About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, September 30, 2008

Comments On The Financial Mess

Knowing they would get a second act, Congress went into full
turkey mode yesterday, with the House calling a vote on the
Paulson plan when they knew the votes were not there. Ms.
Pelosi alerted all put buyers with her damning speech of GWB
and the gang. With the ensuing big blow down in the market,
the House was looking to scare everyone enough to soften up
the public to make this ugly bill more palatable.

With "only" a 12 vote swing needed to create the new gov.
broker / dealer, they can now add some features ordinary
folk might like and hope they can swing it later in the week.

The same dumb banker guys who gave away money in 2005-
2006 are now in panic mode, sucking their thumbs, pooping
their pants and not lending to anyone. There are also plenty
of bankers just playing possum and waiting to see if an agency
does come along to help them take out their trash.

The SEC and, perhaps, even the accountants, are warming to
the idea that mark-to-market accounting may not be such a
hot idea for assets that have no market. Too bad the horse is
long gone from the barn.

Americans, from left through right are steamed to beat the
band. Passage of the Paulson plan with its enormous
commitment of taxpayer capital, will leave a legacy of
profound bitterness toward the gov. One can only hope the
few smart guys left in banking will take their cue if the plan
passes into law and start lending again to deserving borrowers.

The market recouped some of its losses today on hopes the
bailout plan will pass. The gang will be back in DC on Thursday
perhaps to marshall up the forces for a new vote in the House
on a sweetened deal. That will keep hope alive in some hearts.

I do not know whether this plan's moment has passed or not,
but I do know that we all need to get past it one way or the
other to get back to business.

Sunday, September 28, 2008

Stock & Corporate Bond Markets

I am headed out later today for a family birthday celebration and
will miss the release of the provisional bailout plan targeted to
circulate before the markets open in Asia this evening. I note only
that the original two and a half page Paulson version has
mushroomed to over one hundred pages (devil in the details).

The stock market is but mildly oversold in the short run, but
6 -13 week measures show we are moving toward a tradable
oversold. I would prefer another down week to produce a
more formidable set-up, but one has to allow that the plan
to remove known toxic debt from the private system might
serve as a short term palliative to a bruised market. As you
might imagine, the suspension of shorting of financials now
ongoing could temper any bounce we may see.

The corporate bond market took a major hit last week with
yields on many issues jumping by 100 basis points or more.
So we have a handsome short term oversold condition here.
The Bloomberg junk bond index closed out Fri. 9/26 at
15.02%. It helps you understand why junk bonds have that
appellation, but it is also a signal to savvy credit analysts that
one can, if one chooses wisely, earn out one's capital in nearly
5 years via the issuer's own cash.

The next 24 hours should be interesting enough....

Friday, September 26, 2008

The Panic Of 2008

I try to avoid journalistic hyperbole, and I have disdain for the
pundits who have been yelling "Panic!" for months on end.
However, It appears the financial system has finally entered
panic mode. Interbank lending is actually up a remarkable 12%
yr/yr, but has started dipping here in September. Quality
yield spreads at the short end of the market are now well above
what one might expect during a recession period that also features
mild stress on the financial system. Finally, the Fed is starting to
carry over its large liquidity infusions week to week to sustain
banking system liquidity and capital adequacy ratios. The evidence
of the past two weeks does underscore the sense of fright that
Paulson and Bernanke have been giving off. The apparent
novelty of Paulson's plan reflects the fact that questionable
collateralized loan obligations suffuse the system and cannot be
easily isolated and contained.

Bankers hung in there for quite some time over the past year,
but the recent spate of high profile financial services firm
collapses has left them finally undone here in September. A
financial panic can abate rather quickly if the offending virus
is contained and removed from the system in a timely manner
by resolute action. The Paulson plan for all its manifest faults
would provide the gov. the flexibility to traverse the system
to vacuum up the viral paper. It is far more efficient than
dealing with troubled companies on an ad hoc basis. If toxic
loans are bought in widely, it could foster a conviction among
bankers that risks to the system in toto are being addressed.
But alas, info. on the execution of the plan is so lacking that,
if enacted within the next week or so, we would only know
that the gov. is doing business as usual -- throwing money at
a problem.

I do not know if a financial panic left unattended would burn out
quickly enough to spare most sectors and leave our political
and economic systems intact. So I can appreciate people wanting
to take "constructive" action on the problem quickly. My plan
as a trader is to make the fewest number of assumptions I can
in the weeks ahead as authorities move to try to contain the
panic. False assumptions are big killers of portfolio value.

Interestingly, when you look at the devastation underway in the
private sector financial and corporate debt markets, the stock
market stands almost alone as an enterprise not engulfed in the
panic. Perhaps the market has more wisdom than one might
have thought. But there could be a fast 15 - 20% down here if
the difficulties in the financial system are not soon contained.
Also of interest, is that my e-mail inbox is filling up with pieces
advocating a big relief rally if some form of rescue is implemented.
Fascinating time.

Wednesday, September 24, 2008

All Roads Lead To Rome...But..

Paulson is working hard to get the clearence to set up a $700 bil.
broker / dealer on the taxpayers' pad. He might even add a unit
to do merchant banking -- taking stinky credits for equity. That
is one road we all have to travel to get to Rome, so to speak.

We also need to watch the economy itself, and in so doing,
work to keep the rescue plan as separate as we can. Whether
the plan gets off the ground or not, it and the path of the
economy will eventually converge.

Even if Paulson gets most of what he wants and the plan kicks
off soon, we are still looking at a weak economy in which bankers,
relieved though they may be, will not be going out and up to the
corner to hand out cheap loans. If the plan can get the wheels
turning, they will turn slowly early on.

We also have to watch the blowback effects of the plan. This
would include its effects on longer term interest rates, currencies
and commodities prices (the inflation hedge trade). Already,
for example, we have seen mortgage rates jump up with long
Treasury yields as investors factor in more supply of the
latter to digest.

Finally, we have to watch the fate of the rescue plan itself in
the days ahead. Many folks are very angry about this, Congress
is distressed, and the two presidential candidates are super
wary (Would I rather be President or a stand-up guy who
has the courage to speak my mind?) When it comes to
legislation, the wheels can come off small wagons easily, and
since this a huge wagon requiring lots of wheels, well...

Tuesday, September 23, 2008

Stock Market -- Fundamentals

The SP 500 Market Tracker has dropped further in Sept. and is
now at 1025 fair value based on 12 month earnings and inflation
readings. The earnings index has fallen from an annual rate of
around 90.0 in mid-2007 to 69.0 presently. The vast bulk of
the carnage has been in the financial sector, but as production
growth slows globally, more sectors have been implicated. The
p/e ratio for the Tracker has contracted as well over this period
as inflation accelerated sharply until just recently (Rising
inflation raises the investment hurdle rate and suppresses the
market multiple).

The SP 500 is trading at around 1200 at posting time. I think
the market is discounting a return to 80.0 earning power for the
"500" and is probably shading the p/e ratio more for future net
per share risk than for inflation. The 80 number has been the
assumption through much of 2008 as investors figured there
would be an end to the bleeding in the financial sector this year
and some bounceback in non-finacial earnings. The direction of
the economy is a challenge to those assumptions, so the 17%
premium in price of the "500" over the Tracker probably
should not be taken lightly.

My forward looking indicators continue to improve, but the
positive trend of monetary liquidity still suggests a sustainable
improvement in economic activity and profits could be a good
9 months out in time.

One important set of indicators -- credit quality spreads -- are
moving the wrong way reflecting a sharp rise in the price of
risk across the board. Not only is confidence in the global
financial system and economy low now, the US credit markets
are in lockdown mode, with all eyes on the Paulson bailout
plan. This is a bad plan on constitutional, economic and
financial grounds, but the hope appears to be that enactment
in modified form will be materially better than inaction. At
any rate, a positive turn in credit quality spreads would
strengthen the case for equities considerably.

Monday, September 22, 2008

Bailout Proposal Blowback

In recent days I have argued that this plan makes no economic
sense and that whatever Paulson / Bernanke cook up to try to
unchoke the financial markets, it better not chase everyone
back into the inflation hedge trades. Well, BINGO! Today, the
US dollar fell dramatically against the Euro, and the price of oil
soared $25 bl. to close to $130. On top of this, Congress, shoved
into a corner by receiving a three page bailout document a week
before adjournment for the election, has wisely decided to vet
this document thoroughly, and of course, to start adding lights,
decorations and tinsel to the world's most expensive Christmas

From my perspective, a lameduck administration and Congress
have no business trying to do a massive, far ranging program
of this sort. That should be the work of a new administration
and a new Congress, both set for Jan. 2009. And it should not
be a case of act in haste and repent at leisure. If the markets
cannot wait a few months for a sensible overhaul of US priorities,
the system is simply too fragile to "fix" and a large outlay of
funds in the short run will simply be wasted.

The credibility of GWB and his guys is being shredded again
with this latest blowback. It is time for the candidates for
president to find their voices and to tell voters what
initiatives would best serve US interests instead of hiding
behind a badly discredited administration.

My concern after today is that more folly lies ahead in
the short run, but I would also ask you to accept my apology
for the editorial. I promise to get back to business.

Saturday, September 20, 2008

The Paulson $700 billion Plan

Treas. Sec'y Paulson has opted to follow the advice of some
Democrats and independent economists and wants Congressional
approval to buy up to $700 billion of CMOs, mortagages and
related debt from domestically HQ'd financial institutions. The
hope is that by buying up these toxic loans in a reverse auction
(lowest offers accepted), confidence might return to seized up
financial and capital markets.

There is no stable or reliable market for this paper, and values,
when assigned, have an arbitrary air. I am confident looking at
actual loss experiences net of foreclosure proceeds in housing
plus realistic measures of home price declines that the actual
pool of mortgages viewed discreetly is worh considerably more
than the paper is being valued in securitized form.

From a pure economic perspective, the bailout program does
not make sense, so I do not know whether the alleviation of
so much suspect paper will end the seized up condition in the
markets. I hope so. I also hope that Congress and / or the
Treasury manadates the de-securitization of this paper and that
it buys the tranches it needs to complete this process. I would
also urge regulators to view the value of such securitized assets
remaining on the books of intermediaries in terms of their
economic value. If I was a bank CEO stuck with this paper, I
would be loathe to give it up for less than it was worth only
then have to raise capital dilutively. This deal stinks, and as
readers of the blog know, I have several times argued against
mark to market pricing for all esoteric assets.

So far the banking system has held up well, keeping capital
intact through raising additional funds to cover losses. This
auction process conceived by Mr. Paulson will be a major test
for the system and if panicky banks over - dump the toxic
paper at the Treasury, the system will be liquid although
significantly capital impaired.

Friday, September 19, 2008

Stock Market -- Technical

The furious two day relief rally brought the market back from
deep short term oversold to neutral. Today's advance was
strong enough to preclude an automatic bout of heavy profit
taking by short run players on Monday ahead. Clearly though
the current trajectory up is not going to last too long before
money flys off the table. Remember as well the normal admonition
regarding the untrustworthiness of spike bottoms such as we
saw Thursday.

If the enthusiasm does spill over into next week, I would expect
some traders to start cashing in about 2% above today's close.
The SP 500 went out today at 1255, so I would look for some
nastinesss to set in around the 1280 level.

Thursday, September 18, 2008

Still Far From The Madding Crowd...

Earlier today (see below) I briefly discussed attempts by
central bankers to corral rampant fear over the perceived
deterioration of the global financial system. I also pointed
out that gov't officials here and elsewhere would no doubt
continue tinkering to find ways to curb this fear. So, I come
back in from doing some repair work on my driveway to
see new UK and US curbs on short selling and a hint from
Treas. Sec'y Paulson about a new gov. agency to buy up
the sour real estate and related loans at distressed prices
from banks with the aim of restoring transparency,
stability and, hopefully, vibrancy to the system. If this is
a go, it will rquire congressional approval and could be
very expensive. Stock traders and investors loved the
idea and rallied the market strongly.

I have been around long enough to know that financial
people have been at least as scared as the dark days of
early to mid 1982 when the international debt market
imploded. Even if today was the peak fear day, rest
assured that plenty of folks will remain shaky / quakey
for weeks.

The Fed and Paulson have to go about their business of
shoring up the system but be mindful that they want to
avoid sending players full tilt into inflation hedge plays
that would drive up commodities, re-ignite inflation and
ultimately punish income and profits.

We had a spike low in the stock market today. I have
hardly ever bought those and did not do so today, as I
prefer to see the market stabilize and put in a base, if
even a small one.

Oh, yeah. there's more hard work ahead on the driveway.

Far From The Madding Crowd...

Right after I post this piece, I am heading out to do some blacktop
repair on the driveway to beat the cooler weather and the falling
of the leaves.

Speaking of falling, investor and trader fears are obviously
rampant concerning whether the global financial system is getting
unhinged and is near ready to fall apart. The central banks have
poured liquidity into the system in recent days. The feds have chipped
away heavily at "systemic risk" with the takeovers of Fannie, Freddie
and the doleful AIG. But, really, if folks want to blow up the system
via a panic, massive liquidity infusions will not, in the end, stop the
madness. Moreover, stepping too heavily on the monetary pedal
may only trigger another and damaging round of inflation hedge
speculation. Government authorities around the world may be
forced to do further tinkering if fears do not abate, but at this
point, I intend to let this gael blow over when it will and see if folks
really are as scared as they think they are.

A quick way to track the machinations of a worried financial crowd
is to watch the 3 month US Treasury yield. Chart is here. You can
also track the moment to moment action at $IRX.

Tuesday, September 16, 2008

1. Monetary Policy, 2. AIG

Monetary Policy
Bedrock fundamentals of monetary policy such as the trends of
production and capacity utilization (both down) and private
sector data from purchasing managers did lend support to a
mild cut in the Fed Funds Rate from the current level of 2%. I
did not anticipate one because the FFR% is low enough already
and also because the Fed may not wish to touch off more long
side speculation in commodities and short side interest in the
US $. Since the acceleration of inflation over much of 2007 and
2008 reflected a bubbly surge in commodities, the recent sharp
sell down in same will bolster real incomes and relieve pressure
on profit margins for many businesses. As I see it, the important
work for the Fed now is to provide a sensible, moderate growth
path for monetary liquidity.

The apparent stupidity of this once high quality company in
recent years has been breathtaking. And here now we have a
$1 trillion enterprise at death's door sitting down with the Fed
to arrange financing to give it time to figure out a survival plan.
On top, this is taking place during the closing 50 or so days of
a presidential election. So, AIG is holding a gun on Bernanke and
Paulson. If the feds flip these creeps off and the markets tank,
the election could go up for grabs. So the feds are stuck with
trying to keep AIG afloat in a way that finesses the bailout issue
at least until after the election. I am sure discussions are
rather interesting.

Monday, September 15, 2008

Liquidity Situation

As we rolled into September, the liquidity situation was still on the
tight side. My proxy for credit driven liquidity is up by only 3%
yr / yr. This is too small an increase to fund economic expansion.
Monetary liquidity via Federal Reserve Bank Credit was up only
about 4% over the same period. Low liquidity growth reflects
the economic downturn, bank reticence to lend, and a still rather
conservative policy of lquidity injection by the Fed. If you deflate
the changes to liquidity by a roughly 5% inflation rate, the tightness
in the system is all the more noteworthy.

With Lehman in Ch. 11, it will likely have to liquidate a sizable
portion if not all $600 plus billion of its asset book. A goodly amount
of the book will present no problems, but there will be significant
difficulties with the subprime and other "toxic" paper it holds. As
well, Lehman may have to stop funding its pet SIVs and other
conduits. In recognition, the Fed cobbled together a pool of funds
from the 10 major banks of $70 bil. and added $70 billion itself via
the repo market today to provide liquidity to unwind the Lehman
book and those of its debtors. But this is all temporary and does
not constitute a departure in policy. There is also a scramble to
provide short term funding for AIG, the huge insurer, which needs
to raise capital. Since the Fed and Treasury now have to manage
a large portion of junky paper on their books via bailout, they may
have rejected a Lehman survival guarantee to preserve
remaining integrity in an uncertain environment.

The Fed is now skating on very thin ice regarding its liquidity
policy. Weakness in retail sales, rising business inventories and
falling production point to a deepening of economic difficulty, and
the Fed probably should step up liquidity infusion moderately
to avoid prolonging the downturn. The commodities driven
inflation fever has broken for now, so the Fed may have a
"window" to add some $ dough to the system.

Wednesday, September 10, 2008

Gold Price ($759 oz.)

Gold remains in a wicked downtrend, now trading about 27.5%
below the all time high of $1034 set in Mar. ' 08. It has fallen
out of the mania phase, as inflation hedge players leave the
market. The metal is quite oversold, but has yet to stabilize.
Old line traders would tell you it could fall to $700 0z. or
about 20% below the 40 wk m/a before coming to rest. But,
with a volatile play like gold, there's not much telling.

The gold price macroeconomic directional indicator has fallen
sharply since making an all time high on July 4. This weakness
reflects sharp sell downs of oil and industrial commodities. By
peaking at $1034 oz. back in March, gold correctly discounted the
rapid deceleration of key inflation indicators. The macro indicator
is close to a breakdown for the first time since early 2001. Since
it has been a good directional indicator for gold over the years, it
will bear close watching now.

In order for gold to break the long term uptrend, it would have to
take out $620 - 640 oz. in the weeks ahead. Cold consolation for the
gold bulls out there.

For now, I am interested in seeing whether gold can bounce from
its oversold condition back toward $800, which would signal that
that there are still aggressive players in the game.

gold as an investment turns interesting to me down around the
$600 - 650 area. So, it is still well out of my league. I will be
watching to see if gold does get pushed down 20% below its 40 wk
m/a to the $700 area. For a streetTRACKS GLD chart, please
click here.

Monday, September 08, 2008

Fannie / Freddie -- Comments and Alert

Several weeks back, unnamed US Gov. officials told the NY Times
that putting Fannie and Freddie into a gov't conservatorship was
a "live" option. That gave the attentive an opportunity to dump
remaining equity holdings and derivatives, and foreclosed a
Bear Stearns fiasco for shareholders. As of last Friday, only
"rise from the ashes" players should have had long positions.

I guess the Gov. had hoped it could kick the can down the road
until next Jan. when a new administration would have had to deal
with it. But rising yield spreads to Treasuries and concerns about
rolling over the paper forced Bush's hand.

Like you, I have read the terms of the deal and many of the
comments ushered forth. In a nutshell, we the citizens must secure
the liquidity of the mortgage market and underwite the value of
our homes as needed.

By my reading of US demograhics, the market for housing will
remain subdued for another 8 - 10 years, before the large Gen Y
cohort starts moving into its prime home buying years. Yes, pent-
up demand is building, so there will be a recovery in sales and in
construction at some point in the next year or two, but it will be
moderate. Moreover, the days of sustained rapid home price
appreciation may not return for years.

The alert I have in mind concerns the amount of liquidity that
the Fed may have to provide to mop up errant Freddie / Fannie
paper. Some are guessing this could reach up to $25 billion. This
is managable, especially if the Fed starts unwinding primary
dealer liquidity support in Jan. '09 as they have indicated. The
Fed has been stingy with liquidity since 2004, as it moved to
water down Greenspan's egregious excesses. But the markets
will watch what They do carefully, since rapid liquidity infusion
might only re-excite the commodities markets and get the big
money back to thinking about hedging inflation. A train of events
of this sort would punish householders, the housing market and
the economy at large.

Fannie / Freddie -- Comments and

Friday, September 05, 2008

Economic & Inflation Indicators

The weekly leading indicator sets remain in sharp downtrends and
continue to herald an ongoing downturn.

The monthly new orders indicators indicate only mild contraction in
the US and are being heavily supported by a strong export book,
especially in manufactured goods.

The economic power index ( 12 month changes in real wages + total
employment) remains moderately negative but did show some
improvement in August as there was a slight pick up in wage growth
and a deceleration of inflation. The pick up in the EPI is a hopeful sign.
The EPI understated economic purchasing power in recent months
because I did not include the tax rebates, which are now running down
in size.

My "quickie" coincident indicators portray a weak economy -- lower
real wages, retail sales, total employment and production. Averaged
out, the indicators are down 2% yr / yr.

The inflation thrust gauge made a cyclical peak in July and is now headed
sharply lower reflecting the large downdraft in the commodites market.
First beneficiaries should be the real wage and consumer confidence. The
deceleration of inflation -- largely commodities driven -- comes in the wake
of a rapid global economic slowdown.

Thursday, September 04, 2008

Stock Market

Yesterday I suggested that we take note that the weakish market
uptrend had rolled over. I did not anticipate such a fast and forceful
drop would result today. The SP 500 closed out around 1236, and
that's close enough to the low test zone of 1200 - 1215 running back
through late 2005 to invite bear inquiries and to test it out again.

I do not often try to play the commentator, but it appears the weak
action in the market since the sharp rally peak in May of this year
suggests investors are concerned the tax rebates have not been
effective enough in stimulating the economy and that the still large
credit quality yield spreads in the fixed income market are garnering
negative attention re: the financial system.

At any rate, if we do see a test of the lows in that 1200 - 1215 bracket
on the "500", there would be a deep enough short term oversold to
make the sitiuation rather interesting although risky.

Wednesday, September 03, 2008

Technical Notes

Stock Market
The shorter term trends under the daily action are rolling over.
Take Note and scroll down to Fri. 8/29 entry for chart link of
SP 500. Note breaks below 10 and 25 day m/a readings and
today's dip of the 10 below the 25. Looking out through 13 weeks,
the technical ducks are not lined up in a commanding order, so
the short term action may get more attention than usual.

Treasury Bond Market
Bullish advisory sentiment is creeping up, with Market Vane
showing 71% bulls. This is not alarmingly high, but the reading
is tilted enough to warrant a heads-up.

Oil Price
As expected, oil has dropped to support at around $110 bl. where
the price is getting sticky. More interesting pivotal support lies
below at $100 bl. I am still guessing $90 by late in the year.