Econ 2009

[ewmayer]

Two of the story headlines that caught my eye on the CNN/Money homepage this morning:

Stocks rally on Ford, AmEx - "Ford Motor, considered to be the healthiest of the three Detroit automakers, said it lost $1.4 billion in the first quarter as it contended with the worst quarter for the industry in 26 years."

Lower down on the page we see:

AmEx profits tumble 56% - "Profits at American Express declined by more than half in the latest quarter, the company said Thursday, as spending by cardmembers slowed and credit troubles continued to mount."

Draw your own conclusions about the strength of the alleged fundamentals driving the recent stock market rally. Certain wacky internet conspiracy-theoretical bloggers seem to believe that the fact that The Evil Empire's automated-trading programs have been responsible for more than half of the NYSE trading volume of late may just have a little to do with it. Ha, ha, those guys are so zany!


NYT Breaking: U.S. Is Said to Push Chrysler to Prepare for Chapter 11: DETROIT — The Treasury Department is directing Chrysler to prepare a Chapter 11 bankruptcy filing that could come as soon as next week, people with direct knowledge of the action said Thursday.

My Comment: Quite possibly this id intended (among other things) to give the government more cramdown leverage in its ongoing negotiations with GM stakeholders. Last night I heard on the German DW-TV broadcast that Fiat is now seeking a stake in GM spinoff Opel - how their finances would permit that *and* a merger with Chrysler is questionable. In other moribund-automaker news:

GM to Shut 13 North American Plants for Multiple Weeks as Car Sales Slump: General Motors Corp. said it will idle 13 U.S. assembly plants for multiple weeks to reduce inventory after its U.S. vehicle sales fell 49 percent this year through March.


Fed Reports 30% Loss on Bear Stearns Mortgage Loans

My Comment: Remember Bernanke`s confident assurances-at-the-time that the American taxpayer would most likely make money from the deal? Suuuuuuure we will, Ben.


Why I Fired My Broker -- The Atlantic, May 2009

For most of our adult lives, my wife and I have behaved in the way responsible cogs of capitalism are supposed to behave—we invested in a carefully calibrated mix of equities and bonds; we bought and held; we didn’t overextend on real estate; we put the maximum in our 401(k) accounts; we gave to charity; and we saved, but we also spent: mainly on gasoline, food, and magazines. In retrospect, we didn’t have the proper appreciation for risk, but who did? We were children of the bull market. Even at its top, my investment portfolio was never anything to write home about. Its saving grace was that it was mine. And I imagined that when we did cash out, at 60 or 65, I would pass my time buying my wife semisubstantial pieces of jewelry and going bass fishing like the men in Flomax commercials.

Well, goodbye to all that. I took a random walk down Wall Street and got hit by a bus.

How am I sure it’s goodbye? The signs are rampant, but one has become stuck in my mind: a video of Richard Bernstein, the chief investment strategist for Merrill Lynch (sorry, I mean the Merrill Lynch division of Bank of America, which, by the time you read this, may be the Bank of America division of the United States Government), advising Merrill clients such as myself that one of the best financial strategies to adopt now would be to extend my “investment time horizon.”

“If one were to trade the S&P 500 for one day, the probability of losing money is about 46 percent,” Bernstein states. “However, as one extends that time horizon from one day to one month to one quarter to one year to 10 years, the probability of losing money decreases as the time horizon lengthens.”

To which I would add this observation from Keynes: “In the long run, we are all dead.”

This is what I heard Bernstein say: give up. You’re not going to make money on your investments in the next 10 years, or 15, or 20, so you should stop worrying about your portfolio and go to the movies like everyone else.

I called Bernstein and asked him if he was, in fact, advocating a form of Stoicism. He said I was misinterpreting his views. “This is not some sort of psychological compensation device. What I’m saying is that in looking for investment ideas, we should be looking over a five-, six-, seven-year time period. You have to give an investment strategy time to reach gestation.”

But my investment strategy gestated for 15 years. And then it died.

My Comment: The bit about the author`s Merrill Lynch broker advising to him to buy shares of Boston Chicken (before it became the much blander-sounding Boston Market, whose stock never did seem to be able to regain its IPO price, and which filed bankruptcy a few years later, was acquired by McDonald's, which recently flogged it off to a private-equity partnership) brings back memories ... one of my sister`s early jobs out of college was on the young-brokers-in-love circuit at the Merrill office in downtown San Francisco. Thankless job ... spending your days cold-calling people who didn`t know you from Adam and trying to get them to trust you, a 20-something wannabe stockbroker, with their life`s savings, hitting up friends and family to buy some prospects-wildly-exaggerated stock issue just to get a few entries in your monthly sales tally while the veteran brokers skimmed nearly all the commissions resulting from your hard work. Anyway, sis, in the one and only investment she got me to make with Merrill that had a chance of turning a profit in less than 10 years (if ever), managed to get me a small piece of the Boston Chicken IPO which Merrill was co-underwriting. Giving favored clients a piece of a hot IPO has long been a popular form of brokerage-firm baksheesh, the idea being that the client would sell the shares immediately to profit from the first-day "pop" - in essence free money, except of course for the poor retail sucker forced to buy the now-almost-always-overpriced shares on the open market. Sis told me as much, i.e. sell at open and thank me later. But being one of those poor retail slobs whose function is to serve as a "liquidity provider" to the capital markets, this advice was contrary to all the staid "buy and hold" advice brokers invariably give to us poor retail slobs liquidity providers, and I couldn`t bring myself to do it. So I held, watched the shares bleed day after day, and wound up selling at a loss - but thankfully I sold within the year, so it was a modest loss. Boston Chicken Market ... it made me glad to be a Market chicken, as it were.

Remind me to tell y'all the story of Merrill and their pushing of the Eurodisney bond offering some day...let`s just say that was another can't-lose deal that could and did and that for the past 15+ years I`ve been with Fidelity, who never cold-call me or peddle Hot Stocks, charge me $8 per trade irrespective of size (unless it`s a penny stock), throw in a nice range of services like free checking and a no-fee Visa debit card with purchase insurance included, and any losses have been of my own doing.

[cheesehead]

In the early 1960s, my father started investing in stocks through a broker recommended by relative. After a couple of years of seeing monthly statements of wrongly-timed churning during market fluctuations, he swore off brokers and did his own investigations, with subsequent improved results.

I'm sure there are some good brokers; I just don't know how to pick 'em without risking significant financial losses. I have a copy of The Only Investment Guide You'll Ever Need.

[__HRB__]

Originally Posted by cheesehead

I'm sure there are some good brokers; I just don't know how to pick 'em without risking significant financial losses.

We don't agree very often, but I totally agree here.

I once told my broker:"I want to sell 500.000 shares of XYZ short, without putting the price through the floor", and he goes out and finds this *huge* number of suckers from Wisconsin, all willing to buy in lots of around $10.000, and he's made a killing in commissions off me.

So, prices make the anticipated decline over the next couple of months and I'm floatin', but then I lose 50% of my profits the day I'm trying to cover, because the bastard is front-running me!

Some people simply have no shame.

[ewmayer]

Our lead story today is not directly economic in nature, except in the sense that pandemics and global trade are invariably inseparable to some extent:

73 cases of swine flu confirmed; hundreds more feared

Forty of those cases are in the United States, 26 in Mexico, six in Canada and one in Spain, a WHO representative said.

Later Monday, health officials in Scotland said two cases of swine flu had been confirmed there.

Hundreds more cases are suspected, especially in Mexico, where as many as 103 deaths are thought to have been caused by the virus, the country's health minister said. More than 2,000 cases have been reported but not confirmed in the country.

Federal officials confirmed 20 new U.S. cases on Monday.

A federal official said they were at the same school in New York in which eight U.S. cases were confirmed earlier. More than 100 students at the school were out with flu-like symptoms last week.

The outbreak is a particular concern because of who it is hitting hard, United Nations Secretary-General Ban Ki-moon said Monday.

"We are concerned that in Mexico, most of those who died were young and healthy adults," he said. Video Watch Mexican officials discuss flu plan »

President Obama said Monday that the swine flu outbreak is a "cause for concern and requires a heightened state of alert," but is not a "cause for alarm."

He added that the federal government is closely monitoring emerging cases and had declared a public health emergency as a "precautionary tool to ensure that we have the resources we need at our disposal to respond quickly and effectively."

Meanwhile, the European Union's health commissioner Monday called on people to avoid traveling to both the United States and Mexico, which seems to be the epicenter of the outbreak.

Swine influenza, or flu, is a contagious respiratory disease that affects pigs. It is caused by a type-A influenza virus. Outbreaks in pigs occur year-round. The current strain is a new variation of an H1N1 virus, which is a mix of human and animal versions.

When the flu spreads person-to-person, instead of from animals to humans, it can continue to mutate, making it harder to treat or fight off because people have no natural immunity.

My Comment: The current strains of the virus appear susceptible to 2 of the front-line antivirals, but I wonder how long that will last: people are going to start popping Tamiflu doses like candy, making the emergence of a resistant strain nearly inevitable. So it`s a race against time: get a vaccine developed and into mass-scale production before a multidrug-resistant (and still virulent) strain emerges. The etiology of the disease in Mexico is worryingly similar to the 1918 "Spanish" flu pandemic. There was a weird video on the news last night, of 2 Mexican pro soccer teams playing a league match in a huge stadium devoid of spectators.


Today`s interesting macroeconomic data point: Over 70% of the U.S. economy is currently backstopped in one way or another by the U.S. government. But don`t you dare call it "socialism"... we prefer "systemic-risk-cleansed free markets".


Chrysler Reaches Labor Agreement With U.S. Union, Ratification in Canada: [i]Chrysler LLC, racing against an April 30 deadline to cut labor costs or face bankruptcy, reached a tentative contract agreement with its biggest U.S. union and won ratification of an accord with Canadian workers.[/url]


General Motors Bondholders Say Debt-Equity Exchange Is Unlikely to Succeed: General Motors Corp. bondholders find the automaker’s offer to exchange their $27 billion in debt for equity unlikely to succeed, according to a person familiar with the committee representing creditors.

That’s because the offer by GM, the biggest U.S. automaker, treats bondholders worse than other claimants, such as unions, said the person, who declined to be identified because the discussions are private. At least 90 percent in principal amount of the notes must be exchanged by June 1 to satisfy the U.S. Treasury and avert a bankruptcy, GM said today in a statement.

Bondholders are being asked to swap all their claims for 10 percent of the equity in the reorganized company. The offer is contingent on cutting at least half of GM’s $20.4 billion of obligations to a United Auto Workers retiree-medical fund, known as a Voluntary Employee Beneficiary Association, through a debt- for-equity exchange that would give the VEBA as much as 39 percent of common stock in the Detroit-based carmaker.

“This is an offer that’s designed to fail,” said Kip Penniman, an analyst at fixed-income research firm KDP Investment Advisors in Montpelier, Vermont. “To get 90 percent of them to agree to such a deal where there’s no cash, no other debt and pure equity while leaving the union VEBA arrangement unchanged from previous considerations is absurd.”

My Comment: High-stakes game of chicken going on here ... the bondholders know full well they may fare even worse in bankruptcy court, but obviously want to hold out as long as they can to try to get GM to sweeten the deal. But I have a sneaking suspicion the pension obligations are eventually going to end up in the lap of the U.S. taxpayer...but getting back to the bondholders, i.e. all the "fixed-income analysts" who are talking their book as in the above quote, the really funny part is that they were offered a far better deal just last month and blew it off:

The Obama administration ousted Chief Executive Officer Rick Wagoner last month, saying that GM’s plan to return to profit wasn’t aggressive enough, and ordered new CEO Fritz Henderson to cut the automaker’s debt by more than initially demanded. GM will be forced to go into a government-supported bankruptcy without deeper cost cuts from its creditors by June 1, the administration said.

Before Wagoner was removed, GM had proposed that bondholders swap more than three-quarters of their stake for equity, according to a person familiar with the talks. That offer would have given bondholders 90 percent of the equity of the reorganized automaker and a combination of cash and new unsecured notes, the person said at the time.

My Comment: Oh yeah, holding out really worked well for y'all the last time around, didn't it?

[ewmayer]

London Bankers Look for Way Out After `Last Straw' Increase in Tax to 50%: Demetris Efstathiou, a hedge-fund trader and a Londoner for two decades, listened last week to Chancellor of the Exchequer Alistair Darling outline a plan to raise taxes on high earners. Then he decided to leave Britain.

“There is no reason for me to stay here anymore,” said Efstathiou, a 38-year-old Cypriot who moved to London in 1990. “This tax increase is the last straw. This government is no longer interested in the City.”

Prime Minister Gordon Brown’s proposal to boost the tax rate to 50 percent from 40 percent on income above 150,000 pounds ($220,000) pushed headlines about “class warfare” onto the front pages of the capital’s newspapers. It also prompted predictions from business groups that it would undermine the U.K.’s competitiveness and lead to an exodus of financial talent. Brown was portrayed as Vladimir Lenin in a cartoon on Page One of the Daily Telegraph.

The income-tax change, set to take effect next year, would give the U.K. a higher top rate than Spain, Italy, Germany, France and the U.S., according to KPMG, the accounting firm. Among the 30 members of the Organization for Economic Co- operation and Development, the country would jump to seventh from 19th in the rankings of tax rates, accounting firm Ernst & Young said.

The initiative is part of the government’s efforts to contain a planned budget deficit of 12.4 percent of gross domestic product, Britain’s biggest in peacetime. The Treasury expects the tax to raise about 2.2 billion pounds next year when government borrowing will be 173 billion pounds. Darling’s budget calls for 703 billion pounds of deficits in the five years through April 2014.

My Comment: Allow me to put forth the following modest alternative proposal, which would give corporate executives an incentive to keep their compensation at levels which are not the egregious multiples of rank-and-file-employee salaries we have been seeing in the past decade, during which average CEO pay has risen beyond all reason relative to regular-employee pay and has in many cases become completely decoupled from corporate performance:

Assume the average rank and file worker at ExampleCorp earns R. For an ExampleCorp executive earning E in total compensation, tax the first R of that at the regular tax rate, and subject the excess X (in an integral-over-X fashion, with X ranging from 0 to (E-R)) to a tax-rate surcharge of X/R percent over the prevailing tax rate, with the highest total rate not to exceed 100%, obviously. Thus, using U.S. tax rates (with maximum rates around 30% in the high-income brackets) as a rough guide, if am a CEO and my average rank-and-file employee makes $50,000 per year, I could earn up to roughly 30x that, or up to around $1.5 million per year, before my tax rate incurs an "egregious executive pay penalty". The more my pay rises above that, the bigger the hit. If I decide in Wall-Street fashion to pay myself a couple tens of millions, fine - but most of that goes straight to the government. You could say, "but shouldn't CEO pay be reflective of corporate performance?", i.e. a CEO of a highly profitable firm should not be penalized for being extremely well-paid. I say, the above proposal allows such a CEO to be very well-paid, but only if they share some of that profit with the rank-and-file employees first. If you want to give yourself a 100% bonus because your company had a great year, fine - but your regular employees get a 100% bonus that year, too. Seems fair to me.

[garo]

Originally Posted by ewmayer

Today`s interesting macroeconomic data point: Over 70% of the U.S. economy is currently backstopped in one way or another by the U.S. government. But don`t you dare call it "socialism"... we prefer "systemic-risk-cleansed free markets".

I am afraid that just ain't right. There is plenty wrong with the way this and the previous administration are managing the economic crisis but socialism it ain't. Go read the dictionary definition.! It would be far more accurate to call it "The shameful looting of the US taxpayer by the super-rich and well-connected."

[ewmayer]

Garo, I was playing on the fact most folks in the U.S. have a rather bizarre notion (or variety of notions) of what "socialism" means, ranging from "government safety net for everything" to "really high taxes" to "totalitarian regime and 100% thought control". But for the most the part the associations (or better, mis-associations) are negative - think "national socialism" - so whenever a politician/right-wing-talk-radio-host/demagogue wants to end any kind of reasoned debate on an issue involving potentially increased government involvement in anything, they resort to the "this is socialism!" card.

Anyway, the massive government-backstop of All Things Financial is very much a kind of socialism, but since it's only occurred now that the reckless-capitalism-run-amok shit has hit the systemic-risk fan, it`s socialism of the Wall-street-beloved "we all get to share in the losses" kind.

[garo]

It is privatized profits and socialized losses. But to call it socialism is the same as calling say Zimbabwe a democracy. I expected a better understanding of socialism from you :).

From an American blog on the topic of executive pay:

What impresses me about this is that, bluntly stated, Americans are complete sheep. And they can't scale what real theft is.
If some poor soul breaks into a person's house and steals $50 in cash, no one in this country has a problem with the homeowner blowing the burglar's head off.
But if a group of senior banking executives effectively steals $50,000 from every house in America, no one says a word.

[Spherical Cow]

Originally Posted by ewmayer

My Comment: Allow me to put forth the following modest alternative proposal, which would give corporate executives an incentive to keep their compensation at levels which are not the egregious multiples of rank-and-file-employee salaries ...

I like it- and there is a form of precedent for such a sliding structure; I believe that in certain cases, a company's owner is limited in what he can legally put away in a 401(k) plan for himself by the amount his employees are putting away. Our prior owner made the company's 401(k) plan extremely attractive, and openly explained that he was limited in how much he could put in it by how much the employees participated. In your plan, if upper management wants to pay themselves more, but avoid the increasing tax burden, they must first raise the rank-and-file pay.

Good plan-

Norm

[ewmayer]

Estimates of economic costs of a flu pandemic: The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion and result in a nearly 5pc drop in world gross domestic product. The World Bank has estimated that more than 70m people could die worldwide in a severe pandemic.

My Comment: Nothing alarming to see here folks, just cover your mouth when you cough or sneeze and all will be well ... One thing I was very disappointed to not hear any coherent discussion about from the CDC health officials on C-SPAN yesterday was the "asymptomatic infectivity" window: You had one top CDC official (Besser) saying "we see no reason to impose travel restrictions ... just monitor airports for people showing signs of possible infection, blah, blah." Hello? We know that the incubation time for this disease is 1-4 days. If a person is infectious during the incubation time (and that's what I wanted to hear something about, even if speculation based on other better-studied strains of flu), wouldn't that be a compelling argument for imposing travel restrictions to and from countries.areas which are hotspots of the outbreak, irrespective of whether a would-be traveler is showing signs of sickness? It seems that with modern air travel a several-day presymptomatic infectivity window is exactly the thing one needs to be the most concerned about, i.e. rapid spread of a pandemic agent occurring right under one's nose, so to speak. In that scenario, by the time one obviously-sick person gets stopped at an airline gate, hundreds or even thousands of asymptomatic carriers may have already dispersed all over the globe. Think of the movie "12 Monkeys".


Chrysler's Banks, U.S. Government Said to Reach Agreement on Reducing Debt: Chrysler LLC’s banks reached a tentative agreement with the U.S. government to exchange $6.9 billion in secured debt for $2 billion in cash, according to a person with knowledge of the negotiations.


U.S. Consumer Confidence Jumps, Home-Price Drop Slows in Evidence of Shift: Consumer confidence in the U.S. jumped by the most since 2005 this month as stocks rallied, mortgage rates dropped and Americans anticipated more jobs would become available.

The "green shoots" media campaign remains in full swing: Notice that of the 3 "greenish and possibly shooty" items in the italicized subheading above, one (the stock rally) is largely manufactured on coordinated fake-earnings reports from banks, the second is manufactured by the government (by e.g. buying huge amounts of GSE debt and ignoring that the default rate on said debt is soaring) and the third is a mix of manufactured (government stimulus spending) and delusional (said spending will make only a small dent in the jobs numbers, and will create next to no real sustainable economic activity). With respect to the "slowing in home price declines", that`s like saying "Notice that as a function like 1/x or exp(-x) decays toward zero, the rate of decay, as measured by the magnitude of the respective derivatives -1/x^2 and -exp(-x), also goes to zero. This is great news for home prices following a similar trend!" Of course real home prices may indeed be getting close to the long-term (and decidedly nonzero) asymptote represented by the Case-Schiller housing index, but they ain`t going to "shoot" back up any time soon, and that "stabilized" level still leaves tens of millions of people holding mortgages for far more than their houses are worth, i.e. the level of mortgage *debt* is and remains huge even if housing prices are "stabilizing". This looking-for-an-Nth-derivative-which-actually-has-positive-sign smacks of desperation on the media-spin side, which brings me to

Heard on the Street: Some pithy perspectives from the retail-investor level (both of these happen to take the bearish view, but if you think such skepticism isn`t justified you really need to find a different thread ;) spotted "in the wild" that is the Yahoo Finance MBs:

interactiveMedia, 28 Apr 2009 13:53 EDT
Subject: More Great News About the Economy to feed the rally
The 10-City and 20-City composite indexes posted year-over-year declines of 18.8% and 18.6%, respectively. That was slightly better than January, when they fell by 19.4% and 19%, respectively, year-over-year.

Wow, talk about desperate. If this is what leads to market rallies these days, imagine when composite indices are so beaten down with double digit losses in another year and a 14% loss is seen as an improvement over 15% next year. The people buying into these horrendous reports and interpreting them as positive news are deluded.


froggywithfries, 28 Apr 2009 13:55 EDT

But, but, consumer confidence is soaring!

I'm guessing that's temporary due to tax refunds.


interactiveMedia, 28 Apr 2009 14:34 EDT

If consumer confidence were really soaring, we would be seeing positive earnings from all of the big retail and consumer companies. Instead the numbers coming out from them are record losses and nothing short of disastrous. In this depressed economic climate, with huge personal wealth loss at all levels, where would consumers come up with the money to pay for these things anyway? More home equity loans, more credit card debt, etc....
The only money stimulating this economy and holding it from record lows is the government which is borrowing money it doesn't have and telling us that everything is going as well as can be expected.
Everyone else is either broke or holding on to what they have for when the crisis gets worse. The government and the banks are lying to you because by making you believe everything is okay, things will be back to normal. But that is not true. This is not some cyclical meltdown. This is an economic unwinding that has been overdue for many years and and the only reason it is not worse is because the gov is selling out future generations by saddling them with unheard of debt in order to try to stabilize the house of cards that has been built up over the past 20 years with fake paper wealth.

My Comment: Indeed, I expect tax refunds are significantly higher this year due to all the 2008 investment losses being written off. But like so much other personal revenue these days, it`s going toward paying down debt and saving for a rainy day - which of course is bad for a pathological-levels-of-debt-based economy like ours. But it`s not spending and credit that need to rise again, it`s the basic economic model that needs to get tossed.


Bair Looks Beyond Tests, Says FDIC Needs Power to Close Holding Companies: Federal Deposit Insurance Corp. Chairman Sheila Bair, looking beyond stress tests that will determine the health of the top 19 U.S. banks, said her agency should have the authority to close even the biggest lenders.

The “too-big-to-fail concept” should be “tossed into the dustbin,” and the FDIC should have the power to close “systemically important” financial firms, Bair said in a New York speech yesterday. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program,” she said.

My Comment: Sheila, Sheila, Sheila, how many times do me and Bennie and Timmy have to remind you to get with the program? "systemically important" means "must be bailed out at all costs", and we do mean all costs - securities laws be damned, financial disclosure regulations be damned, Federal Reserve Act be damned, cost to the taxpayer and to smaller better-run banks be damned. Man, I *told* George Dubya and Hank P. that this was the kind of trouble we`d get once we started doing the "Pee Cee" thing and letting chicks (ones not working for the Hoover Institution like Condie, that is) into the club. This stuff was so much easier when it was just us Goldman boys and the occasional Skull-and-Boneser to play the heavy...

[AES]

Originally Posted by garo

..It is privatized profits and socialized losses...

IMO, this is the "imperfect implementation of collectivist principles" as defined by Karl Marx.