Posts Tagged 'markets'

A Bill We’ll Be Paying Back For Generations …

Published September 19, 2008 Deep , Universal Leave a Comment
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Ok, so I’ve admitted that the government probably had to do something to stem the financial crisis.

Now I’m going to talk about all the ways this bailout could – and probably will – go wrong (with the caveat that all the details still haven’t been worked out).

  • Everyone talks about how this plan will be reminiscent of the government’s ultimately successful strategy to create the Resolution Trust Corp. (RTC) in 1989 to help resolve the Savings & Loan banking crisis.  Numerous difficulties arose during that bailout as more than 2900 institutions and $900 billion in assets ultimately had to be rescued, and yet the cost and complexity of this current crisis will easily dwarf anything seen in the S&L crisis. The bad loans in question are larger in scope, broader in reach, and more intricate in design. Deciding which assets to buy, how much to pay for those assets, and how to get rid of them will be extremely delicate matters, and if we have learned anything about government, mistakes will be made in the process.
  • The plan will certainly cost U.S. taxpayers a lot of money. Some optimists are talking about how the government could end up making money from this deal if they’re able to pick up these assets at very distressed levels and then sell them back at higher prices once things settle down. Such a scenario is possible but highly doubtful. What is much more likely is that the U.S. balance sheet, already drowning in foreign debt and facing enormous future liabilities caused by a troubling demographic shift (e.g. Social Security), will continue to deteriorate. This will lead to higher inflation, a higher deficit, higher taxes, a weaker dollar and ultimately, a large transfer of wealth to other nations.
  • This bailout, even if successful and profitable, will once again institutionalize the concept of moral hazard into our economy. This is something I’ve talked about before in this blog, but economic moral hazard basically means that people will take on too many risks if they believe they will be bailed out if things go bad. There are folks, including me, who feel that the S&L bailout is one reason why the financial system got so quickly back into trouble. The Glass-Steagall deregulation of the industry didn’t help, either. I hear a lot of people say our current predicament is too critical and dire to spend time philosophizing about moral hazard, but that’s a circular argument which will never lead to addressing the issue.
  • That’s why it’s so critical the government makes sure all institutions that need help suffer some kind of repercussion as it designs and implements its plan. And when the dust settles, government should begin modest re-regulation of the financial industry to try and ensure this level of risk-taking doesn’t happen again. Finally, the government should go hard after people who committed crimes during this period, and take back some of the billions in ill-gotten gains from those bad apples. No need to play the blame game immediately, and you’re never going to get back all that money (thinking about the multimillion-dollar bonuses many of these guys got over the past several years is a bit sickening), but people as well as institutions need to realize that overly risky behavior could lead to punishment down the road.
  • The one thing we do know about the current plan is that the SEC has declared all-out war on short sellers (investors who sell borrowed shares in hopes of buying the stock back at lower prices and pocketing the difference). The agency has banned short selling on 800 financial-related stocks and forced large short sellers to disclose their positions. I hate this. It frankly disgusts me. It’s something a country like China would do (and has done). I’m a long-only investor, but short sellers are an easy scapegoat – they provide liquidity in the market and often correctly point out flaws in companies and business models. However, I do understand that confidence can make or break our financial system, and plummeting stock prices caused by unchecked short selling certainly threatened to exacerbate the crisis. So, while this ban sets a very bad precedent, I suppose I can live with it as long as it is a very temporary measure. In the end, the ban will only work if time and some breathing room was the only thing the market needed to stabilize. If this bailout isn’t sufficient and we have even more serious systemic issues, then this market rally will be only a temporary reprieve – stocks will fall again and the problems will begin anew as soon as the ban is lifted.

All Clear? Hardly …

Published September 19, 2008 Deep , Universal 3 Comments
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The SEC has banned short-selling on financial stocks. The Treasury has guaranteed money market funds and is cooking up plans to spend hundreds of billions of dollars to buy distressed assets and save troubled banks. The market has rebounded huge, taking back all of this month’s losses.

So are we all clear??

Hardly.

I think in the short-term, the moves have bought the financial system time to gather its senses, to take a breath. That’s a good thing, and clearly the ban on short selling is doing a lot to move prices higher (I’m going to write about the numerous, potentially devastating long-term ramifications of all these decisions in a following post).

Something needed to be done. We took out our previous lows and got that panicky sell-off I talked about in an earlier post. The potential for blood on the streets (Main Street as well as Wall Street) was very real. A functioning economy ultimately rests on people’s confidence in it, and widespread panic can cripple the health of such a system to the point where it takes years to recover.

But even if you stabilize the system with these moves, you’re still going to be faced with most of the same issues: A moribund housing market, a stretched-to-the-limit consumer, a weakening job market, a credit crunch, a global slowdown. It will take time and a lot of pain to resolve these issues. Anything we do will at best ease some of that pain, while there’s a very real risk we end up doing something to make the problems last longer than they otherwise would.

In sum, the government may have just put a floor in the market with these moves, and at least temporarily prevented a disastrous widespread panic that could have led to another Great Depression.

But I also think we’ve seen most of the short-term stock price gains we’re going to see (maybe we see another 5-10%).

And the medium-term future for the economy AND the market still doesn’t look particularly bright. We’re going to be stuck in this economic morass for some time to come, and the market will continue to reflect that reality.

Merrill saw the light … now, maybe we can to

Published September 15, 2008 Trivial , Universal Leave a Comment
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I just wanted to offer my immediate, quick, bullet-point take on the flurry of GIGANTIC market-related news today, which i briefly referenced last night.

  • Lehman Brothers’ brankruptcy obviously sucks for the company’s employees and shareholders, but this HAD TO HAPPEN. Over the past year, starting with Bear Stearns, the U.S. government has spent hundreds of billions of dollars, and will likely spend hundreds of billions more, bailing out numerous large financial institutions. The process had to stop as there will likely continue to be a stream of companies, in the financial sector (hello AIG) and then elsewhere (hello GM), that ask for bailouts or other financial assistance from a federal government which just doesn’t have the balance sheet to support any more albatrosses. The obligations it has already taken on will bring the U.S. economy to the brink of disaster, and the government had to make a stand that most companies from here on out would be on their own.
  • Merrill Lynch CEO John Thain is no dummy. He saw the government playing tough in the Lehman negotiations, and decided now was the time to pursue an exit strategy – while he still had the time. Without a doubt, Merrill would have been in the bears’ crosshairs next. The deal he signed with Bank of America was an extremely savvy one.
  • Can’t say the same for Bank of America and its CEO Ken Lewis. He is already dealing with the repercussions of unwisely taking on Countrywide Financial, a large home lending organization that was among the worst of the worst in terms of bad apples. Now, he’s paying a healthy premium for Merrill when there is little doubt the stock would have fallen much, much lower in the coming weeks. Fifty billion dollars is nothing to sneeze at. Perhaps the only explanation for the timing of the transaction was that the U.S. government placed some pressure on Lewis and Thain to make a deal – though that was denied in a press conference.  Or perhaps Lewis is just a patriot who feels a company named Bank of America should do its part to bolster the confidence of the economy (and knows deep-down his own institution will be threatened if things don’t turn around soon).
  • All this news is obviously causing turmoil on Wall Street. The markets are down big as I write this, yet I think there is a possibility that a short-term rally occurs in the near future. I’m encouraged that the financial stock index as well as the other major market indices are still holding above their all-time lows. The market is already hugely bearish, which is a good contrarian indicator (when everyone’s already bearish, that can mean that there aren’t many people left who want to sell)
  • This is not the end of the story. There will be more fallout. The long orgy of easy credit days are over, the U.S. consumer is on life support and will remain there for years, and the world economy will continue to feel the pain of our exuberance for some time.  I still worry about a significant, deep, prolonged recession or even mild depression. I worry that the global markets are now so complex, so intertwined, that even one failure like Lehman could cause a systemic collapse. I worry that a geopolitical event pushes us over the edge. I worry that the aging demographics of the U.S. and the country’s enormous and growing budget deficit will make it tough for us to pull out of our current malaise. But I now also have at least a glimmer of hope that I haven’t had for a long time. The government and the Fed can’t bailout, or rate cut its way out of this mess. We have to feel some pain, maybe a lot of it.  But it’s true that things look darkest before the dawn.  We’re not there yet, I don’t think, but we’re certainly closer.

Pessimism doesn’t pay …

Published July 27, 2008 Deep , Personal , Uncategorized , Universal Leave a Comment
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My dad is an eternal optimist, one of those turn-lemons-into-lemonade people. And yeah, it sometimes annoys the living shit out of me.

I am, after all, an in-the-long-run-we’re-all-dead type of guy, a devout half-empty man (I’d call myself an eternal pessimist, but I don’t believe anything lasts forever :) )

Clearly, if optimism is a genetic trait, it skipped a generation. In my life, I fear the worst. It’s what I do. A headache is a brain tumor. A bumpy plane ride, a crash landing. An abandoned suitcase, a ticking bomb. A lover’s quarrel, a relationship killer.

For a long time, I believed pessimism – in addition to providing the most efficient route to being pleasantly surprised – was also the more appropriate mindset for the modern world. You look around and see the Earth in peril. You see bad things happening to good people, and good things happening to bad people. You see a holy war in the Middle East that never ends, and social security reform in the U.S. that never begins.

You would think that this year, especially, pessimism would be the way to go, what with the U.S. economy teetering on collapse (I put the odds of a multi-year recession at about 50 percent, and of another depression at 10 percent).

But I’ve recently decided that dad was right all along. Pessimism doesn’t pay – literally. And here’s why:

1. Pessimism can actually help lead to the worst-case scenario…

Phil Gramm took a lot of criticism recently for suggesting the American media and public should stop whining about the economy, but negativity can absolutely contribute to, prolong, or intensify a recession. That’s why economists pay such close attention to consumer sentiment surveys – psychology matters. People who think the economy is turning south will act more cautiously, spending less and saving more, which ends up causing more weakness and creating a vicious circle.

A negative outlook can be self-fulfilling in other areas of life as well. I often find that people who dread bad things happening avoid taking the positive proactive measures that could prevent those things from happening, and even at times engage in destructive behavior that increases the likelihood of a bad outcome.

2. However, the worst-case scenario rarely happens…

This weekend, Congress decided to pass a housing bill that helps homeowners facing foreclosure restructure their mortgages and stay in their homes. The bill also has provisions to bail out Fannie Mae and Freddie Mac, the government-sponsored private entities that handle more than $5 trillion in mortgages and helped create the current mess by making loans that should have never been made in the first place.

In an election year, the housing bill was a political inevitability, and probably an economic necessity as well since Fannie and Freddie are indeed too large to fail. The bill has some decent aspects to it, such as the regulation forcing lenders to be clearer about the true costs of a mortgage, and it could help stabilize the moribund housing market.

But the bill is also a travesty because it encourages future risky behavior by reaffirming and institutionalizing the idea that the government will always be there to bail you out. As a recent article in The Economist noted, a government bailout is about privatizing profits and socializing losses, which sucks for people like me who continued to rent partly because I thought the market was overheated, and yet as a taxpayer will end up paying more than a fair share of the bailout costs.

The bill may be a bad one, but it also proves the point that in life, people facing dire outcomes can often rely on the support of loved ones, like friends and family (or a generous government), to help them avoid a bad situation or at least make a bad situation more manageable.

So usually, all that worrying and pessimism accomplishes nothing except for perhaps, say, preventing someone from buying a home in Manhattan that likely would have almost doubled in value by now (pessimism may not pay, but bitterness is groovy)!!!! …

3. And if the worst-case scenario actually does occur, you probably have other things to worry about … or you have nothing to worry about because you’re dead.

My grandfather always said he would never buy stocks because of what happened in the Great Depression. Meanwhile, for the rest of his lifetime, America never had another depression, and the stock market rose by thousands and thousands of percentage points. He basically guaranteed he’d never be rich just so he wouldn’t be desolate.

That’s why I tell almost everyone who has at least ten years to invest to put a nice chunk of their money in stocks or mutual funds. In the long run, the market should be one of the best places to put your money. Yeah, at some point, the American empire is going to come crumbling down, and/or the world will end, but you’re going to have a lot of other concerns if that happens.

I mean, if this current situation does become economic Armageddon, do you think that shoebox of cash under your mattress is really going to do much good? If the economy has gone to hell, those dollars probably won’t be worth much anyway, especially if this time inflation ends up being part of the problem. Sure, that money may buy some loaves of bread for a few more months, but life is still going to suck…

And the same is true in other areas of life. I mean, what’s the point in worrying excessively about nuclear weapons or terminal cancers when being correct basically means you’re dead???

As I see it, pessimists will always be right because eventually shit happens and everything good ends, but in the meantime, the optimists will be having all the fun. So i might as well bring my half-filled glass of lemonade and join the party.

Bubbling Black Revisited …

Published July 24, 2008 Uncategorized Leave a Comment
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Time for a short self-congratulatory post (For if I don’t do it, who will?).

Right before the Fourth of July, I wrote that the price of oil was a bubble waiting to be pricked and nearing a short-term top. In the past three weeks, the price of oil has fallen by about $20 bucks a barrel, or almost 15 percent, a huge move by any standard. In terms of daily closing prices, July 3rd ended up being the exact top.

I also correctly pointed out the main reason usually cited for the fall-off: Decreased demand due to a weakening economic picture, particularly in the U.S. and Europe. I also believe the fact U.S. government officials have been speaking out against an Israeli attack on Iran’s nuclear production facilities has helped. I do not think any of George W’s jawboning about offshore drilling, nor Congress’ subsequent investigations into oil market speculation, had any real impact.

However, I wouldn’t start planning to buy that new SUV just yet. I am a bit concerned that we didn’t get that last parabolic move in the price of oil that I thought we’d get. Bubbles don’t typically fizzle out; they tend to pop in dramatic fashion. So I still believe another big move higher, one that potentially busts through July’s high of $147, could be forthcoming.

In other words, this is one hot-button election issue that won’t be going away anytime soon.

You can’t force compassionate capitalism (or ‘My BuschInBev is fine. How’s your pikken?’)

Published July 16, 2008 Trivial , Uncategorized , Universal Leave a Comment
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As a native St. Louisan who always feels some sort of odd civic pride whenever those clever beer commercials end with a dude intoning ‘Anheuser-Busch, St. Louis, Missouri,’ I know I’m supposed to be upset about the recent acquisition by Belgium-based InBev. Yet I can’t muster any passion over the loss of the historic brewer and one of my hometown’s few remaining independent corporate behemoths (TWA, McDonnell Douglass, Ralston Purina all bit the dust long ago).

I mean, I know what’s eventually going to happen, and it’s not going to be pretty for St. Louis.  The brands will stay and the distribution network will remain mostly in place, because that’s the value in A-B, but nothing else will be sacred. Oh, InBev is saying all the right things about keeping the breweries open and the U.S. headquarters in St. Louis and all the jobs secure, but at some point the cost cuts will come, and then they’ll come again and again. At first, it will be easy targets like those Anheuser company perks (e.g. free cases of beer for employees) but eventually many jobs will be lost.

Cost-cutting, outsourcing, consolidation, restructurings: They’re all just part and parcel of the global economy nowadays, a competitive necessity. Of course, this means a lot of hard-working Americans are left in a lurch through no fault of their own, a fact which not surprisingly attracts a lot of attention from politicians in the midst of an election season (and a slumping economy, to boot).

Even less surprisingly, the politicians’ overall response to the situation has been woeful. You have short-sighted initiatives like fiscal stimulus checks and oil drilling hype. You have even more damaging scapegoating, with calls for increased protectionism and prosecution of short-sellers.

The best thing in Washington may just be the unending partisan bickering, which isn’t helpful but at least results in some good ol’ fashioned gridlock.

Alas, it’s going to get worse as the presidential candidates find success in appealing to the lowest common denominator. When the economy is weak, populism sells better than sex. But it won’t really solve anything.

You can’t force capitalism to be compassionate, especially when national borders no longer serve as a major barrier to economic development. Raise taxes or limit executive compensation or increase labor protections and businesses move overseas.

Even worse is when the government tries to get into the business of capitalism, as the result is bound to be a disaster like the sickening developments with Fannie Mae and Freddie Mac, government-sponsored mortgage lenders that will eventually require billions of dollars in a taxpayer-funded bailout.

I wish I had better answers, but this is not an easy dilemma to solve. How do you enjoy the productivity benefits of capitalism and open borders and yet maintain a desired level of societal stability and income equality (or at least not obscene disparity)?

My advice: Focus and invest a lot of money on education (and re-education of displaced workers).  Create tax incentives to encourage ‘good’ corporate behavior, like investment in local factories and workforces, as well as development of new technologies that could solve some of the nation’s problems (e.g alternative energy).

And perhaps most controversially, spend some money on programs designed to convince Americans that the lowest possible price isn’t the only thing to consider when making a purchase. The emerging ‘green’ industry has shown that consumers are willing to pay more if they think their dollars are making a difference so maybe, just maybe, compassion and capitalism can mix … as long as it’s not forced.

Bubbling Black … Pop Goes the Diesel

Published July 4, 2008 Uncategorized 3 Comments
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OK, I know nothing about the oil market, but considering I distinctly remembering the then-CEO of Exxon-Mobil saying on CNBC that oil was way overpriced based on the fundamentals some 2-plus years and $100/barrel ago, I don’t see why my lack of knowledge on the subject should keep me from commenting.

Plus, being involved in the tech blowup earlier this decade, I do know something about market bubbles, and I believe we are getting close to at least a short-term top in the price of oil. Wall Street brokers are calling for oil prices reaching as high as $500/barrel in the coming months and years (reminiscent of a $1000 target price set by one analyst for the now-bankrupt CommerceOne Internet software company); speculators as well as regular Joes and Janes are pouring money into oil and gas investments (not a surprise given it’s the only thing on the Street that’s working); and perhaps most tellingly, CNBC just aired a one-hour special ‘America’s Oil Crisis’ replete with the necessary disturbing intro music and computer graphic (U.S. map drowning in oil).

Timing the exact end of a speculative blowoff move higher is always tricky, but darn it if the similarities between the oil price chart and the Nasdaq circa March 2000 don’t look rather compelling. The dot-com party lasted far longer than many people imagined, so there’s likely to be another run higher, and if so, it’s gonna be explosive, but the end is near.

What’s the news event that triggers the sell-off? Maybe it’s a new law that supports offshore drilling, or limits speculation. More likely, and more distressing, the fall could just come as high oil prices bring the world’s economies – and thus rising oil consumption – to a screeching halt.

Even if oil sells off, I do not think we’re going back to $50 a barrel anytime soon. I’m not sure I buy the ‘peak oil’ theory, but we are talking about a limited and much-needed resource, after all, not dot-com stock that can be issued until the funny dog handpuppets come home.

High oil prices will present problems for a lot of people and economies, but in the end, those prices will cause their own demise as good-old human ingenuity provides the technological means to sever our dependence on oil … giving the Earth a much-needed break and hopefully making it less likely American troops are sent into harm’s way to sate our energy addiction.

So, here’s my fearless prediction: We top out in oil sometime within the next month and we hit double-digit oil sometime by this time next year. Of course, if Israel attacks Iran, all bets are off ;-)

P.S. For another (mostly balanced, well-reasoned) take on why oil is as high is it is, read this article.

P.P.S. (Man, I gotta work on this ‘very short’ blog post thing!)

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