CNBC's 6-9am program featured a half-hour segment, ending at 8:30, with David Tepper, founder and head of the $12B+ hedge fund Appaloosa Management. I'm sure it's already a featured clip on the network's website, and will remain in the paid portion for some time.
Tepper said a lot during his half hour as the program's only guest. But there were two comments which, for me, were especially notable.
The first was his nonchalance concerning the bet his hedge fund made on US bank equities and debt in 2009. According to Tepper, Treasury published a white paper declaring, in advance, the bank equities it would purchase, and at what prices. Citing the failure to comply with this document as fraud under SEC rules, Tepper claimed that it was easy to go long in the bank instruments which delivered Appaloosa's reported 100%+ gains for 2009.
"Sometimes, it's that easy," the 17-year veteran hedge fund manager observed.
Despite questions from Becky Quick and Joe Kernen concerning the changes in federal government actions, versus stated intent, for TARP, and its quixotic behavior two years ago this fall, Tepper remained calmly insistent that Appaloosa's long positions going into 2009 were a simple, riskless move.
I can't help believe that Tepper is putting a different face on those risks now then he and his team viewed them two years ago.
For example, the federal government enjoys sovereign immunity from many lawsuits. And it's very unlikely that any administration would allow its SEC head to bring action against its Treasury Secretary or the Fed for failing to act upon a 'white paper.'
I'm sorry, but I just don't buy Tepper's characterization of his funds' positions as essentially riskless and a no brainer in late 2008 and early 2009.
If he'd been wrong, and Treasury had had second thoughts, we'd have read about Appaloosa's horrendous losses. And maybe a feeble attempt to bring suit. Which probably would have brought heat from the SEC to quash the attempt at forcing Treasury to follow through.
The second interesting comment from Tepper arguably began to turn equity market futures this morning. When asked about his views for the rest of the year, Tepper didn't hesitate to say he was longer than usual, and fully expected the Fed to make good on its desire to facilitate US economic growth.
According to Tepper, between continued easy money, borrowing, and/or, if necessary, QE2, he's confident that the Fed will get its wish. As he put it, to paraphrase,
'If the Fed continues easing, equities will do well, but bonds will get killed. If, on the other hand, that doesn't ignite growth, and they need to do more quantitative easing, then everything will do well for the remainder of the year.'
Tepper didn't say there wouldn't be a price to be paid for all of this easing. He simply reiterated his early comment about 2009, i.e., you should believe the Fed and Treasury when they say they want to assure an economic result which, in the short term, they have the means to effect.
Having seen some prior examples of a market heavyweight's comments on CNBC seem to move the S&P and Dow futures, I'm not at all dismissive of the impact of David Tepper's remarks. When he began speaking, the S&P futures were around 1122. Now, at 9am, an hour later, they are around 1133, with the added help of some positive economic news.
One has to wonder why Tepper suddenly appeared on CNBC this morning. Was it a function of the equity markets falling back from their recent, multi-month highs? Was Tepper concerned about the fate of his long positions?
I don't believe in coincidences of this sort. A few months ago, Doug Kass, a noted bear and also a guest/host on CNBC earlier this morning, made public his belief that equities had hit a bottom and, sure enough, they began a march upward that morning.
No matter how talented the equity manager, whether public or private/hedge fund in nature, I can't help but see them all merely talking their books when they agree to appear on CNBC.
Friday, September 24, 2010
What To Expect from the Bureau of Consumer Financial Protection
Much has been made of Elizabeth Warren's rather tortured, strangely-handled appointment to head the federal government's new Bureau of Consumer Financial Protection. I've written about that aspect of her long-awaited appointment here on my companion political blog.
In this post, though, I'd like to consider what this new agency is likely to do to and for US financial consumers.
According to a Wall Street Journal article on the subject, Warren is to oversee a staff which will now commence writing hundreds of pages of new rules and policies governing practices at financial firms.
Warren is now attempting to spin her efforts as being "willing to cooperate with business leaders."
Unlikely.
Anyone who's seen Warren's scolding, imperious, inquisitorial manner during her TARP Oversight Committee will find it hard to believe that statement.
Instead, Warren has spoken of "tricks and traps" that consumer lenders employ, and of calling for "fundamental changes to the way rules are written in Washington." According to the Journal article, Warren wants two-pages contracts for mortgages and credit cards. It's not clear how that would offer more protection to consumers, unless the language is so sweeping as to provide for nearly-unlimited lender liability.
You don't really have to know just what new regulations will be written to understand the effects they are likely to have on consumer lending. Rather than allocate credit according to a consumer's ability to pay, new regulations are more likely to result in no access to credit whatsoever for borderline borrowers.
If consumer lending documents truly become distilled to one or two pages, it's reasonable to assume that only the safest credits will be funded. The fewer terms and conditions are allowed, the more assured lenders will want to be that their customers, and their loans to them, are very low-risk.
Just stepping back and considering Warren's overall belief that lenders have behaved predatorily, and consumers need to be 'protected,' it's a good bet that the price of credit will rise, when it's available.
Perhaps a good example of this likelihood was Warren's reaction to a question from Jack Welch on CNBC's morning program yesterday. When Welch asked Warren if she thought her efforts would increase the price of credit, she replied,
'That's the wrong question to ask.'
Amazing, isn't she? Simply ruling an inconvenient question off limits, out of bounds, to be ignored. Which she did.
She went on to claim, without any examples, that whole companies existed simply to take advantage of consumers with 'tricks' to make them pay exhorbitant fees and rates. Then resorted to the hoary old references to 'families' to contend that all was amiss in the finance industry. Not just a few bad apples, according to Warren, because she never actually admitted that there were honest lenders out there.
Instead, Warren painted a picture of poor, uneducated, stupid consumers waiting to be fleeced by sharp lenders. In her world, consumers sign loan agreements they don't read or understand, despite being adults and understanding that nobody is making them borrow money. For a glimpse of this, go find and watch CNBC's House of Cards documentary. The scene with the large California woman who knew she couldn't afford her mortgage, but figured that 'if they want to give me the money, they must believe it's okay and I can afford it.'
That woman is the prime example of the average consumer in Elizabeth Warren's world. In reality, of course, no amount of regulation or protection will prevent such a person from making mistakes, borrowing too much money, at unaffordable rates. But don't try to tell that to Warren.
Thus, as with most regulatory overkill, the results of her efforts will, typically, be the opposite of intentions. In this case, it will not facilitate borrowing for lower-income borrowers, but probably eliminate them from qualifying for loans at all.
In this post, though, I'd like to consider what this new agency is likely to do to and for US financial consumers.
According to a Wall Street Journal article on the subject, Warren is to oversee a staff which will now commence writing hundreds of pages of new rules and policies governing practices at financial firms.
Warren is now attempting to spin her efforts as being "willing to cooperate with business leaders."
Unlikely.
Anyone who's seen Warren's scolding, imperious, inquisitorial manner during her TARP Oversight Committee will find it hard to believe that statement.
Instead, Warren has spoken of "tricks and traps" that consumer lenders employ, and of calling for "fundamental changes to the way rules are written in Washington." According to the Journal article, Warren wants two-pages contracts for mortgages and credit cards. It's not clear how that would offer more protection to consumers, unless the language is so sweeping as to provide for nearly-unlimited lender liability.
You don't really have to know just what new regulations will be written to understand the effects they are likely to have on consumer lending. Rather than allocate credit according to a consumer's ability to pay, new regulations are more likely to result in no access to credit whatsoever for borderline borrowers.
If consumer lending documents truly become distilled to one or two pages, it's reasonable to assume that only the safest credits will be funded. The fewer terms and conditions are allowed, the more assured lenders will want to be that their customers, and their loans to them, are very low-risk.
Just stepping back and considering Warren's overall belief that lenders have behaved predatorily, and consumers need to be 'protected,' it's a good bet that the price of credit will rise, when it's available.
Perhaps a good example of this likelihood was Warren's reaction to a question from Jack Welch on CNBC's morning program yesterday. When Welch asked Warren if she thought her efforts would increase the price of credit, she replied,
'That's the wrong question to ask.'
Amazing, isn't she? Simply ruling an inconvenient question off limits, out of bounds, to be ignored. Which she did.
She went on to claim, without any examples, that whole companies existed simply to take advantage of consumers with 'tricks' to make them pay exhorbitant fees and rates. Then resorted to the hoary old references to 'families' to contend that all was amiss in the finance industry. Not just a few bad apples, according to Warren, because she never actually admitted that there were honest lenders out there.
Instead, Warren painted a picture of poor, uneducated, stupid consumers waiting to be fleeced by sharp lenders. In her world, consumers sign loan agreements they don't read or understand, despite being adults and understanding that nobody is making them borrow money. For a glimpse of this, go find and watch CNBC's House of Cards documentary. The scene with the large California woman who knew she couldn't afford her mortgage, but figured that 'if they want to give me the money, they must believe it's okay and I can afford it.'
That woman is the prime example of the average consumer in Elizabeth Warren's world. In reality, of course, no amount of regulation or protection will prevent such a person from making mistakes, borrowing too much money, at unaffordable rates. But don't try to tell that to Warren.
Thus, as with most regulatory overkill, the results of her efforts will, typically, be the opposite of intentions. In this case, it will not facilitate borrowing for lower-income borrowers, but probably eliminate them from qualifying for loans at all.
Thursday, September 23, 2010
A Downside of Low Interest Rates
Earlier this week, the Wall Street Journal ran an article discussing a somewhat hidden downside to the US economy's current ultra-low interest rates. That problem is what such rate levels do to assumptions driving pension fund values versus long term liabilities.
Simply put, companies- and states, for that matter- are facing much greater shortfalls in their pension funding. For example, the article cited GM sources as saying that "every .25 percentage-point decline in its discount rate could increase its pension obligation by about $2.4 billion."
That obligation as "underfunded by $17.1 billion at the end of 2009."
On a larger scale, the article noted,
"If S&P 500 companies took account of the interest-rate decline as of Aug. 31 to calculate their pension-fund balances, the combined deficit would increase by about $167 billion, or nearly two-thirds more than the year-end 2009 deficit of about $260 billion, estimates Jack Ciesielski of the research firm Analyst's Accounting Observer."
Leave it to the free market's checks and balances to identify this risk. Between suspect private sector growth rates inhibited by government interference, taxation and deficit policies, and these low interest rates, one wonders how any ground will be gained on these pension liabilities.
Down the road, of course, this could morph into lower demand and savings, as retirees don't collect expected pension payments.
Simply put, companies- and states, for that matter- are facing much greater shortfalls in their pension funding. For example, the article cited GM sources as saying that "every .25 percentage-point decline in its discount rate could increase its pension obligation by about $2.4 billion."
That obligation as "underfunded by $17.1 billion at the end of 2009."
On a larger scale, the article noted,
"If S&P 500 companies took account of the interest-rate decline as of Aug. 31 to calculate their pension-fund balances, the combined deficit would increase by about $167 billion, or nearly two-thirds more than the year-end 2009 deficit of about $260 billion, estimates Jack Ciesielski of the research firm Analyst's Accounting Observer."
Leave it to the free market's checks and balances to identify this risk. Between suspect private sector growth rates inhibited by government interference, taxation and deficit policies, and these low interest rates, one wonders how any ground will be gained on these pension liabilities.
Down the road, of course, this could morph into lower demand and savings, as retirees don't collect expected pension payments.
Jeff Sonnenfeld's Misinformed Praise of Ann Mulcahy & Xerox
With Larry Summers' resignation from the administration's economic team, every pundit worth her/his salt has been tossing names out for his replacement. Among business people, to my astonishment, former Xerox CEO Ann Mulcahy has been mentioned as an inside favorite.
Jeff Sonnenfeld lauded Mulcahy on CNBC yesterday afternoon as having had a "fabulous tour of duty" as the struggling firm's CEO.
If you look at the accompanying chart of the price series of Xerox and the S&P500 Index, it's hard to understand Sonnenfeld's enthusiasm for Mulcahy's performance.
Mulcahy became CEO of Xerox on 1 August, 2001.
After a smartly-rising performance from 1990-1999, Xerox's share price deflated, along with that of many other technology firms, when the tech bubble burst in 2000. By 2001, the company's stock price had begun to recover, but has basically flat-lined over the period of Mulcahy's management. The S&P did roughly the same.
How does this make Mulcahy some sort of management maven? And why does anyone even bother with Xerox anymore? It's been a technology also-ran for at least a decade.
Leave aside that she's never been considered an economist. Precisely what is it about Mulcahy's lackluster reign at the copier company that would make anyone believe she's somehow qualified to be an economic adviser, or process coordinator, at the White House?
I know. Sonnenfeld probably believes that without Mulcahy, Xerox would have performed even worse since 2001! That's the sort of performance that could well find Mulcahy a spot on the administration's economic team.
Because it certainly wouldn't have been due to Mulcahy's doing her shareholders any favors during her term as CEO at Xerox.
By the way, in his long-winded comments, Sonnenfeld confided that Summers' post was only created in the Clinton administration to give Bob Rubin a place to hang until he could be made Treasury Secretary. If that's really true, how about letting Summers leave and just save the money? It's not like we need more economists in the administration, is it? With their current performance, I'd say rather fewer might be better.
If the stories about Mulcahy being a serious contender for Summers' job are true, I'm not sure who comes off worst- Sonnenfeld, Mulcahy, or the White House.
Jeff Sonnenfeld lauded Mulcahy on CNBC yesterday afternoon as having had a "fabulous tour of duty" as the struggling firm's CEO.
If you look at the accompanying chart of the price series of Xerox and the S&P500 Index, it's hard to understand Sonnenfeld's enthusiasm for Mulcahy's performance.Mulcahy became CEO of Xerox on 1 August, 2001.
After a smartly-rising performance from 1990-1999, Xerox's share price deflated, along with that of many other technology firms, when the tech bubble burst in 2000. By 2001, the company's stock price had begun to recover, but has basically flat-lined over the period of Mulcahy's management. The S&P did roughly the same.
How does this make Mulcahy some sort of management maven? And why does anyone even bother with Xerox anymore? It's been a technology also-ran for at least a decade.
Leave aside that she's never been considered an economist. Precisely what is it about Mulcahy's lackluster reign at the copier company that would make anyone believe she's somehow qualified to be an economic adviser, or process coordinator, at the White House?
I know. Sonnenfeld probably believes that without Mulcahy, Xerox would have performed even worse since 2001! That's the sort of performance that could well find Mulcahy a spot on the administration's economic team.
Because it certainly wouldn't have been due to Mulcahy's doing her shareholders any favors during her term as CEO at Xerox.
By the way, in his long-winded comments, Sonnenfeld confided that Summers' post was only created in the Clinton administration to give Bob Rubin a place to hang until he could be made Treasury Secretary. If that's really true, how about letting Summers leave and just save the money? It's not like we need more economists in the administration, is it? With their current performance, I'd say rather fewer might be better.
If the stories about Mulcahy being a serious contender for Summers' job are true, I'm not sure who comes off worst- Sonnenfeld, Mulcahy, or the White House.
Wednesday, September 22, 2010
Is Google A Monopolist?
That was the title of last Friday's Wall Street Journal presentation of two editorials arguing the question.
It's nice to have a topic to discuss that involves more pure business and strategy than government intervention, although, the very question actually begs the latter.
The Google case seems, on the surface, to resemble that of the infamous browser wars in which Microsoft drove Netscape into oblivion. That certainly is the contention of one of the editorialists, Rick Rule, now retained by Microsoft and other firms in an anti-trust action against Google.
However, as I thought about this question over the weekend, I found myself believing that Mr. Rule is engaging in a deceptive and erroneous comparison.
Google offers a free search engine to anyone wishing to use it. But it is not the only search engine available. In fact, so robust is the search engine market that Microsoft re-entered the fray recently with its branded Bing service. And just this past week, a co-anchor on CNBC announced that she had gone back to Yahoo's search engine and found it better than the other two.
Since one accesses Google's search engine as an online service, it immediately begins to depart from the browser example, in that those software programs were coming pre-loaded on personal computers of the day.
If memory serves, one of the major anti-competitive behaviors by Microsoft involved tying its browser to its Windows personal computer operating system when selling the latter to PC producers such as Dell. The argument against Microsoft was that it was illegally using the ability of Dell to sell PCs pre-loaded with the most popular operating system, Windows, to force it to also pre-load the included Internet Explorer web browser, and exclude Netscape's or any other firm's browser.
As such, Microsoft's alleged anti-competitive behavior involved violating the Robinson-Patman Act's provisions involving illegal tying.
Google, however, isn't tying anything to a product for which money is paid.
No, the current argument is really about advertising market foreclosure. Even the debate concerning Google's alleged manipulation of search results is baseless in that nobody pays for searches.
Thus, despite a long-winded diatribe, Mr. Rule's only real well-founded point is that Google's share of online advertising exceeds 70%, which he claims exceeds the Sherman Act's "consensus" threshhold.
However, again, online advertising isn't "sold" to users. It's bought by those wishing to advertise, and they can choose all three search engines, if they wish, on which to advertise their products and services.
It reminds me of my local, freely-distributed weekly 'newspaper.' Many communities have them. A local publisher prints and distributes variants of the same weekly paper to many nearby towns through contracted carriers. Nobody pays for these nuisances, and often they receive multiple copies. Thus, it could be said that the publisher in question has a monopoly, in that every house in a town is given at least one copy of the paper. Companies pay to advertise in the paper, but nobody suggests that these small entities have a harmful monopoly on advertising.
Mr. Singhal, a Google fellow and the Journal's choice to represent Google's viewpoint in the other editorial, argues that Google is always vulnerable to its search engine being eclipsed by a better one, thus upsetting its business model. I wrote a post several years ago contending precisely this case. Everything else that Google has pursued has necessarily been dependent upon revenues from search-related advertising. If search goes down, Google's entire empire is in jeopardy.
As an aside, while I understand that Google's, and other search providers, receive their ad revenues from those wishing to place product and service ads, I continue to marvel that companies do this. My own behavior almost never results in purchasing goods or services directly from an ad on an online search. True, a company purchasing a keyword might get a click-through from me, but rarely a purchase.
In any case, businesses do see value in buying various search words and terms, fueling Google's, Yahoo's and Microsoft's search-related advertising revenues.
But none of those seem to even remotely pass the test of current anti-trust laws which require the guilty party to actively foreclose markets to suppliers or predatorily price goods or services to buyers in order to eliminate competitors.
It seems that, like it or not, existing anti-trust laws do not easily apply to the world of online search and advertising. Google's predominance, when viewed objectively, would not seem to be a result of any illegal activity, whether it is a monopoly, or not.
It's nice to have a topic to discuss that involves more pure business and strategy than government intervention, although, the very question actually begs the latter.
The Google case seems, on the surface, to resemble that of the infamous browser wars in which Microsoft drove Netscape into oblivion. That certainly is the contention of one of the editorialists, Rick Rule, now retained by Microsoft and other firms in an anti-trust action against Google.
However, as I thought about this question over the weekend, I found myself believing that Mr. Rule is engaging in a deceptive and erroneous comparison.
Google offers a free search engine to anyone wishing to use it. But it is not the only search engine available. In fact, so robust is the search engine market that Microsoft re-entered the fray recently with its branded Bing service. And just this past week, a co-anchor on CNBC announced that she had gone back to Yahoo's search engine and found it better than the other two.
Since one accesses Google's search engine as an online service, it immediately begins to depart from the browser example, in that those software programs were coming pre-loaded on personal computers of the day.
If memory serves, one of the major anti-competitive behaviors by Microsoft involved tying its browser to its Windows personal computer operating system when selling the latter to PC producers such as Dell. The argument against Microsoft was that it was illegally using the ability of Dell to sell PCs pre-loaded with the most popular operating system, Windows, to force it to also pre-load the included Internet Explorer web browser, and exclude Netscape's or any other firm's browser.
As such, Microsoft's alleged anti-competitive behavior involved violating the Robinson-Patman Act's provisions involving illegal tying.
Google, however, isn't tying anything to a product for which money is paid.
No, the current argument is really about advertising market foreclosure. Even the debate concerning Google's alleged manipulation of search results is baseless in that nobody pays for searches.
Thus, despite a long-winded diatribe, Mr. Rule's only real well-founded point is that Google's share of online advertising exceeds 70%, which he claims exceeds the Sherman Act's "consensus" threshhold.
However, again, online advertising isn't "sold" to users. It's bought by those wishing to advertise, and they can choose all three search engines, if they wish, on which to advertise their products and services.
It reminds me of my local, freely-distributed weekly 'newspaper.' Many communities have them. A local publisher prints and distributes variants of the same weekly paper to many nearby towns through contracted carriers. Nobody pays for these nuisances, and often they receive multiple copies. Thus, it could be said that the publisher in question has a monopoly, in that every house in a town is given at least one copy of the paper. Companies pay to advertise in the paper, but nobody suggests that these small entities have a harmful monopoly on advertising.
Mr. Singhal, a Google fellow and the Journal's choice to represent Google's viewpoint in the other editorial, argues that Google is always vulnerable to its search engine being eclipsed by a better one, thus upsetting its business model. I wrote a post several years ago contending precisely this case. Everything else that Google has pursued has necessarily been dependent upon revenues from search-related advertising. If search goes down, Google's entire empire is in jeopardy.
As an aside, while I understand that Google's, and other search providers, receive their ad revenues from those wishing to place product and service ads, I continue to marvel that companies do this. My own behavior almost never results in purchasing goods or services directly from an ad on an online search. True, a company purchasing a keyword might get a click-through from me, but rarely a purchase.
In any case, businesses do see value in buying various search words and terms, fueling Google's, Yahoo's and Microsoft's search-related advertising revenues.
But none of those seem to even remotely pass the test of current anti-trust laws which require the guilty party to actively foreclose markets to suppliers or predatorily price goods or services to buyers in order to eliminate competitors.
It seems that, like it or not, existing anti-trust laws do not easily apply to the world of online search and advertising. Google's predominance, when viewed objectively, would not seem to be a result of any illegal activity, whether it is a monopoly, or not.
Tuesday, September 21, 2010
New Fed Rules & Commercial Bank Presidents: Does It Even Matter?
Sometimes it's worth considering the output of a system, before getting excited about changes to its inputs.
In this case, I'm referring to a recent Wall Street Journal article professing concern that Chase's Jamie Dimon doesn't feel he can "perform his duties on the Fed board" because of recent financial regulatory reform legislation.
Is the the same Fed which has been reduced to a 0% interest rate policy and quantitative easing in order to effect monetary policy in the US? The Fed which is dominated by its chairman, currently known for throwing liquidity at any crisis, rather than let natural systemic reactions help to right the nation's economy?
Having work with several CEOs of large US banks in my past, I'm wondering just what it is for which Dimon is required on a regional Fed board. Even that of New York.
I'm one of those people who doesn't believe that large company CEOs magically become omniscient and smarter, i.e., someone they never were before, just by being anointed with the title.
In Dimon's case, he was never considered a monetary or economic policy savant when he carried Sandy Weill's bags for years at Shearson, American Express, Travelers or Citigroup. Why should he have such wisdom now?
The gritty, operational details of banking, the expertise with which might be a necessity on a regional Fed board, aren't generally possessed by bank CEOs, either.
In short, I wonder just what a bank CEO can provide to a Fed board that reports and analysis from his/her bank's various functions can't, with greater specificity?
The most important element of the Journal article to me was the potential conflict now created by new legislation and the existing Federal Reserve. It could well be that the recently-passed law improperly and illegally infringes upon Fed powers. Or maybe it's a legal curtailment that constitutes a sort of 'back door' curbing of Fed powers which has been threatened by Congress, but never implemented, for decades.
That would seem to be the real story. Not just whether a certain bank CEO on a certain regional Fed board is no longer able to "perform his duties."
In this case, I'm referring to a recent Wall Street Journal article professing concern that Chase's Jamie Dimon doesn't feel he can "perform his duties on the Fed board" because of recent financial regulatory reform legislation.
Is the the same Fed which has been reduced to a 0% interest rate policy and quantitative easing in order to effect monetary policy in the US? The Fed which is dominated by its chairman, currently known for throwing liquidity at any crisis, rather than let natural systemic reactions help to right the nation's economy?
Having work with several CEOs of large US banks in my past, I'm wondering just what it is for which Dimon is required on a regional Fed board. Even that of New York.
I'm one of those people who doesn't believe that large company CEOs magically become omniscient and smarter, i.e., someone they never were before, just by being anointed with the title.
In Dimon's case, he was never considered a monetary or economic policy savant when he carried Sandy Weill's bags for years at Shearson, American Express, Travelers or Citigroup. Why should he have such wisdom now?
The gritty, operational details of banking, the expertise with which might be a necessity on a regional Fed board, aren't generally possessed by bank CEOs, either.
In short, I wonder just what a bank CEO can provide to a Fed board that reports and analysis from his/her bank's various functions can't, with greater specificity?
The most important element of the Journal article to me was the potential conflict now created by new legislation and the existing Federal Reserve. It could well be that the recently-passed law improperly and illegally infringes upon Fed powers. Or maybe it's a legal curtailment that constitutes a sort of 'back door' curbing of Fed powers which has been threatened by Congress, but never implemented, for decades.
That would seem to be the real story. Not just whether a certain bank CEO on a certain regional Fed board is no longer able to "perform his duties."
Monday, September 20, 2010
Private Equity's Comeuppance
Last Wednesday's Wall Street Journal had an article highlighting the challenges of private equity firms attempting to cash out of firms via IPOs in the current thin market for such issues.
The overall thrust of the article was simply that the private equity groups are now facing the fact that they constitute the bulk of IPOs and, as such, might drive down prices for the firms they are now trying to unload. And that many are under the pressure of expiring fund pools to liquefy their gains via sale of the firms they once took private.
But my own takeaway was that, as with all markets, timing is everything. And what seems to be a great strategy at one point in time can become a curse at another time.
In fact, this article illustrated to me that there is a second risk to the private equity business besides the one that recently became evident by Cerberus' debacle with Chrysler and GMAC. That problem is simply too many private equity firms chasing too few opportunities, leading to deals with little chance of paying off. Combinations of excessive prices paid by the private equity groups, and poor choice of targets, results in some deals never making it through the process and back out into the public markets.
Now, in addition to failure on the front end of the private equity process, however, we see that simply having a fund near its dissolution date can result in a group having to dump properties back into the equity markets at a bad time. Not only are there few other IPOs, but, in the current market, it's not clear that prices will be the best they could be.
Seems all is not unalloyed gold in the private equity business, after all.
The overall thrust of the article was simply that the private equity groups are now facing the fact that they constitute the bulk of IPOs and, as such, might drive down prices for the firms they are now trying to unload. And that many are under the pressure of expiring fund pools to liquefy their gains via sale of the firms they once took private.
But my own takeaway was that, as with all markets, timing is everything. And what seems to be a great strategy at one point in time can become a curse at another time.
In fact, this article illustrated to me that there is a second risk to the private equity business besides the one that recently became evident by Cerberus' debacle with Chrysler and GMAC. That problem is simply too many private equity firms chasing too few opportunities, leading to deals with little chance of paying off. Combinations of excessive prices paid by the private equity groups, and poor choice of targets, results in some deals never making it through the process and back out into the public markets.
Now, in addition to failure on the front end of the private equity process, however, we see that simply having a fund near its dissolution date can result in a group having to dump properties back into the equity markets at a bad time. Not only are there few other IPOs, but, in the current market, it's not clear that prices will be the best they could be.
Seems all is not unalloyed gold in the private equity business, after all.
Friday, September 17, 2010
CNBC Stacks The Deck For It's Monday President's Town Hall Meeting
CNBC has been loudly trumpeting its upcoming 'Town Hall" meeting featuring the president. I believe it's scheduled for sometime on Monday. The host for the carefully-staged event is uber-liberal CNBC- and NY Times- reporter John Harwood.
As a member of CNBC's Exchange panel, I was invited to respond to 10 questions which will obviously be used to inform the president of their viewers' opinions.
Unfortunately, I didn't copy/paste the questions as I answered them, then found I can't access the poll, now that I've completed it. But I recall several of the questions.
They cover, as you'd expect, whether you think the current administration and party in power have the country on the right or wrong track. Whether the GOP would do better. What, among a list of some 7-8 issues, do you feel are the 2-3 most important facing the country, and how is the administration doing on those issues?
There were 2-3 questions specifically addressing the administration's tax-borrow-and-spend stimulus policies versus the alternative of cutting taxes and spending less. But, in an interesting handling of these issues, the poll, and CNBC, carefully avoided introducing any facts involving spending, unemployment, forecasted effects of the stimulus, etc.
In short, they presented the choices as theoretical, ignoring the obvious failure of the actually-implemented stimulus programs of this administration.
While I can't recall the exact few questions which I found to be misleading and worded to give softball-style results, I had the distinct impression that the entire poll is meant to give the president incredible leeway and running room to claim that those who registered disagreement with his policies and their poor results 'just don't understand,' or are too impatient.
I will give CNBC partial credit for at least asking what one thought was the primary cause of current economic problems, allowing, among the multiple choices, for naming Bush's policies or the current administration's policies. But, even here, the unstated presumption was that, nearly two years into this administration, it is even relevant to claim that the current situation is the fault of a prior administration.
This president has done so much to increase deficits and national debt, empower unions, interfere with business, and much, much more to create uncertainty in the business world, that it's simply impossible, in one question, to cover all the ways in which he and his administration have caused severe economic damage.
Thus, I don't have any confidence that my honest opinions and reflections of reality will be taken seriously. They will, no doubt, like others of my ilk, be spun positively by the liberal management of CNBC, the better to let the president evade responsibility for his actions, claim misunderstanding by voters, and generally be handled with kid gloves by his adoring, friendly host.
Furthermore, CNBC's ads for the event bill it as "America's CEO answers his shareholders," or some such verbiage. But this president has zero business experience or acumen. I don't think anyone, even on his own staff, believes that he knows the first thing about economics or business. Thus, having an event devoted to his taking questions and expounding on these topics is, by definition, a waste of time. You'd be better off having his economic council members, Treasury Secretary, et.al, show up, because at least they are supposed to know something about business. Although none of them, either, as Bernie Marcus noted on CNBC this morning, have skin in the game, or relevant experience, either. But, seriously, can you really believe an hour or more with this president will bring forth any statements of economic insight, or business sense? I rather doubt it.
I wouldn't waste my time on that program, and suggest you not, either. At best, it's a home field love fest for this administration. At worst, it's going to be a free campaign appearance by the president with the intent of rescuing his party's fortunes in the upcoming Congressional elections.
As a member of CNBC's Exchange panel, I was invited to respond to 10 questions which will obviously be used to inform the president of their viewers' opinions.
Unfortunately, I didn't copy/paste the questions as I answered them, then found I can't access the poll, now that I've completed it. But I recall several of the questions.
They cover, as you'd expect, whether you think the current administration and party in power have the country on the right or wrong track. Whether the GOP would do better. What, among a list of some 7-8 issues, do you feel are the 2-3 most important facing the country, and how is the administration doing on those issues?
There were 2-3 questions specifically addressing the administration's tax-borrow-and-spend stimulus policies versus the alternative of cutting taxes and spending less. But, in an interesting handling of these issues, the poll, and CNBC, carefully avoided introducing any facts involving spending, unemployment, forecasted effects of the stimulus, etc.
In short, they presented the choices as theoretical, ignoring the obvious failure of the actually-implemented stimulus programs of this administration.
While I can't recall the exact few questions which I found to be misleading and worded to give softball-style results, I had the distinct impression that the entire poll is meant to give the president incredible leeway and running room to claim that those who registered disagreement with his policies and their poor results 'just don't understand,' or are too impatient.
I will give CNBC partial credit for at least asking what one thought was the primary cause of current economic problems, allowing, among the multiple choices, for naming Bush's policies or the current administration's policies. But, even here, the unstated presumption was that, nearly two years into this administration, it is even relevant to claim that the current situation is the fault of a prior administration.
This president has done so much to increase deficits and national debt, empower unions, interfere with business, and much, much more to create uncertainty in the business world, that it's simply impossible, in one question, to cover all the ways in which he and his administration have caused severe economic damage.
Thus, I don't have any confidence that my honest opinions and reflections of reality will be taken seriously. They will, no doubt, like others of my ilk, be spun positively by the liberal management of CNBC, the better to let the president evade responsibility for his actions, claim misunderstanding by voters, and generally be handled with kid gloves by his adoring, friendly host.
Furthermore, CNBC's ads for the event bill it as "America's CEO answers his shareholders," or some such verbiage. But this president has zero business experience or acumen. I don't think anyone, even on his own staff, believes that he knows the first thing about economics or business. Thus, having an event devoted to his taking questions and expounding on these topics is, by definition, a waste of time. You'd be better off having his economic council members, Treasury Secretary, et.al, show up, because at least they are supposed to know something about business. Although none of them, either, as Bernie Marcus noted on CNBC this morning, have skin in the game, or relevant experience, either. But, seriously, can you really believe an hour or more with this president will bring forth any statements of economic insight, or business sense? I rather doubt it.
I wouldn't waste my time on that program, and suggest you not, either. At best, it's a home field love fest for this administration. At worst, it's going to be a free campaign appearance by the president with the intent of rescuing his party's fortunes in the upcoming Congressional elections.
A Reminder On The Ineffectiveness of Basel Capital Requirements
George Melloan, a former Wall Street Journal staffer, made a useful point in his editorial which appeared in Tuesday's edition.
Entitled Basel's Capital Illusion, Melloan notes that, while more capital certainly won't be a bad thing for US and other large banks, nobody should infer that the new capital requirements will prevent any further financial sector problems.
That's because, as Melloan points out, the US financial meltdown was caused by government policies aimed at "affordable housing" beginning twenty years ago.
Though many in the federal government are loathe to acknowledge this fact, the private sector banks only followed the lead of Fannie Mae, Freddie Mac and numerous CRA threats in lending to questionable borrowers. Mortgage banks such as Countrywide, too, only followed in the wake of the GSEs' securitization of low-quality mortgages.
Melloan reminds us that none other than Bill Clinton waived the Basel requirements for Freddie and Fannie because they were engaged in implementing federal policies to encourage more people with lower incomes to become homeowners. He writes,
"This was a laudable goal that ultimately wrecked the housing and banking industries."
Between Alan Greenspan's Fed reducing interest rates to absurdly low levels, and holding them there, while the GSEs revved up the private financial sector's institutions to originate mortgages, upstream them to Fannie and Freddie, then distribute them as private-labeled MBSs, large volumes of toxic, low-quality mortgages came to pollute global investment markets.
New Basel accords won't prevent any of that sort of governmental policy mistakes from tanking our financial sector in the future.
Entitled Basel's Capital Illusion, Melloan notes that, while more capital certainly won't be a bad thing for US and other large banks, nobody should infer that the new capital requirements will prevent any further financial sector problems.
That's because, as Melloan points out, the US financial meltdown was caused by government policies aimed at "affordable housing" beginning twenty years ago.
Though many in the federal government are loathe to acknowledge this fact, the private sector banks only followed the lead of Fannie Mae, Freddie Mac and numerous CRA threats in lending to questionable borrowers. Mortgage banks such as Countrywide, too, only followed in the wake of the GSEs' securitization of low-quality mortgages.
Melloan reminds us that none other than Bill Clinton waived the Basel requirements for Freddie and Fannie because they were engaged in implementing federal policies to encourage more people with lower incomes to become homeowners. He writes,
"This was a laudable goal that ultimately wrecked the housing and banking industries."
Between Alan Greenspan's Fed reducing interest rates to absurdly low levels, and holding them there, while the GSEs revved up the private financial sector's institutions to originate mortgages, upstream them to Fannie and Freddie, then distribute them as private-labeled MBSs, large volumes of toxic, low-quality mortgages came to pollute global investment markets.
New Basel accords won't prevent any of that sort of governmental policy mistakes from tanking our financial sector in the future.
Thursday, September 16, 2010
Larry Summers On CNBC This Morning
I'm sitting here having a hard time believing what I heard out of Larry Summers' mouth for the past 10 or so minutes.
Summers' credentials as an economist have led him to a professional life split between Harvard University and various federal government administrations.
But this morning, Summers put the 'political' back into political economy, the original name of his chosen field of study.
In answer to all sorts of questions, Summers pounded away with just these themes,
-This administration is committed to fixing the disaster brought about by the last one which was solely a function of financial deregulation.
-There are pictures of Treasury Secretaries of former administrations sawing...SAWING....regulations in half. Clearly, this alone led to the 2007-08 financial meltdown.
-There are people in banks who have constructed algorithms to maximize the number of customers who will overdraw their account and, thus, pay overdraft fees. Their days are numbered.
-This administration will work with anyone from the other end of Pennsylvania Avenue who wants to meet our goal of doubling exports in five years.
It's hard to know where to start debunking Summers' obvious untruthful statements. In a post appearing tomorrow, I cite George Melloan's recent Wall Street Journal article noting that the Basel Accord's latest bank capital rules won't change the fact that the recent financial sector crisis was initiated by governmental agency actions involving risky home loans to lower income individuals.
Summers' contentions to the contrary, deregulation had nothing to do with the recent crisis. In fact, then-existing regulators had sufficient powers and obligations to have prevented, or at least identified, the crisis while it was building. They did not. This had nothing to do with their regulatory power.
Larry's wrong.
It's hard to understand, per Summers' statements, how some people "writing algorithms" at money center banks, can thus trigger overdrafts by individual consumers. But that's what Larry contends.
Again, Larry's wrong.
Finally, Summers baldfacedly misrepresented this administration's openness to the economic ideas of others. It's reasonable to believe that, right now, most Americans, including business owners and investors, think that job creation in the US should be government's economic priority. Whether that involves exports should be a decision left up to the companies which may elect to grow through exports.
Regardless of that, the administration's record for the past 19 months has been to ignore any ideas from the other political party, or those which weren't originated in the White House.
Jim Nussle, the guest host on CNBC in the final hour this morning, and a former budget director, rushed to say, immediately after Summers went off-air, words to the effect,
'Yes, just let Larry Summers direct the economy and choose investment priorities from Washington. That'll work.'
Nussle's glib comment underscored the reality of Summers' remarks. When Larry wasn't ignoring the truth, he was engaged in centralized planning of the worst sort.
Summers' credentials as an economist have led him to a professional life split between Harvard University and various federal government administrations.
But this morning, Summers put the 'political' back into political economy, the original name of his chosen field of study.
In answer to all sorts of questions, Summers pounded away with just these themes,
-This administration is committed to fixing the disaster brought about by the last one which was solely a function of financial deregulation.
-There are pictures of Treasury Secretaries of former administrations sawing...SAWING....regulations in half. Clearly, this alone led to the 2007-08 financial meltdown.
-There are people in banks who have constructed algorithms to maximize the number of customers who will overdraw their account and, thus, pay overdraft fees. Their days are numbered.
-This administration will work with anyone from the other end of Pennsylvania Avenue who wants to meet our goal of doubling exports in five years.
It's hard to know where to start debunking Summers' obvious untruthful statements. In a post appearing tomorrow, I cite George Melloan's recent Wall Street Journal article noting that the Basel Accord's latest bank capital rules won't change the fact that the recent financial sector crisis was initiated by governmental agency actions involving risky home loans to lower income individuals.
Summers' contentions to the contrary, deregulation had nothing to do with the recent crisis. In fact, then-existing regulators had sufficient powers and obligations to have prevented, or at least identified, the crisis while it was building. They did not. This had nothing to do with their regulatory power.
Larry's wrong.
It's hard to understand, per Summers' statements, how some people "writing algorithms" at money center banks, can thus trigger overdrafts by individual consumers. But that's what Larry contends.
Again, Larry's wrong.
Finally, Summers baldfacedly misrepresented this administration's openness to the economic ideas of others. It's reasonable to believe that, right now, most Americans, including business owners and investors, think that job creation in the US should be government's economic priority. Whether that involves exports should be a decision left up to the companies which may elect to grow through exports.
Regardless of that, the administration's record for the past 19 months has been to ignore any ideas from the other political party, or those which weren't originated in the White House.
Jim Nussle, the guest host on CNBC in the final hour this morning, and a former budget director, rushed to say, immediately after Summers went off-air, words to the effect,
'Yes, just let Larry Summers direct the economy and choose investment priorities from Washington. That'll work.'
Nussle's glib comment underscored the reality of Summers' remarks. When Larry wasn't ignoring the truth, he was engaged in centralized planning of the worst sort.
Why Isn't Michael Porter Emeritus Yet?
I just saw Harvard's Michael Porter on CNBC this morning.
Frankly, it's beyond me why they keep trotting out a guy who's clearly in his dotage. I guess name recognition, although I'm unaware of any recent work of originality or import that Porter's done in at least a decade.
And even his long-ago strategy books were derivative of SPI's research and existing data, crossed with conventional microeconomics.
However, this morning's appearance provided fresh evidence of Porter's irrelevance to today's economic debates.
Carlos whatshisname, the co-anchor on assignment in Boston today, listened raptly as Mike solemnly declared that the big economic question of the day is whether the free market approach works for everyone.
As an aside, to show how totally out of touch Porter is with America, he gratuitously stated,
'You'd be amazed at how many people in America still want to start their own business.'
No, Mike, I, and millions of other educated Americans, would not be amazed. Apparently, only you and your Harvard colleagues are amazed. Amazed that one of the two founding liberties of the nation- religion and vocation- are alive and well as aspirations even today.
Porter then went on to assert that 'we are debating' whether more free markets or more government intervention is 'the right answer' to the 'problem' that starting a business has become so burdensome and complex, thanks to, ah.....so much existing government intervention.
When asked what "the right answer is," by Carlos, Mike replied, as you'd expect, grinning,
'Well, it's really a mix of the two.'
Gee, why am I not surprised? Pick the safe middle ground.
Honestly, Porter seemed completely out of touch with the real world of American business and government regulatory interference.
Unfortunately, CNBC apparently didn't choose to interview the Harvard professor who co-wrote a provocative recent Wall Street Journal piece reporting the results of empirical research on different governmental fiscal policies. No surprise that his work found lower taxes and governmental spending were associated with higher GDP growth.
Isn't if odd- maybe amazing, to quote Porter- that the two most prominent business phenomena associated with Harvard didn't come from it's business school? I'm referring, of course, to Bill Gates, who dropped out of Harvard undergrad, and Mark Zuckerberg, who co-founded Facebook as a Harvard undergrad.
If he's not emeritus yet, Porter probably should be now.
Frankly, it's beyond me why they keep trotting out a guy who's clearly in his dotage. I guess name recognition, although I'm unaware of any recent work of originality or import that Porter's done in at least a decade.
And even his long-ago strategy books were derivative of SPI's research and existing data, crossed with conventional microeconomics.
However, this morning's appearance provided fresh evidence of Porter's irrelevance to today's economic debates.
Carlos whatshisname, the co-anchor on assignment in Boston today, listened raptly as Mike solemnly declared that the big economic question of the day is whether the free market approach works for everyone.
As an aside, to show how totally out of touch Porter is with America, he gratuitously stated,
'You'd be amazed at how many people in America still want to start their own business.'
No, Mike, I, and millions of other educated Americans, would not be amazed. Apparently, only you and your Harvard colleagues are amazed. Amazed that one of the two founding liberties of the nation- religion and vocation- are alive and well as aspirations even today.
Porter then went on to assert that 'we are debating' whether more free markets or more government intervention is 'the right answer' to the 'problem' that starting a business has become so burdensome and complex, thanks to, ah.....so much existing government intervention.
When asked what "the right answer is," by Carlos, Mike replied, as you'd expect, grinning,
'Well, it's really a mix of the two.'
Gee, why am I not surprised? Pick the safe middle ground.
Honestly, Porter seemed completely out of touch with the real world of American business and government regulatory interference.
Unfortunately, CNBC apparently didn't choose to interview the Harvard professor who co-wrote a provocative recent Wall Street Journal piece reporting the results of empirical research on different governmental fiscal policies. No surprise that his work found lower taxes and governmental spending were associated with higher GDP growth.
Isn't if odd- maybe amazing, to quote Porter- that the two most prominent business phenomena associated with Harvard didn't come from it's business school? I'm referring, of course, to Bill Gates, who dropped out of Harvard undergrad, and Mark Zuckerberg, who co-founded Facebook as a Harvard undergrad.
If he's not emeritus yet, Porter probably should be now.
Tim Geithner On Economics
Monday's edition of the Wall Street Journal published a news article entitled Geithner Warns of Risk of Washington Inertia.
Citing the Treasury Secretary as concerned about sluggish US economic performance due to a lack of federal action, the piece states,
"He said the U.S. can no longer rely on consumer spending, which has long powered the economy, to be the growth engine that leads the recovery this time around and said Washington needed to plant the seeds for investment and exports."
If that passage doesn't chill the blood of US private sector business people, what will?
Thinking that perhaps Geithner is, unbeknownst to me, an economic sage, I checked his educational background. His undergraduate degree was in international and Asian studies. The closest thing to a PhD in Economics he possesses is an MA in International Economics from the Johns Hopkins School of Advanced International Studies. I think it's fair to characterize that as more of a political science degree, and less of a hardcore macroeconomic or microeconomic degree.
Thus, Geithner would not appear to have academic credentials to utter credible pronouncements on the seismic shift in drivers of the US economy.
As a former manager of functions and departments in several companies, including consulting firms, I'm used to making decisions involving matters on which I may not have personal academic expertise.
For those situations, I do what most effective managers do. I ask questions, identify assumptions and uncertainties, gather information from credible sources, and choose an option.
In this blog, I've often opined on economic matters, but only in light of, and with explicit references to the views of and evidence provided by esteemed, degreed, generally respected economists.
It causes me more concern than I have already had regarding Geithner that he issues silly, apparently unsubstantiated statements as if they were established or empirically-supported economic fact. No reference to the work of legitimate economists.
Instead, we have the Treasury Secretary simply declaring a preference for government-directed spending on investment and exports. Meaning that he believes a few Washington bureaucrats, elected and/or appointed, are more capable of directing our nation's economic resources than are the millions of investors and business people to whom those resources they ultimately belong.
Very scary stuff, indeed.
Citing the Treasury Secretary as concerned about sluggish US economic performance due to a lack of federal action, the piece states,
"He said the U.S. can no longer rely on consumer spending, which has long powered the economy, to be the growth engine that leads the recovery this time around and said Washington needed to plant the seeds for investment and exports."
If that passage doesn't chill the blood of US private sector business people, what will?
Thinking that perhaps Geithner is, unbeknownst to me, an economic sage, I checked his educational background. His undergraduate degree was in international and Asian studies. The closest thing to a PhD in Economics he possesses is an MA in International Economics from the Johns Hopkins School of Advanced International Studies. I think it's fair to characterize that as more of a political science degree, and less of a hardcore macroeconomic or microeconomic degree.
Thus, Geithner would not appear to have academic credentials to utter credible pronouncements on the seismic shift in drivers of the US economy.
As a former manager of functions and departments in several companies, including consulting firms, I'm used to making decisions involving matters on which I may not have personal academic expertise.
For those situations, I do what most effective managers do. I ask questions, identify assumptions and uncertainties, gather information from credible sources, and choose an option.
In this blog, I've often opined on economic matters, but only in light of, and with explicit references to the views of and evidence provided by esteemed, degreed, generally respected economists.
It causes me more concern than I have already had regarding Geithner that he issues silly, apparently unsubstantiated statements as if they were established or empirically-supported economic fact. No reference to the work of legitimate economists.
Instead, we have the Treasury Secretary simply declaring a preference for government-directed spending on investment and exports. Meaning that he believes a few Washington bureaucrats, elected and/or appointed, are more capable of directing our nation's economic resources than are the millions of investors and business people to whom those resources they ultimately belong.
Very scary stuff, indeed.
Wednesday, September 15, 2010
This Is Banking Leadership? Moynihan's "Strategy" for BofA
Yesterday's Wall Street Journal covered BofA Brian Moynihan's earth-shaking new strategy for the financial utility. According to the article, Moynihan's brilliant conception,
"revolves around cross-selling to customers, companies and institutional investors who interact with the retail, corporate and wealth-management parts of the bank."
Wow! Deep, stunning stuff, isn't it?
In fairness to Moynihan, in about nine months he's been able to at least articulate one of money center banking's oldest standby strategies, which is considerably more than the hapless Vik Pandit of Citigroup has ever managed.
In admitting his stroke of genius "is just hard work," and nothing fancy, I think Moynihan has made a good case for his current $800K cash compensation to be substantially reduced in this and future years.
While the Journal piece quotes a typical analyst claiming that BofA is poised for juicy growth and returns due to its having banking relationships with half of the households in America, and any economic uplift will propel it to stellar performance, I'm not so sure.
We are in an era of financial utilities. The era of reckless growth of large commercial banks, at any price, and risk, is apparently over. With little ability to pump the few growing subsectors of finance while ignoring risks, it's unlikely that banking has the same future potential for consistently superior total returns that some members of the sector experienced in the past decades.
When regulators and new laws have proscribed so much of behaviors which led to unsustained growth of financial institutions in past years, it's hard to see how that growth will continue in the future.
Frankly, you could put a mediocre manager in terms of any of the three remaining US money centers- Chase, Citigroup or BofA- and, for that matter, Wells Fargo, too, and probably not notice any difference from current management.
Moynihan's choice of the retread approach of cross-selling and efficient operations have never actually provided any financial institution with consistently superior total returns in the past. Every institution which tried them, including James Robinson's American Express and Sandy Weill's Citigroup, failed miserably and expensively.
Moynihan's appointment as BofA CEO, and subsequent recycling of the oldest, dullest "strategies" in commercial banking, illustrates the bankruptcy of ideas in the sector, the lack of alternatives, and the reliance on old, failed approaches.
Too bad none of the nation's four largest bank CEOs, and their managements, can admit that US commercial banking just isn't, and shouldn't be, a high-growth sector anymore. Such growth doesn't come without risk, and, as protected, publicly-insured institutions, it's inappropriate for them to attempt such growth any longer.
"revolves around cross-selling to customers, companies and institutional investors who interact with the retail, corporate and wealth-management parts of the bank."
Wow! Deep, stunning stuff, isn't it?
In fairness to Moynihan, in about nine months he's been able to at least articulate one of money center banking's oldest standby strategies, which is considerably more than the hapless Vik Pandit of Citigroup has ever managed.
In admitting his stroke of genius "is just hard work," and nothing fancy, I think Moynihan has made a good case for his current $800K cash compensation to be substantially reduced in this and future years.
While the Journal piece quotes a typical analyst claiming that BofA is poised for juicy growth and returns due to its having banking relationships with half of the households in America, and any economic uplift will propel it to stellar performance, I'm not so sure.
We are in an era of financial utilities. The era of reckless growth of large commercial banks, at any price, and risk, is apparently over. With little ability to pump the few growing subsectors of finance while ignoring risks, it's unlikely that banking has the same future potential for consistently superior total returns that some members of the sector experienced in the past decades.
When regulators and new laws have proscribed so much of behaviors which led to unsustained growth of financial institutions in past years, it's hard to see how that growth will continue in the future.
Frankly, you could put a mediocre manager in terms of any of the three remaining US money centers- Chase, Citigroup or BofA- and, for that matter, Wells Fargo, too, and probably not notice any difference from current management.
Moynihan's choice of the retread approach of cross-selling and efficient operations have never actually provided any financial institution with consistently superior total returns in the past. Every institution which tried them, including James Robinson's American Express and Sandy Weill's Citigroup, failed miserably and expensively.
Moynihan's appointment as BofA CEO, and subsequent recycling of the oldest, dullest "strategies" in commercial banking, illustrates the bankruptcy of ideas in the sector, the lack of alternatives, and the reliance on old, failed approaches.
Too bad none of the nation's four largest bank CEOs, and their managements, can admit that US commercial banking just isn't, and shouldn't be, a high-growth sector anymore. Such growth doesn't come without risk, and, as protected, publicly-insured institutions, it's inappropriate for them to attempt such growth any longer.
Tuesday, September 14, 2010
US vs. Health Insurers: Why It's Tough To Analyze Sectors/Companies Now
Wisconsin Republican House member Paul Ryan co-wrote an editorial in the Wall Street Journal yesterday contending,
"Every day, more see that the road to serfdom in America does not involve a knock in the night or a jack-booted thug. It starts with smooth-talking politicians offering seemingly innocuous compromises....."
"Every day, more see that the road to serfdom in America does not involve a knock in the night or a jack-booted thug. It starts with smooth-talking politicians offering seemingly innocuous compromises....."
Yet, on the opposite page that morning, in the lead staff editorial, entitled Sebelius Has a List, the Journal's own countered Ryan's contention.
Moreover, that lead staff editorial offers yet another example to explain, again, why my own posts of the past few years have become less strategy-focused, and much more politically- and macroeconomically-focused.
The editorial suggested,
"Witness Kathleen Sebelius's Thursday letter to America's Health Insurance Plans, the industry trade group- a thuggish message even by her standards. The Health and Human Services secretary wrote that some insurers have been attributing part of their 2011 premium increases to ObamaCare and warned that "there will be zero tolerance for this type of misinformation and unjustified rate increases."
Zero tolerance for expressing an opinion, or offering an explanation to policyholders? They're more subtle than this in Caracas."
And that, dear readers, provides the example. Look at how much qualified judgment is evident in Sebelius' letter? She and her minions deny that ObamaCare is putting pressure on insurers' costs, despite prior admissions of same by the president. Further, she finds, a priori, that any attempt by insurers to communicate these truths to customers or investors will be judged as "misinformation," the accompanying rate increases "unjustified."
As I wrote here recently in my companion political blog, Massachusetts' own insurance commissioner was against similar moves by that state's governor. It seems that many senior bureaucrats forget that when they move to cap and/or control insurers' rates and revenues, they unwittingly threaten the solvency of same, and their ability to actually pay legitimate claims.
Oooops!
But you can see how Paul Ryan may be a bit myopic, or simply optimistic.
It seems that the jack-booted state is alive and well at HHS. And this type of capricious regulatory punishment of private sector firms is why strategy matters so much less today than it used to, while perceived political correctness, singing the party line, and generally avoiding political persecution and prosecution is the new order of the day for American business.
Monday, September 13, 2010
US Debt Levels & Interest Rates
Jason Trennert wrote an interesting little editorial in Friday's Wall Street Journal reminding us of the nature of short-term funding, and the folly of relying on it.
He ends his piece with a quote from Hemingway,
"In this context, it might be wise to remember Hemingway's Mike Campbell from "The Sun Also Rises," who, when asked how he went bankrupt, responded, "Gradually, then suddenly." "
Trennert is doing us all a service by reminding us of what happened to Bear Stearns and Lehman. When markets lose confidence, what was gradual bankruptcy, often in the form of higher interest rates and shorter lending maturities, suddenly becomes no funding at all.
He notes that the US Treasury has shortened our funding cycle to the point that we now owe "$5.2 trillion due in the next three years out of the $8.3 trillion outstanding."
That's more than 60% of our total outstanding debt, with much more being anticipated from increased deficits in the coming years.
Trennert also tells us that the current weighted-average funding cost is 1.21%- an absurdly low rate for the condition of the US government's financial situation. Much of that ultra-low rate is due, no doubt, to two factors. One, the massive holdings of US dollar-denominated debt by global investors, so that they can't easily just stampede out of dollars. And the lack of a viable, liquid alternative of sufficient capacity to absorb inflows if/when dollars are dumped.
Trennert notes, sagely,
"But the time to secure long-term funding is when you can and it is mildly expensive, not when you have to and the costs are exorbitant."
Or worse, you have to, and there is no cost at which you can extend your debt maturities.
To begin cutting our debt levels, the US will have to either save more, invest less. Both of these will slowly erode our GDP growth rates.
But continuing to rely on global investors to absorb ever more US debt with no end in sight is foolish.
Our current administration may, or may not, as Trennert points out, be using short-term funding to disguise the real costs of debt. But reliance on such short-term funding is ill-advised and too risky when betting on the ability to continue to place US debt while increasing its deficits.
But recent average 5-year note rates are 3.77%, roughly triple the current weighted-average, which would add $133 billion to the US government's annual interest rate bill.
He ends his piece with a quote from Hemingway,
"In this context, it might be wise to remember Hemingway's Mike Campbell from "The Sun Also Rises," who, when asked how he went bankrupt, responded, "Gradually, then suddenly." "
Trennert is doing us all a service by reminding us of what happened to Bear Stearns and Lehman. When markets lose confidence, what was gradual bankruptcy, often in the form of higher interest rates and shorter lending maturities, suddenly becomes no funding at all.
He notes that the US Treasury has shortened our funding cycle to the point that we now owe "$5.2 trillion due in the next three years out of the $8.3 trillion outstanding."
That's more than 60% of our total outstanding debt, with much more being anticipated from increased deficits in the coming years.
Trennert also tells us that the current weighted-average funding cost is 1.21%- an absurdly low rate for the condition of the US government's financial situation. Much of that ultra-low rate is due, no doubt, to two factors. One, the massive holdings of US dollar-denominated debt by global investors, so that they can't easily just stampede out of dollars. And the lack of a viable, liquid alternative of sufficient capacity to absorb inflows if/when dollars are dumped.
Trennert notes, sagely,
"But the time to secure long-term funding is when you can and it is mildly expensive, not when you have to and the costs are exorbitant."
Or worse, you have to, and there is no cost at which you can extend your debt maturities.
To begin cutting our debt levels, the US will have to either save more, invest less. Both of these will slowly erode our GDP growth rates.
But continuing to rely on global investors to absorb ever more US debt with no end in sight is foolish.
Our current administration may, or may not, as Trennert points out, be using short-term funding to disguise the real costs of debt. But reliance on such short-term funding is ill-advised and too risky when betting on the ability to continue to place US debt while increasing its deficits.
But recent average 5-year note rates are 3.77%, roughly triple the current weighted-average, which would add $133 billion to the US government's annual interest rate bill.
Friday, September 10, 2010
Where The Fed Has Led Us
Yesterday's Wall Street Journal's lead editorial on the Opinion page consisted of a number of economists' ruminations on what the Fed should do next.
First, let me note how refreshing it is to see real economists polled, rather, as often is the case, see the co-anchors on CNBC ask everybody who troops onto their set whether we'll see a double dip economy, or not?
The likes of John B. Taylor, of the famous Taylor Rule for monetary policy, Richard Fisher (Dallas Fed President), Frederic Mishkin ((former Fed Governor), Ron McKinnon, Vincent Reinhart and Alan Meltzer are an impressive group from which to read comments on the topic.
But what struck me more than any single comment from these accredited economic sages is simply the horrifying situation in which Helicopter Ben and his predecessor, Alan Greenspan, have placed the US economy.
As an adult, I lived through the Volcker years. As a very aware teen, I recall William Martin's and Arthur Burns' inept accommodations to LBJ and Nixon, then G. William Miller's hamhanded attempts at running the Fed, mercifully for only a little more than a year.
After Volcker's superb, calm reign in the wake of his bungling predecessors, you'd think we'd permanently learned some lessons about monetary policy, wouldn't you?
But, no, we haven't.
So we are now in the bizarre situation of nearly repeating the 1930s: low rates and a flat economy.
Isn't anyone besides these economist worried about the repeat of the last few years, in which banks funded lousy investments due to the absurdly low cost of capital? Didn't we learn anything from Greenspan's pumping the housing sector with ultra-low rates?
And what about the ridiculously large Fed balance sheet at a time when we're funding our government debt overseas? How's that not fungible? The Fed doesn't create money out of thin air, you know. Right now, it's monetizing bad loans like crazy. The net result is our government, whether through the Fed or Treasury, is issuing fully-valued debt overseas to buy over-valued instruments domestically.
Borrow to buy high.....sound smart to you? Me neither.
Looking beyond the trees of individual economists' advice on whither next for Ben & Co., it's scary to see that forest.
A sluggish, slowly, if at all, recovering economy, too-low rates, too large Fed balance sheet, huge Federal debt, spending and deficits, with a politically-intimidated private sector scared by encroaching regulatory and legislative actions and uncertainty.
Whatever the Fed does next probably won't be sufficient, on its own, to lead us back to healthier interest rate levels in a vibrant, growing, low-inflation economy.
First, let me note how refreshing it is to see real economists polled, rather, as often is the case, see the co-anchors on CNBC ask everybody who troops onto their set whether we'll see a double dip economy, or not?
The likes of John B. Taylor, of the famous Taylor Rule for monetary policy, Richard Fisher (Dallas Fed President), Frederic Mishkin ((former Fed Governor), Ron McKinnon, Vincent Reinhart and Alan Meltzer are an impressive group from which to read comments on the topic.
But what struck me more than any single comment from these accredited economic sages is simply the horrifying situation in which Helicopter Ben and his predecessor, Alan Greenspan, have placed the US economy.
As an adult, I lived through the Volcker years. As a very aware teen, I recall William Martin's and Arthur Burns' inept accommodations to LBJ and Nixon, then G. William Miller's hamhanded attempts at running the Fed, mercifully for only a little more than a year.
After Volcker's superb, calm reign in the wake of his bungling predecessors, you'd think we'd permanently learned some lessons about monetary policy, wouldn't you?
But, no, we haven't.
So we are now in the bizarre situation of nearly repeating the 1930s: low rates and a flat economy.
Isn't anyone besides these economist worried about the repeat of the last few years, in which banks funded lousy investments due to the absurdly low cost of capital? Didn't we learn anything from Greenspan's pumping the housing sector with ultra-low rates?
And what about the ridiculously large Fed balance sheet at a time when we're funding our government debt overseas? How's that not fungible? The Fed doesn't create money out of thin air, you know. Right now, it's monetizing bad loans like crazy. The net result is our government, whether through the Fed or Treasury, is issuing fully-valued debt overseas to buy over-valued instruments domestically.
Borrow to buy high.....sound smart to you? Me neither.
Looking beyond the trees of individual economists' advice on whither next for Ben & Co., it's scary to see that forest.
A sluggish, slowly, if at all, recovering economy, too-low rates, too large Fed balance sheet, huge Federal debt, spending and deficits, with a politically-intimidated private sector scared by encroaching regulatory and legislative actions and uncertainty.
Whatever the Fed does next probably won't be sufficient, on its own, to lead us back to healthier interest rate levels in a vibrant, growing, low-inflation economy.
Thursday, September 09, 2010
Those Pesky Bank-Held Mortgages
Andy Kessler, a periodically-published editorialist in the Wall Street Journal and former hedge fund manager, wrote a piece at the end of August entitled TARP and the Continuing Problem of Toxic Assets.
Leaving aside recent better-than-expected housing data, and Kessler's own wacky, unworkable ideas for handling the problem assets, he did a service by reminding readers that the problem remains with us.
In his editorial, he wrote,
"Home sales dropped 27% from a year ago July to a 3.83 million annual rate, which was blamed on the May expiration of the $8,000 home buyer's tax credit. Dig deeper and its even scarier. Existing home inventory (the number of homes for sale) now stands at four million units- that's a 12.5-month supply versus the average 6.2-month supply since 1999. As late as 2005, home inventory was just 2.5 million. Using that as a baseline or normal number, there are now around 1.5 million "extra" homes on the market that are not selling and either empty or soon to be foreclosed.
And those toxic mortgage assets? As far as I can tell, most are still there, valued at "mark to wish" since the Financial Accounting Standards Board's relaxation of "mark to market" accounting rules. Who knows what they're really worth? The stock market is guessing not much, sending finance stocks like Bank of America, Wells Fargo and even J.P.Morgan down close to 52-week lows.
...without a housing turnaround, jobs in construction, decoration, mortgage banking, auto sales and finance will stay in the doldrums. Delinquency rates, which are a leading indicator of foreclosures, are on the rise. According to the latest Mortgage Bankers Association survey, in the second quarter, prime adjustable-rate mortgage (ARM) delinquency rates rose to 9.3%, with prime fixed-rate mortgages seeing delinquencies up 4.75%. On the subprime side, ARM delinquencies hit 30.9% with fixed at 22.5%.
This is not good for banks that still own toxic assets of any type of mortgage, subprime or not. If home prices fall further, and I can't see too many scenarios where they won't, these toxic assets are all set to drop in value. At some point, buyers of bank debt will get nervous. If this toxic sludge were sitting on a shelf at the Treasury or Fed, it really wouldn't matter. But, instead, even a small uptick in foreclosures could take down the banking system- again."
Let's recall that major banks halted foreclosures in early 2009 due to coercion by the incoming administration. Having been forced to take TARP funds only months earlier, all the major money center banks were pretty much vulnerable to such intimidation.
That doesn't mean they don't still hold the toxic stuff, as Kessler reminds us. And that, with a continuing weak housing market, the toxic mortgages remain impaired, and could easily become worse.
At this point, I don't really think there are any better solutions than forcing banks back to "mark to market" valuations. None of Kessler's various sleight-of-hand suggestions for fixing the problem seem reasonable or feasible.
To me, this all leads back to employment. Not the construction- and housing-related employment to which Kessler referred, but the simple notion that, without an imminent, healthy expansion of non-government, non-stimulus-sourced, genuine private sector jobs, the housing sector, and toxic mortgages, will continue to ail, then grow worse.
Eventually, if that happens, it's going to affect equity values- again.
There's no long term substitute for letting asset values find their own, real, un-manipulated value. Nearly two years' worth of government subsidies, coercion and other actions to try to wave a magic wand over housing prices and related mortgage values have all failed to fix anything. For that, we'll finally have to just let housing values and their associated mortgages find real, market-based values. Until then, nobody will really believe current 'values' anyway. Certainly not as a basis for long term investments.
Leaving aside recent better-than-expected housing data, and Kessler's own wacky, unworkable ideas for handling the problem assets, he did a service by reminding readers that the problem remains with us.
In his editorial, he wrote,
"Home sales dropped 27% from a year ago July to a 3.83 million annual rate, which was blamed on the May expiration of the $8,000 home buyer's tax credit. Dig deeper and its even scarier. Existing home inventory (the number of homes for sale) now stands at four million units- that's a 12.5-month supply versus the average 6.2-month supply since 1999. As late as 2005, home inventory was just 2.5 million. Using that as a baseline or normal number, there are now around 1.5 million "extra" homes on the market that are not selling and either empty or soon to be foreclosed.
And those toxic mortgage assets? As far as I can tell, most are still there, valued at "mark to wish" since the Financial Accounting Standards Board's relaxation of "mark to market" accounting rules. Who knows what they're really worth? The stock market is guessing not much, sending finance stocks like Bank of America, Wells Fargo and even J.P.Morgan down close to 52-week lows.
...without a housing turnaround, jobs in construction, decoration, mortgage banking, auto sales and finance will stay in the doldrums. Delinquency rates, which are a leading indicator of foreclosures, are on the rise. According to the latest Mortgage Bankers Association survey, in the second quarter, prime adjustable-rate mortgage (ARM) delinquency rates rose to 9.3%, with prime fixed-rate mortgages seeing delinquencies up 4.75%. On the subprime side, ARM delinquencies hit 30.9% with fixed at 22.5%.
This is not good for banks that still own toxic assets of any type of mortgage, subprime or not. If home prices fall further, and I can't see too many scenarios where they won't, these toxic assets are all set to drop in value. At some point, buyers of bank debt will get nervous. If this toxic sludge were sitting on a shelf at the Treasury or Fed, it really wouldn't matter. But, instead, even a small uptick in foreclosures could take down the banking system- again."
Let's recall that major banks halted foreclosures in early 2009 due to coercion by the incoming administration. Having been forced to take TARP funds only months earlier, all the major money center banks were pretty much vulnerable to such intimidation.
That doesn't mean they don't still hold the toxic stuff, as Kessler reminds us. And that, with a continuing weak housing market, the toxic mortgages remain impaired, and could easily become worse.
At this point, I don't really think there are any better solutions than forcing banks back to "mark to market" valuations. None of Kessler's various sleight-of-hand suggestions for fixing the problem seem reasonable or feasible.
To me, this all leads back to employment. Not the construction- and housing-related employment to which Kessler referred, but the simple notion that, without an imminent, healthy expansion of non-government, non-stimulus-sourced, genuine private sector jobs, the housing sector, and toxic mortgages, will continue to ail, then grow worse.
Eventually, if that happens, it's going to affect equity values- again.
There's no long term substitute for letting asset values find their own, real, un-manipulated value. Nearly two years' worth of government subsidies, coercion and other actions to try to wave a magic wand over housing prices and related mortgage values have all failed to fix anything. For that, we'll finally have to just let housing values and their associated mortgages find real, market-based values. Until then, nobody will really believe current 'values' anyway. Certainly not as a basis for long term investments.
Wednesday, September 08, 2010
New Revelations On Lehman's Funding Tactics
Yesterday's Wall Street Journal contained an article by Peter Eavis in the Heard On The Street column entitled Lehman's Flighty Funding Lesson.
If true, what Eavis contends is that Lehman was misleading lenders and regulators for months prior to its collapse. In fact, apparently as early as February of that year, just prior to Bear Stearns' demise. Among its moves were securitizing junk collateral to pass it off as better-quality for loans from Chase, as well as the Treasury's Primary Dealer Credit Facility.
A Chase executive pointedly alleged that Lehman knew it substantially overstated the value of the illiquid, underlying instruments in the collateral securities.
The Journal article quotes from a June, 2008 email written by then-New York Fed senior official William Dudley,
"I think without the PDCF, Lehman might have experienced a full-blown liquidity crisis."
Eavis notes that the recently-passed 'Dodd-Frank' financial regulatory bill is largely silent or vague on the use of repo markets by large, highly-leveraged financial institutions.
This is particularly disturbing, since so much of what occurred in 2007 and 2008 ultimately depended upon excessive leverage in the form of short-term financing.
I've written elsewhere, for years, that the modern broker/dealer is, for all intents and purposes, merely an extension of the broker/dealer lending desk of its creditors, which are typically money center banks.
As such, since said banks all have investment banking units, the separate broker/dealers, when they still existed, were necessarily competing with lower-cost rivals who also funded them. And used less leverage, plus had access to the Fed window and insured consumer deposits.
There aren't any large independent broker/dealers anymore. In part, they failed because, to compete with their lenders, they had to take more risk, which ultimately proved lethal.
But, as Eavis notes, you'd expect the recently-passed regulatory laws to address this. They don't. They essentially allow regulators latitude in how and when to apply limits on various funding sources.
It seems almost comically narrow-minded that the FCIC is just now discovering the essentially fraudulent means by which Lehman managed to survive for its last 6-7 months, but new financial sector regulatory laws were passed months ago. And clearly missed focusing on what we are now learning were key practices which aggravated and worsened the 2007-08 financial markets crisis.
If true, what Eavis contends is that Lehman was misleading lenders and regulators for months prior to its collapse. In fact, apparently as early as February of that year, just prior to Bear Stearns' demise. Among its moves were securitizing junk collateral to pass it off as better-quality for loans from Chase, as well as the Treasury's Primary Dealer Credit Facility.
A Chase executive pointedly alleged that Lehman knew it substantially overstated the value of the illiquid, underlying instruments in the collateral securities.
The Journal article quotes from a June, 2008 email written by then-New York Fed senior official William Dudley,
"I think without the PDCF, Lehman might have experienced a full-blown liquidity crisis."
Eavis notes that the recently-passed 'Dodd-Frank' financial regulatory bill is largely silent or vague on the use of repo markets by large, highly-leveraged financial institutions.
This is particularly disturbing, since so much of what occurred in 2007 and 2008 ultimately depended upon excessive leverage in the form of short-term financing.
I've written elsewhere, for years, that the modern broker/dealer is, for all intents and purposes, merely an extension of the broker/dealer lending desk of its creditors, which are typically money center banks.
As such, since said banks all have investment banking units, the separate broker/dealers, when they still existed, were necessarily competing with lower-cost rivals who also funded them. And used less leverage, plus had access to the Fed window and insured consumer deposits.
There aren't any large independent broker/dealers anymore. In part, they failed because, to compete with their lenders, they had to take more risk, which ultimately proved lethal.
But, as Eavis notes, you'd expect the recently-passed regulatory laws to address this. They don't. They essentially allow regulators latitude in how and when to apply limits on various funding sources.
It seems almost comically narrow-minded that the FCIC is just now discovering the essentially fraudulent means by which Lehman managed to survive for its last 6-7 months, but new financial sector regulatory laws were passed months ago. And clearly missed focusing on what we are now learning were key practices which aggravated and worsened the 2007-08 financial markets crisis.
Tuesday, September 07, 2010
Apple TV Returns
Last Thursday's Wall Street Journal articles discussing Apple's return to television left me with the sense that the company is now too late with too little to make a difference as it typically does in its other specialized digital processing hardware.
When I read that the new Apple TV offering includes Netflix streaming video access, it told me that Apple is accepting the latter's dominance in television-delivered internet-based video content.
That wouldn't seem to bode well for Apple TV's ability to differentiate from other similar video content purchase/storage systems.
Perhaps it's more of a niche-filling strategy, so that the firm offers something in this increasingly hot space.
However, as I noted in this post late last month, Tivo has finally marketed a relatively inexpensive keyboard remote. This will allow viewing of virtually any website through Tivo, which also streams Netflix.
Doesn't this make Apple very late with nothing particularly unique in this product/market space?
I think it does.
When I read that the new Apple TV offering includes Netflix streaming video access, it told me that Apple is accepting the latter's dominance in television-delivered internet-based video content.
That wouldn't seem to bode well for Apple TV's ability to differentiate from other similar video content purchase/storage systems.
Perhaps it's more of a niche-filling strategy, so that the firm offers something in this increasingly hot space.
However, as I noted in this post late last month, Tivo has finally marketed a relatively inexpensive keyboard remote. This will allow viewing of virtually any website through Tivo, which also streams Netflix.
Doesn't this make Apple very late with nothing particularly unique in this product/market space?
I think it does.
Friday, September 03, 2010
California's Unsustainable Pension Burden
To get some idea of what sort of stealth government deficits are looming, it's worth reading California governor Arnold Schwarzenegger's August 27th Wall Street Journal editorial.
Arnold presented a bar chart showing California's past and projected annual retirement costs for public employees rising from roughly $5B in 2007, to $10B in 2013, and more than 20B by 2018.
Reading the list of actions by the state's government favoring public pension gives you a headache.
Meanwhile, the governor presents another graphic showing private sector job losses in the state totally 1.2MM since 2008, while public sector jobs have only barely budged, losing perhaps 10K.
It's difficult to understand how US equity markets can be expected to soar while lurking public sector deficits and excessive spending provide an offsetting drain on economic resources.
If California, once the prized growth engine of the US economy, has fallen into this unsustainable situation, how many other states are in similar straits? Where will the resources come from to provide for these unpaid public sector pension promises?
Federalizing them won't cure anything. It will only encourage more unaffordable pension promises.
It's articles like Arnold's which makes me sceptical that recent equity market rises are also sustainable for more than a few weeks at a time.
Arnold presented a bar chart showing California's past and projected annual retirement costs for public employees rising from roughly $5B in 2007, to $10B in 2013, and more than 20B by 2018.
Reading the list of actions by the state's government favoring public pension gives you a headache.
Meanwhile, the governor presents another graphic showing private sector job losses in the state totally 1.2MM since 2008, while public sector jobs have only barely budged, losing perhaps 10K.
It's difficult to understand how US equity markets can be expected to soar while lurking public sector deficits and excessive spending provide an offsetting drain on economic resources.
If California, once the prized growth engine of the US economy, has fallen into this unsustainable situation, how many other states are in similar straits? Where will the resources come from to provide for these unpaid public sector pension promises?
Federalizing them won't cure anything. It will only encourage more unaffordable pension promises.
It's articles like Arnold's which makes me sceptical that recent equity market rises are also sustainable for more than a few weeks at a time.
Thursday, September 02, 2010
Whither The Equity Markets- Again?
How to interpret the recent roller coaster ride that has been the S&P500 Index?
Yesterday, the index rose over 40 points, to 1080.29. Yet, only four sessions earlier, the S&P closed at 1047.22. Back on June 30, the index closed just under 1031. Then up to nearly 1128 on August 9th.
By our proprietary volatility measure, the index regained in just yesterday all the volatility it had managed to shed since August 12th.
To me, the very fact that volatility has been, well, so volatile, suggests a lack of sufficient confidence in equities at present to underpin belief in a long, steady rise in values.
Plus, if you have followed the various apparent reasons for the equity index's recent lurchings between highs and lows, you, like I, know that the reasons for the declines, i.e., global economic weakness and lingering high US unemployment, are no closer to resolution than they've been for months. By contrast, the market rises seem to be short, sharp and a product of seemingly-myopic fixation on the rise in a few isolated economic indicators.
It's tough to know just when to go short, but the market dynamics, and our signals, suggest that this is the next likely direction for equity prices.
Yesterday, the index rose over 40 points, to 1080.29. Yet, only four sessions earlier, the S&P closed at 1047.22. Back on June 30, the index closed just under 1031. Then up to nearly 1128 on August 9th.
By our proprietary volatility measure, the index regained in just yesterday all the volatility it had managed to shed since August 12th.
To me, the very fact that volatility has been, well, so volatile, suggests a lack of sufficient confidence in equities at present to underpin belief in a long, steady rise in values.
Plus, if you have followed the various apparent reasons for the equity index's recent lurchings between highs and lows, you, like I, know that the reasons for the declines, i.e., global economic weakness and lingering high US unemployment, are no closer to resolution than they've been for months. By contrast, the market rises seem to be short, sharp and a product of seemingly-myopic fixation on the rise in a few isolated economic indicators.
It's tough to know just when to go short, but the market dynamics, and our signals, suggest that this is the next likely direction for equity prices.
Wednesday, September 01, 2010
Gary Kaminsky On Stock Buybacks
Earlier this week, in his co-hosting role on CNBC's noontime program, Gary Kaminsky made a very coherent little presentation which reinforces an aspect of the proprietary equity research on which my equity portfolio selection and 
management strategy is based.
Kaminsky displayed price charts for Intel and Microsoft for the past few years. In each case, he demonstrated that, since each firm's substantial stock buyback programs, their prices had flattened.
I don't recall the exact dates for each equity, but the nearby Yahoo-sourced price chart for INTC, MSFT and the S&P500Index makes the case for the last five year period, within which has been each firm's buyback activity.
All three series are down for the period, with both companies below the S&P, meaning, adjusting for risk of lack of diversification, they've both done significantly worse than the index.
Kaminsky only said that he believes corporate senior managers lack the touch for timing their stock buybacks.
I'll go much, much further, based on my own research.
In a statistically significant sense, stock buybacks shrink capital. Capital growth is related to consistently superior total returns. So are some other fundamental measures, both inputs and performance, which accompany the growth of capital.
Shrinking production inputs is going to get you a low- or no-growth company. Which is why I have not considered either Intel or Microsoft to be a growth company for at least a decade.
That's what's really behind Kaminsky's charts and contention.
More power to him for reminding investors that companies which can't do any better than to shrink shareholder capital aren't going to be succeeding in highly-competitive, growth-oriented product/markets.
management strategy is based.Kaminsky displayed price charts for Intel and Microsoft for the past few years. In each case, he demonstrated that, since each firm's substantial stock buyback programs, their prices had flattened.
I don't recall the exact dates for each equity, but the nearby Yahoo-sourced price chart for INTC, MSFT and the S&P500Index makes the case for the last five year period, within which has been each firm's buyback activity.
All three series are down for the period, with both companies below the S&P, meaning, adjusting for risk of lack of diversification, they've both done significantly worse than the index.
Kaminsky only said that he believes corporate senior managers lack the touch for timing their stock buybacks.
I'll go much, much further, based on my own research.
In a statistically significant sense, stock buybacks shrink capital. Capital growth is related to consistently superior total returns. So are some other fundamental measures, both inputs and performance, which accompany the growth of capital.
Shrinking production inputs is going to get you a low- or no-growth company. Which is why I have not considered either Intel or Microsoft to be a growth company for at least a decade.
That's what's really behind Kaminsky's charts and contention.
More power to him for reminding investors that companies which can't do any better than to shrink shareholder capital aren't going to be succeeding in highly-competitive, growth-oriented product/markets.
Tuesday, August 31, 2010
The SEC's New Board Nomination Rules
Yesterday's lead staff editorial in the Wall Street Journal trumpeted the victory of Saul Alinsky's tactics via the SEC's new, easier rules for union pension funds to force companies to place their board nominees on proxy ballots.
Without going into laborious (pun intended) detail, left-leaning SEC chief Mary Schapiro rammed through criteria owning only 3% of a company's equity for only 3 years in order to nominate up to 25% of a board's membership. The key difference is that, in the past, union pension funds would have had to pay for campaigns and mailings to achieve the same effect. Alinsky was on record as calling the 1960s proxy campaign against Kodak a watershed event.
However, on the same day as the editorial appeared, there was a discussion among some guests on CNBC involving the near-total extinction of institutional buy-and-hold equity strategies.
For better or worse, almost no professional money managers really sit on equity assets for years anymore. It's simply too risky in today's equity market environment.
That would imply that anyone taking advantage of this new SEC ruling is a rather backward, antiquated equity manager.
The Journal editorial alleges that this rule would make companies vulnerable to union coercion to do things like resign membership in the Chamber of Commerce, or explicitly back a government policy or favored administration legislation, regardless of the action's benefit for the company.
First, I think the editorial is a bit over the top on the coercion angle. I think it's legitimate to expect such coercion, but I think it's wrong to believe that companies will simply fold on the issues, or that the union pension nominees will automatically be elected, or, being elected, will be able to force the board and company to do their bidding.
But the SEC's rule, in the context of today's equity management approaches, seems, itself, antiquated.
If very few managers, perhaps even including those managing money for union pension funds, hold that much equity for that long, is the rule even going to be able to be invoked very often?
I've argued in prior posts, found under the "shareholder democracy" and "corporate governance" labels, that the former term is a myth, as currently used.
The only "shareholder democracy" in which I'm interested is one that assures me instant, liquid markets for buying or selling equities. My equity strategy doesn't include corporate actions or board composition in its factors for selections. It actually prohibits me from owning an equity for as long as 3 years in any significant concentration.
So, if most institutional investors hold for significantly less than 3 years, constantly seeking the best potential returns in the equity markets, is the SEC's new proxy rule going to affect those investors and their behaviors?
Supposing that the Journal editorial's implication is correct, and those companies in the crosshairs of union pension funds suffer worse performance and returns, then investors will have already moved out of those companies' equities before the real damage occurs. And, if this happened, in a recurring fashion, won't the union pension fund board nominees begin to be defeated, as their elections are publicly shown to damage shareholder wealth?
In fact, the reality of shorter institutional holding periods, and greater turnover of holdings, pretty much makes slower-moving SEC rules moot, don't they? Investors are buying and selling on a much shorter cycle than the SEC's proxy rules take to change boards.
Maybe this is much ado about nothing.
Without going into laborious (pun intended) detail, left-leaning SEC chief Mary Schapiro rammed through criteria owning only 3% of a company's equity for only 3 years in order to nominate up to 25% of a board's membership. The key difference is that, in the past, union pension funds would have had to pay for campaigns and mailings to achieve the same effect. Alinsky was on record as calling the 1960s proxy campaign against Kodak a watershed event.
However, on the same day as the editorial appeared, there was a discussion among some guests on CNBC involving the near-total extinction of institutional buy-and-hold equity strategies.
For better or worse, almost no professional money managers really sit on equity assets for years anymore. It's simply too risky in today's equity market environment.
That would imply that anyone taking advantage of this new SEC ruling is a rather backward, antiquated equity manager.
The Journal editorial alleges that this rule would make companies vulnerable to union coercion to do things like resign membership in the Chamber of Commerce, or explicitly back a government policy or favored administration legislation, regardless of the action's benefit for the company.
First, I think the editorial is a bit over the top on the coercion angle. I think it's legitimate to expect such coercion, but I think it's wrong to believe that companies will simply fold on the issues, or that the union pension nominees will automatically be elected, or, being elected, will be able to force the board and company to do their bidding.
But the SEC's rule, in the context of today's equity management approaches, seems, itself, antiquated.
If very few managers, perhaps even including those managing money for union pension funds, hold that much equity for that long, is the rule even going to be able to be invoked very often?
I've argued in prior posts, found under the "shareholder democracy" and "corporate governance" labels, that the former term is a myth, as currently used.
The only "shareholder democracy" in which I'm interested is one that assures me instant, liquid markets for buying or selling equities. My equity strategy doesn't include corporate actions or board composition in its factors for selections. It actually prohibits me from owning an equity for as long as 3 years in any significant concentration.
So, if most institutional investors hold for significantly less than 3 years, constantly seeking the best potential returns in the equity markets, is the SEC's new proxy rule going to affect those investors and their behaviors?
Supposing that the Journal editorial's implication is correct, and those companies in the crosshairs of union pension funds suffer worse performance and returns, then investors will have already moved out of those companies' equities before the real damage occurs. And, if this happened, in a recurring fashion, won't the union pension fund board nominees begin to be defeated, as their elections are publicly shown to damage shareholder wealth?
In fact, the reality of shorter institutional holding periods, and greater turnover of holdings, pretty much makes slower-moving SEC rules moot, don't they? Investors are buying and selling on a much shorter cycle than the SEC's proxy rules take to change boards.
Maybe this is much ado about nothing.
Monday, August 30, 2010
Talking His Book This Morning On CNBC: Bob Doll
BlackRock's equity chief Boll Doll is on CNBC this morning talking his generic book- again.
This time, I happened to hear Doll contend 'I don't think we've actually ever seen a double dip recession.'
Now, I've heard quite a handful of eminent economists, Nouriel Roubini included, appear on CNBC last week to weigh in on the US economy. Many feel that growth has faltered, a full-blown recovery is not underway, and there is a fairly good chance that US economic activity will decline again shortly.
Call it what you will, these economists, with less at stake in the equity markets than Doll, seem quite a bit more sanguine.
Doll, by contrast, seems to be cheerleading in every CNBC appearance. He never sees a falling market, only one requiring patience, or preservation of cash for subsequent buying. It's like BlackRock has decided as a matter of policy that they will never call a down market or a market crash.
Bad for business. Especially when you are mostly long and don't want your CNBC morning forecast to destroy your own equity positions by the time the opening bell rings at 9:30AM.
Which reinforces my tendency to take the views of very prominent equity managers like Doll, with substantial publicly-accessible funds, with a great amount of scepticism. They simply have too much at stake in the market to speak candidly.
This time, I happened to hear Doll contend 'I don't think we've actually ever seen a double dip recession.'
Now, I've heard quite a handful of eminent economists, Nouriel Roubini included, appear on CNBC last week to weigh in on the US economy. Many feel that growth has faltered, a full-blown recovery is not underway, and there is a fairly good chance that US economic activity will decline again shortly.
Call it what you will, these economists, with less at stake in the equity markets than Doll, seem quite a bit more sanguine.
Doll, by contrast, seems to be cheerleading in every CNBC appearance. He never sees a falling market, only one requiring patience, or preservation of cash for subsequent buying. It's like BlackRock has decided as a matter of policy that they will never call a down market or a market crash.
Bad for business. Especially when you are mostly long and don't want your CNBC morning forecast to destroy your own equity positions by the time the opening bell rings at 9:30AM.
Which reinforces my tendency to take the views of very prominent equity managers like Doll, with substantial publicly-accessible funds, with a great amount of scepticism. They simply have too much at stake in the market to speak candidly.
Operational Failure & Loss Of Consumer Trust
I periodically buy groceries at a local, smallish chain called Kings. It was, some years ago, acquired by Marks & Spencer of the UK, then sold again, to whom I don't recall. The chain is known for good-quality produce and an upscale selection of merchandise, as well as very good and pleasant service.
The chain used to encourage customers to use the chain's affinity card, but that stopped some months ago. Recently, perhaps to challenge Stop 'N Shop's policy of giving a 2 cent credit for each bag brought by the customer, Kings announced that, henceforth, they would give a 4 cent/bag credit.
Stop 'N Shop has self-checkout of two varieties, about one of which I wrote in that linked post. Thus, it's easy for the customer to enter the number of bags they have brought, and receive the credit.
Kings has no self-checkout. Only human cashiers.
Thus, it's been my experience over the past few months, that perhaps as often as 4 times in 10, the cashier won't remember to ring up the 4 cent bag credit. Typically, it's a teen-aged employee who neglects to do this, despite my prominent display of one of the chain's own distinctive mesh plastic bags upon checking out.
This has caused an interesting reaction in me. While realizing that we're only talking about 4 cents, I never the less find myself annoyed when the cashier fails to notice my bag and deduct the paltry amount.
In the past six months, my attitude toward the chain has gone from one of respect and overall positive image, to one of increasing annoyance at their inability to execute on their own bag credit policy.
Better, in my opinion, that they simply drop it, or assume you have a bag and just show a deduction, than cause minor disappointment by failing to implement a policy they chose to rather publicly trumpet.
Now, I feel like I'm being lied to by the chain, since the odds of the cashier correctly implementing the policy is not different than a coin toss, unless I start selecting older cashiers for a 4 cent payoff.
Hardly worth the effort.
But Kings' management has now, well, managed to make me believe they are becoming as inept as Stop 'N Shop's own management team. Only the latter is much larger, headquartered in another state, and more understandably incapable of sensible behavior.
Kings isn't.
It's clear that Kings' managers aren't making the bag credit policy important to cashiers, because they don't seem to pay much attention to whether a customer has a bag, or not. So it's a failure of training, monitoring and rewards for competent cashier behavior.
I wonder how many other customers are beginning to slowly, subtly change their opinions of the chain from this small but very noticeable failure?
The chain used to encourage customers to use the chain's affinity card, but that stopped some months ago. Recently, perhaps to challenge Stop 'N Shop's policy of giving a 2 cent credit for each bag brought by the customer, Kings announced that, henceforth, they would give a 4 cent/bag credit.
Stop 'N Shop has self-checkout of two varieties, about one of which I wrote in that linked post. Thus, it's easy for the customer to enter the number of bags they have brought, and receive the credit.
Kings has no self-checkout. Only human cashiers.
Thus, it's been my experience over the past few months, that perhaps as often as 4 times in 10, the cashier won't remember to ring up the 4 cent bag credit. Typically, it's a teen-aged employee who neglects to do this, despite my prominent display of one of the chain's own distinctive mesh plastic bags upon checking out.
This has caused an interesting reaction in me. While realizing that we're only talking about 4 cents, I never the less find myself annoyed when the cashier fails to notice my bag and deduct the paltry amount.
In the past six months, my attitude toward the chain has gone from one of respect and overall positive image, to one of increasing annoyance at their inability to execute on their own bag credit policy.
Better, in my opinion, that they simply drop it, or assume you have a bag and just show a deduction, than cause minor disappointment by failing to implement a policy they chose to rather publicly trumpet.
Now, I feel like I'm being lied to by the chain, since the odds of the cashier correctly implementing the policy is not different than a coin toss, unless I start selecting older cashiers for a 4 cent payoff.
Hardly worth the effort.
But Kings' management has now, well, managed to make me believe they are becoming as inept as Stop 'N Shop's own management team. Only the latter is much larger, headquartered in another state, and more understandably incapable of sensible behavior.
Kings isn't.
It's clear that Kings' managers aren't making the bag credit policy important to cashiers, because they don't seem to pay much attention to whether a customer has a bag, or not. So it's a failure of training, monitoring and rewards for competent cashier behavior.
I wonder how many other customers are beginning to slowly, subtly change their opinions of the chain from this small but very noticeable failure?
Subscribe to:
Posts (Atom)
