysts are, in reality, marketers for the equities which their firms underwrite and in which they make a market.
You'd ordinarily think that a reporter was more objective than an analyst whose firm clearly has conflicts of interest.
Ingrassia's review tells you different. I am not sure Paul meant to open the media kimono quite so widely, but there it is.
It validates one of my very first posts on this blog, from 2005. In that post, entitled Speaking Truth To Power- the GM Situation, I wrote,
"Truly, as I have written in a prior post, this is simply not the company’s salient problem. GM cannot and does not design and produce vehicles which sufficient numbers of people will buy at prices which will sustain the company’s financial health.
You would not know any of this, to judge from the press’ reaction to the agreement. Or Wall Street’s reaction, for that matter.
I now wonder if GM, even in its last acts as a sustainably profitable enterprise, wields enough financial leverage to silence any significant, honest appraisal of its situation.
Do analysts worry that they will be shut out of conference calls if they point to GM’s revenue problems as insoluble? Do the various media outlets worry that they will have seen the last GM ads in/on their medium, should they report candidly about the company’s prospects?
It’s now beginning to seem to me that all these parties, “stakeholders,” if you will, literally have more to gain from a fatally bleeding GM than they do from a merged/acquired/failed GM."
How can we take seriously the supposedly-objective articles we read in the Journal, Forbes, Fortune, et.al., if their reporters later admit they were rooting for their subjects the whole time? Not just biased, but actually choosing stories to paint better pictures of bad situations?
Could this, in addition to a faster news cycle and internet advertising, be a key reason that old media is dying?
How about CNBC, which so clearly tries to cheerlead the equities market? Such as when idiotic NYSE floor reporter Bob Pisani speaks so emotionally about what 'we' want in the market to see it go higher? As if reality is unimportant, and reporting the likely real trend is less crucial than spending on air time boosting any faint reason for viewers and other investors to buy equities?
Ingrassia's and Taylor's admissions prove my point that it certainly makes all business media coverage suspect.
Monday, May 31, 2010
Pawn Stars: Marketing 101
There is a program on the cable History Channel now in its second season entitled Pawn Stars.
A reality television program, the series provides a detailed look into the workings of a Las Vegas, Nevada pawn shop owned by a father and his son, Rick, with the grandson, Corey, and his friend also involved as employees.
For a clear, simple look at how business can be presented in a very understandable manner, it's hard to beat Pawn Stars.
I don't know how many times Rick, the son and co-owner, tells the audience, by speaking to the camera, or a customer, that he will mark up what he buys from them 100%. Thus, his purchasing decisions must include a price that allows for any refurbishment, and still allow him to realize a 100% profit on his acquisition costs.
What this tells you is that Rick and his father, a/k/a "the old man," have simplified their cost accounting to cover overhead with this markup policy. They don't even begin to try to allocated employee costs, utilities, taxes, etc., to individual items. They simply know that by buying something at $100, and re-selling it for $200, on average, they'll make sufficient profits to cover slow-moving merchandise, unsaleable items, frauds, and all other normal operating costs.
On a routine basis, they are presented with some diamond in the rough, such as an old Coca Cola salesman's display case. This was bought, rusted and missing parts, for something like $75. One of their frequently-appearing experts, a guy who restores old vending machines, motorcycles and the like, took a week or so to restore the case to mint condition, and tells Rick he'll be able to get several hundred dollars for it.
As to strategy, Rick frequently tells customers who want a lot more than he will offer on some antique firearm, chest, or other curiosity, that if they choose to sell it at auction, there will be listing fees, selling fees, brokerage fees, and the risk of auction prices.
Today, I saw him refuse a quilt composed of patches which each bore an original or facsimile signature of a celebrity. Rick told the seller that he just wasn't in a position to buy the item for tens of thousands of dollars, in hopes of finding one buyer who would happen to drop into his pawn shop and buy it for twice that price.
Instead, he counseled the would-be seller to contact an auction house.
The guys at that pawn shop really have an instinctive feel for market prices and a surprising amount of knowledge across a wide variety of goods. This makes for a very transparent, accessible lesson in the basic mechanics of business.
Know your key competitive advantages, stay within them, and stick to policies and strategies which work. At the pawn shop, their available capital, in cash, knowledge of many items, and end-user pricing sense, plus a large, steady customer flow, allows them to undercut other channels of re-distribution for many niche items.
Were that many other, larger businesses so adept at knowing their limits and their key competitive advantages.
A reality television program, the series provides a detailed look into the workings of a Las Vegas, Nevada pawn shop owned by a father and his son, Rick, with the grandson, Corey, and his friend also involved as employees.
For a clear, simple look at how business can be presented in a very understandable manner, it's hard to beat Pawn Stars.
I don't know how many times Rick, the son and co-owner, tells the audience, by speaking to the camera, or a customer, that he will mark up what he buys from them 100%. Thus, his purchasing decisions must include a price that allows for any refurbishment, and still allow him to realize a 100% profit on his acquisition costs.
What this tells you is that Rick and his father, a/k/a "the old man," have simplified their cost accounting to cover overhead with this markup policy. They don't even begin to try to allocated employee costs, utilities, taxes, etc., to individual items. They simply know that by buying something at $100, and re-selling it for $200, on average, they'll make sufficient profits to cover slow-moving merchandise, unsaleable items, frauds, and all other normal operating costs.
On a routine basis, they are presented with some diamond in the rough, such as an old Coca Cola salesman's display case. This was bought, rusted and missing parts, for something like $75. One of their frequently-appearing experts, a guy who restores old vending machines, motorcycles and the like, took a week or so to restore the case to mint condition, and tells Rick he'll be able to get several hundred dollars for it.
As to strategy, Rick frequently tells customers who want a lot more than he will offer on some antique firearm, chest, or other curiosity, that if they choose to sell it at auction, there will be listing fees, selling fees, brokerage fees, and the risk of auction prices.
Today, I saw him refuse a quilt composed of patches which each bore an original or facsimile signature of a celebrity. Rick told the seller that he just wasn't in a position to buy the item for tens of thousands of dollars, in hopes of finding one buyer who would happen to drop into his pawn shop and buy it for twice that price.
Instead, he counseled the would-be seller to contact an auction house.
The guys at that pawn shop really have an instinctive feel for market prices and a surprising amount of knowledge across a wide variety of goods. This makes for a very transparent, accessible lesson in the basic mechanics of business.
Know your key competitive advantages, stay within them, and stick to policies and strategies which work. At the pawn shop, their available capital, in cash, knowledge of many items, and end-user pricing sense, plus a large, steady customer flow, allows them to undercut other channels of re-distribution for many niche items.
Were that many other, larger businesses so adept at knowing their limits and their key competitive advantages.
Friday, May 28, 2010
Liesman's Economic Folly This Morning On CNBC
George W. Bush's economic adviser, Ed Lazar, was a guest host on CNBC this morning. As part of the discussion, he was forced to tolerate CNBC's resident economic idiot, Steve Liesman.
Liesman resembles nothing so much as the young child allowed, for the first time, to join the adult table at a holiday dinner. Because he was on the set with a real economist, Lazar, Liesman got to pretend he is one, as well.
Thus, the hapless CNBC reporter earnestly challenged Lazar on the subject of taxes. Liesman, being the typical liberal, equipped to think incorrectly and ignore empirical evidence, insisted that our current federal debt obligations will just have to require more and higher taxes. How else can we ever pay those debts?
With a straight face appropriate for a simpleton, Liesman declared that debts this massive require action on 'both sides,' meaning spending restraint and higher taxes. Never mind the evidence that higher taxes depress the economic activity and risk-taking so crucial to job and GDP growth, or that those higher taxes never actually collect the higher revenues anticipated.
Liesman wouldn't understand these things because he's not an economist- he's an economic reporter who gets to sit with degreed professional economists and talk as if his comments have equal merit.
When will CNBC wake up and fire this dunce?
Liesman resembles nothing so much as the young child allowed, for the first time, to join the adult table at a holiday dinner. Because he was on the set with a real economist, Lazar, Liesman got to pretend he is one, as well.
Thus, the hapless CNBC reporter earnestly challenged Lazar on the subject of taxes. Liesman, being the typical liberal, equipped to think incorrectly and ignore empirical evidence, insisted that our current federal debt obligations will just have to require more and higher taxes. How else can we ever pay those debts?
With a straight face appropriate for a simpleton, Liesman declared that debts this massive require action on 'both sides,' meaning spending restraint and higher taxes. Never mind the evidence that higher taxes depress the economic activity and risk-taking so crucial to job and GDP growth, or that those higher taxes never actually collect the higher revenues anticipated.
Liesman wouldn't understand these things because he's not an economist- he's an economic reporter who gets to sit with degreed professional economists and talk as if his comments have equal merit.
When will CNBC wake up and fire this dunce?
More Bad News For Carol Bartz & Yahoo
In this post, written two months ago, I cast doubt on Carol Bartz' ability to turn around the ailing, failing Yahoo.
In my opinion, Bartz' arrival was simply too late to reverse the damage done by Terry Semel and Jerry Yang.
Now, in a recent Wall Street Journal piece, some quantitative data are bearing out that sentiment.
According to a piece in yesterday's Journal, Facebook has now passed Yahoo in terms of "display-ad impressions- the number of times users saw an ad."
Yahoo also trailed overall internet visitor growth this year, 4% to 10%. According to the article, time spent on the site declined by 11%, while page views were down 13%. Both of those measures were positive in double-digits for the overall internet.
With performance metrics like these, it's very difficult to see how Bartz will change Yahoo's fortunes.The nearby Yahoo-sourced price chart of the S&P500Index and Yahoo for the past year show a dismal picture for shareholders. Yahoo is flat, while the S&P is up over 15%.
Like Palm's recent purchase, for patents, by HP, perhaps it's time for Bartz to find a buyer for the firm she currently heads, and save shareholders even more losses in months and years to come.
Rick Santelli On Inflation
The other day, Rick Santelli blasted out a rapid-fire indictment of the Fed concerning inflation and commodities pricing.
Essentially, Santelli reminded CNBC viewers that inflation, as Milton Friedman stated, is a monetary phenomenon. It has to do with the quantity of money relative to value in an economy- nothing more, nor less, nor different.
Santelli noted that the Fed is now pointing to falling commodity prices and claiming deflation is a risk, and inflation has been tamed!
Not so, says Mr. Santelli. And he's entirely correct.
He contends that two administrations, Congress and the Fed, having debauched our dollar by printing, borrowing and spending money the US does not have, have sowed the seeds of imminent inflation.
To escape notice of this, the federal government is pointing to the fall in prices of various goods- housing, metals, oil- and claiming victory over inflation, as Santelli contends. And possible deflation, to boot, thus providing cover for the near-zero interest rates.
Of many pundits on CNBC, Santelli is the only one to my knowledge to have pointed out this clever obfuscation by the Fed regarding inflation, monetary profligacy, and commodity prices.
Essentially, Santelli reminded CNBC viewers that inflation, as Milton Friedman stated, is a monetary phenomenon. It has to do with the quantity of money relative to value in an economy- nothing more, nor less, nor different.
Santelli noted that the Fed is now pointing to falling commodity prices and claiming deflation is a risk, and inflation has been tamed!
Not so, says Mr. Santelli. And he's entirely correct.
He contends that two administrations, Congress and the Fed, having debauched our dollar by printing, borrowing and spending money the US does not have, have sowed the seeds of imminent inflation.
To escape notice of this, the federal government is pointing to the fall in prices of various goods- housing, metals, oil- and claiming victory over inflation, as Santelli contends. And possible deflation, to boot, thus providing cover for the near-zero interest rates.
Of many pundits on CNBC, Santelli is the only one to my knowledge to have pointed out this clever obfuscation by the Fed regarding inflation, monetary profligacy, and commodity prices.
Thursday, May 27, 2010
Karl Otto Pohl On The Eurozone Bailout
A hard-to-notice, easily overlooked section of the Wall Street Journal's editorial page is its "Notable & Quotable" feature.
The other day, the section reprinted this exchange from a Spiegel Online interview with former Bundesbank head Karl Otto Pohl,
"Pohl: The foundation of the euro has fundamentally changed as a result of the decision by euro-zone governments to transform themselves into a transfer union. That is a violation of every rule. In the treaties governing the functioning of the European Union, it explicitly states that no country is liable for the debts of any other. But what we are doing right now, is exactly that. Added to this is the fact that, against all its vows, and against an explicit ban within its own constitution, the European Central Bank (ECB) has become involved in financing states. Obviously, all of that will have an impact. . . .
The European Union should have declared half a year ago—or even earlier—that Greek debt needed restructuring.
Spiegel: But according to Chancellor Angela Merkel, that would have led to a domino effect, with repercussions for other European states facing debt crises of their own.
Pöhl: I do not believe that. I think it was about something altogether different. . . .
It was about protecting German banks, but especially the French banks, from debt write offs. On the day that the rescue package was agreed on, shares of French banks rose by up to 24 percent. Looking at that, you can see what this was really about—namely, rescuing the banks and the rich Greeks."
Given my comments about the Euro in this recent post, I found Pohl's comments very insightful and sensible.
Sad to say, you tend to trust ex-officials to be more candid and honest than the ones in power. Pohl didn't actually judge Merkel, but he did not shrink from explicitly disagreeing with Merkel's alleged reasons for the Greek bailout by Germany.
While the excerpt doesn't cover Pohl's thoughts on the future for the Euro or the EC, I can't help but wonder what responses to those questions would have been.
When Pohl says "obviously, it will have an impact," one senses he may mean economic, financial and political.
Sounds about right to me.
The other day, the section reprinted this exchange from a Spiegel Online interview with former Bundesbank head Karl Otto Pohl,
"Pohl: The foundation of the euro has fundamentally changed as a result of the decision by euro-zone governments to transform themselves into a transfer union. That is a violation of every rule. In the treaties governing the functioning of the European Union, it explicitly states that no country is liable for the debts of any other. But what we are doing right now, is exactly that. Added to this is the fact that, against all its vows, and against an explicit ban within its own constitution, the European Central Bank (ECB) has become involved in financing states. Obviously, all of that will have an impact. . . .
The European Union should have declared half a year ago—or even earlier—that Greek debt needed restructuring.
Spiegel: But according to Chancellor Angela Merkel, that would have led to a domino effect, with repercussions for other European states facing debt crises of their own.
Pöhl: I do not believe that. I think it was about something altogether different. . . .
It was about protecting German banks, but especially the French banks, from debt write offs. On the day that the rescue package was agreed on, shares of French banks rose by up to 24 percent. Looking at that, you can see what this was really about—namely, rescuing the banks and the rich Greeks."
Given my comments about the Euro in this recent post, I found Pohl's comments very insightful and sensible.
Sad to say, you tend to trust ex-officials to be more candid and honest than the ones in power. Pohl didn't actually judge Merkel, but he did not shrink from explicitly disagreeing with Merkel's alleged reasons for the Greek bailout by Germany.
While the excerpt doesn't cover Pohl's thoughts on the future for the Euro or the EC, I can't help but wonder what responses to those questions would have been.
When Pohl says "obviously, it will have an impact," one senses he may mean economic, financial and political.
Sounds about right to me.
Innocent or Idiot Abroad? Geithner In China & Europe
Am I alone, shaking in fear as I hear our naive Treasury Secretary, Tim Geithner, babbling about economics while abroad in China earlier this week?
After much hoopla surrounding his visit, I heard part of an interview with him on CNBC. Asked about China's insatiable appetite for raw materials, and its potential affects on the US, Geithner chirped about how great it was that China is an important, large global economic power. How wonderful that they, too, have a growing demand for basic commodity metals and energy.
Huh?
What's our chief tax cheat been smoking lately?
Of course, it's true that Geithner's claims to fame have mostly been as a governmental-entity-employed financial systems plumber.
Faced with a real crisis at the New York Fed two years ago, Geithner blinked in negotiations with the French and, in contravention of normal bankruptcy law, promptly paid off AIG's derivatives creditors in full.
An economic sage Geithner is not. What he's doing spreading economic falsehoods is anybody's guess. But last time I checked, US consumers would benefit by less demand for commodities, not more, as that would allow prices to drift lower, not higher.
Yesterday morning, Geithner was already in Europe, making inane comments about the Eurozone's situation.
I can't wait for this idiot to get home and hide out somewhere where he won't embarrass himself or the American people.
After much hoopla surrounding his visit, I heard part of an interview with him on CNBC. Asked about China's insatiable appetite for raw materials, and its potential affects on the US, Geithner chirped about how great it was that China is an important, large global economic power. How wonderful that they, too, have a growing demand for basic commodity metals and energy.
Huh?
What's our chief tax cheat been smoking lately?
Of course, it's true that Geithner's claims to fame have mostly been as a governmental-entity-employed financial systems plumber.
Faced with a real crisis at the New York Fed two years ago, Geithner blinked in negotiations with the French and, in contravention of normal bankruptcy law, promptly paid off AIG's derivatives creditors in full.
An economic sage Geithner is not. What he's doing spreading economic falsehoods is anybody's guess. But last time I checked, US consumers would benefit by less demand for commodities, not more, as that would allow prices to drift lower, not higher.
Yesterday morning, Geithner was already in Europe, making inane comments about the Eurozone's situation.
I can't wait for this idiot to get home and hide out somewhere where he won't embarrass himself or the American people.
Wednesday, May 26, 2010
Apple v. Microsoft- Lessons On Value Creation
Today's Wall Street Journal happens to contain two separate articles involving Apple and Microsoft.
Still, we'd rather be Google. Why? Because Google can fail at everything but as long as it keeps its search box at the center of our digital lives, the ad gusher will continue to flow."
The lesson here seems, at least to me, to be obvious. Mr. Jenkins' appetite for market size notwithstanding, I'll take consistently superior total returns every time. And as long as Steve Jobs continues to run Apple, that's probably what you'll get.
The headline piece in the Marketplace section is "Microsoft CEO Takes Over Gadget Unit," while Holman Jenkins, Jr.'s editorial is titled, "Apple's Second Date with History."
In the Marketplace article, Nick Wingfield discusses the troubles Microsoft has had since its initial splash with XBox. Two key senior managers are retiring, and Ballmer is now taking over the entertainment and communications devices units. He writes,
"Microsoft's problem hasn't been that it was late to the consumer-device market. Michael Garternberg, an analyst at advisory firm Altimeter Group, said Microsoft missed important consumer trends by focusing on its core business markets.
The shifting fortunes could be underscored in the coming weeks by a changing-of-the-guard in market capitalization. While Microsoft has long been the tech industry's most highly valued company, a little more than $6 billion now separates its $229 billion stock market value from Apple's."
Wingfield quotes an academic attributing the difference to higher consumer spending growth versus that for business IT products and services.
Personally, I think that academic got the cart before the horse, in the sense that the real difference between the firms has to do with pursuing commodity markets instead of product/markets which reward better design and functionality.
Holman Jenkins begins his editorial noting how Apple had a near-death experience many years ago, only to be rescued by the internet. Jenkins, too, discusses how Microsoft competed in operating systems, which became commoditized, while Apple went off in a different direction, specializing in digital devices for specific applications.
Jenkins believes Apple, through its closed systems for the iPod and iPhone, risks another brush with death, as Google's Android cell phone operating system challenges it for supremacy. He ends his piece contending,
"Apple this time understands (we hope) that it isn't playing for all the marbles, but can build a very nice business on just those customers who crave a premium service tightly controlled by the wonderful Mr. Jobs, even if it means paying a bit more and forgoing access to a lot of Web goodies that might not work so well in favor of a smaller number that work really well.
Still, we'd rather be Google. Why? Because Google can fail at everything but as long as it keeps its search box at the center of our digital lives, the ad gusher will continue to flow."Jenkins' parting comment led me to construct the nearby Yahoo-sourced price chart for Apple, Google, Microsoft and the S&P500 Index for the past five years.
Sorry, Holman, but I'd bet on Apple. And actually have, as it's been a frequent member of my recent equity strategy portfolio selections, whereas Microsoft has not for a decade, and Google has not, if at all, for quite some time.
The price chart confirms what I suspected. That is, Apple's highly-focused, niche strategies have given its shareholders better returns over time, with Google already falling back to earth, and the now-hapless, gargantuan Microsoft lumbering along near the S&P's return.
I think quite highly of Mr. Jenkins, but on this topic, I have to respectfully part company with him.
In my humble opinion, as a trained marketing professional, both Messrs. Wingfield and Jenkins miss the key point about Apple's strategy versus Microsoft and Google.
Jenkins actually mentions that Apple chose to forsake the open operating systems world, and focus on niche digital devices. But he fails to understand the key benefit of that choice.
I believe it is this. Both Microsoft and Google became dominant in large markets, which, though providing for rapid early growth, have made it difficult to sustain such growth. Whether it's operating systems and basic office productivity software or online ad revenue from free search, both companies have saturated those markets and must look to higher-cost, more challenging new businesses for growth.
Apple, by contrast, chose to pursue specific consumer need satisfaction with a family of specialized digital devices. Steve Jobs has a flair for design, packaging and promotion of these devices.
Truth be told, over time, the product/market segment Jobs chose provides for better product margins and higher barriers to entry. Note how Microsoft has become loathed for its poorly-designed, patch-heavy operating systems. It's an open secret that many users still run XP and older Office packages. Including me.
Google has even forced Microsoft to include net-based Office applications in their recent product version. Meanwhile, Bing competes with Google's search, and everybody is looking at proprietary online or cell-based ad systems.
The lesson here seems, at least to me, to be obvious. Mr. Jenkins' appetite for market size notwithstanding, I'll take consistently superior total returns every time. And as long as Steve Jobs continues to run Apple, that's probably what you'll get.The nearby price chart for the same entities, from 1985, clearly shows Microsoft flattening by the dawn of this decade. Apple declined after the dot-com bust, then rocketed forward on the i-series products and services. Google, from its inception, only matched Apple's returns.
After Jobs, le deluge. No argument there. But Microsoft crested while Gates was still there, and Google's very wide-open business model, while initially capturing huge profits as the first-mover, is now having some difficulty continuing that early growth.
I see Schumpeter's theory at work in this picture. Apple re-invents itself in a technological space far faster and more successfully, profitably, than either of its putative rivals.
With large markets tends to come commoditization and earlier end to superior growth and returns. The case of Apple, Microsoft and Google bears that out once again.
TARP Oversight Chief Scold Elizabeth Warren On CNBC (Yet Again) This Morning
TARP Oversight panel chief scold Elizabeth Warren was on CNBC, yet again, this morning.
For the very first time, she actually had something positive to say, and came really close to fingering two culprits responsible for some of the financial problems of 2008 and their aftermath.
Self-identifying as a bankruptcy law professor, Warren asserted that there are two fundamental principles in that discipline- equity owners take losses first, to exhaustion, if necessary, followed by creditors taking a haircut on their claims.
She noted that in AIG's case, neither occurred.
I found this to be atypically lucid and useful, for which Warren should be commended.
Then she proceeded to drop the ball. For the next few minutes, she nattered on about how the New York Fed had claimed that they either had to let AIG fail, and, thus, the US economy, or pay creditors in full. No other option existed. This would speak to Warren's second bankruptcy principle.
To anyone familiar with the publicly reported facts, there is one person, and one person alone, to whom Warren and her TARP oversight colleagues can turn to probe this curious situation- current Treasury Secretary Tim Geithner. (For more on the tax-cheat-in-chief's role in the AIG affair, search my posts with the label 'Geithner.')
But instead of stating this, and either castigating Geithner for his actions, or promising to (re?)call him to testify for the panel, she immediately began pulling other names out of the air, like Bob Willumstad.
Could Warren be skipping over Geithner because she was appointed by a Democratic Congress and, thus, knows better than to implicate one of their own, the administration's Treasury Secretary? That's certainly how it looks.
Warren also stated that AIG shareowners are still trading their equity, which should not have occurred under bankruptcy law.
Well, for that, we have Congress to thank, do we not? Because Congress authorized the TARP, and then-Treasury Secretary Paulson to do whatever he thought necessary. And I believe he was responsible for choosing to rescue AIG in the fashion that left it largely government-owned.
Why doesn't Warren probe the reasons why Paulson and Congress chose to simply disregard bankruptcy law and arrange bespoke bailouts?
In the one area in which Warren would seem to have applicable expertise, bankruptcy, all she seems to be doing is warning that it's a bad idea to let financial firms know they may get rescued.
She spent considerable time at the end of her CNBC appearance warning that it is dangerous to let firms believe they will be, once again, rescued by the federal government. She also offered that the just-passed financial regulatory bill should be continued to be modified as time goes by.
Aren't you glad Liz thought of those two ideas? Because nobody else has.
Seriously, we don't need Warren to lecture us on what a bad idea the entire TARP/bailout idea was, nor that regulatory law shouldn't be passed as a work in progress. Being naive about financial services, Warren completely missed the obvious, i.e., capital flows will be affected by current legislation, not some unknown, hoped-for future fixes in a bad law about to be passed and signed.
Well, thank God for small favors. At least, for once, Warren actually used her legal background to come close to identifying the guilty parties in the TARP fiasco.
For the very first time, she actually had something positive to say, and came really close to fingering two culprits responsible for some of the financial problems of 2008 and their aftermath.
Self-identifying as a bankruptcy law professor, Warren asserted that there are two fundamental principles in that discipline- equity owners take losses first, to exhaustion, if necessary, followed by creditors taking a haircut on their claims.
She noted that in AIG's case, neither occurred.
I found this to be atypically lucid and useful, for which Warren should be commended.
Then she proceeded to drop the ball. For the next few minutes, she nattered on about how the New York Fed had claimed that they either had to let AIG fail, and, thus, the US economy, or pay creditors in full. No other option existed. This would speak to Warren's second bankruptcy principle.
To anyone familiar with the publicly reported facts, there is one person, and one person alone, to whom Warren and her TARP oversight colleagues can turn to probe this curious situation- current Treasury Secretary Tim Geithner. (For more on the tax-cheat-in-chief's role in the AIG affair, search my posts with the label 'Geithner.')
But instead of stating this, and either castigating Geithner for his actions, or promising to (re?)call him to testify for the panel, she immediately began pulling other names out of the air, like Bob Willumstad.
Could Warren be skipping over Geithner because she was appointed by a Democratic Congress and, thus, knows better than to implicate one of their own, the administration's Treasury Secretary? That's certainly how it looks.
Warren also stated that AIG shareowners are still trading their equity, which should not have occurred under bankruptcy law.
Well, for that, we have Congress to thank, do we not? Because Congress authorized the TARP, and then-Treasury Secretary Paulson to do whatever he thought necessary. And I believe he was responsible for choosing to rescue AIG in the fashion that left it largely government-owned.
Why doesn't Warren probe the reasons why Paulson and Congress chose to simply disregard bankruptcy law and arrange bespoke bailouts?
In the one area in which Warren would seem to have applicable expertise, bankruptcy, all she seems to be doing is warning that it's a bad idea to let financial firms know they may get rescued.
She spent considerable time at the end of her CNBC appearance warning that it is dangerous to let firms believe they will be, once again, rescued by the federal government. She also offered that the just-passed financial regulatory bill should be continued to be modified as time goes by.
Aren't you glad Liz thought of those two ideas? Because nobody else has.
Seriously, we don't need Warren to lecture us on what a bad idea the entire TARP/bailout idea was, nor that regulatory law shouldn't be passed as a work in progress. Being naive about financial services, Warren completely missed the obvious, i.e., capital flows will be affected by current legislation, not some unknown, hoped-for future fixes in a bad law about to be passed and signed.
Well, thank God for small favors. At least, for once, Warren actually used her legal background to come close to identifying the guilty parties in the TARP fiasco.
Tuesday, May 25, 2010
Wither The Euro?
I heard a quote attributed to Milton Friedman last week regarding the Euro.
Friedman allegedly predicted that the currency would collapse with its first financial crisis. After considerable reading, reflection and discussions with well-informed, learned colleagues, I find myself in agreement.
I wrote here recently that Doug Dachille crystallized for me some misgivings I've had since the beginning of the Euro. Dachille's viewpoint was echoed as I spoke with a very experienced retired CEO this past weekend.
With some added days' perspective since last week's continued turmoil over the Euro, and the prior week's ECB actions, it continues to be difficult to see how the Eurozone countries can grow their way out of this fiscal mess.
And it is a fiscal mess. Recall that the origin was a rather quiet disclosure months ago that the prior Greek government simply lied about its budgets and deficits.
I won't reiterate my and others' comments on the quasi-socialist, slow-growth economies of the EU, the transfer of wealth from Northern European nations to Southern ones, and the inevitable stress on fiscal policies, savings, taxes and long term Eurozone growth. It's enough to note that, once the immediate bailout/crisis mode has passed, the EU will continue to live with economic problems associated with funding the Greek and other national rescues.
The trouble may well bring down Angela Merkel's government in time. At that point, you have an opening for the previously unthinkable- German withdrawal from the Euro and its return to the DeutschMark.
Just because this won't all happen this next month or this summer doesn't mean pressure isn't building for a radical, discontinuous resolution of the simmering Euro problem. It's ultimately a cultural clash- robust, harder-working Northern European economies rescuing more spendthrift Southern European economies.
These nations have hundreds of years of experience as independent nations with independent fiscal policies. It's hard to believe they will move closer to surrendering those differing fiscal policies to a single, more powerful Brussels-based EU government. Thus, with the status quo probably untenable, the other extreme becomes more believable- the end of the Euro.
Friedman allegedly predicted that the currency would collapse with its first financial crisis. After considerable reading, reflection and discussions with well-informed, learned colleagues, I find myself in agreement.
I wrote here recently that Doug Dachille crystallized for me some misgivings I've had since the beginning of the Euro. Dachille's viewpoint was echoed as I spoke with a very experienced retired CEO this past weekend.
With some added days' perspective since last week's continued turmoil over the Euro, and the prior week's ECB actions, it continues to be difficult to see how the Eurozone countries can grow their way out of this fiscal mess.
And it is a fiscal mess. Recall that the origin was a rather quiet disclosure months ago that the prior Greek government simply lied about its budgets and deficits.
I won't reiterate my and others' comments on the quasi-socialist, slow-growth economies of the EU, the transfer of wealth from Northern European nations to Southern ones, and the inevitable stress on fiscal policies, savings, taxes and long term Eurozone growth. It's enough to note that, once the immediate bailout/crisis mode has passed, the EU will continue to live with economic problems associated with funding the Greek and other national rescues.
The trouble may well bring down Angela Merkel's government in time. At that point, you have an opening for the previously unthinkable- German withdrawal from the Euro and its return to the DeutschMark.
Just because this won't all happen this next month or this summer doesn't mean pressure isn't building for a radical, discontinuous resolution of the simmering Euro problem. It's ultimately a cultural clash- robust, harder-working Northern European economies rescuing more spendthrift Southern European economies.
These nations have hundreds of years of experience as independent nations with independent fiscal policies. It's hard to believe they will move closer to surrendering those differing fiscal policies to a single, more powerful Brussels-based EU government. Thus, with the status quo probably untenable, the other extreme becomes more believable- the end of the Euro.
Monday, May 24, 2010
How Governments Brought Uncertainty and Risk Back Into Capital Markets
Several pieces of information or opinion I received over the weekend leave me with the clear sense that the recent, sudden slide in US equity market prices is very clearly attributable to actions of governments around the world. As such, what governments, including Germany, the Euro community, and the US Congress and Fed have done is effectively inject fear and uncertainty into investors in global capital markets.
For example, PIMCO executive Mohamed El-Erian penned an opinion piece in the weekend Wall Street Journal discussing the return of the "nervous weekend."
Referring, originally, to US government weekend triage actions in the fall of 2008, now it's European governmental entities providing the stream of market-roiling actions.
Among El-Erian's observations were,
"I fear that markets may not get sufficiently reassuring answers any time soon to these questions.
There is still a deep hesitancy among European policy makers to acknowledge that the approach to rescuing Greece is incomplete. But few outside observers are fooled by a strategy that results in a further increase of the country's already excessive debt-to-GDP ratio, relies too heavily on a blunt and draconian fiscal policy instrument, and sustains a debt overhang that will deter new investments and amplify an already painful drop in GDP.
The bottom line is simple yet consequential: The disruption in financial markets is not a garden-variety market fluctuation. Instead, it's an over-due recognition that the global economy faces an uncertain future that involves slower growth and greater government regulation."
In another Journal editorial, columnist Jason Zweig focused on professional investor Seth Klarman's recent comments in an interview he gave to Zweig at the CFA Institute's annual meeting. Among the remarks attributed to Karman were,
"The government is now in the business of giving bad advice. By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can't stand earning 0% on their money, so the government is forcing everyone to speculate.
All we got out of this crisis was a Really Bad Couple of Weeks mentality.
I am more worried about the world, more broadly, than I ever have been in my career.
Will money be worth anything if governments keep intervening anytime there's a crisis to prop things up?"
And, finally,
"Sometimes, when you can't figure out a good defense, the best thing to do is to go on offense."
Finally, the US Senate passed a dysfunctional, horrible financial regulatory so-called 'reform' bill authored chiefly by a retiring Chris Dodd, who is beating a hasty path home to Connecticut ahead of corruption charges over his sweetheart mortgage deals from now-defunct Countrywide.
New Hampshire GOP Senator Judd Gregg, also retiring, but for different reasons, contended this morning on CNBC that this bill is a knee-jerk reaction to show voters that Senators will punish "Wall Street."
He ticked off a number of serious flaws in the bill, and noted that, surprisingly, House financial committee chairman Barney Frank actually has a Senate bill further to his left than to his right.
Take all of the actions these three people have noted, together, and you have a heretofore rising, low-volatility US equity market turned upside down in just a little over three weeks.
When governments lie about their finances, e.g., Greece, and then attempt to duck responsibility and consequences, followed by uncoordinated fiscal policies among the Euro's members, and the US Congress adds to fears with bad legislation, global investors are rightly concerned.
In fact, my volatility measure, which is calculated differently from, but tends to track the VIX, has hit recent highs in the past week.
Count me among those who believe this equity market swoon is by no means over, nor is fear out of the equity markets by a long shot.
For example, PIMCO executive Mohamed El-Erian penned an opinion piece in the weekend Wall Street Journal discussing the return of the "nervous weekend."
Referring, originally, to US government weekend triage actions in the fall of 2008, now it's European governmental entities providing the stream of market-roiling actions.
Among El-Erian's observations were,
"I fear that markets may not get sufficiently reassuring answers any time soon to these questions.
There is still a deep hesitancy among European policy makers to acknowledge that the approach to rescuing Greece is incomplete. But few outside observers are fooled by a strategy that results in a further increase of the country's already excessive debt-to-GDP ratio, relies too heavily on a blunt and draconian fiscal policy instrument, and sustains a debt overhang that will deter new investments and amplify an already painful drop in GDP.
The bottom line is simple yet consequential: The disruption in financial markets is not a garden-variety market fluctuation. Instead, it's an over-due recognition that the global economy faces an uncertain future that involves slower growth and greater government regulation."
In another Journal editorial, columnist Jason Zweig focused on professional investor Seth Klarman's recent comments in an interview he gave to Zweig at the CFA Institute's annual meeting. Among the remarks attributed to Karman were,
"The government is now in the business of giving bad advice. By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can't stand earning 0% on their money, so the government is forcing everyone to speculate.
All we got out of this crisis was a Really Bad Couple of Weeks mentality.
I am more worried about the world, more broadly, than I ever have been in my career.
Will money be worth anything if governments keep intervening anytime there's a crisis to prop things up?"
And, finally,
"Sometimes, when you can't figure out a good defense, the best thing to do is to go on offense."
Finally, the US Senate passed a dysfunctional, horrible financial regulatory so-called 'reform' bill authored chiefly by a retiring Chris Dodd, who is beating a hasty path home to Connecticut ahead of corruption charges over his sweetheart mortgage deals from now-defunct Countrywide.
New Hampshire GOP Senator Judd Gregg, also retiring, but for different reasons, contended this morning on CNBC that this bill is a knee-jerk reaction to show voters that Senators will punish "Wall Street."
He ticked off a number of serious flaws in the bill, and noted that, surprisingly, House financial committee chairman Barney Frank actually has a Senate bill further to his left than to his right.
Take all of the actions these three people have noted, together, and you have a heretofore rising, low-volatility US equity market turned upside down in just a little over three weeks.
When governments lie about their finances, e.g., Greece, and then attempt to duck responsibility and consequences, followed by uncoordinated fiscal policies among the Euro's members, and the US Congress adds to fears with bad legislation, global investors are rightly concerned.
In fact, my volatility measure, which is calculated differently from, but tends to track the VIX, has hit recent highs in the past week.
Count me among those who believe this equity market swoon is by no means over, nor is fear out of the equity markets by a long shot.
Friday, May 21, 2010
Congress' New Clearinghouses
A Wall Street Journal editorial earlier this week exposed some inconvenient truths regarding proposed Congressional so-called 'reform' of derivatives trading. The topic is clearinghouses.
Personally, I find the notion of establishing clearinghouses for derivatives to be progress, if it prevents the valuation panics attendant upon derivatives due to counterparty risk, and the consequent panic over the valuation of the holders of said derivatives.
If, rather than having daisy chains of derivatives existing among various institutions, the bulk of the instruments are traded via an exchange, perhaps counterparty risk will be reduced, thus improving confidence in the risks of potential losses to the various parties.
However, the evolving, awful Dodd bill doesn't seem to have so much confidence in the proposed exchanges for derivatives.
The Journal editorial notes that the fine print of Dodd's effort gives said clearinghouses Fed discount window borrowing privleges.
Pretty scary, eh?
Because that blows the argument about 'no more bailouts' out of the water.
In fact, this provision makes clear that Dodd & Co. fear precisely that even a derivative exchange can't be sufficiently well-capitalized to cover losses, and, thus, needs access to...you guessed it....our taxpayer money.
The editorial points out,
"Also most clearinghouses that operate today set margins based on historic volatility. Everything works well as long as patterns continue as they have in the past, but as we have so painfully learned the worst crises involve assets long considered very safe that turn out to be risky. We now know that regulators at the Treasury's Office of Thrift Supervision signed off on AIG's credit-default swaps because they backed AAA-rated mortgage assets. And everyone knew housing had been rock-solid for decades."
Once again, we are reminded that regulators who are, frankly, less smart than industry practitioners will cause taxpayers losses every time. In the last crisis, our federal regulators proved unable or unwilling to challenge rating agency opinions and/or think for themselves about high ratings on securities backed by whole new mortgage instruments (subprime and Alt-A).
So any Congressional creation that depends upon regulators to get the basics right, such as, oh, say, the derivatives exchange collateral levels, is bound to be wrong.
And that means, as the Journal piece concludes, that this legislation won't do much more for derivatives risk than, first, concentrate it into an exchange, then pass any uncovered risk/losses to taxpayers, via the Fed window.
Makes you want to cry, doesn't it?
Personally, I find the notion of establishing clearinghouses for derivatives to be progress, if it prevents the valuation panics attendant upon derivatives due to counterparty risk, and the consequent panic over the valuation of the holders of said derivatives.
If, rather than having daisy chains of derivatives existing among various institutions, the bulk of the instruments are traded via an exchange, perhaps counterparty risk will be reduced, thus improving confidence in the risks of potential losses to the various parties.
However, the evolving, awful Dodd bill doesn't seem to have so much confidence in the proposed exchanges for derivatives.
The Journal editorial notes that the fine print of Dodd's effort gives said clearinghouses Fed discount window borrowing privleges.
Pretty scary, eh?
Because that blows the argument about 'no more bailouts' out of the water.
In fact, this provision makes clear that Dodd & Co. fear precisely that even a derivative exchange can't be sufficiently well-capitalized to cover losses, and, thus, needs access to...you guessed it....our taxpayer money.
The editorial points out,
"Also most clearinghouses that operate today set margins based on historic volatility. Everything works well as long as patterns continue as they have in the past, but as we have so painfully learned the worst crises involve assets long considered very safe that turn out to be risky. We now know that regulators at the Treasury's Office of Thrift Supervision signed off on AIG's credit-default swaps because they backed AAA-rated mortgage assets. And everyone knew housing had been rock-solid for decades."
Once again, we are reminded that regulators who are, frankly, less smart than industry practitioners will cause taxpayers losses every time. In the last crisis, our federal regulators proved unable or unwilling to challenge rating agency opinions and/or think for themselves about high ratings on securities backed by whole new mortgage instruments (subprime and Alt-A).
So any Congressional creation that depends upon regulators to get the basics right, such as, oh, say, the derivatives exchange collateral levels, is bound to be wrong.
And that means, as the Journal piece concludes, that this legislation won't do much more for derivatives risk than, first, concentrate it into an exchange, then pass any uncovered risk/losses to taxpayers, via the Fed window.
Makes you want to cry, doesn't it?
Thursday, May 20, 2010
The "Flash Crash" & Market Liquidity
Tuesday's Wall Street Journal featured an article comparing the recent "flash crash" to what it termed "a real one in 1987."
Surprise, we're flirting with another such day today.
A key paragraph in the long piece read,
"Selling pressure became on both days became so intense that any remaining buyers were overwhelmed, creating an "air pocket" in stocks and other securities that led to vertiginous declines.
Many market makers on Black Monday had exhausted their funds, while others were overwhelmed by the volatility. The NYSE later took steps to boost traders' capital."
Here's my question.
It's been 33 years since the 1987 crash. We knew then that small market makers on the NYSE were incapable of withstanding the avalanche of sell orders that what was then advanced technology allowed to occur. Technology has moved on and now dwarfed the volume of that crash.
One of the significant results of that crash was the acquisition of many market makers by larger brokers, as so many of the former had shown themselves either unable or unwilling to fulfill the role, in exchange for which they were given monopolies on trading selected issues.
Why have we not yet decided, once and for all, to either let the chips fall where they may in the rare, but inevitable market free-falls, or to halt trading entirely?
It's not like we haven't had three decades and change to reflect on this important question, is it?
Markets need to be continuous, liquid and able to prevent any one buyer or seller from having pricing power over an issue. If any one of these conditions is violated, it's no longer a market.
Period.
Maybe the problem is that the industry hasn't given Congress a sensible, practical approach to what are well-known conditions.
In 1987, there were 2-3 similar 'gapped pricing' upward spirals earlier in the year. But, because fills resulted in higher prices, nobody complained. It was a different story in October of that year, when equity sell orders got filled at prices far lower than the quotes at the time of the market order placement.
We know how equity markets behave in these situations. Simply put, market makers won't step in to catch the "falling knife" of plummeting prices on equities. They will not answer phones, and will institute "speed bumps," in hopes that a pause of 1-2 minutes will fix everything. So, in that situation, it's an implicit closure of markets.
If, instead, as over on the NASDAQ, market sell orders continue to flood a market with no buyers, prices will plummet. If anyone still wishes to enter market orders in that situation, it's buyer beware.
Which do we want to exist in observable situations of market panic, as characterized by trading volumes and index price declines/unit of time?
We need our sector executives, especially on the exchanges, to formulate workable solutions and insist that Congress enact them so that all investors know, a priori, how markets will, or will not, function at times in which pre-defined crisis parameters apply.
Surprise, we're flirting with another such day today.
A key paragraph in the long piece read,
"Selling pressure became on both days became so intense that any remaining buyers were overwhelmed, creating an "air pocket" in stocks and other securities that led to vertiginous declines.
Many market makers on Black Monday had exhausted their funds, while others were overwhelmed by the volatility. The NYSE later took steps to boost traders' capital."
Here's my question.
It's been 33 years since the 1987 crash. We knew then that small market makers on the NYSE were incapable of withstanding the avalanche of sell orders that what was then advanced technology allowed to occur. Technology has moved on and now dwarfed the volume of that crash.
One of the significant results of that crash was the acquisition of many market makers by larger brokers, as so many of the former had shown themselves either unable or unwilling to fulfill the role, in exchange for which they were given monopolies on trading selected issues.
Why have we not yet decided, once and for all, to either let the chips fall where they may in the rare, but inevitable market free-falls, or to halt trading entirely?
It's not like we haven't had three decades and change to reflect on this important question, is it?
Markets need to be continuous, liquid and able to prevent any one buyer or seller from having pricing power over an issue. If any one of these conditions is violated, it's no longer a market.
Period.
Maybe the problem is that the industry hasn't given Congress a sensible, practical approach to what are well-known conditions.
In 1987, there were 2-3 similar 'gapped pricing' upward spirals earlier in the year. But, because fills resulted in higher prices, nobody complained. It was a different story in October of that year, when equity sell orders got filled at prices far lower than the quotes at the time of the market order placement.
We know how equity markets behave in these situations. Simply put, market makers won't step in to catch the "falling knife" of plummeting prices on equities. They will not answer phones, and will institute "speed bumps," in hopes that a pause of 1-2 minutes will fix everything. So, in that situation, it's an implicit closure of markets.
If, instead, as over on the NASDAQ, market sell orders continue to flood a market with no buyers, prices will plummet. If anyone still wishes to enter market orders in that situation, it's buyer beware.
Which do we want to exist in observable situations of market panic, as characterized by trading volumes and index price declines/unit of time?
We need our sector executives, especially on the exchanges, to formulate workable solutions and insist that Congress enact them so that all investors know, a priori, how markets will, or will not, function at times in which pre-defined crisis parameters apply.
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