Tuesday, September 15, 2009
Looks like today is natural gas and coal stock day; I like the latter sector more so I'll highlight some names there. Interesting behavior considering China is re-opening mines, [Aug 24, 2009: Bloomberg - Coal Rally Ending as China Shuns Imports, Opens Mines] thus reducing international demand, but with both natgas AND coal moving together it is basically an investment call on the strength of the domestic economy (natural gas use especially dependent on the local economy) Since you can see identical behavior I assume some algorithm HAL9000 behavior i.e. if retail sales > X variable, buy coal and natural gas stocks.
Breakouts all over...
Reasoning 2: While the stock has not done anything bad, it certainly has done almost nothing good either in these past 2 months while the market rallies endlessly. Underachiever. There are countless companies losing money hand over fist, up 50% in this time frame and I would have been far better served buying one of those. Why I bother with profitable, growing companies is a mystery to me.
Taking our 0.5% stake in GeoEye (GEOY) and securing a minor 4% gain. If past is precedent, the stock should begin an epic rally beginning tomorrow. A close over $26.50 should bring in buyers...
[Aug 10, 2009: GeoEye Beats Expectations on Bottom Line, Slight Miss on Top]
[May 13, 2009: Starting GeoEye on; Should Benefit from DigitalGlobe IPO]
Likewise to Riverbed, momentum based models love breakouts like this ... so one could consider it as a long here. I assume, short of the printing presses running out of ink those gaps in the mid $30s will require an Armageddon like moment. ;)
We're taking our 2.2% allocation and going home with a 13% loss. Can you feel the squeeze?
We came into the week pretty well hedged 1:1 (close to it) but with the transactions today and the SPY calls I bought yesterday we are quite heavily skewed long for now.
In fact, this is now a nice long possibility - with a stop out below yesterday's low in my opinion.
- Capital One Financial Corp. said Tuesday that delinquencies on its U.S. credit cards rose in August, although defaults slowed, sending its shares tumbling nearly 5 percent.
- The McLean, Va., company in a regulatory filing with the Securities and Exchange Commission said its annual net charge-off rate, or the percentage of loans the company believes won't be repaid compared to total loans, dropped to 9.32 percent in August from 9.83 percent in July. (that's an improvement)
- The rate for loans at least 30 days delinquent worsened, however, for the second straight month. The delinquency rate rose to 5.09 percent last month from 4.83 percent in July. (this is more recent data and doesn't fit into the "2nd degree improvement" story)
- In Capital One's auto-loan unit, the charge-off rate in August rose to 4.31 percent from 4.26 percent in July. The delinquency rate climbed to 9.42 percent from 9.22 percent.
Specific to Capital One I think all this delinquency data is now moot since this firm can borrow from the Fed at nearly nothing and push that money into buying US Treasuries for risk free gains, or letting consumers borrow it at 23%+. Even if the default rate is 25% (more than double from here) they should make money on a 20%+ spread on paying consumers. It's great to have the Federal Reserve making your business completely idiot proof to run.
The larger question if indeed US consumers matter anymore, is how will spending get back to the good ole days if easy credit is no longer available. Borrowing at 23-29% is very different than 0-12%. But these are not questions anyone is asking and since the government now is taking the place of consumers as the spending machine of the economy, I suppose US consumers behavior is a moot point. When in need, simply put your hand out ... and the government will fill it so you can go consume. Or pay back Capital One's debts.
As for the greater market as I stated once over S&P 1050, there really seems to be no resistance until 1100 so I have replaced those September SPY calls I got rid of late last week with 1 batch yesterday (October 105s), and one today (October 106s). Until proven otherwise S&P 1040 is the floor for now. I'm enjoying being complacent... it's sort of fun.
I see now we are back to the pattern we had in March & April where you can buy S&P futures overnight when they are in the red and make a mint as the market surges to the green during the day. Almost like clockwork. I used to do a game when I wrote down S&P futures at midnight then checked at 9 AM and it almost created a gain (and a large one at that) March, and April - same thing past 2 sessions. I still wish someone who had access to the futures data could tell how much of the rally from March 6th was during normal market hours and how much has been during "overnight" when these futures are much more easily "moved to the correct spot".
Short Capital One Financial in fund; no personal position
Long October SPY 105, 106 Calls in fund; long SPY 105 calls in personal account
Gordon Brown to UK People: "I must tell you the tough truth about the hard choices." "Labour will cut costs, cut inefficiencies, cut unnecessary programs and cut lower priority budgets.”
US Politicians to US People: "You can't handle the truth, we have more programs coming to subsidize the economy and if you want a home, car, or fridge - please call your local representative at 1-888-Steal-from-Grandkids"
Loosely translated: "You don't want the truth because deep down in places you don't talk about at parties, you want me spending future generations money for today's generation. You need me spending future generations money for today's generation. We use words like spend, buy, consume. We use these words as the backbone of a life spent keeping Americans believing we are working in their interest while simply trying to preserve our Congressional jobs, with no regard for long term consequences."
"Did you order the new generational theft bill?"
"I did the job..."
"Did you ORDER THE NEW GENERATIONAL THEFT BILL!!?"
"Your #@&*#&@*# right I did!"
[End of scene]
The US is running out of fellow reckless teenagers in the globe - we might be the last one staying out late, stumbling home at 4 AM after a night of drinking and skipping class. Luckily we are the biggest and baddest bully on the block and since the younger generation won't do a thing about generational theft, we can continue down this path for a while more. Prosperity - here we come.
Let's see what is happening in the country that most resembles the US in terms of actions the past decade.
- Prime Minister Gordon Brown said Britain’s Labour government will have to cut spending in order to reduce its debts, bowing to pressure from the Bank of England, Standard & Poor’s and opposition politicians.
- “I must tell you the tough truth about the hard choices,” Brown said in a speech to union leaders in Liverpool today. “Labour will cut costs, cut inefficiencies, cut unnecessary programs and cut lower priority budgets.”
- It’s the prime minister’s most explicit statement yet on the need for restraint on government spending and a reversal of his position in June, when he pledged more investment in the face of calls from the Conservative Party for reductions.
- “The time for generalities is over,” Vince Cable, the Liberal Democrat lawmaker in charge of his party’s Treasury policy, said in London today. “We need to debate when, how and where the cuts will come.”
- The Treasury plans to sell a record 220 billion pounds ($362 billion) in debt this year and next year expects a deficit above 12 percent of gross domestic product, the most in the Group of 20 nations. Standard & Poor’s has threatened to downgrade Britain’s AAA credit rating.
- Bank of England Governor Mervyn King today reiterated his concerns about the deficit. “Everyone is concerned that we get back to a position where the public finances are on a sound footing,” King told lawmakers in London today. “The failure to do so might create risks in terms of the cost of financing.”
- Dave Prentis, general secretary of Unison, said he was concerned by the lack of detail in Brown’s pledge to save money by “cutting lower priority budgets.” “He’s got to put a lot more flesh on the bones,” he said. “We really need talks about what he means by waste, what he means by back-room services, and how deep he thinks cuts will have to go.”
- Brown said that the spending reductions the Treasury already plans will “cut the deficit in half over the next four years” and that the U.K. is acting with America, Germany and France to keep debt “around 80 percent of national income” and to reduce it as the economy rebounds.
- While the government plans to reduce the deficit to 5.5 percent of GDP by 2014, the stock of public debt is forecast to more than double to 1.4 trillion pounds, the current value of the U.K. economy. S&P has said that level of debt isn’t compatible with a top-notch credit rating.
Gafisa says the return to relative health of credit markets will allow it to raise money via debt offerings; while a share offering might come in the future - it won't happen in 2009.
- Gafisa SA, Brazil’s second-largest homebuilder, may sell bonds in the domestic market this year, taking advantage of record low interest rates to repay maturing debt, said Chief Financial Officer Duilio Calciolari. “Because liquidity is increasing, we’re seeing more options for the company, like issuing additional bonds,” Calciolari said in an interview in New York. “It’s a matter of opportunity. Now that we have lower costs, we can refinance our short-term debt.”
- The Sao Paulo-based company sold 250 million reais ($137 million) of 2-year floating-rate notes in the local market last month, according to Bloomberg data. Gafisa will have 509 million reais in maturing debt by June 2010, according to company documents.
- The homebuilder has no plans to sell shares this year, he said. Gafisa’s rivals Rossi Residencial SA and PDG Realty SA Empreendimentos e Participacoes have announced share sales this year, heightening speculation Gafisa would follow. “There’s a chance we’ll sell shares in the future but not this year,” Calciolari said.
- The company’s revenue from low-income housing may increase to as much as 60 percent next year from the current 50 percent, he said.
- Sales may grow 15 percent this year and 25 percent in 2010, according to Calciolari. “There’s a huge demand for housing, especially for the low-income sector.”
- Prices for high-end homes have recovered to pre-crisis levels, he said.
[Mar 30, 2009: Restarting Gafisa as Sam Zell Increases Stake]
[Oct 22, 2008: Sam Zell Increases Stake to Gafisa to 18.7%]
[Aug 17, 2008: Gafisa Earnings]
[Nov 19, 2007: Initiated a Position in Gafisa - Brazilian Homebuilder]
Long Gafisa in fund; no personal position
Monday, September 14, 2009
- [Jan 7, 2008: Reader Pledges Toward Mutual Fund Launch]
- [May 26, 2008: Frequently Asked Questions]
- Our story in Barron's [A New Kind of Fund Manager]
For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.
Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)
I will post an update of performance versus Russell 1000 every 4 weeks; we've moved over to a new tracking this year (Investopedia.com) as the old system would not allow shorting of individual
Under the new tracking system, our ninth 4 week period is now complete. (Data is through last Friday's closing prices)
(click to enlarge)
Another stellar period for stocks; one begins to sound like a broken record. Unlike the previous period when 18 of the 20 days were up or with no loss greater than 0.5% on the S&P 500 these 3 weeks were marked by an inverse "V" shape, and then a hockey stick rally in the last week. The first week had a moderate rally (Monday of that week marked some consolidation), and then week two was flattish - but most of the action these 2 weeks were in a small select group of government supported financials; some days 33-40% of the trading volume on the NYSE was in the AIG, C, FNM, FRE, BAC's of the world. By the end of week two we were in the throes of a 7 week rally that commenced in mid July. Finally some air was let out the following week, as worries about China and consumer confidence mattered... for a few short days anyhow. A 4%ish rally (let's call it a pitstop) simply laid the groundwork for yet another rally late in week 3, and through the Labor Day shortened week 4. Gains in the last week were broad based as no one sector dominated as we've seen in previous periods.
For the 9th "four week" period we returned +6.8%, versus the market's +4.0%, so an out performance of +2.8%.
On a cumulative basis we are now +47.9%, versus the Russell 1000's +13.0%, so an out performance of +34.9% for our "year to date" if you will. (thus far 36 weeks)
Please note we did not start on Jan 1st... so this is not an apples to apples "year to date" performance but obviously close.
Our yearly goal of beating the index we track against by 15% has been reached, and we're now at the highest level of outperformance versus the market for the year. Both absolute performance (making money) and relative performance (outperforming the market) were achieved in the period - which is always the best outcome.
*** Long/Short Discussion below
This period from a 40,000 point of view we lagged in the first two weeks as we had let go of a lot of realized gains in the previous period and were looking for some (even minor) correction as a long in the tooth rally reached week 6 & 7. That did not happen, instead the dominance of government supported financial institutions was the main theme in these weeks. While gaining about 1% the first two weeks of this period, the market was up 2%. The majority of our absolute performance and all of our relative (versus the market) performance came in the latter half of period 9. The swift 4% correction in week 3 allowed us to realize gains (some of which were locked in) on the short side of our portfolio, while adding incrementally to some long exposure. We quickly went from a 2:1 short/long book to 1:1. Cash remained high throughout the period. Despite this balance we lost some performance at the beginning of week 4, but had a big day last Thursday with our top 2 long positions (SWKS RFMD) pre-announcing / saying positive things in conferences and a SPY call option short term strategy with about 10% of the portfolio that was held for about 15 hours with 5%, and a few hours (intraday) with the other 5%. Despite our ambivalence on the economy as a whole, layered onto an epic rally - short positions were not expanded materially as a flood of liquidity in 1999 taught us how out of hand things can get. While these periods end badly, until they end a lot of people on the short side will take immense damage.
Specific transactions this period were a lot more limited than some of the previous time frames - frankly the market had gotten extremely boring as the same intraday patterns had been emerging with almost all the action in the opening 90 minutes and closing 30 minutes. I call this the "Dead in the Middle of the Day" market, or Siesta Market.
Early in week 1 (Monday) the SPY ETF filled a "gap" we were waiting for at 98 (i.e. S&P 980); not being able to expect much more than that these days we quickly moved to cover some short exposure (including closing out a 4% ValueClick short allocation), and add some long exposure in 2 Chinese names Longtop Financial (LFT) and E-House Financial (EJ). I said the easy short trade had been made; which proved prescient in retrospect. The next day we were stopped out of the very volatile Longtop Financial - the company was to report the next day so we would of moved to the sidelines either way. Tuesday, AsiaInfo Holdings (ASIA) had a 10% spike so we jumped out of our position which has been newly started - since then the stock has gone nowhere. ValueClick rallied by mid week so we were back in our short. After touching 980 early in the week, the rally was on and by late in the week S&P 1020 had been breached. Blue Coat Systems (BCSI) had been acting weak despite a bounce in the tape, and we were stopped out.
The following week was extremely quiet - probably our least amount of movement in many a month as the Siesta market, dominated by the zombie financial institutions took over the stage. We were stopped out of Quality Systems (QSII) which has since recovered to move back over some key moving averages. We attempted to short Shanda Interactive (SNDA) but put our stop loss a tad too closely and by the end of the week we had been stopped out; if we had a slightly looser collar we would of eventually made good money on the short, which ended up working within a week. We closed our Allegiant Travel (ALGT) position which has since rallied; more importantly than the recent move - we have been in this name for a long time and it simply moves to its own drummer; technical analysis which is our mechanism for attempting to know when to enter/exit, add/remove exposure simply seems moot with this name.
Week 3 finally gave us a sell off to work with, as China corrected (recall, Shanghai "filled a gap" before boucing back from an oversold condition later in the period). When that gap filled, we added back to our Morgan Stanley China A Shares (CAF) which we had cut back sharply in late July. I thought China potentially had more downside so I did not put on a full position, but instead we saw a U turn once the gap completed. Our limit order for CNinsurance (CISG) filled at a very advantageous price of $16. We covered the ValueClick (VCLK) short yet again for a nice gain in under a week. The first reversal intraday to the downside in many moons gave much hope to the bears on Tuesday of that week; but we were not convinced - in normal markets that would be very worrying - these markets have not struck me as "normal" in quite a while. We covered 90% of our Riverbed Technology (RVBD) short into that reversal down. We mentioned silver had been perking up but in error did not add a silver position, or add much to our gold exposure - these instruments rallied strongly late in week 3. We closed out long position O'Reilly Automotive (ORLY) as we had a multitude of limit buy orders which we thought might hit (other than CISG none did) - however ORLY has been very weak since we sold it. Brazilian homebuilder Gafisa (GFA) was downgraded on a potential share offering - we took the opportunity to add some exposure but the stock has exploded higher since; wish we had more. By late in the week the market had rebounded to a degree and I mentioned a potential retest of recent highs could be in the offing; unfortunately I did not put money where my mouth was - some SPY calls or a levered long ETF should of been added at that point. With the jobs report looming Friday I did not want to be exposed too heavily one way or the other but I forgot that all economic news is now good news. We had a good week, but 2 missed opportunities (precious metals, adding index exposure anticipating at least a revisit of recent highs) left some profits on the table.
Week 4, we sat tight early in the week and lost some ground as we were fully hedged and the market rallied. We added a short of Costco (COST) Monday, and re-expanded our Riverbed Technology (RVBD) short after taking profits on that position the previous week. Finally on Wednesday as we saw the market approaching "test time", it was clear that worst case we were going to revisit recent highs and create (at minimum) a double top, so I added a 5% exposure in SPY calls - those were sold the next day for a near 60% gain as true to form we rallied to (and through) S&P 1040 which were highs from a few weeks earlier. On that breakout we also added another 5% exposure which were sold within hours for about 24% gain. These were September calls so with expiration coming the following week, that was another reason to let go of the exposure. We also added to our long book - 3 names: Skyworks Solutions (SWKS), Triquint Semi (TQNT), and Blackstone Group (BX). Skyworks, which is currently our top position, promptly raised guidance after the bell and was a big performer the following day. RF Micro Devices (RFMD) which was our 2nd largest position similarly said good things at a conference and also had a good day on Thursday. Blackstone Group was upgraded by Goldman Sachs the day after we bought. We took profits on our Chinese exposure added the previous week - both in the Morgan Stanley China fund and CNinsurance - the former had rallied 10%, the latter 20%. I am not going to turn that down for 1 week's "work". Late in the week we began a position in Atheros Communications (ATHR) - despite a gap in the chart (lower) we are hoping to see filled, it's been many months since stocks have been going back to retrace yawning chasms in their charts so we decided to bite the bullet after stalking this name for a long while and get started. To end the week we closed a PPG Industries (PPG) short for a loss.
Frankly as I skimmed the news items the past 4 weeks it is surreal in the face of this rally - poverty surging, FHA loans going bad as the taxpayer prepares to take a hit in a few years, cash for appliances, cash for clunkers, $16 billion handed in cash for housing clunkers (nearly $3B directly to realtors pockets), US credit contracting at a 10% annual rate, continued job losses. But in the government/Fed subsidized economy (and market), all one needs is more (and more) liquidity and we are getting it in spades. Further we have built a system where corporations can prosper without consumers needing to - the government makes up the difference. Having lived through 1999 in a much more naive state, I am going to use that experience as my playbook from here. We can party for a long time; and one day we'll pay the piper in a big way; all those warning about the piper will be deemed naysayers, doomsdayers, and losers by the party animals. Unlike 2000, I will be playing both sides of this reality - not just the naive, happy go lucky "NASDAQ to 5000, it's different this time" side. ;)
[Jan 30, 2009: Fund Performance Period 1]
[Mar 2, 2009: Fund Performance Period 2]
[Mar 30, 2009: Fund Performance Period 3]
[Apr 27, 2009: Fund Performance Period 4]
[May 28, 2009: Fund Performance Period 5]
[Jun 21, 2009: Fund Performance Period 6]
[Jul 20, 2009: Fund Performance Period 7]
[Aug 17, 2009: Fund Performance Period 8]
I usually talk about this in sweeping terms as I have read countless stories through the past decade which illustrate this happening - if you choose to look for it. But since I saw this piece last week in the Wall Street Journal on a company I follow relatively closely, Marvell Technology (MRVL), I thought it would provide a great illustration of what is happening in the general economy and why employment is structurally (not cyclically) shifting in the States.
- Marvell Technology Group Ltd. plans to add staff at its Shanghai design center as the U.S. chip maker experiences increasing demand for consumer electronic chips in China. To meet strong demand in China, Mr. Sutardja said Marvell plans to increase its staff at its Shanghai design center to at least 1,000 by the end of 2010 from 650 now. The company also plans to expand the Shanghai design center's building.
- California’s Marvell Technology Group will cut 15% of its workforce, or 850 jobs.
- The job cuts will come from all areas of the company. The firm has imposed company-wide salary freezes, cut some salaries, suspended bonuses and consolidated facilities.
I am sure these are completely unrelated developments.
So let's talk about this for a moment. As an investor, I am thrilled - I am able to hire smart people at far lower wages than the Americans I let go, and with a lot less benefits to boot. Plus the workers are where the real growth will be in the coming decade. I love this move. In fact I love it so much I will look the other way when the top level execs shower themselves in options for their ability to "beat the number" in the coming quarters.
As an American citizen? Perhaps it's not quite so wonderful. Here is what I have to hope per economic dogma - some string of perfect outcomes that are predicted by a textbook: By (a) these 350 jobs going to China, (b) a new small group of middle class will be developed. As I extrapolate this 350 jobs to countless others moved overseas - (c) a huge swathe of middle class will eventually be built. Who will then, (d) in some number of years, demand products from America ... which will allow (e) the 850 people I fired in March to have work in America creating something the Chinese want. At some point in the future - but who knows when.
That all sounds quite convenient and fantastic on the surface - as long as I can figure out a place to stuff these people in the near term (Walmart? more restaurants? bars? can we please reinflate the housing bubble so they can be a realtor, broker, or construction worker? More healthcare jobs we cannot afford?). But some questions
- How many years will take place between the displacement of "today" in America and the "middle class demanding things in China" from America?
- What do we do with those workers in the meantime aside from plugging them into government work or pseudo government (health care)?
- What will happen to the income of said "displacements" as they move out of jobs from a very good high tech company to... (crickets chirping)?
- What exactly are Americans making today that the Chinese want and need to import excluding large scale industrial weapons / defense?
- What exactly will Americans be making in "some day in the future" (5? 10? 15 years?) when the Chinese middle class get to a level of wealth and can buy things from us... ?
- Whatever those products are you named in question 5, why can't the Chinese make them internally in 5, 10, 15 years?
The reality is a lot of this is unstoppable - it's not the fault of anyone; with a flattening globe, and borders meaning less than anytime in history - this is the eventual fate. What is also unstoppable seems to be the denial of this happening.
I am giving you one example - please feel free to extrapolate over the past 10 years, the coming 20 years... rinse it, wash it, repeat it, and roll in the dogma while you are at it. Anyhow, in the time I wrote this I believe 0.6 federal government jobs and 1.3 health care jobs were just created so there is hope yet (cough). How are we paying for those jobs (now 1/3rd of the total job force and growing) you ask.... with a faltering tax base? Certainly we cannot ask large corporations to pay their share or the jobs will be moved overseas - and we can't ask the executives to pay for their share or they will move overseas. Hmm... it's like we are backed into a corner... we spend spend spend like drunken sailors (have to keep the peasants distracted with new cars and homes via government handout)... but we cannot tax anyone except for middle class peasants. They seem to be the only entities in the country who cannot threaten to move if you dare to attempt to balance this yawning national deficit on their backs.
Anyhow, I don't worry about these things anymore as I connect back into the Matrix - just thinking out loud about things that certainly will work out in the end. Dogma tells me it will, and dogma has gotten us so far these past few decades. In the meantime, I see a can on the ground. I'm going to go kick it.
[Aug 14, 2009: No New Normal Say Some Economists, Prosperity Without Jobs?]
I wanted to highlight this most excellent entry by Simon Johnson and Peter Boone in the blog Baseline Scenario. Johnson is the former IMF chief economist [Apr 21, 2009: Simon Johnson on Yahoo Tech Ticker] who most loudly appears to be agitating against the financial oligarch situation in the U.S. which he says parallels those of any 3rd world country. While the commentary below is excellent in my opinion, I had proposed this will end up much like post Enron or post dot com. A few superficial fixes will be passed, mostly watered down by powerful lobbyists, and we'll just lay the groundwork for the next disaster.
I have seen nothing to dissuade me from those thoughts I advanced many moons ago... power has become more concentrated in even fewer hands, a handful of banks now control even more of the country's assets, and to boot they now can fund forever at lower rates than their competition because just as with Fannie and Freddie they have the implicit backstop of the US taxpayers always at the ready - and investors worldwide know this.
So while this piece is lengthy -it covers many of the themes we've discussed in a multitude of posts, and no real changes will be made in this corrupted system; it is a good mental exercise to think about a system that benefits the greater good rather than a select sliver of society. This story is good timing considering tonight's "Mission Almost Accomplished" Speech by President Obama.
Early in the First World War, British generals decided to attack German trenches with an initial light bombardment, followed by infantry walking in close order across No Man’s Land. The result was tens of thousands killed in a series of military disasters, but the generals reacted with only small adjustments to their approach and essentially persisted in repeating the same mistakes for years. “The English soldiers fight like lions,” one German general remarked. “True. But don’t we know that they are lions led by donkeys?” was the reply.
Today, a year after global financial collapse and the ensuing tragedy for millions, our economic leaders are lining us up to suffer again (and again) through the same horrible experiences.
The collapse of Lehman Brothers in September 2008 demonstrated just how far our economic system in general and bank management in particular have gone awry. Lehman borrowed at low interest rates in global credit markets, and invested over half a trillion dollars of other people’s money in assets which, today, are worth next-to-nothing: failed ski hills in Montana, now empty suburban housing in California, and crazy bets on derivatives (options to buy or sell securities, in various complex combinations).
Worries about these failed investments sparked a run on the bank. And, after a mad weekend of trying to save Lehman, the U.S. “authorities” – meaning Henry Paulson (Secretary of the Treasury), Ben Bernanke (chairman of the Federal Reserve Board), and Timothy Geithner (President of the New York Fed) – decided to let it go bankrupt. Creditors, realizing no major bank is safe if our leaders might now let them fail, pulled cash from major financial institutions and bought relatively safe US Treasuries and UK Gilts.
Today Lehman’s senior debt trades at a mere 10 cents on the dollar, suggesting its $600 billion in assets were a mirage. This outcome is even more startling when compared to senior debt at Kazakhstan’s defaulting large banks, where management is now accused of serious malfeasance, yet that debt trades at 20 cents on the dollar – twice the price of Lehman’s debt.
At the G20 meeting of finance ministers last week, political leaders united behind two key steps which they claim will “prevent another Lehman”: tighter controls on the pay of executives and more capital for banks. France and Germany blame the crisis on lax regulation in Anglo-Saxon markets and excessive pay packets that encourage irresponsible risk taking. The British and Americans counter that European banks have too much debt (i.e., in the jargon, are “overly leveraged”), and need to raise more capital. The final communiqué proposes to do both, and we will hear more of the same at the upcoming G20 heads of government summit in Pittsburgh. But, in reality, both sides want only minor adjustments that cannot solve the real problems posed by our financial system.
Tim Geithner, now US Treasury Secretary, is pushing for higher capital requirements for banks, i.e., they need to have more shareholder funds to protect against future losses. But he surely knows that two weeks prior to its bankruptcy, Lehman’s management reported they were well-capitalized, with a tier one capital ratio of 11% — roughly twice what the United States currently considers is needed for a well-capitalized bank, and much higher than the American side is proposing in private conversations.
Christine Lagarde, France’s Finance Minister, and Angela Merkel, President of Germany, helped convince the G20 that bank compensation policies need to be amended to encourage long term incentives. They want compensation packages to be limited and bonuses to be locked up, so we can be sure employees’ incentives are consistent with the long term survival of their banks.
President Merkel and Minister Lagarde need to look no further than Lehman for a model of how to introduce a good policy to align incentives. The top management and many employees in the company were largely compensated in shares of the company which vested over many years, so when Lehman Brothers went down, it brought crashing down the lives and finances of its 20,000 employees. Dick Fuld, the highly compensated head of Lehman, lost many million dollars – and presumably a large part of his total wealth. Apart from criminal penalties (of the kind not seen for banking in a century), can we think of a better way of aligning incentives with the outcomes for a bank?
The real problem with our financial system is that our economic and political system work together to encourage excessive risk, and this risk in turn leads to cycles of prosperity and collapse. In 1998, a much smaller Lehman Brothers was placed in financial peril by the aftermath of the Asian financial crisis and failure of Long Term Capital Management, a major hedge fund. The Federal Reserve responded by lowering interest rates and other central banks followed suit. This reduced the cost of obtaining funds, effectively bailing out Lehman and other institutions in trouble.
As markets have grown to recognize how quick the Federal Reserve is to bail out institutions (and executives) in trouble, they naturally respond. In the 1990s, people talked about the “Greenspan Put” a term which derisively suggests that it is always safe to invest in risky assets, because the Federal Reserve is ready to bail out investors (a put is effectively a promise to buy an asset at a fixed price if you are unable to sell it to someone else at a higher price – this is a way to lock-in profits or limit losses on investments). However, in months following the collapse of Lehman, we learned that the “Bernanke Put” is even more valuable since Chairman Bernanke, alongside the Bank of England, the European Central Bank, and central banks in much of the rest of the world, is prepared to take drastic measures to prevent asset prices from falling when there are risks of global collapse.
This policy of responding to the aftermath of bubbles, rather than addressing them before they get going, through tighter regulation, has become the mantra of most central banks. It is usually combined with fiscal policy stimulus and other measures to support the economy. Each time banks fail, by bailing the system out again, we teach our finance sector a lesson: you can safely take too much risk because, when you lose, the taxpayer will pick up the bill. We also send a simple message to creditors: it is safe to lend to Goldman Sachs, or Barclays Bank, because taxpayers and our nations’ savers are standing by to cover your losses. Rational bank executives and creditors respond as any person would: creditors lend to banks at low interest rates, and our banks gamble heavily hoping to make large profits. Such a system is destined to fail, but the party can run for a long time.
While Ben Bernanke has done a wonderful job of preventing financial meltdown, his calls in 2002-2003 for very low interest rates, without fixing our financial system, contributed to the credit expansion that led us into the current mess. In the United Kingdom, the Conservatives plan to transfer regulatory powers to the Bank of England, despite the fact that, like the Federal Reserve, the Bank of England has been a key component of our ever growing cycles of credit expansion and bust.
The “collapse or rescue” decision forced by Lehman’s failure is a symptom of a much larger systemic problem. We need leaders, both in the financial world and in public service who recognize that our financial sector too often causes social harm. There is no doubt that it also provides valuable services that are vital to the well-being of our pensioners and savers, and help manage and mitigate risk for our corporations. Yet too often these activities cause losses, which, either directly or indirectly, become a burden on the rest of society.
The pre-crisis activities and portfolios of Barclays, Goldman Sachs, and other “survivors” of this crisis were only slightly different from Lehman Brothers or Bear Stearns, which failed. The “good” banks also securitized subprime assets, helped build the intricate web of IOUs between banks and insurance companies, and leveraged their balance sheets to enormous levels. The winners were not better, they were just smart enough to make sure someone else held the bad assets when the music stopped, and they were powerful enough to win generous bailout packages from their governments.
The danger we face is that, by bailing out these institutions and rewarding failed managers with new powerful positions, we have now created a much more dangerous financial system. The politically well-connected, knowing they will most likely do fine in the next crisis, is now highly incentivized to take even greater risk.
Once we admit this profound problem in our system, we can begin to think of the radical measures needed to solve it. There is no doubt these solutions will include much greater capital requirements, so that bank shareholders know that they face substantial losses if their ventures fail.
But, we also need to ensure that our regulators are not captured by the banks that they are meant to oversee. This means we need to put checks on financial donations to political parties, and we need to buttress our regulators with more intellectual firepower and financial resources, along with rules that ensure independence, in order to be sure they can act in the interests of the broader population.
We also need to close the revolving door, through which politicians and regulators leave office to earn their nest eggs in finance, and “financial experts” move directly from failing banks to designing bailout packages. The conflicts of interest are abundant and most dangerous.
Last week the UK’s chief financial regulator, Adair Turner, faced heavy criticism from the City, Chancellor Darling, Boris Johnson, and editorials in the Financial Times and Wall Street Journal. His main offense was daring to raise the issue of whether parts of our financial system have become socially dysfunctional, in an interview with Prospect Magazine. He called for greater capital requirements at banks, and he pondered how it would be possible for regulators to preserve the valuable parts of our financial system, while ensuring that regulation limited the harmful parts. These are eminently sensible questions which anyone with a public spirit should understand are critical policy issues today.
Sadly, these public rebukes to Lord Turner are a further indication that very few of our leaders are prepared to even discuss the real problem, let alone seek a sufficient solution. Smart people and well-organized governments can, as in the past, behave like donkeys.
By Peter Boone and Simon Johnson
An edited and shorter version of this post appeared today in the Sunday Times (of London).
I think Decoupling 4.0 circa 2014 should have more legs and then Decoupling 7.0 circa 2019 will be valid. By that point a new axis of power shall be entrenched in Asia, and with it a lot more domestic consumption in China, India (and by proxy Brazil). But with the US at roughly a quarter of world GDP, versus China's sub 7%, Brazil's 2.5% and India's 2% the world is not ready to leave the US consumers arms.
Just doing the most simplistic of math - in a $14 Trillion economy, 70% dependent on Americans "consuming", simply seeing a return to long term trend rates of that figure returning to 65%, takes $700 Billion of consumption out of the system. To put that in perspective there are only 17 countries on the globe with GDP > $700 Billion. Canada's entire economy is about double that figure, etc. So while I like the concept of decoupling eventually, it appears to be another hope rather than reality at this time... but with so many "visible hands" mixing with the invisible hands, trying to prove that is now impossible.
- When markets around the world tumbled in unison last fall, the once-popular view that Asian markets and economies could hold up despite the turmoil in the West was quickly forgotten. Now, investors have once again embraced the idea of "decoupling." Markets in Shanghai, Hong Kong and Singapore are up nearly twice as much as those in the U.S. and Europe as their economies recover strongly from the recession.
- Optimism about Asia focuses largely on China's success in kick-starting its stalled economy with stimulus spending and easy credit. Exports to China are helping a number of other economies recover, too, including Japan, South Korea and Singapore. Australia's economy is getting a boost from Chinese demand for its metals.
- Frederic Neumann, an economist with HSBC in Hong Kong, still believes in decoupling. "I actually think we had decoupling in train since the middle of 2006, and that process got derailed temporarily by the breathtaking disruption in financial markets" when Lehman went under, he says. "Now we have it back," he says, thanks in large part to loose monetary conditions.
Oops, that was Neumann, not Newman. Carry on...
- The question remains, for how long? Exports are still the key to Asian growth, and consumer spending in the U.S., their biggest target market, remains anemic.
- Economists and policy makers agree that Asian consumers need to spend more if the region's manufacturers are to wean themselves off exports. Efforts to spur domestic spending include beefing up health-care protection and retirement benefits that will ultimately convince people that it is safe to buy more now and save less for a rainy day. They also include tax breaks and other short-term incentives.
- Americans are formidable consumers, spending nearly $10 trillion a year; consumers in China and India combined manage to spend only about a fifth that much.
- Mr. Neumann says the growth in Asia is making up for some of the slowdown in the U.S. This year, Asians outside of Japan will spend about $165 billion more than they did in 2008, according to HSBC's forecasts, even as U.S. consumer spending shrinks about $30 billion.
- Not everyone is convinced decoupling is a valid story. Asian markets fell more sharply that Western markets, so investors who held tight in Asia would likely be no better off than if they had invested in the U.S. In recent weeks, the rally in emerging markets has stalled on concerns that investor enthusiasm may have gotten ahead of reality.
- "Decoupling is a myth," says Stephen Roach, chairman of Morgan Stanley Asia. "In the aftermath of the post-Lehman demand shock in the developed world, every single Asian economy either slowed sharply or tumbled into outright recession. How can anyone call that decoupling?" [May 31, 2009: Stephen Roach on Asia - No Sail]
- Speaking in Hong Kong recently, David Wyss, chief economist for Standard & Poor's, called decoupling "one of the dumbest ideas any magazine writer has ever come up with." (actually to be fair to magazine writers, I believe this concept was advanced most heavily by the "give us your money; the water is fine" Wall Street / CNBC cabal)
- For his part, Mr. Neumann acknowledges that the decoupling story isn't that tidy. (but it sure goes down great with Kool Aid) Asian monetary policy is likely to remain loose for some time even as economies pick up because the region's central bankers, who tend to shadow the U.S. Federal Reserve, fear that raising rates will cost them a competitive edge against their neighbors.
- "This is the critical issue: we don't have monetary-policy decoupling," Mr. Neumann says. The result is that asset bubbles are building in China and other Asian markets "that might end in tears in a few years time," he says.
Sunday, September 13, 2009
To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.
Cash: 68.4% (v 72.5% last week)
24 long bias: 16.7% (v 14.1% last week)
9 short bias: 14.9% (v 13.5% last week) *includes long term puts
33 positions (vs 31 last week)
A short but very positive week with 3 very strong days, including a "double top" breakout on Thursday, followed by essentially no pullback on Friday. At this point it seems a market driven on technicals (the charts say to buy, so I must buy), performance anxiety by those who missed the majority of this epic move up, liquidity, and (insert your own grassy knoll theory about potential "support" by backdoor government actions). While the market is perhaps overbought on the short term, the pattern of buying on dips has worked for half a year, and will continue to work until it begins to fail on a continuous basis.
A quick look at the short term charts for S&P 500 and NASDAQ shows identical double top breakout patterns on both - where NASDAQ was the leader about 2 months ago, S&P 500 on the back of financials and industrials has taken the more recent leadership reign.
Looking on a longer term S&P 500 chart we are now near the "opposite site" of the traumatic selloff of October 2008. Eleven months ago we experienced a 20% drop in 1 week which can clearly be seen by the series of long red lines. The positive of this occurance is that resistance is nil in that area to the upside. In the near term, once S&P 1050 would be breached there would appear to be little stopping a very quick 50 extra S&P points, to make a pit stop to S&P 1100. From S&P 1100 to 1200 there are a few more impedements but nothing like what the market has blasted through the past few months.
I don't know when valuation will matter again (or if) but I am simply speaking from tea leaves in the above. Certainly the era of job cutting has continued so with costs lowered on one end, and governments spending on the other - corporations are in a bit of a sweet spot, and analysts seem to have not caught up. Can they cut themselves to prosperity? Not in the long run but the market today is "saying" as long as you beat expectations and have your CEO say something about "stabilization" (even at low levels) or "strength in Asia" it is good enough for us to drive the value of your stock up. We'll worry about valuations later and/or valuation means nothing today because the recovery of the future will make stocks look cheap on future earnings. And that's effectively where we are now.
Big picture what I see happening is continued dip buying - eventually, one of these days the dip buying will fail and the level of complacency will mean people are not positioned correctly for a meaningful pullback. But trying to position for said pullback (that has yet to appear) has at best left you with an opportunity cost situation, and at worst left you with serious losses. This phantom correction will happen - the pace we are on now is simply unsustainable. I track the market in 4 week increments so as not to focus so much on the day to day, with the last period just finishing Friday. This last period the S&P rallied 4%, which does not sound like a lot but it annualizes to a 52% gain. The period before this one the S&P rallied 7%; that annualizes to a 91% gain. The periods before that were 2.2%, 3.8%, 2.5%, 6.6%, and 11.0%. You get the picture. I believe one reader said we've had at most 9 consecutive months up in the markets before a monthly pullback; we are now working on month 7 of gains. But as I said, we will be so conditioned to buy on dips WHEN we have a meaningful correction - it will hit us from the blind side. I, for one, will be curious how the real estate data comes in once we lose seasonality and the immensely positive effects on the lower end of the market by the first time owner taxpayer handout. And how the market reacts to those "not as green" shoots.
We continue to be in a light earnings area of the calendar, with the heavy lifting beginning the 2nd week of October but a couple of interesting reports this week with Best Buy (BBY) Tuesday, Oracle (ORCL) Wednesday, Palm (PALM), fund holding Discover Financial (DFS) and FedEx (FDX) Thursday. Year over year comparisons should be very easy in the quarter to come since that was the "end of the world" period with Lehman, AIG, Fannie, Freddie, Merrill, Citi, Bank of America, TARP, et al. FedEx preannounced to the upside earlier this week and a relentless series of misses and lowering expectations - so can now enjoy the upside of setting the bar very low.
As for Discover, based on anecdotal evidence (my mailbox) I have to get more and more bullish on the profitability of credit card companies. In the past 60 days I've had more massive interest rate increases on all my credit cards (save 1) than I've had in the 20 years previous. These companies are getting ahead of the new regulations coming online in 1st half of 2010 and jacking up rates; I'm now the proud owner of multiple cards with >20% interest rates (and that's with prime at near historic lows) whereas 2 years ago if I had something above 12% I'd cringe. Mid single digits was more normal when not enjoying 0% balance transfer rates (that usually lasted 18+ months). Now, this could be zip code targeting due to living in a 1 state depression (i.e. restricting credit to those who live in economically degrading zip codes) or perhaps I am just enjoying the life many others are now experiencing. Needless to say when borrowing from the Fed at nearly zilch and jacking the rates some pay on balances from "5-12%" to 23%+, profitability must be skyrocketing. At least if you are a sucker who pays back debt, rather than living large - rolling your debt into the house mortgage than crying for government relief at "unfair lending practices" - sadly I did not partake in that game. This interest rate explosion could explain the relentless rise in Capital One (COF) as well. Needless to say my remaining balances are shrinking as "Massive Profit Center for Oligarchs" is one label I never want to wear. Obviously many others might not be able to escape this new paradigm.
Economically, Tuesday is busy (remember all economic news is to be "surprised" by) - we get Producer Price Indexes, Retail Sales, and the Empire State Mfg Survey premarket. Consumer prices and Industrial Production come Wednesday with housing starts Thursday along with the normal weekly jobless claims. Money Supply and Fed Balance Sheet come out last Thursday but I suppose those two are only for econo-nerds, and not the speculative class. It's an option expiration week as well, which usually has one big down day as markets are manipul... err, the free market moves into the exact right place for a small select group of investors to make a lot of money.
Portfolio wise, we added Costco (COST) to our short book, expanded the Riverbed Technology (RVBD) short (which is at a make or break it spot as of Friday), and expunged PPG Industries (PPG) at a loss late in the week. We were pretty fortunate in buys this week, adding to positions in Skyworks Solutions (SWKS) right ahead of a pre-announcement after the bell that evening, and Blackstone Group (BX) which Goldman Sachs upgraded the next day. Skyworks is our top long position and our 2nd largest is RF Micro Devices (RFMD) which similarly surged this week on good news at a conference. This is our favorite secular growth sector, and 2 of the 3 names we own said very positive things this week; we expect nothing different from the third one. A new position in Atheros Communications (ATHR) was started (same theme as the RF semi stocks but a differrnt subsector); I am actually hoping to buy this in larger scale at lower prices so would not mind losing money on this first batch of buys. We took profits in some Chinese exposure after a 6 day straight up rally from oversold conditions.
Earlier in the week the market was approaching "test time" and at least in the near term the test was passed; we took advantage of the momentum of the moment. Thursday we made some mad money on the "double top" breakout via two 5% call option positions, one started Wednesday and one Thursday on the actual breakout. The SPY calls we bought Wednesday netted nearly a 60% one day gain and the Thursday position was a nice 24% return in a few hours. We actually did the exact same maneuver (buying off a double top breakout) with SPY calls on a breakout mid July, although back then we put a lot more money on the line (nearly 20% of the portfolio); so this pattern has worked well for us twice now. While very short term in nature and we're back in cash very quickly, it is some icing on the cake for a portfolio not well suited for the "straight up" type of rally we mostly have experienced the past half year.
Overall in regards to the markets, while I am happy to play along in this situation there are some very strange things happening such as bonds rallying (courtesy of heavy Federal Reserve interference, now driving mortgage rates back down to near 5%) at the same time gold/silver is. And the equity market is also rallying with gold/silver, which is the inverse of how things happened in 2008. While I've been losing of late on our long term SPY put options, I still like have a 3%ish allocation out there as "insurance" in case one day I wake up and the Matrix has been exposed. Until then, we smile ruefully and say "it is what it is".
While the financial world is wrapped up in some form of evolving, subsidized, interfered with, "new normal" - it is important as US citizens to find some constants in life. Thankfully this weekend, the University of Michigan did what what it traditionally does, and Notre Dame likewise returned to its traditional role. Let us rejoice that normalcy / tradition, has returned to some portions of our society. I'm sure all readers, except for a lonely few in northern Indiana - will share in this view.
Long: 16.7% (v 14.1%)
Short: 14.9% (v 13.5%)
This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.
*** Please note, I've added an options category for things I am holding longer than intraday.
(click to enlarge)
LONG (2 photo files)
OPTIONS (long or short)
Saturday, September 12, 2009
On 9/11/01, the Dow was at 9,605.
On 9/11/09, the Dow closed at 9,605.
*note: the markets never opened that fateful day as the attacks were before 9:30 AM
(hat tip, Bespoke)
I cannot emphasize enough that Ben Bernanke, being a student of the Depression, believes the #1 error of the time was applying the breaks to easy money policies too early. What that means in modern times is, until it is abundantly clear a very real recovery is here, the kerosene of easy money will continue to be thrown onto the fire. I am seeing the same words coming from Tim Geithner and Larry Summers. Besides the fact it is always more politically convenient to give away free punch than to take it away, this is a universal thread in all their comments. John Paulson believes it. [May 16, 2009: John Paulson Continues to Pile Into Gold] Marc Faber believes it. We need to believe it.
In layman's term, we have this big hole of debt - it is contracting onto itself as Americans (a) try to do the right thing and pay down their debt (b) consumers as a whole are too weak to spend on their own like in the "good ole days" and (c) banks actually act rationally in giving out loans because the securitization market [where they got rid of most of their loans the past decade, to suckers who believed in AAA ratings] has taken a near mortal blow. Now that banks have to hold more of the loans, they actually seem to care about the propensity to be paid back - our "financial innovations" of the past decade had let them avoid that old school concept. So with the crippling of the securtization market, there are no more new suckers to offload these loans to; so until new ones are borne, there is only one sucker. The Federal Reserve which has BECOME the securitization market.
So we have this hole of credit contraction described above (deflationary)- and a Fed who wants to fill this hole (inflationary). A great battle ensues - but the Fed has the means to endlessly (in their eyes) fill the hole. It's called a printing press and its sugary properties makes all the pain go away to the people - at least in the near term. (see NASDAQ bubble 1999, see real estate bubble 2004-2007) So everyone applauds said printing press operators - just as they did in the late 90s, and mid 00s. But the currency suffers... and suffers... and suffers. (note US dollar performance since leaving the gold standard) And so do living standards for the majority who live under this regime who believes inflation (the loss of buying power) is the "righ thing".
Further there is no control in what this kerosene lights up. Obviously the powers that be want the economy to magically take flight despite a real unemployment rate at roughly 14 percent and underemployment closer to 20. The federal government is trying to take care of that (minor) issue via generational arbitrage...take from future generations to buy cars, homes, cut taxes, plug holes in state budgets for today's generation. But end demand is still relatively poor despite the handouts. Yet all that liquidity needs a home...and like water it will find its level in 1 place or another. If not needed in the real economy, it will plow into the Wall Street economy. And selective inflation in speculative assets can occur...even if concurrent deflation in parts of the real economy is occurring. Therefore, short of a rebirth of the US consumer in the very near future - this seems to be our path.
VP Kohn reiterates the viewpoints above... the hole will not only be filled but we are going to top it off. And only then will the punch bowl be even considered to be taken away. Which is why I was scoffing about 2 months ago when the "fed funds futures market was indicating a chance of tightening by end of year 2009". What world do these people live in? So it's not Helicopter Ben, it's not B52 Bomber Ben - we now have Kerosene Ben. He is an arsonist of the highest order... and Wall Street loves a good fire. When the fire reaches 50 feet high, he will still be pouring kerosene on to make sure it doesn't peter out prematurely - only 100 feet will do. Because that's just what he (and his predecessor) do (did).
In the meantime many a new bubble will be created. (they will be celebrated by the speculator class) And then we'll have a crash when all the oxygen has been used up. And then a new hole will be created from the crash, (does any of this sound familiar?) and then the Fed will create more punch later in the next decade. And we will stupidly ask how did we get here again. This pattern will continue because we refuse to take the pain of our excess even once. We are above pain because we are a special people.
It will only stop when our creditors say "enough!" Creditor #1 (China) is taking step after step to show us they won't be part of this pattern in about 10 years. They are stuck playing along for now. Everything you have seen thus far the past 2 years... as spectacular as it has been... will pale in comparison to the banana republic tactics we should see happening in the late 2010s and early 2020s. We are in the largest economic experiment in mankind, led by people and institutions who have made error after error, and in return are being given even more power. Surely that will work out "in the end".
But between now and then? Perhaps 2 more massive bubble and bust cycles can be created. "They'll" call it prosperity. Those of us outside of the Matrix will see the truth. To that end, we already see pieces such as "10 Bubbles in the Making "
- Federal Reserve Vice Chairman Donald Kohn said on Thursday the U.S. central bank was developing tools to move away from its extremely loose monetary policy, but such an exit would not happen any time soon.
- "As the FOMC has said, that time is not likely to come for an extended period," he said, referring to the Fed's monetary policy-setting Federal Open Market Committee.
- The paper, on the Fed's track record since the failure of investment bank Lehman Brothers at this time last year, noted the central bank's massive expansion of its balance sheet would not lead to inflation due to its ability to pay interest on reserves that are held with it by commercial banks. (that is where you laugh) "Paying interest on reserve balances also has important benefits and will play a key role in our exit from unusually accommodative policies when the time comes," Kohn said.
- Critics say the doubling in size of the Fed's balance sheet to around $2 trillion since last September will lead to higher consumer prices when growth picks up and banks begin to lend out these excess reserves, fueling another credit bubble. But the Fed argues that its ability to pay interest on reserves will break this linkage.
- "Raising the interest paid on those balances should provide substantial leverage over other short-term market interest rates because banks generally should not be willing to lend reserves in the federal funds market at rates below what they could earn simply by holding reserve balances," Kohn said.
- This position was supported in the paper by Columbia University economist Ricardo Reis. However, he did caution that the increase in the balance sheet was not without risks, and warned that if this led to credit losses at the Fed, it could force the Fed to go hat in hand to the U.S. government, compromising its policy independence. (that would actually be amusing, considering the US government has been going hat in hand to the Federal Reserve)
- Kohn added this outcome "seems extremely remote," and he argued that the Fed would continue to earn substantial net profits on its balance sheet for the next few years in all but the most distant scenarios. (other things that once seemed 'extremely remote' - housing prices falling nationally in the US, AAA rated securtizations blowing up all over the globe, monster bailouts of financial institutions that were not even on the FDICs troubled bank list, AAA rated AIG being a ward of the state, Goldman Sachs needing to hide under the umbrella of the FDIC.... shall I continue?)
- "Short-term interest rates would have to rise very high very quickly for interest on reserves to outweigh the interest we are earning on our longer-term asset portfolio. With the global economy quite weak and inflation low, a large and rapid rise seems quite improbable," Kohn said.
Best Of FMMF
- 1: Warren Buffet Piles on Europe
- 2: [Video] Jim Chanos Returns from Europe, Even More Bearish on China
- 3: A Chart to Open Our Eyes - Staggering Changes by Multinationals in Employment Behavior 00s vs 90s
- 4: Futures Blasted on Dexia Woes... and Poor Preliminary China Data
- 5: Market Working to Worst Thanksgiving Since 1932
- 6: Et Tu, German Bonds? Poor Auction Raises Eyebrows