Mark Byron

Maturity isn't Fun

Here's an interesting piece on McDonalds disappointing Wall Street with its earnings-

Sales at restaurants opened at least 13 months rose amid what CEO Jim Skinner called a "challenging global economic environment." Same-store sales gained 3.3% in the U.S., 3.5% in Europe and 1.1% in the Asia/Pacific, the Middle East and Africa. Growth has slowed from earlier this year, when McDonald's reported global comparable sales of 6.7% in January and 7.5% in February.

Last I checked, McDonalds is a mature company. You can expect it to grow at about the rate the economy grows unless it does something to add to its cut of the American budget or tastes shift towards it. Tweaking value members and marketing coffeehouse-style brews will help, but everyone else is tweaking their offerings as well.

In a tough economy, 3% growth isn't bad. It isn't anyone's idea of a growth stock, but it has ceased to be a high flyer a long time ago.

 

Half a Trillion

That's what Apple is worth- it has a market cap (price*shares outstanding) of $515 billion as we go to press. That's over a $100B more than Exxon, the runner up in market cap.

Strangely, Apple isn't overpriced. It earned just under 33 billion dollars last year, giving it a modest price-to-earnings ratio of 15.72. That PE ratio is normal for the computer industry, and if you think Apple's prospects with its iPhones and iPads and other iCandy is better than those mere mortals in their wake, them Apples might be a steal at a new record of $552 a share.

A stock split might be an order, but with odd lot costs being a lot less than in the bad old days, that might not be as much as an issue as it used to be.

Barry in Your Pocket

I passed on Mondays GOP debate and tonight's State of the Union; the lowlight of the evening seems to have been the president's desire to have a 30% minimum tax on millionaires. That's likely to play well, given that a certain former private equity CEO with an eye on Obama's job showed that he's paying 15%.

One problem with that proposal is that the people who would be most affected would be people getting capital gains, and some people who aren't normally millionaires in income can become one for a year when selling a family business. For instance, a farmer who has a million-dollar spread may only make $50K a year (farmers usually don't make a good return on their investment), but he'd suddenly be making a million for this year if he sold off the family freehold.

We already have the Alternative Minimum Tax to get some of the game-playing out of the system, but there are reasons why we have special treatment for capital gains; a lot of long-term profit is actually inflation.

Swapping Deck Chairs on the Euro

Somehow, I have to stifle an inner Ron Paul here on the news of the Fed easing credit terms for European central banks borrowing dollars. That screechy voice is hollering "all that funny money is going to come back to bite us in the butt; they're dollar-swapping deck chairs on a financial Titanic."

The financial markets liked the news; the US markets had a very good Wednesday. However, such moves are mere window dressing unless governments get to the ugly business of balancing their budgets. The British public sector took to the street yesterday, protesting budget cuts, pension cuts/age delays and wage freezes. However, it's tough moves like that that are likely to be needed in order to get governments at a level that is sustainable for the economy to support.

In both Greece and Italy, technocrats are now in charge; in political cultures that are used to having the cabinet ministers being members of the legislature, having non-elected outsiders is abnormal and seemingly undemocratic. It doesn't seem that odd from an American perspective, since the US cabinet is usually about 2/3rd technocrats and 1/3 politicians; the current cabinet has two ex-governors (Sebelius and "Big Sis"), an ex-senator (Hillary) and two-ex-congressman (Panetta and LaHood), with the rest being more technocrats.

However, since the politicians are not in great position to cut programs they campaigned for  not too long ago, cooler heads can sometimes be helpful. They can often lean towards continuing the big-government status-quo rather than more radical downsizing, but consensus is needed in such a major overhaul.

The British government seems to have something of a backbone. PM Cameron seems a bit RINOey by US conservative standards, but he seems to be facing down his critics with some Thatcheresque steel. What's surprising is that he's managing to keep his Liberal Democratic coalition partners on-board through all this.

Cameron gave the vocab lesson of the day, calling the protests of the left a "damp squib." That has a different meaning in US football, where a squib kick is a low, hopping kick that doesn't go far but is hard to return, saved for very late in a half when a long KO return is more of a danger than good field position. In Cameron's use, "wet firecracker" would be the best translation to US English.

It's Called Fundimental Analysis, My Dear Watson

Here's an interesting piece on how web searches for a company increase just before trading in that stock spikes. That should be a no-brainer; if a stock is being researched, some folks will look to buy or sell based on what they're finding out and the research will likely be a leading indicator of activity.

However, that seems to skip past the folks at MIT-

That's surprising because Cristelli and co say that most webusers check each stock of interest just once per month. This implies that they are not expert traders. So the effect emerges from the collective but uncoordinated activity of many inexpert users--a kind of wisdom crowds.

Checking one a month might be a fair pattern for a stock that is either in your portfolio or is being tracked for possible purchase, but expert traders might well do research into a stock before trading; if something came up on their radar via any variety of screening tools, they might go on the Web to see what is making the company tick.

Note that this just tracks trading activity. It doesn't say that the stock will go up or down, just that extra shares will be traded.

Twist and Shout

I'm not a big fan of this Operation Twist 2.0 that the Fed is trying. They have shot their monetary policy wad a while back when they drove short term interest rates down to zero (or at least under 0.25%), putting themselves in a classic liquidity trap, where the economy fails to respond to any additional money pumped into the system.

Usually, the Fed has short-term debt, mostly from the US Treasury, in the mix. Here, they're redoing their portfolio, selling off some of their short-term stuff and buying long-term debt in its place. In theory, this should lower long-term interest rates, as a reduced supply of longer-term T-notes and T-bonds will raise their price and (since price and yield go teeter-tottering in opposite directions) lower interest rates. That would then lower the cost of raising money for both individuals and businesses, making mortgages more affordable and making marginal projects that might not pass present-value muster at higher costs of capital doable at a lower cost of raising funds.

There are two main problems with that premise. The first is that it leaves the Fed vulnerable to a hike in interest rates. Since the value of a dollar is largely backed up by the Fed's stash of investments, getting a portfolio with a longer duration leaves it more sensitive to changes in interest rates; the longer a bond has to go, the more you have to suffer the lower rate you're now stuck with and the bigger the hit its price takes if you sell it early. Much as banks suffered in 2008-9 when their mortgage portfolios took it in the neck, the Fed might suffer if their twisted portfolio goes down in value.

Secondly, the problem is not as much with interest rates but with confidence in the future. The feeble European economy coming to grips with too much government debt in the Eurozone has markets queasy, and the increased scope of government, with business and their owners getting hit with more regulation (including a looming mandate to cover health insurance for employees) and possibly higher taxes, has expansion plans for businesses frozen in many cases.

That uncertainty will be on the table through November of next year, when markets will see if they have to deal with the Obama team through 2016 or not. The president kept saying that we can't afford to wait 14 months, but unless he and VP Biden are willing to resign now and cut to the chase, we're likely to have things stay sluggish until then.

The Fed is in "do something!" mode. The Twist 2.0 is like giving a dead man an enema; it can't hurt. It could hurt if interest rates rise and the Fed takes a hit, but for now, it's doing something.

 

 

Sailing on the QE3

It's worth taking a look at what the Fed's up to and what the Fed's balance sheet looks like (go to page 6 for it on the PDF). This will help counter some of Ron Paul's more outre rhetoric and give a whoa-mule two-by-four to some of the more desperate moves of the Fed.

Our US currency is largely backed up by... US debt. The Fed owns about $2 trillion in US debt on its balance sheet of $2.427 billion in assets. The liability side has $941 billion in currency, $1.3 trillion in deposits from banks and Uncle Sam, about $200 billion in other stuff and $53 billion in equity.

Here's Ron Paul from the last presidential debate

We owe the Fed $1.6 trillion in treasury bills.  Where'd they get the money to buy it?  They created it out of thin air.  So we pay them interest.  Now that's on our books.  So we literally, with legislation, could wipe $1.6 trillion off that is not a solution to the monetary problem or our spending problems, but it would give you a year to work this out.

The figure is closer to $1.0 trillion in pure Treasuries and another trillion in government-sponsored debt (Fannie Mae and Freddie Mac most likely), but the concept is still in play. The balance sheet I referenced was from Jan 1, so we might be a bit higher now.

Were we to take the advice of Paul and just repudiate that debt, the dollar would be worth about 20 cents of what it is worth today, since the Fed would have about $400 billion of assets to cover $2.37 billion of liabilities. That's about 16 cents on the dollar.

What it would create is hyperinflation, as we would see prices rise roughly 600% overnight given the decreased value of the remaining Fed balance sheet. If Ben Bernanke's safety in Texas was questioned by Gov Perry after doing QE3, a President Paul would be need bullet-proof undies 24/7 if he tried to pull that, for the resulting chaos would... at least make for a very interesting poli-fi novel.

___________________

Meanwhile, back to reality as we know it. Washington and the Fed have very little tools in the arsenal for stimulus. Fiscal policy is largely moot given the huge deficits; there is little room for any big tax cuts or spending programs when the lean is towards reining in deficit spending. Standard monetary policy is largely moot as well, as short term interest rates border on zero; we've hit what economists call a liquidity trap, where any extra money pumped into the banking system just sits there.

Normally, the Fed buys short-term Treasury bills as part of its balance sheet, buying them to add to the money supply and selling them to take money out. However, since short-term interest rates are at zero, the Fed has been playing with buying longer-term Treasuries and other long-term debt in order to try and bring long-term rates down as well; higher bond prices mean lower interest rates, as the two go in opposite directions. In theory, the lower rates will lower corporate cost of capital and make marginal projects worth doing at a lower CoC.

"Quantitative easing" is the new buzzword for that strategy. The Fed has done two rounds of that, with the second tranche getting the shorthand QE2, likely as a nod to the luxury liner and/or her royal namesake. A proposed third batch thus gets the shorthand QE3; that's the policy that has Rick Perry hot and bothered.

Why is QE3 dangerous? If we do have a return of inflation, it may do to the Fed's balance sheet by accident what Paul would do on purpose. High inflation leads to higher interest rates and... lower values of existing bonds, since as I mentioned earlier, interest rates and bond prices are on a teeter-totter. Short-term securities don't lose much in value, but the longer the term, the more sensitive it is to interest rates.

The Fed could easily find itself where a lot of banks were back in 2008, with negative equity due to a drop in value of its portfolio.

Bernanke and company want to do something. However, we're at a point where the Fed can't do much without compromising its core function of maintaining a stable dollar and a stable financial system. Washington can't do much, either.

The economy is going to need to get out of this largely on its own; lowering the regulatory burden on businesses, especially including ditching "Obamacare", would be a net plus, but fiscal and monetary policy have emptied their barrels at present and have no good ammo left.

Weekend at Bernanke's.... Neck

During the pre-straw-poll debate, both Newt and Ron Paul went after the Fed, rather ill-advisidely in my view. Newt was a bit more measured, but Paul acted like if he had a spare nuke to use, it would go at the Fed rather than Iran.

Rick Perry has joined the Fed-as-piñata game in a nasty way.

“If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas,” Perry said. “Printing more money to play politics at this particular time in American history is almost treacherous or treasonous in my opinion.”

If that's Perry's working level of treason, I might be heading east on I-69 to Sarnia for safety come 2013. Not that QE3 would be a great idea, but the idea of executing a central bank boss for bad policy sounds like something out of a banana republic (or a bananas one). Threatening bodily harm via lynch mob doesn't look great either; Jewish bankers might not want to be around this new strongman from Texas.

There is a long history of anti-big-city-bank populism; that's one of the reasons we didn't allow national-scope banks until the last few decades. However, I don't recall seeing a serious politician want to put a Fed chairman up on treason charges.

 

AA+? Is That a 13-Step Program?

S&P dropped the hammer late yesterday and moved Uncle Sam down from the top-drawer AAA down to AA+. While there is a non-trivial chance that the US might default somewhere down the line, the timing might be more a policy hissy-fit from S&P than a coherent asessment of American default chances.

One interesting aspect to S&P is that five US companies have AAA ratings from S&P (I think this is up to date); Microsoft, Exxon-Mobil, Pfizer, ADP and Johnson and Johnson.

There is a logical flaw in that set-up ; the US can tax the above companies into the ground in order to pay its bills. Exxon is an inviting target for "windfall profits" taxes, even as Microsoft makes a bigger return on sales than the oil companies. As a drug maker, Pfizer is at the mercy of future government monopsony of the drug market if a more nationalized health care system does materialize.

Most of us computer uses wind up having to give Bill Gates his pound of flesh for the latest version of Office and Windows, but we have the option of going with Open Office or Linux if we want to. We don't have the option of not paying our taxes unless we either want an extended stay in Club Fed or want to move to a country without an extradition treaty.

We may well see a day where the US makes like Peru did a while back where it gave the world financial community the middle-digit salute and renigged on its debt. However, its more likely that any of the five AAAers wind up going belly-up before then. Only Johnson and Johnson is fairly immune to heavy government regulation, and even they pay taxes.

Investors are giving Uncle Sam a 0.01% interest rate yesterday; there isn't a lot of room to slide any default risk premium into that yield.

Mellon-collie Mattresses

Here's an interesting story; one of the big money center banks, Bank of New York-Mellon, is charging corporate clients for putting money in checking accounts. We're used to seeing that for small-fry individuals, but this is being applied to the big, multi-million dollar accounts.

The reason is that with short-term interest rates at near zero, banks are losing money on checking deposits. They have to pay the FDIC a tenth of a percent a year as deposit insurance and T-bills are making less than that; at the peak of l'affair debt-ceiling, it had gotten up to 0.09%, but has crashed back down to 0.01% at last check.

When savings accounts are earning squat, there is little reason not to keep spare cash in cash. Banks are used to making their money on the difference between what they pay to get money and what they lend it out for. Normally, checking accounts are cheap money, with a zero interest rate less any transactions costs. However, when they get next-to-nothing on their investments, that interest spread starts to become effectively negative.

Interesting times, indeed.

Apples and Oranges

Here's a semi-cute story that shows more than a bit of financial illiteracy; Apple has more cash on hand that the US government does. The reason that that is a illiterate statement is that you're comparing the Fed's checking account to Apples checking and short-term savings account.

That's because the first line on a big-company's balance sheet is typically cash and marketable securities; companies often keep only what they need in the very short term in checking and keep the rainy-day money in T-bills, CDs and other short-term investments. Even there, you have to include 12 billion in cash, 16 billion in short-term investments and 48 billion in long term investments to get to the stated 76 billion for Apple. Conversely, the Treasury's checking account has a mere 74 billion, but that's six times what Apple has in its checking accounts.

If we used that same standard with Uncle Sam, all the TARP investments would count towards their account, as would the stock in "Government Motors" and Chrysler. Sadly, they'd have Apple easily beat if you used the same metrics. Making the government a stockholder in a company leads to some odd conflicts of interest, which is why that's been done sparingly over the years.

Outside of those oddities, Uncle Sam doesn't do much saving; if it does run a surplus for a stretch, it will issue less new T-bills than otherwise. Thus, today's Apple piece is comparing apples and lemons.

 

Moody's Off-key Blues

One of the bullet points in the coverage of the debt ceiling "crisis" is that the credit agencies are warning of a rating drop, potentially taking the US out of its standard position as the benchmark "risk free rate." However, the big ratings agencies like Moody's and Standard and Poors generally make changes after the market has moved an issuer's interest rates up, being more the Master of the Obvious rather than a prophet.

That isn't happening yet. Looking at the bond page at Bloomberg (the dude has bad policies but good financial info; that's why he can self finance a NYC campaign), the three-month T-bill is at 0.06%. Not 6%, 0.06%. Not a lot of room to include much if any default risk; at that interest rate, you'd be better off putting it in a mattress if things were nearly as dire as the headlines read.

The "smart money" isn't getting out of Dodge yet. That's not to say that things might not get messy in the next few weeks, but there seems to be more talk about a financial meltdown than any evidence of fear of one. If Wall Street were as jittery as the talking heads make them out to be, we'd at least see a 0.6% T-bill rather than a 0.06% one.

 

Marshalling Your Contacts

Here's an interesting irony given that Jim Tressel got forced out of his Ohio State coaching job earlier this year for lying about improper player perks. Tressel got his OSU gig courtesy of a great run in the 90s at Youngstown State, taking them to the I-AA title game six times and winning four.

The first three of those trips were against Marshall, headed up by Jim Donnan; Donnan parlayed his good fortune at Marshall into a gig at Georgia (somehow I don't recall him at UGA). He's now accused of helping run a Ponzi scheme by his creditors.

The federal court documents, filed Thursday and Friday, are part of a larger bankruptcy case involving West Virginia-based company GLC Ltd.

Formed in March 2004, GLC Enterprises, as it was known then, attracted investments from several high-profile figures from the world of sport. Among them are former University of Oklahoma and Dallas Cowboys coach Barry Switzer; Virginia Tech football coach Frank Beamer; Texas State football coach Dennis Franchione; and Texas Tech football coach Tommy Tuberville.

Here's a copy of the complaint. There's echoes of Bernie Madoff scamming the folks he knew in New York Jewish circles or the Mainse brothers using their 100 Huntley Street connections to bring Canadian Pentecostals into another Ponzi scheme; Donnan seems to have used his football connection to bring a who's-who of college football coaching into the mix. He's yet to be charged with a crime, but the SEC and FBI might well be interested in what comes out in Donnan's bankruptcy filing. 

This seems a lot bigger than fibbing about free tattoos, but it is a sad state of affairs that the two top coaches in college football's "second division" of two decades ago are now getting disgraced within months of each other.

 

Ghosts of Weimar

The European Central Bank, the Eurozone's analogue to the Fed, is raising interest rates, trying to tighten things up to get ahead of inflation. This Reuters piece tries to make hay out of the Europeans turning their backs on Fed leadership, but this is nothing new.

In the second screen of the piece, they get around to this paragraph-

Historically the Fed, which does not have a formal, explicit inflation target, has been somewhat happier to accept higher inflation than the 12-year-old ECB and Germany's Bundesbank before it.

Although the euro zone and the United States face similar external inflation pressures, their central banks take a different view of their economies. The Fed's mandate requires it to promote full employment in addition to keeping inflation in check; the ECB's focus is delivering price stability -- a reflection of its mandate, but also the legacy of the hawkish Bundesbank, which the ECB carries in its DNA.

The German bankers make up the spiritual core of the ECB, and German economic history is tragically marked by hyperinflation. Between the World Wars, Germany had a nasty bout of inflation, where the mark's value went down a million-fold and more. The financial chaos that that 1920s hyperinflation caused helped bring the Nazis to power in the early 30s; the harsh financial reparations that the WWI victors placed on Germany helped cause the problem, as paying back the tab in hard foreign currency put inflationary pressure on the mark. That helped give the Nazis a boogieman in foreign bankers with a large Jewish presence to play into their mythology.

Post WWII, German central bankers have been inflation hawks, making sure that doesn't happen again. The Eurozone has kept a lot of that attitude, so being quick to bail out of an expansionary cycle is within their character.

In the US, it's the Great Depression and deflation that is the bugbear; we've had bad inflation in the late 70s-early 80s, but a stalled-out economy is a bigger fear to US bankers. Thus, we have a Fed-ECB mild disconnect, as the Fed worries about a double-dip recession and the ECB worries about runaway inflation.

The New Sugar Daddies

Here's an interesting story out of northern Canada, where one local mining company is looking to buy out another, but doesn't have the cash to do it and is looking for Chinese help in financing the deal.

Baffinland Iron Mines suitor Nunavut Iron Ore is seeking backing for its bid from deep-pocketed Chinese investors, sources say.

Getting involved in a fast-moving hostile takeover battle is not viewed as something that generally interests Chinese investors, but sources said that hasn't stopped Nunavut from approaching potential backers that could help the company compete with ArcelorMittal's cash offer for all of Baffinland.

Chinese investors have been keen on snapping up natural resources, including ore. From investing in the Australia outback to the Inuit side of the old Northwest Territories, Chinese investors are looking to feed their industrial machine and make friends while they do it.

Such activities are more political in developing countries, where investment in local infrastructure can make friends at the UN, but extending those deep pockets to US allies like Canada and Australia can erode US influence. That's not to say that every deal done by a Chinese company has an ulterior motive, but Chinese "soft power" in world finance is a force to be dealt with.

Starter Castle Parsonage

Do you have $180,000 a year to pay for a mortgage? Mike Huckabee does-

According to the Arkansas Times, the 2008 presidential candidate is constructing a $2.2 million home on a lot in Blue Mountain Beach he acquired earlier in the year for $800,000. The beach is located near Destin Florida, on the state's panhandle.

The Arkansas Times, which viewed local tax records - also reports the former Arkansas governor has taken on a $2.8 million mortgage to buy the land and build the home, while paying $250,000 out of pocket. That mortgage is in addition to a near-$400,000 encumbrance on Huckabee's vacation home in North Little Rock, Arkansas, according to the Times.

The new home will consist of 8,224 square feet of living space and nearly 3,000 square feet of deck and porch areas.

I've been doing some online finance tutoring and had my mortgage-math spreadsheet at the ready. If we plug in a 30-year mortgage at a jumbo (too big for Fannie Mae or Freddie Mac and thus a bit more illiquid/hard to resell) rate of 5.125%, we get a monthly payment of $15,245.64.

Huck is doing well these days. However, most folks who are in position to run for president often are. Between speaking gigs, books and money from his Fox News work, he's likely more than good for it. That might also mean that he might be too extended to give up the pundit gigs to make a second run for the White House in 2012.

I had a piece in by story-to-blog folder on Huck's pathway to the White House. That largely requires That Woman not to run. Since it looks like the queen of TLC is running, Huck can enjoy his new Redneck Riviera digs until 2016 or later. Or, he could parachute in an take on Bill Nelson for the Senate in 2012; the Florida GOP could do far worse.

Cash for Junckers

It appears that Ireland and Portugal are financially a bit edgy, as Irish government debt has a 5.37% default risk premium over German debt; I would assume that the Bloomberg writers were using the Germans as the near-risk-free baseline. Portugese debt has a 4.14% premium.

So far, the Irish and Portugeese haven't asked for help, but those high default risk premia make a lot of observers nervous.

Luxembourg Prime Minister Jean- Claude Juncker, who chairs the group of euro-area finance ministers, said he doesn’t expect imminent agreement on a bailout for Ireland because Dublin hasn’t asked for support.

“I don’t think we’re nearing an agreement because Ireland didn’t put forward a request,” Juncker told Bloomberg Television in an interview in Frankfurt today. “The Irish think that they can keep the problems they’re facing under their control. They are not near the point where they would ask for external help.”

The Irish needed to extend FDIC-like insurance on the large Irish banking industry when we had the financial meltodown of late 2008; those gaurentees are becoming more expensive than origionally planned and have caused those Irish interest rates to rise.

Morally Bankrupt

Here's a jolting bit of news; the Crystal Cathedral has gone and written a new chapter in its church's history- Chapter 11. The home of positive thinking had negative cash flow and has filed for bankruptcy to keep creditors from grabbing assets.

An split between Robert Schuller and his son a few years ago probably didn't help and a down California and US economy likely hit the bottom line. Now, having Schuller's daughter at the help with her doctorate in management might make sense.

Let's put a bit of a twist on the title. If it is OK to go into debt to finance church expansion, then you're holding open the possibility of having your church go bankrupt if it can't pay its bills. If you did take on those debts in a honorable light, could you be acting morally if you thus had to go bankrupt when things went south?

I can't point too many fingers here, since I just went through Chapter 7 myself this summer. However, if the CC folks had played things a bit closer to the vest and not gone as Hollywood as they did, they might have been able to ride this out.

The interesting question to ask will be who would be interested in buying the building if such a deal is needed. Are there aspiring Joel Osteens in the Orange County area who might like moving into that facility? Or, could a big megachurch (Rich Warren's Saddleback comes to mind) that is outgrowing its current digs split in two and send one set over to Garden Grove?

What in heck do you do with a monster church building if it goes under?

 

 

The Not-so-Big Payback

Here's some interesting news from Wall Street-dividends rose in the third quarter compared to this time last year. That was deemed to be good news, but it might not be depending on other factors.

What came to mind when I saw that news at lunch is that it would be the payout ratio (dividends/net income) that would indicate how companies are seeing the future. Companies that see a lot of good places to expand their company might opt to plow their profits back into the firm; growing companies often don't pay any dividends, waiting until they grow to a point where they can't find good things to do with their money internally.

A higher payout ratio could mean that companies are confident about the future, since firms are loathe to cut dividends, given that investors over-react to cuts. It could also mean that the future looks so cloudy that they don't see any growth to speak of and would rather pay earnings out as dividends rather than reinvest it in the company.

I had to Google for information on current payout ratios, hence the Globe and Mail link above; they note that the S&P 500 has a 30% payout ratio at present, rather than the normal 50%. If dividends are rising but the payout ratio is stable, then it would seem to be neutral-to-good news.

Keep Your Powder Dry

I somehow don't have Mark Cuban's blog bookmarked; I found this post via the TrueHoop basketball blog on ESPN, which is on finance rather than basketball.

It's a read-the-whole-thing post, but Cuban's premise is that the low interest rate environment that the Fed has set up has allowed a lot of dumb money to pour into the stock market; that, combined with the speed of the Internet-driven market making good buys last a nanosecond before everyone else figures it out, makes it hard to make a profit in the modern stock market.

Not only are the free-lunch arbitrage opportunities drying up, but the dumb money makes the market very volitile. That's the look at the market level.

The real-world that the stock market draws its value from is iffy. The amount of money poured into the system by the Fed should create inflation sooner or later. Things are getting squirrely in Iran and Venezuela and fixing the federal deficit is going to take an ugly combination of budget cuts and tax increases; either that, or the Treasury bond market is going to go into junk bond status if Washington keeps cranking out the paper.

Both they dynamics of the market and the economy have Wall Street looking iffy. This is a point, to borrow from Will Rogers, to worry more about the return of your money than the return on your money. A near-zero percent bank account won't make money, but it sure won't lose it.

Normally, I'm not a market timer, but I'd feel better keeping my powder dry and wait for some opportunities when the doo-doo does hit the fan.

One Nation, In Dirigible

Here is an interesting piece that Drudge linked to, noting that Thursday's stock market statistics had an odd anomoly that has usually preceded a major market crash if it happens twice in a seven-week period.

They call it the Hindenburg Omen after the German airship that caught fire in New Jersey in the 1930s. It had a trifecta of stats

(1) 2% of stocks have to be hitting new yearly highs and 2% of stock have to be hitting new lows. Usually, you don't have a lot of new highs and lows at the same time.

(2) The ratio of stocks going up to stocks going down has to be lower in the last four weeks than in the last eight weeks, but yet greater than one.

(3) The market (the NYSE index in this case) has to be above it's average of the last 10 weeks.

Put those three together and you have the recipe for a crash.

I'm not a big fan of technical analysis, but their might be some real-world reason for this set up.

For the first one, there is a lot of good news and bad news at the same time. Some sectors of the economy are recovering, giving us some new highs for the last 12 months, while the lack of recovery in many sectors plus fear of a double-dip recession might cause vulnerable companies to see new lows.

The second one is possibly marking fear of that double dip. It's noting a deceleration of stock market gains, a negative second derivative for the math geeks in the crowd.

The third one marks a stock market that is on the rise, but not always for long.

Combining the three factors and we have above-average stock price with a rate of movement that is hitting the top of the hill and leveling out, with good and bad news in store for stocks at the same time. One major piece of bad news could have investors screaming towards the exits, for the declining plus-minus ratios has us getting to the top of a roller-coaster hill ready to take the plunge.

They have not had a second Hindy day yet, although Wednesday was close. This will be interesting to watch.

GM and GDH

We're at the first anniversary of the GM/Chrysler "bailout", where Uncle Sam bought out the creditors and became the second largest shareholder behind the UAW's retiree health fund. President Obama was in the Detroit area yesterday bragging on how what the talkers like to call "Government Motors" is doing post-bankruptcy.

As much as Republicans would like to have some extra ammo, that decision seems to be working out. GM is rebounding nicely and is looking to be in position to do an IPO of GM 2.0 and let the stock market take the stock off the hands of the UAW and Uncle Sam and let them go back to building cars and normal regulating respectively. Like the original Chrysler bailout in the Carter era, this one looks to prove to be a good investment.

Does that mean that the anti-bailout crowd deserves both barrels, like WH press secretary Gibbs did yesterday?

Told by a reporter that “You had Rush Limbaugh today — today or yesterday — talking Obama Motors again,” Gibbs, who doesn’t often provide free advertising by taking on his critics by name from the podium, let fire.

“Look, Rush Limbaugh and others wanted to walk away. Rush Limbaugh and others saw a million people that worked at these factories, that worked at these parts suppliers, that had — that supported communities, and thought we should all just walk away. The president didn’t think that walking away from a million jobs in these communities made a lot of economic sense,” Gibbs said.

That is a bit of an overstatement by Gibbs. Had GM and Chrysler gone through a conventional bankruptcy proceeding, most of their operations, and the operations of their suppliers, would have kept going, as the credits would have been interested in keeping a live GM and Chrysler in a Chapter 11 rather than selling the factories and car inventories at fire-sale prices in a Chapter 8 liquidation. Some of the underperforming plants and suppliers might have bit the big one in a Ch11 restructuring, but not all million jobs as Gibbs would have us believe.

That being said, such a large bankruptcy would have been messy, and Uncle Sam would have wound up picking up a big chunk of the UAW's retirement health care tab via pension-guarantee funds. The negotiations between the UAW and the bankruptcy judge on wage and benefits cuts to make GM 2.0 viable would have had the potential to be rather ugly. Creditors would be in court looking for a better deal and appeals could have taken years, with the Supreme Court likely getting involved in some of the more contentious issues. Owners of cars would have their warranties go up in smoke in return for some stock in the restructured company or a cents-on-the-dollar settlement.

Would that brawl of a Ch11 filing been better than the Government Motors version of Uncle Sam forcing a deal on the creditors and buying them out at about 20 cents on the dollar? From a free-market standpoint, it was an awkward precedent of having government step in and take over one of the country's largest employers. However, the chaos that it saved seemed to be beneficial to the country as a whole. Using the Gross Domestic Happiness meme, this was a plus to GDH and, in 20/20 hindsight, GDP as well.

Hayek and Friedman might be spinning at 5000RPM in their graves, but the Obama's team move worked. However, that move was in the middle of a less-than-effective TARP package for financial institutions and a massive "stimulus package" that has underperformed its expectations. Government was increasing its hold on the economy at a pace not seen since at least the LBJ era, and the GM package got lumped into the Obama excesses.

A McCain administration might have done something similar had they had the reins last year and would have had a harder time getting the UAW onside to a plan. The economic libertarians would have screamed at about 75% present voice over it, but it would have been the GDH thing to do.

Yuanna Change the Peg?

China's central bank has ruffled some feathers by proposing their semi-fixed exchange rate for the yuan be based on a basket of currencies rather that the US$. The public logic is that since trade isn't just a US thing, that the exchange rate should reflect a broader range of trading partners.

The private logic might be that they are nervous about how much US debt they hold and want to slowly back away from the US, given the sluggish nature of the US economy; a Chinese bond-rating firm has giving US debt a less-than-AAA rating, possibly an initial shot across the bow that Beijing may start dumping dollar-denominated assets. They also might want to distance themselves from the US if expansionist policies draw the ire of a future US government.

That might be of a greater long term importance than North Korea's saber-rattling this week over a South Korean-US exercise. Dear Leader and his posse are nervous about that 90,000 tons of diplomacy called the USS George Washington and are threatening to “legitimately counter with their powerful nuclear deterrence." Whether that means an all-out war or just another missile test remains to be seen; probably the latter, for they aren't in position to win a war with the US.

Dark Chocolate

A broker/hedge fund named Armajaro Holdings has nearly cornered the cocoa market in Europe; hat tip to Connextions and Lansbury's Lido for the heads up.

What is interesting about this cocoa story is that Armajaro actually took possession of the cocoa and is having it stored in the silos of the London International Financial Futures and Options Exchange, the European counterpart to the Chicago Merc where ag futures are traded. Normally, hedge funds would have futures or options contracts on something they thought would go up (or down) in value, then take a reversing contract just before the option expired. However, in this case, the "speculator" is actually taking possession of the goods.

According to the Daily Finance article, "Armajaro serves as a seller of bulk cocoa to many of the world's largest chocolatiers, so it's clearly not some ill-informed, cowboy investor." Cowboy might be open to debate, but they seem to know what they're doing.

There are some edgy signs in the cocoa market, as the Ivory Coast crop is looking iffy, so there seems to be some upward pressure in that market; Armajaro would then be moving to get ahead of the market and sell into those rising prices.

Is this one to storm the barricades over, as LL is fixin' to do? Not quite yet. If there were 20 hedge funds without a cocoa background in on this, I might be more prone to agree, but this appears to be more of a wholesaler stocking up on inventory than anything more sinister. If they do anti-competitive moves to take-advantage of things, like turn and try to block imports from the Americas or Asia, then I'll be at the virtual barricade with them.

Why not Nationalize Big Oil?

Oliver Stone wants to nationalize the oil industry. It might not be that bad of an idea, assuming that they actually buy the companies rather than just grab the assets a la leftists elsewhere.

• Gas prices can drop about 10% if the roughly 10% return on sales that oil companies get can be converted into savings at the pump, more like 14% if taxes are taken out of the picture as well.

• New oil refineries will be easier to place, for it will be the government looking to get them done, having more clout to quiet agencies who would want to slow things down.
• It will show people that oil companies weren't the robber barons they were cast out to be, since prices didn't plummet under state ownership.
• It will give the left one less thing to whine about and for state AGs to demagogue over.
• Yes, it will cut into exploration, since wildcatting will be a federal job, but since they are tightening the regulatory loop, we won't lose that much.

Of course, if they buy the companies, they will further run up the deficit and will (egads!) actually be in charge of it and won't be in position to mau-mau them every election cycle. How will the left live without Big Oil to kick around?

How Long is that Bucket List?

Interesting post from Dr. Greg Mankiw on the ramifications of being able to genetically test for longevity. If insurance companies can't use those tests to set prices but individuals can use the test to set up a financial strategy...

(1)People who are going to croak early will tend to buy life insurance. People who are expected to live longer lives will be better off to invest the money. That adverse selection will tend to raise life insurance prices, as the insurance poll will start to skew to quick-dies.

(2) Lifetime annuities will be taken out by the people with longer lives. That will tend to lower the interest rates on those annuities.

(3) If one person in a couple is slated to live longer than the other, they can aim pensions to the life of the long-lived pair.

(4) Social Security would see the quick-dies take their payments at 62, while longer-lived folks will hold out longer.

Those adverse selections will skew insurance towards the price of the sickly and skew retirement products towards the long-lived.

That is going to be a problem with health insurance going forward, where the sickly will tend to buy insurance, especially if companies can't charge extra for having a poor health history or block coverage of preexisting condition. The price of health insurance will skew towards the cost of the sickly patient and thus drive up the price.

For the Money, for the Glory.... but Mostly for the Money

The full-contact game of musical chairs, college football style, kicked off yesterday with Colorado joining the Pac 10; more chairs got filled today as Nebraska joined the Big 10 and Boise State joined the Mountain West.

The Nebraska move was a stunner, at least in the quickness. We went from rumor to done deal in a matter of hours, as the Nebraska folks voted on it early this afternoon and the Big 10 approved it shortly thereafter.

The next chairs to get filled may depend upon the Texas schools. A rumor has been floated that Texas A&M might go to the SEC rather than the PAC-10. The SEC would be a decent cultural fit for A&M, for I'm not sure how a battalion of Aggie ROTCers will go over in Berkeley; probably about as well as the moderate Baptists at Baylor.

This seems more like some sort of video game where you're sliding teams around to maximize cash flow; Sim-AD. ESPN has a Trade Machine for checking on the capology of an NBA trade; they might need a Realignment Machine for the NCAA.

I clicked the Finance category by accident when I went for Football. I think I'll keep it.

P.S. Brownie points to the person who identifies the source of the title without Googling.

The Big Payback

Here's an interesting story that I found looking at the automotive news- Uncle Sam has hired Lazard Frères to oversee an eventual GM IPO, to the tune of a half-mil a month.

What is interesting is that the guy who had the GM portfolio at the Treasury Department, Steven Rattner, was a Lazard alum. Lazard also rings a bell since one of the big Democratic donor operatives was Felix Rohatyn, who ran Lazard for decades; in the 80s, I recall that he was the guy Democratic politicians went to first to get Wall Street to donate. I didn't have Rohatyn's name committed to memory, but when I saw Lazard's name come up, I remembered that it had a Democratic rainmaker as boss.

Someone needs to have that gig, and Lazard seems a valid a choice as any, but it seems a bit incestuous at best to have your car czar hire his old firm to do the underwriting, and more than a bit of a quid-pro-quo for all the donations from that firm over the years.

Here's a list of the current donations from Lazard via Open Secrets.com, and things skew decidedly to the Democratic side. Vernon Jordon, veteran Democratic operative and Friend of Bill, is on their payroll.

That's one reason why getting government into the investment business is touchy, since your party's favorite investment banker is going to get some extra business if you do that. On the state level, they have to watch for investment bankers getting cozy with officials, since states need help from investment banks to place their municipal bonds, so you can see some quid-pro-quos where officials will send business to donor bankers. It looks like we're seeing some of that here.

Easing off the Gas

The Fed raised the discount rate to 0.75%; that's different from the Fed Funds rate that is their main money-supply target, which stays at 0.25% or less. The discount rate had been at 0.5% and a quarter-percent ("25 basis points" if you want to sound like a finance geek) move is the customary tick in rates.

A quick monetary-policy review: the Fed Funds rate is what banks lend each other reserves at the Fed. Banks have to keep a certain average amount of reserves on hand,  and if they're short in the first part of a period, they'll borrow later on to get back to their average. The discount rate is what struggling banks get charged by the Fed if they can't get other banks to lend to them at the Fed Funds rates.

Raising that rate to a half-percent above the FF rate gives a bit more discouragement for banks to go gonzo on their lending. As the piece mentions, this move shouldn't affect other interest rates in the market much, for it the Fed Funds rates that is used by the market as a benchmark for other loans.

Still, this is the first raising of interest rates since 2008's Black September meltdown. It's a sign that they're starting to get worried about inflation and less worried about growth; they've had monetary policy's pedal to the metal since Black September and are just now starting to ease up.

Rush Is Financing Saab? Not!

An interesting story in the news today as part of my car beat is GM selling Saab to a small luxury car company called Stryker Motors. GM gets just under $400m in cash and preferred stock, but the deal is predicated of getting the European Investment Bank to cough up a $560m loan that will be guaranteed by the Swedish government.

This EIB is the investment arm of the EU, doing politically-desirable loans and investments; while government investment in GM and Chrysler is an anomaly in American finance, the EIB has been at it since the 1950s. 

If you're a talk radio listener, you'll recognize that acronym, since Rush Limbaugh's business vehicle is the "Excellence in Broadcasting network." To see EIB in the form of the EU's putting its statist nose into the financial markets is an interesting irony. However, the Europeans were there first, beating Rush to it by at least a quarter-century.