It's bankrupt. Its reputation is in tatters. And it has been forced from its plush headquarters building. Yet working for Lehman Brothers Holdings Inc. -- what remains of it -- has become one of the hottest jobs on Wall Street.
That's because Lehman, though a shadow of its former self after selling many of its businesses to Barclays PLC and Nomura Holdings Inc., retains a broad patchwork of assets. It has some $7 billion in cash and more than 1,400 private investments valued at $12.3 billion. Then there's a thicket of about 500,000 derivative contracts with 4,000 trading partners worth some $24 billion.
Then & Now
Associated PressThen:
CEO: Richard Fuld (above)
Employees: 25,158
Cash on balance sheet: $3.3 billion
Alvarez & MarsalNow:
CEO: Bryan Marsal, (above)
Employees: 500
Cash on balance sheet: $7 billion
So for now, Lehman is seen as a relatively secure home for throngs of finance professionals thrown out of work in recent months. It's even become a place for former Lehman CEO Richard Fuld to informally hang his hat.
"We're getting swamped with résumés," says Bryan Marsal, a turnaround expert who is now Lehman's chief executive officer. The inquiries, he says, are from people affiliated with marquee names such as Bank of America, Citigroup Inc., and Morgan Stanley.
"It's just a tough, tough time, and there are a lot of good people out there looking for work."
The wages are not great by past standards. But there are hidden benefits. It could take two years or more to wind down the firm. Such a timeline promises the kind of job security that's a rarity on Wall Street today.
Charged with untangling the mess is Alvarez & Marsal, the New York-based restructuring firm where Mr. Marsal is a co-founder. With 150 full-time employees working on the case, its chief task is to sell off Lehman's remaining assets and maximize recovery for creditors, which are owed more than $150 billion.
Mr. Marsal says the goal is to dissolve the firm in 18 to 24 months from now, though several restructuring experts say that's an aggressive timetable.
Alvarez & Marsal got the gig in September after Lehman's board appointed it to administer the bankrupt company's estate. To carry out the mission, Alvarez & Marsal kept 130 Lehman employees on the firm's payroll. It has also recruited back more than 200 former Lehman employees, and is still hiring staff to handle targeted areas such derivatives and real-estate holdings.
Behind the scenes is Mr. Fuld, the firm's former chairman and chief executive, who was widely vilified when Lehman collapsed in mid-September. Though Mr. Fuld was removed from the payroll on Jan. 1 and relieved of his company-provided black Mercedes, Lehman has agreed to let him keep an office at the firm. He's just around the corner from Mr. Marsal, who says he picks Mr. Fuld's brain about Lehman's business several times a week.
"We asked him to stay if he has nowhere better to go," says Mr. Marsal. "He's been very good about making himself available for questions about Lehman assets."
Through a spokeswoman, Mr. Fuld declined to comment.
Lehman's dismantling is an expensive process. Associated costs run about $30 million a month, excluding fees to lawyers and advisers on the case. Employees are paid a salary -- with modest retention bonus added as "a kiss" says Mr. Marsal -- to entice workers to stay at a place with a limited lifespan.
Life Inside Lehman Brothers
3:25
WSJ's Dennis Berman and Peter Lattman discuss the latest at Lehman Brothers, where job stability has become surprisingly ubiquitous.
The assignment is a lucrative one for Alvarez & Marsal, which is charging Lehman hourly fees of $550 to $850 for its top executives working on the case, with rich incentive fees for the firm depending on its recovery for creditors.
Despite Lehman's assured dissolution, executive recruiters say it isn't surprising that the collapsed investment bank has become a desirable place to work.
"This is a well-paying job in one of the worst employment markets in history," says Skiddy von Stade, founder of New York-based executive placement firm F.S. von Stade & Associates. "Through the disposition of Lehman's assets, the employees will have a chance to demonstrate their strengths and skills for opportunities down the road -- possibly with the very buyers of these securities and investments."
Mr. Marsal says compensation is in line with similar jobs on Wall Street, yet far below what it was at Lehman. He and his team are "very, very careful" about the expenses of the firm, which he says are generally lean. "The excess of Lehman was the size of the salaries and the expectations of people with the bonus plan," he says.
View Full Image
Reuters
Staff members stand in a meeting room at the Lehman Brothers offices in the financial district of Canary Wharf in London Sept. 11, 2008.
Gone are the pay and perks that came with being a top executive at pre-bankruptcy Lehman. Mr. Fuld and his management team sat on the 31st floor of Lehman's former headquarters, a state-of-the-art steel-and-granite building in Times Square. Barclays bought that site and took it over, so now Lehman's command center is a run-of-the-mill office on the 45th floor of the Time-Life building, which long served as Lehman overflow space.
Mr. Marsal and his team are making due without weekly deliveries of fresh flowers and warm chocolate-chip muffins on Fridays -- perks enjoyed by the firm's former brass. Gone too is the executive dining suite where a private chef prepared lunch for Lehman's top executives. Instead, Mr. Marsal and his crew grab a bite in the cafeteria at Time Inc., which has granted access to the Lehman employees.
Henry Klein is part of Lehman's new topsy-turvy reality. A nine-year Lehman veteran, he oversaw a portfolio of investments in India from the firm's New York office. When Lehman failed, Mr. Klein was transferred to Barclays, but says he had little to do there. "I was at Barclays, but my assets were at Lehman."
Mr. Klein left Barclays in mid-November, and then approached Alvarez & Marsal. Today, he's back overseeing the very assets he says he managed at Lehman.
The 46-year-old Mr. Klein is currently focused on a small $36 million real-estate investment in Hyderabad, a large city in south central India. Lehman may continue to back the deal, but also may have to pull its funding. "It's a difficult decision," says Mr. Klein. "We don't have tons of time."
Luc Faucheux, 39, heads up the desk at the bankrupt entity that trades interest-rate swaps and other fixed-income derivatives. "I always wanted this job," laughs the former Lehman staffer who says he had a related, but less senior role. "Be careful what you wish for, because you might just get it."
"Let's face it," he adds. "Given the state of the world we're in, the things I'm learning working on the largest bankruptcy in history are a set of skills that could be marketable for the foreseeable future."
Rather than immediately sell assets into a depressed market, Alvarez & Marsal has opted to retain and manage a chunk of Lehman's holdings.
Last month, Alvarez & Marsal decided to keep a 49% interest in Lehman's money-management business, Neuberger Investment Management, selling the balance to Neuberger's management. It made a similar move with Lehman Brothers Merchant Banking, the firm's flagship private-equity business. The estate also has held on to more than 100 direct stakes in private companies. These include direct investments made alongside Lehman's private-equity clients in large boom-era buyouts such as First Data Corp. and Texas utility TXU Corp.
So far, Lehman has more than doubled its cash reserves to $7 billion from $3.3 billion, in part through the sale of its headquarters to Barclays. It is also raising money by selling off the firm's sizable art collection, whose value Lehman has pegged at roughly $30 million. Some of the photographs and paintings still grace the halls of Barclays and Lehman's Neuberger unit.
Finally, there is a cavalry of corporate jets valued at $164 million. Lehman has already sold six jets, as well as interests in fractional shares service NetJets Inc. for $53 million. Still on the block: Six more planes, including a Boeing 767, and a Sikorsky chopper.
Some of those jets Lehman owned as investments and only four were used for corporate purposes at any one time, according to a Lehman spokeswoman.
"The fleet's been grounded," Mr. Marsal reassured the bankruptcy judge overseeing the case at a hearing last month. "Nobody is flying around these planes and no one is using the helicopter.
Monday, February 2, 2009
Wednesday, January 28, 2009
Fuels on the Hill
There seems to be an amazing amount of misunderstanding of the basics of fiscal policy, even among people who should know better. Leave on one side the remarkable parade of economists who think that the savings-investment identity proves that government action can’t increase spending; PGL points us to a higher-level fallacy: the widespread belief that Ricardian equivalence doesn’t just say that tax cuts have no effect — which it does — it also says that private consumption automatically offsets any rise in government spending, which is just wrong.
Justin Wolfers suggests that this is because economists just haven’t been thinking and writing about fiscal policy. Maybe. But in my own neck of the woods, that isn’t true. In the New Open Economy Macroeconomics, which dates back to classic work by Obstfeld and Rogoff in the early 90s, both fiscal and monetary policy are usually analyzed.
And by the way: these are extremely buttoned-down models, with lots of intertemporal maximization, careful attention to budget constraints, and at most some assumption of temporary price rigidity. Nobody who was at all familiar with this literature could make the logic mistakes that are coming fast and furious from the fresh-water economists.
What this reveals, I think, is just how insular part of the macroeconomics profession has become. They just don’t read anything that doesn’t come from their cult circle; they just weren’t aware of major bodies of work that didn’t happen to be in their preferred style.
This insularity is asymmetric. Ask a PhD student at Princeton what a real business cycle theorist would say about something, and he or she can do that; ask a student at one of the freshwater schools what a new Keynesian would say, and I doubt that he or she could answer. They’ve been taught that there is one true faith, and have been carefully protected from heresy.
It’s a sad story.
Justin Wolfers suggests that this is because economists just haven’t been thinking and writing about fiscal policy. Maybe. But in my own neck of the woods, that isn’t true. In the New Open Economy Macroeconomics, which dates back to classic work by Obstfeld and Rogoff in the early 90s, both fiscal and monetary policy are usually analyzed.
And by the way: these are extremely buttoned-down models, with lots of intertemporal maximization, careful attention to budget constraints, and at most some assumption of temporary price rigidity. Nobody who was at all familiar with this literature could make the logic mistakes that are coming fast and furious from the fresh-water economists.
What this reveals, I think, is just how insular part of the macroeconomics profession has become. They just don’t read anything that doesn’t come from their cult circle; they just weren’t aware of major bodies of work that didn’t happen to be in their preferred style.
This insularity is asymmetric. Ask a PhD student at Princeton what a real business cycle theorist would say about something, and he or she can do that; ask a student at one of the freshwater schools what a new Keynesian would say, and I doubt that he or she could answer. They’ve been taught that there is one true faith, and have been carefully protected from heresy.
It’s a sad story.
Wednesday, January 21, 2009
Missing Fraudster Nadel Was 'Top US Manager' In 2003
One of the notable aspects of the Bernie Madoff case is that very few people knew who he was. Despite his stellar gains, he never got any kind of public recognition. The only articles about his performance were skeptical, like the ones in Barron's and Mar/Hedge.
Conversely, one of the newly emerge Mini-Madoffs, Art Nadel, actually was recognized as a top US money manager, in 2003. The award was given by newsletter The Wall Street Digest, according to Reuters.
Some, like 68-year-old Tony Hagar, say they were drawn to his funds by The Wall Street Digest and the upbeat report by its editor, Donald Rowe, and now question how much due diligence the investment newsletter industry conducts.
"He seemed to indicate that they were a reasonable investment. They put out a letter that says these folks have done substantially well, and that Don Rowe had looked at them closely," said Hagar.
Hagar is right to wonder how much due diligence was done here. We're guessing none to little. So far this no mention of Nadel or his award at The Wall Street Digest's "In The News" section of their website.
Conversely, one of the newly emerge Mini-Madoffs, Art Nadel, actually was recognized as a top US money manager, in 2003. The award was given by newsletter The Wall Street Digest, according to Reuters.
Some, like 68-year-old Tony Hagar, say they were drawn to his funds by The Wall Street Digest and the upbeat report by its editor, Donald Rowe, and now question how much due diligence the investment newsletter industry conducts.
"He seemed to indicate that they were a reasonable investment. They put out a letter that says these folks have done substantially well, and that Don Rowe had looked at them closely," said Hagar.
Hagar is right to wonder how much due diligence was done here. We're guessing none to little. So far this no mention of Nadel or his award at The Wall Street Digest's "In The News" section of their website.
Saturday, January 17, 2009
Markets can do anything they want
The selling over the past few days smacks of panic, yet again.
Some of this melt-down is forced selling as de-leveraging continues in the realms of the Masters of the Universe. Some of this selling is due to bear raids that are specifically designed to wreck the financial stocks and force the government to come in and wipe out the equity of bank stock holders. And some is just sheer panic.
It is incredible to me that people are willing to throw out everything and run and hide in the so-called “safety” of the Treasury market while opportunity beckons across risky assets unlike anything seen in decades. As the government gets ready to run trillion dollar deficits for as far as the eye can see, investors are so cowered that they are willing to accept 2% a year for a decade.
There is this theory in finance known as “The Efficient Market Hypothesis.” This theory postulates that the market is an efficient processor of information, whether it is all information (the strong form theory) or merely all widely known information (the semi-strong form theory), and that information is priced into stocks. Because stock prices are a reflection of all or all known information, the market is "efficient."
But consider what we have gone through over the past decade – The Asian Contagion, the collapse of Long-Term Capital Management, the Tech Bubble, the Credit Bubble, the Housing Bubble, and now the Treasury Bubble as investors were recently accepting T-bills with negative yields.
The market is not a wise, all-knowing processor of information and seer of the future.
The market is an idiot.
Everywhere I look, I read that it is the end of the world. All the news is bad. Everything is horrible. It is the Great Depression all over again. And so on.
Yes, the economy is bad. Yes, things are bleak. Yes, the world has changed. Who on God’s Green Earth does not know this already?
But is it really the end of the world?
Economic growth is driven primarily by technological progress. Advances in technology make things cheaper and lowers the cost curves of producers, freeing up resources for investment and expansion. This process is usually known as “productivity growth.” And unless the American public has become collectively lazy and stupid all of a sudden, the technological advancement and productivity growth that has made this country the richest nation the planet has ever seen will continue.
This is not to minimize the problems in the economy. We may be on the brink of a true depression, if a depression is defined as a 10% contraction in economic activity. We must continue to de-lever. We have some very serious problems we must work through.
But we are working through those problems. Many of the dominoes that had to fall have fallen. Dominoes remain standing but we are nearer the end of the decline in asset prices than the beginning.
This decade so far has been the worst decade for stocks. Ever. Valuations for stocks are attractive and the expected return from equities is at the highest level in decades. Credit markets are improving and governments are flooding the financial system with liquidity.
The most powerful force in asset markets is reversion to the mean. We have overshot the mean on the downside.
Can the market go lower? Of course. Markets can do anything they want.
But others can bet against reversion to the mean. I’m not.
Some of this melt-down is forced selling as de-leveraging continues in the realms of the Masters of the Universe. Some of this selling is due to bear raids that are specifically designed to wreck the financial stocks and force the government to come in and wipe out the equity of bank stock holders. And some is just sheer panic.
It is incredible to me that people are willing to throw out everything and run and hide in the so-called “safety” of the Treasury market while opportunity beckons across risky assets unlike anything seen in decades. As the government gets ready to run trillion dollar deficits for as far as the eye can see, investors are so cowered that they are willing to accept 2% a year for a decade.
There is this theory in finance known as “The Efficient Market Hypothesis.” This theory postulates that the market is an efficient processor of information, whether it is all information (the strong form theory) or merely all widely known information (the semi-strong form theory), and that information is priced into stocks. Because stock prices are a reflection of all or all known information, the market is "efficient."
But consider what we have gone through over the past decade – The Asian Contagion, the collapse of Long-Term Capital Management, the Tech Bubble, the Credit Bubble, the Housing Bubble, and now the Treasury Bubble as investors were recently accepting T-bills with negative yields.
The market is not a wise, all-knowing processor of information and seer of the future.
The market is an idiot.
Everywhere I look, I read that it is the end of the world. All the news is bad. Everything is horrible. It is the Great Depression all over again. And so on.
Yes, the economy is bad. Yes, things are bleak. Yes, the world has changed. Who on God’s Green Earth does not know this already?
But is it really the end of the world?
Economic growth is driven primarily by technological progress. Advances in technology make things cheaper and lowers the cost curves of producers, freeing up resources for investment and expansion. This process is usually known as “productivity growth.” And unless the American public has become collectively lazy and stupid all of a sudden, the technological advancement and productivity growth that has made this country the richest nation the planet has ever seen will continue.
This is not to minimize the problems in the economy. We may be on the brink of a true depression, if a depression is defined as a 10% contraction in economic activity. We must continue to de-lever. We have some very serious problems we must work through.
But we are working through those problems. Many of the dominoes that had to fall have fallen. Dominoes remain standing but we are nearer the end of the decline in asset prices than the beginning.
This decade so far has been the worst decade for stocks. Ever. Valuations for stocks are attractive and the expected return from equities is at the highest level in decades. Credit markets are improving and governments are flooding the financial system with liquidity.
The most powerful force in asset markets is reversion to the mean. We have overshot the mean on the downside.
Can the market go lower? Of course. Markets can do anything they want.
But others can bet against reversion to the mean. I’m not.
Wednesday, January 7, 2009
Marc Faber Jan. 07, 2009
This morning, Marc Faber, managing director of Marc Faber Ltd. and publisher of the monthly investment newsletter The Gloom Boom & Doom Report talked with Bloomberg’s Carol Massar, Erik Schatzker, and Ellen Braitman about the outlook for industrial commodities and gold prices, as well as government intervention in the economy, his outlook for the financial markets, and his investment strategy for technology stocks. Notable excerpts from the exchange included:
2009 Outlook
Well, economically it will be very bad. We have a contracting economy, globally, everywhere. And, I mean, not mildly contracting, but falling off a cliff. However, after this fall off of a cliff, the news in the next 3 months could look somewhat better than expected. In other words, there could be some rebound from the lows in economic activity.
U.S. Economic “Stimulus” Proposals
Well, it may help a little bit, temporarily. But in the long run, it’s a disaster. Any government intervention into the economy is basically bad, in particular, an intervention that is designed to support prices. The Federal Reserve, and the Treasury, both actually want to support asset prices. Most cartels that have been designed to support prices eventually broke down and prices collapsed.
Industrial Commodities
Gold is now very expensive compared to industrial commodities. Actually, it’s at the highest level in 30 years or more. And so right now, as of today, I would rather buy a basket of oversold industrial commodities.
Crude Oil
I would say, the long-term demand for oil is there. The supply won’t be there. So, long-term, I think the price will be much higher than it is today.
World War III
Everybody talks about monetary and fiscal policies, but nobody talks about the worsening geopolitical situation in the world. I think World War III has already begun.
FREE VIDEO: How to connect the market dots in 2009
Blue Chip Companies
I think in every industry, the leading companies emerging from the crisis, whenever the economy recovers, will be very strong.
Asian Stocks
If someone has no money in Asia, now you can buy top-quality companies at reasonable PE’s.
BRIC (Brazil, Russia, India, China) Stocks
Prices are now down to attractive levels as an entry-point, as a trading opportunity, like the metal stocks I mentioned. So, I think I would buy these BRIC countries for a rebound, looking for a rebound of around 30% from the present level.
Long-Term Outlook
Well, I’m very bearish long-term because I think that Treasury bond yields will go up a lot, and the trade of 2009 is to short U.S. government bonds- big time… I think it will take 5 years until the world recovers.
2009 Outlook
Well, economically it will be very bad. We have a contracting economy, globally, everywhere. And, I mean, not mildly contracting, but falling off a cliff. However, after this fall off of a cliff, the news in the next 3 months could look somewhat better than expected. In other words, there could be some rebound from the lows in economic activity.
U.S. Economic “Stimulus” Proposals
Well, it may help a little bit, temporarily. But in the long run, it’s a disaster. Any government intervention into the economy is basically bad, in particular, an intervention that is designed to support prices. The Federal Reserve, and the Treasury, both actually want to support asset prices. Most cartels that have been designed to support prices eventually broke down and prices collapsed.
Industrial Commodities
Gold is now very expensive compared to industrial commodities. Actually, it’s at the highest level in 30 years or more. And so right now, as of today, I would rather buy a basket of oversold industrial commodities.
Crude Oil
I would say, the long-term demand for oil is there. The supply won’t be there. So, long-term, I think the price will be much higher than it is today.
World War III
Everybody talks about monetary and fiscal policies, but nobody talks about the worsening geopolitical situation in the world. I think World War III has already begun.
FREE VIDEO: How to connect the market dots in 2009
Blue Chip Companies
I think in every industry, the leading companies emerging from the crisis, whenever the economy recovers, will be very strong.
Asian Stocks
If someone has no money in Asia, now you can buy top-quality companies at reasonable PE’s.
BRIC (Brazil, Russia, India, China) Stocks
Prices are now down to attractive levels as an entry-point, as a trading opportunity, like the metal stocks I mentioned. So, I think I would buy these BRIC countries for a rebound, looking for a rebound of around 30% from the present level.
Long-Term Outlook
Well, I’m very bearish long-term because I think that Treasury bond yields will go up a lot, and the trade of 2009 is to short U.S. government bonds- big time… I think it will take 5 years until the world recovers.
Tuesday, January 6, 2009
Obama's Big Tax Plan
Boy was I wrong! $300 billion in tax cuts are probably on the way -- and soon.
More Stories
Lessons From the Madoff Scandal
A Year Worth Forgetting
Fed's Balance Sheet Is Ballooning Fast
Right after the election, I was virtually certain that upper-income individuals would face higher federal income tax bills as early as this year. And I didn’t see anything very good on the business tax horizon, either. But after two more months of horrifying economic data, it’s a whole new ball game.
Now, President-elect Obama is proposing a $775 billion economic stimulus package that does not appear to impose higher taxes on anybody or anything for 2009. Instead, it looks like we will immediately see some of the “middle-class tax cuts” Obama promised, plus some unanticipated business breaks too. All in all, these tax cuts could add up to $300 billion (or more) over the next two years.
As Congress mulls over the Obama proposals, more details will emerge. Until then, here are some guesses about what might be coming.
Individual Tax Breaks
New Credit for Middle-Class Workers
We will likely see a new credit of up to $500 for working singles and up to $1,000 for working couples. The credit will probably be delivered via reduced federal payroll tax withholding, so it will take a few months for most workers to collect the full benefit in the form of bigger paychecks. When a similar-sounding credit was pitched during the campaign, it was to be phased out for singles earning over $75,000 and for couples earning over $150,000, but it appears those income limits may be moving targets now. How the credit might be extended to self-employed folks remains to be seen.
Liberalized Earned Income Credit
During the campaign, Obama pledged to increase the number of individuals who are eligible for the earned income credit and provide larger credits to noncustodial parents who fulfill their child support obligations, low-income married couples, and families with three or more children. Earned income credits are “refundable,” which means taxpayers can collect them even if they don’t owe any federal income tax (in other words, the government pays you instead of the other way around). There’s a good chance the upcoming stimulus package will include this change.
Business Tax Breaks
New Five-Year Loss Carry Back Allowance
Businesses might be allowed to "carry back" tax losses incurred in 2008 and 2009 to the previous five years. That way, taxes paid on earlier profits that were wiped out by recent losses can be reclaimed immediately as tax refunds. Under the current rules, losses can generally be carried back only two years and excess losses must be carried forward to future years -- which means those losses can’t do any tax-saving good until future profits are earned. With many companies facing uncertain prospects, extending the loss carry back period to five years would be good tax policy in my opinion.
Extended Section 179 Deduction Allowance
Thanks to the Section 179 deduction privilege, many small and medium-sized businesses can depreciate most or all of the cost of qualifying new and used assets in the first year they are put to use. Most depreciable assets (other than real estate) qualify for this deduction -- including equipment and most purchased software. For tax years beginning in 2009, the maximum Section 179 deduction was scheduled to drop from $250,000 to only $133,000. The upcoming stimulus package could extend the $250,000 allowance or perhaps make it even bigger.
Extended First-Year Bonus Depreciation
Last year, businesses were allowed to claim 50% first-year bonus depreciation for qualifying new (not used) assets that were both purchased and placed in service during calendar 2008. But this valuable break expired on Dec. 31. Unlike the Section 179 deduction, first-year bonus depreciation was available to even the largest businesses. The upcoming stimulus package could extend the first-year bonus depreciation deal through 2009.
New Jobs Credit for Employers
The stimulus package could include new tax credits for employers that hire more workers and perhaps even for those that forgo laying off workers. Details are cloudy, but a range of $40 to $50 billion worth of tax savings is being mentioned. (During the campaign, the Obama tax plan included giving businesses a $3,000 credit for each new full-time job created in the U.S.)
More Details to Come
For what it's worth, everything you’ve read here is nothing more than informed speculation. That said, there’s little doubt that we will soon see a whopping stimulus bill that includes some major tax breaks. Once the dust settles, we'll help you understand what it all means.
More Stories
Lessons From the Madoff Scandal
A Year Worth Forgetting
Fed's Balance Sheet Is Ballooning Fast
Right after the election, I was virtually certain that upper-income individuals would face higher federal income tax bills as early as this year. And I didn’t see anything very good on the business tax horizon, either. But after two more months of horrifying economic data, it’s a whole new ball game.
Now, President-elect Obama is proposing a $775 billion economic stimulus package that does not appear to impose higher taxes on anybody or anything for 2009. Instead, it looks like we will immediately see some of the “middle-class tax cuts” Obama promised, plus some unanticipated business breaks too. All in all, these tax cuts could add up to $300 billion (or more) over the next two years.
As Congress mulls over the Obama proposals, more details will emerge. Until then, here are some guesses about what might be coming.
Individual Tax Breaks
New Credit for Middle-Class Workers
We will likely see a new credit of up to $500 for working singles and up to $1,000 for working couples. The credit will probably be delivered via reduced federal payroll tax withholding, so it will take a few months for most workers to collect the full benefit in the form of bigger paychecks. When a similar-sounding credit was pitched during the campaign, it was to be phased out for singles earning over $75,000 and for couples earning over $150,000, but it appears those income limits may be moving targets now. How the credit might be extended to self-employed folks remains to be seen.
Liberalized Earned Income Credit
During the campaign, Obama pledged to increase the number of individuals who are eligible for the earned income credit and provide larger credits to noncustodial parents who fulfill their child support obligations, low-income married couples, and families with three or more children. Earned income credits are “refundable,” which means taxpayers can collect them even if they don’t owe any federal income tax (in other words, the government pays you instead of the other way around). There’s a good chance the upcoming stimulus package will include this change.
Business Tax Breaks
New Five-Year Loss Carry Back Allowance
Businesses might be allowed to "carry back" tax losses incurred in 2008 and 2009 to the previous five years. That way, taxes paid on earlier profits that were wiped out by recent losses can be reclaimed immediately as tax refunds. Under the current rules, losses can generally be carried back only two years and excess losses must be carried forward to future years -- which means those losses can’t do any tax-saving good until future profits are earned. With many companies facing uncertain prospects, extending the loss carry back period to five years would be good tax policy in my opinion.
Extended Section 179 Deduction Allowance
Thanks to the Section 179 deduction privilege, many small and medium-sized businesses can depreciate most or all of the cost of qualifying new and used assets in the first year they are put to use. Most depreciable assets (other than real estate) qualify for this deduction -- including equipment and most purchased software. For tax years beginning in 2009, the maximum Section 179 deduction was scheduled to drop from $250,000 to only $133,000. The upcoming stimulus package could extend the $250,000 allowance or perhaps make it even bigger.
Extended First-Year Bonus Depreciation
Last year, businesses were allowed to claim 50% first-year bonus depreciation for qualifying new (not used) assets that were both purchased and placed in service during calendar 2008. But this valuable break expired on Dec. 31. Unlike the Section 179 deduction, first-year bonus depreciation was available to even the largest businesses. The upcoming stimulus package could extend the first-year bonus depreciation deal through 2009.
New Jobs Credit for Employers
The stimulus package could include new tax credits for employers that hire more workers and perhaps even for those that forgo laying off workers. Details are cloudy, but a range of $40 to $50 billion worth of tax savings is being mentioned. (During the campaign, the Obama tax plan included giving businesses a $3,000 credit for each new full-time job created in the U.S.)
More Details to Come
For what it's worth, everything you’ve read here is nothing more than informed speculation. That said, there’s little doubt that we will soon see a whopping stimulus bill that includes some major tax breaks. Once the dust settles, we'll help you understand what it all means.
Monday, January 5, 2009
The End of the Financial World as We Know It
AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
Related
Op-Ed Contributors: How to Repair a Broken Financial World (January 4, 2009) This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?
Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?
To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.
In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.
In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.
Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.
What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.
The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.
A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.
Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.
OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.
The credit-rating agencies, for instance.
Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.
Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”
The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.
These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.
This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.
By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.
Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)
At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)
The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.
But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.
Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)
The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.
IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.
The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.
At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.
At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”
How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.
And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.
SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.
When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.
Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.
But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.
In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.
It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.
Related
Op-Ed Contributors: How to Repair a Broken Financial World (January 4, 2009) This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?
Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?
To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.
In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.
In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.
Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.
What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.
The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.
A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.
Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.
OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.
The credit-rating agencies, for instance.
Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.
Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”
The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.
These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.
This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.
By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.
Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)
At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)
The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.
But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.
Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)
The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.
IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.
The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.
At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.
At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”
How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.
And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.
SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.
When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.
Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.
But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.
In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.
It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.
Thursday, January 1, 2009
Wednesday, December 31, 2008
Wednesday, December 24, 2008
Tuesday, December 23, 2008
Marc Faber on Dec. 23th, 2008
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vh4CZyP0iSKg.asf
As of May 2007
According to Wilshire Associates, the total U.S. market cap is approximately $15.35 trillion (May 23, 2007).
According to the World Federation of Exchanges, global market cap stood at 51.23 trillion in January 2007.
So the rest-of-world market cap is at least twice as large as the U.S. stock market.
According to the World Federation of Exchanges, global market cap stood at 51.23 trillion in January 2007.
So the rest-of-world market cap is at least twice as large as the U.S. stock market.
Mainland Markets Surpass Japan in Market Cap
The China Economic Review reports:
Mainland China's two stock exchanges combined have become the world's second-largest stock market by capitalization with US$4.72 trillion, the South China Morning Post reported. According to Bloomberg, The combined market value of the Shanghai and Shenzhen stock exchanges passed that of the Tokyo Stock Exchange (TSE) on January 4, as Japan's Nikkei-225 Index fell to finish at a 117-month low. The TSE's market capitalization stood at US$4.11 trillion, yesterday while the two mainland exchanges posted a combined US$4.61 trillion.
Mainland China's two stock exchanges combined have become the world's second-largest stock market by capitalization with US$4.72 trillion, the South China Morning Post reported. According to Bloomberg, The combined market value of the Shanghai and Shenzhen stock exchanges passed that of the Tokyo Stock Exchange (TSE) on January 4, as Japan's Nikkei-225 Index fell to finish at a 117-month low. The TSE's market capitalization stood at US$4.11 trillion, yesterday while the two mainland exchanges posted a combined US$4.61 trillion.
Sunday, December 21, 2008
Dow and SP, who leads who?
There are many articles talking about Dow being stronger than spx to be able to hold the rally, I took a look at 1987 crash chart and found it was true before the recovery but vice versa after, if history repeats, then the recent weaker dow stronger spx would indicates a real recovery in stock market has started.
Just my own wishful thinking.
Just my own wishful thinking.
Saturday, December 20, 2008
Out with the Old
BECAUSE 2008 ALREADY SUFFERS A SURFEIT of gloom, let's begin with a little good news: Wall Street's top strategists believe -- or hope -- that the U.S. stock market has already absorbed the worst of the selling pressure this year, and will start to recover in 2009.
John Patrick for Barron's
2009 Outlook: Stocks will scale sharp peaks and brave deep valleys to reach higher ground in 2009.
The not-so-great news: Any progress might be limited.
That's not to say there won't be violent rallies and sharp pullbacks along the way. An urgent scramble to dump risky assets and hoard capital this year triggered a crisis of credit -- and confidence -- that wiped out more than half of the stock market's value. And while stocks quickly rebounded 18% from their late-November low, the dozen strategists and chief investment officers surveyed by Barron'sexpect the Standard & Poor's 500 index to finish 2009 near an average of 1045, or 18% above today's level of 888.
Such a forecast may not seem very modest at first -- until you consider strategists' vocationally bullish bent, how this volatile market can easily cover 18% in mere days, and all those statistics promising massive gains a year after stocks first slip into -- and presumably bounce out of -- a bear market. In fact, a majority of the surveyed strategists have pinned their 2009 year-end targets within a narrow 50 points of the 1,000 mark as though there's safety in numbers.
The source of their circumspection: the uncertain economy. Nearly everyone expects the U.S. economy to worsen as companies cut costs and lay off workers (on top of the 1.25 million jobs already eliminated from September to November), and as economists pencil in gross domestic product declines of 4% or more for the fourth quarter of 2008 and early 2009. And while the consensus hopes for a second-half rehabilitation, no one knows when a lasting recovery will take hold. Indeed, 10 of the 12 firms surveyed see the U.S. economy contracting in 2009.
So why should stocks rise in the face of such ambiguity? For a start, the strategists hope that a stock market that has already fallen 52% from its 2007 peak to its Nov. 20 low has discounted much of the deterioration still to come. With more than 37% of mutual-fund assets recently parked in money-market funds, the highest level since 1991, there's ample cash for bargain hunting should stocks dip below a certain threshold. Hopes run high that cheaper energy costs will support consumer spending, and -- most important -- that the deep freeze in the credit markets triggered by Lehman Brothers' collapse will continue to thaw. And everyone is counting on the government's aggressive policies to help stop the rot.
"The size of global policy response to stabilize both the financial system and the growth outlook is virtually unprecedented," says Morgan Stanley chief global equity strategist Abhijit Chakrabortti. "It does not appear likely to us that equity markets will fall substantially from here, given growth expectations have been substantially lowered, growth data are depressed and there is a high level of skepticism surrounding the ability of policy-makers to salvage the financial system and stabilize growth."
A year earlier, forecasters made the mistake of placing too much faith in the Fed -- back then, they believed the Federal Reserve's interest rate cuts and thriving foreign economies could help the U.S. stave off a recession. This time around, their trust may be more justified: at least the government is no longer in denial about the economic threat, and fighting deflation has become the urgent priority for governments around the world. Just last week, the Fed cut benchmark rates below a historic 0.25% and promised a vast array of lending programs to consumers and businesses.
AT THE SAME TIME, investor expectations have been quashed -- the bar is set low when today's yardstick is the Great Depression. Witness the lunge for safety and near-zero yields on short-term Treasuries. "People are practically paying the government to hold their money -- if that's not a sign of negative sentiment, I don't know what is," says Jason Trennert of Strategas Research Partners.
No one thinks wild swings will subside quickly from record 5%-a-day moves in October, but the downward plunges have at least been replaced by volatility of the sideways variety. "The market can rally fiercely and then pull back some," says Citigroup's chief investment strategist Tobias Levkovich. Over the eight years after the 1932 bottom, there were at least five rallies that averaged 93%. The 1974 bear-market bottom spawned no fewer than six rallies over the next eight years averaging 32.5%. The surges, however, were followed by retreats, and Levkovich sees the choppy S&P 500 ending 2009 at 1,000.
IF THESE STRATEGISTS ARE RIGHT, the 39% gain from the Nov. 20 low of 752 to 1045 might mark the tentative start of a new bull market -- or a big bounce within an extended bear market. Even those who expect the S&P 500 to hold its Nov. 20 low see that threshold being tested in 2009 -- not immediately, since fresh allocations toward decimated stocks will provide a momentary lift. But buyers' resolve will be tested as early as February, when companies reporting messy fourth-quarter earnings offer a peek at the damage they've sustained.
Also, "I think a lot of bad decisions might have been made in the record volatility of this year's second half, and odds are there could be another surprise," warns Thomas Lee of JPMorgan. Potential threats that might rattle the market include a collapse of, say, a big U.S. industrial company or a foreign bellwether, or debt defaults by a sovereign power. Lee sees a range-bound first half, before a possible second-quarter test spawns a constructive second half. All through 2009, Wall Street expects the Fed to keep borrowing costs at extremely hospitable levels to goose spending, and at least nine strategists (or their economists) see benchmark rates kept below 1% even a year from today.
The flight to quality that drove 10-year Treasuries' yield down toward 2% last week also smacks of "a crowded trade and feels a little overdone," says Alison Deans, Neuberger Berman's chief investment officer. The firm's portfolio managers increasingly are scouring investment-grade corporate debt -- sporting attractive yields above 7% -- to park their money while browsing for stocks. In fact, 10 of the 12 strategists expect Treasuries to back off next year and for the 10-year yield to reverse its slide; the holdouts are JPMorgan, whose bond strategists see the benchmark yield finishing 2009 at 1.65%, and Merrill Lynch. (For Barron's bond-market outlook, see Current Yield.)
Anyone looking for change in 2009 will not be disappointed. As America weans itself off debt, and as the government begins to own banks, insurers or even automakers, a "tectonic shift occurs with the transfer of leverage from the private to the public sector," says Christopher Hyzy, chief investment officer of U.S. Trust, Bank of America's private wealth-management unit. The world's gross imbalances will begin to moderate. For example, developing Asia will see savings decline and spending rise, while the West, anxious to mend its balance sheets, will save more and spend less.
Top strategists and chief investment officers on whether the market has hit bottom yet. (Dec. 20)
The clearest consensus about this period of rebalance and repair is for stocks to suffer limited downside risk, but also capped upside gains. But when pressed to pick which one of these two notions they feel more confident about, the strategists become quite evenly divided.
BULLS WHO THINK THIS TIGHTLY wound market is more likely to surprise to the upside point out how cheap stocks have become. "Bottom-up" predictions by Street analysts for the S&P 500 to earn $78 a share next year seem naïve, and surely will be slashed toward less-deluded "top-down" estimates from strategists who have factored in the weakening economy and who peg profits at $60.20.
David Kostin, Goldman Sachs' chief investment strategist, expects operating earnings to slip 33% this year to $55 a share, then fall another 5% next year to $53 before rebounding in 2010 to $69. While he steers clients toward more defensive companies with strong balance sheets and reliable dividend growth, he says that an overall market trading at 1.7 times book value -- half the 10-year average of 3.4 times -- is a sign "the equity market is undervalued from a long-term perspective."
Studying how far multiples shrank during previous swoons, Kostin pegs the trough for the S&P 500 at 850 if this proves to be an average bear market. But if this bear market plays out to a worst-case scenario, the bottom could be a lot lower, at about 630.
Valuation multiples expanded relentlessly in the 1980s and 1990s as long-term interest rates fell. Stocks won't enjoy the same lift today, with the 10-year yield already near 2%. Still, price-to-earnings multiples "are well below where they should be, given where interest rates are and where inflation is," argues Larry Adam of Deutsche Bank Private Wealth Management. He thinks multiples can expand as investors' appetite for risk returns.
"The S&P 500 also is at its most broadly diversified in at least a decade," Adam adds. Technology hogged 30% of the benchmark's weight in 1999, while financials took up more than 22% in 2006, but today the most prominent segments -- technology, consumer staples -- represent no more than 15% of the increasingly balanced market.
James Paulsen of Wells Capital Management says the U.S. was dealt a below-the-belt blow from which it can bounce back. "The one policy that had been tremendously effective was the well-orchestrated fear-mongering campaign" waged by the Treasury and the Fed to persuade Congress to pass a $700 billion bailout bill, Paulsen says.
The bad news: the resulting crisis of confidence frightened perfectly healthy corporations and consumers into suspending economic activity. "But the good news also is that it is a crisis of confidence," Paulsen says. "Just as we're surprised by the crisis' depth and severity going in, we might be surprised by how sharp the rebound can be going out."
Concerns about the collapse of consumer spending -- the engine that drives the U.S. economy -- also may have been exaggerated. "Credit won't grow at the rate we're accustomed to, but there's still pent-up demand from deferred purchases," says Jerry Webman, Oppenheimer Funds' senior investment officer. And let's not forget the boost that comes from $40 oil.
SO WHAT'S HOLDING STOCKS BACK? "If you have to point to one constant in the market, it is uncertainty," says Hyzy. More cautious strategists think the S&P 500 will struggle to sustain rallies above 1050, since investors will be asked to pay more than 15 times for per-share earnings of $70 or more.
Many strategists, of course, hope housing demand will recover as mortgage rates fall and as the new administration pushes consumer-friendlier reform. Unemployment might not peak until late-2009 near 9%, but it is a lagging indicator, since employers typically hold off new hires until they are convinced things are looking up. Still, weaker operating leverage, compressed profit margins, a stronger dollar and anemic foreign growth could all cap rallies.
Among the more prescient calls from last year's forecast was Merrill Lynch's prediction of "the first consumer-led recession since 1991," even if the firm, too, underestimated the severity of this year's selloff. While others were anticipating a profit rebound, Merrill also was among the first to forecast weaker profits in 2009 -- a view that has since become consensus.
Today, the firm still hews to its defensive crouch, although chief investment strategist Richard Bernstein reckons "2009 is likely to be better than 2008 for investors." Among other things, he preaches patience in the rush to pick a market bottom, "since the opportunity cost is low and there's a stiff penalty for being early and wrong." Merrill economist David Rosenberg thinks fiscal stimulus can help "cushion the blow but will not reverse the business cycle." Spirited consumption by baby boomers kept recent recessions short and mild. But now, "the average boomer is in his 50s and after two decades of spending, the boomer is done."
With this decade's booms -- in commodities, real estate, hedge funds and private equity -- all swelled by cheap money, Bernstein says the violent market shakeup and bursting of the credit bubble will pave the way for new market leaders. Defensive segments like consumer staples and health care may prove to be more than a temporary shelter, and could outperform even over the longer run.
Asked what it'll take before he turns more bullish, Rosenberg flags three markers that could signal a sustainable economic expansion: the rise of the U.S. personal savings rate to 8% from 2%; a decline in the glut of unsold new homes, currently at 11 months' supply, to about eight months' worth; and for the percentage of household after-tax income spent servicing debt to fall from more than 13% to about 10.5%.
Where lurk the potential shocks? For many strategists, the happiest surprise is if the financial system gets fixed swiftly. That could drive the S&P 500 to 1190, and Chakrabortti pegs the chances of that at 20%.
By early next year, the losses suffered by banks and brokerages also will pass the $1 trillion mark, and "odds are good that markdowns and provisioning have already peaked," says Chakrabortti, who warned more than a year ago that downturns led by housing -- the world's slowest-moving assets -- tend to be prolonged. Improving value for deeply discounted loans might even trigger "write-backs," where financial firms that haven't dumped their debt get to bump up the value of their loan portfolios.
Table: 2009 ForecastsOn the other hand, policy failure and dislocated financial markets could send the S&P 500 to 400, the odds of which Chakrabortti pegs at 25%. "Another potential downside surprise is if Asian or emerging-market consumption falls sharply -- I don't think that has been discounted by the market."
Meanwhile, inflation -- so feared just a few months ago -- goes virtually unremarked these days, even though the government bluntly promises it will print as much money as necessary to keep the financial systems functioning. "The trade of 2009 will be to figure out when to stop playing deflation and begin playing inflation again," Trennert says.
AGAINST THIS UNCERTAINTY, model portfolios must walk a delicate balance between guarded and bold: The three sectors favored by BlackRock's global chief investment officer Robert Doll are health care, with its strong cash flow and its defensive stance; technology, which straddles the divide between stability and cyclicality; and energy, which is the most economically sensitive.
Forcing borrowing rates down to zero will need time to work. In this climate, Hyzy prefers "the top of the capital structure" -- essentially more secure senior debt -- and keeping an eye on small- to mid-cap stocks that could outperform if the Obama administration manages to stimulate job creation. He also emphasizes infrastructure and defense stocks. "There is a propensity for violence during tough times, and conflicts can arise as the global economic downturn picks up steam," he says. "We must be prepared for that."
While the market has flocked toward quality -- strong balance sheet, robust cash flow, predictable profits -- investors should keep an eye out for improving credit spreads and a return of risk appetite. "At some point, the argument for quality could become long in the tooth, and lower quality will do just fine -- thank you very much," Doll says. When that happens, investors might shift some money from big pharmaceuticals toward HMOs within health care, from software toward select chip makers, and from big integrated oil companies toward explorers and refiners. Ditto a shift from the currently popular domestic focus back toward multinationals with international clout.
No surprise: health care is the new year's most crowded trade, with the sector beloved by 10 of 12 strategists.
Curiously, technology was favored by five out of the six buy-side CIOs, but not one sell-side strategist. Deutsche's Adam, for one, likes tech companies' cash stash and self-sufficiency from the debt market. Inventory is disciplined after the bloated bubble years, and technology improves productivity of companies operating with leaner staff. Our next president, Barack Obama, is a tech-savvy broadband geek, and even his health care reform includes tech-reliant proposals like the modernizing of medical records.
The knock on the sector, however, is how companies might find it easier to slash capital spending than lay off workers. Credit-market indicators suggest that payrolls will shrink another 3% by the summer, but capital spending could be cut 15%, says Citi's Levkovich. "Companies that sell to consumers could suffer, but companies that sell to other companies will be worse off," he says. His picks include retailers, where "expectations are already extraordinarily poor."
A chasm also has opened up in financials, which is favored by four sell-side strategists. "America's private debt -- the aggregate value of household and corporate debt -- is trading at 70 cents on the dollar, and that's not the right price," says JPMorgan's Lee, who expects this fear-driven discount to narrow after the rush to delever. Tightening credit spreads and a steeper yield curve also should help financial firms.
ODDLY ENOUGH, NOT ONE of the surveyed buy-side managers is ready to warm up to financials. Like tech stocks earlier this decade and energy stocks in the early 1980s, financial stocks need a lot more time to recover from the pricking of the credit bubble. "More capacity needs to be taken out, which means more bad debt, write-offs and consolidation," Doll says. "Policy is an ameliorating factor and it is targeted at financials, the sickest part of the market. But if it works, it will benefit the whole economy." In other words: why risk betting on financials?
Meanwhile, the sectors that led the most recent bull market have become its new pariahs: Energy is recommended by just two strategists, and materials by only one. "While demand for commodities will be hurt in a global recession, we have done virtually nothing to solve our oil dependence," says Doll, who sees energy stocks bouncing should the economy return to any semblance of normalcy. Crude oil has also fallen more than 70% to below $40 a barrel, and Doll sees the $40 level "as a flashpoint below which oil-producing countries will curtail supply." (OPEC, in fact, voted last week to reduce supply.)
In contrast, four strategists suggest avoiding energy, four are dissing materials and five suggest steering clear of industrials. Quite remarkably, 12 of these 13 negative calls against these commodity-driven sectors are from the sell-side. Materials and industrial companies, for instance, are famously capital-intensive. They suffer big depreciation expenses that erode earnings and pressure margins, and commodity prices are still falling. "The bar is set very high for companies that led the previous bull market," Lee says, "and it's rare for old leaders to re-assert themselves."
For that matter, even the vanquished bull market itself will need a little help -- and a little hope -- to reassert itself in the year ahead.
Wednesday, December 17, 2008
Barclays Recommends Caution, Nasty Surprises Ahead
Barclays (BCS) stays cautious in its global outlook for December:
We are in the midst of the most severe global recession since at least the early 1980s, if not the Great Depression. It is difficult to find an economy anywhere in the world that is not being hit hard, and the downward momentum underway virtually ensures that activity will continue to fall significantly through Q1.
If fiscal stimulus plans and market supports do their job, Barclays says this contraction could bottom around mid-2009 but warns:
Plenty of nasty surprises lie ahead, as economic performance in the fourth and first quarters is set to be considerably worse than anything in the current cycle thus far. This will take its toll on income statements, balance sheets, and liquidity around the globe. We thus suggest keeping relatively sizeable portions of portfolios in liquid instruments to allow investors to take advantage of opportunities as they arise.
We could get an early 2009 rally off recent lows, but the rest of the year remains largely uncertain. So what to buy? Barclays recommends the following (bold is mine):
Buy US investment grade credit and TIPS. Our valuation metrics suggest that corporate debt spreads are already close to the highs they reached in the Great Depression, and even if they remain elevated, the amount of carry suggests that decent profits are likely to be made by investing and holding these assets. Real yields on TIPS in the 5-7yr part of the curve are in excess of 3%, and are pricing in an extended period of deflation.
Given the high degree of risk associated with any scenario in today’s environment, it is wise to hedge even these relatively cautious positions. Nominal European government bonds seem relatively cheap considering the likely economic weakness and associated monetary ease that we expect in Europe. A long position is likely to provide an effective hedge to significantly weaker economic growth or a more extended period of deflation than we expect.
We are cautious on emerging market assets, commodities and equities. Emerging market debt and equity were hit relatively late in the de-leveraging cycle and it could well take some time before investor interest is rekindled. We thus recommend underweight positions in emerging market equities and non-investment grade credit. The downturn is having a devastating effect on demand for commodities, and it is hard to be confident that the bottom in prices has yet been reached. OPEC production cuts should help support oil prices, but similar supply management is not expected to benefit other commodities in the near term. Equity valuations are cheap compared to history, but not as cheap as credit. Over the long run, we believe equities offer excellent value, but we are concerned that the weakness in earnings that will follow the sharp contractions in economies in Q4 and Q1 is not yet fully appreciated. Consequently, we recommend a very cautious dip-buying approach, primarily in Europe, where valuations are the lowest.
Most of the position reduction in currency markets that has favored the dollar and the yen appears to have run its course, and we are not looking for further significant gains in these former funding currencies. The commodity currencies may have somewhat further to fall as the global downturn plays out, whereas sterling seems set to recover as the gloom surrounding UK prospects – particularly relative to the euro area – seems to be overdone.
The above, plus today's pull-back from Wednesday's Fed-inspired rally, should keep equity investors from becoming too optimistic.
We are in the midst of the most severe global recession since at least the early 1980s, if not the Great Depression. It is difficult to find an economy anywhere in the world that is not being hit hard, and the downward momentum underway virtually ensures that activity will continue to fall significantly through Q1.
If fiscal stimulus plans and market supports do their job, Barclays says this contraction could bottom around mid-2009 but warns:
Plenty of nasty surprises lie ahead, as economic performance in the fourth and first quarters is set to be considerably worse than anything in the current cycle thus far. This will take its toll on income statements, balance sheets, and liquidity around the globe. We thus suggest keeping relatively sizeable portions of portfolios in liquid instruments to allow investors to take advantage of opportunities as they arise.
We could get an early 2009 rally off recent lows, but the rest of the year remains largely uncertain. So what to buy? Barclays recommends the following (bold is mine):
Buy US investment grade credit and TIPS. Our valuation metrics suggest that corporate debt spreads are already close to the highs they reached in the Great Depression, and even if they remain elevated, the amount of carry suggests that decent profits are likely to be made by investing and holding these assets. Real yields on TIPS in the 5-7yr part of the curve are in excess of 3%, and are pricing in an extended period of deflation.
Given the high degree of risk associated with any scenario in today’s environment, it is wise to hedge even these relatively cautious positions. Nominal European government bonds seem relatively cheap considering the likely economic weakness and associated monetary ease that we expect in Europe. A long position is likely to provide an effective hedge to significantly weaker economic growth or a more extended period of deflation than we expect.
We are cautious on emerging market assets, commodities and equities. Emerging market debt and equity were hit relatively late in the de-leveraging cycle and it could well take some time before investor interest is rekindled. We thus recommend underweight positions in emerging market equities and non-investment grade credit. The downturn is having a devastating effect on demand for commodities, and it is hard to be confident that the bottom in prices has yet been reached. OPEC production cuts should help support oil prices, but similar supply management is not expected to benefit other commodities in the near term. Equity valuations are cheap compared to history, but not as cheap as credit. Over the long run, we believe equities offer excellent value, but we are concerned that the weakness in earnings that will follow the sharp contractions in economies in Q4 and Q1 is not yet fully appreciated. Consequently, we recommend a very cautious dip-buying approach, primarily in Europe, where valuations are the lowest.
Most of the position reduction in currency markets that has favored the dollar and the yen appears to have run its course, and we are not looking for further significant gains in these former funding currencies. The commodity currencies may have somewhat further to fall as the global downturn plays out, whereas sterling seems set to recover as the gloom surrounding UK prospects – particularly relative to the euro area – seems to be overdone.
The above, plus today's pull-back from Wednesday's Fed-inspired rally, should keep equity investors from becoming too optimistic.
Saturday, December 13, 2008
The Madoff Dynasty June, 2000
The Madoff Dynasty
Bernie Madoff, Chairman and CEO of Bernard L. Madoff Investment Securities, is surrounded at the office by his brother, Peter, his nephew, Charles, his niece, Shana and his sons, Mark and Andrew. But back in 1960 when he started his firm with $5,000 saved from lifeguarding at Rockaway Beach and later installing underground sprinkler systems, there was only his wife, Ruth-who helped with some bookkeeping-and dreams of Wall Street success.
Today, Bernard L. Madoff Investment Securities is a leading market maker in off-exchange and after-hours trading of U.S. stocks, including all companies in the S&P 500 and 200 leading Nasdaq stocks. It is also one of the largest market makers in convertible bonds, preferred stocks, warrants, units and rights. Madoff Securities has over $300 million in firm capital and currently ranks among the top one percent of U.S. securities firms. But it took some time to get there.
Back in the 1970s, the Madoffs found that NYSE Rule 390-which was only recently rescinded-gave them the advantage of being able to trade NYSE-listed stocks away from the floor, which NYSE members could not do. The Madoffs accessed those stocks through the National Market System (NMS) which was mandated by the Securities Acts Amendments of 1975 to stir competition in U.S. equity markets.
Subsequently, the Intermarket Trading System (ITS) was developed, an order-routing system linking the regional stock exchanges with the NYSE, AMEX and OTC market. In order to enhance the liquidity of their trading pool, the Madoffs became involved with Nasdaq and the Cincinnati Stock Exchange, which facilitated links to other exchanges.
The need to embrace technology early on just to get in the game has served the Madoffs well over the years. They were one of the first firms to automate when they hired TCAM Systems to develop execution software that would read the consolidated quote feed showing all specialists bids and offers on the regional exchanges, the NYSE and the AMEX. Because the executions were totally automated, faster and more efficient, and because the firm guaranteed to match the national best bid and offer for orders up to 5,000 shares-and price improvement if the spread was higher than the minimum increment-Madoff Securities Inc. began to attract significant order flow from regional and discount brokerage firms.
With such activity at the office, it's no wonder business found its way to the dinner table at home. "All of his family members grew up with this being our lives. When it is a family operated business you don't go home at night and shut everything off, so you take things home with you, which is how all of us grew up," says Mark Madoff, director of listed trading at Madoff Securities.
Mark joined the family team in 1986 when he graduated from the University of Michigan. By that time, he was the third family member to jump on board. Peter Madoff, senior managing director and head of trading, began at the firm in 1965 and graduated from Fordham Law School in 1967. That same year Peter had a daughter named Shana. She joined the firm in 1995 after graduating from the same law school her father attended and currently serves as in-house council. Following Peter came Charles Wiener, the son of Bernie's sister Sandra. Charles joined Madoff Securities in 1978 and now serves as director of administration. After Mark joined in 1986, Andrew Madoff, Bernie's youngest son, started in 1988 having graduated from the University of Pennsylvania's Wharton School of business and is currently director of Nasdaq trading. Peter's son Roger Madoff joined Primex Trading in 1999-Primex is an alternative trading system formed from a partnership of four large investment banks and Madoff Securities. "What's nice is that everyone has their own area, I have compliance, Mark has listing, Andy has Nasdaq. So even though we can work together, we're not all thrust into one position fighting over something to do," says Shana.
Mark says, "What makes it fun for all of us is to walk into the office in the morning and see the rest of your family sitting there. That's a good feeling to have. To Bernie and Peter, that's what it's all about." -Anthony Guerra
Bernie Madoff, Chairman and CEO of Bernard L. Madoff Investment Securities, is surrounded at the office by his brother, Peter, his nephew, Charles, his niece, Shana and his sons, Mark and Andrew. But back in 1960 when he started his firm with $5,000 saved from lifeguarding at Rockaway Beach and later installing underground sprinkler systems, there was only his wife, Ruth-who helped with some bookkeeping-and dreams of Wall Street success.
Today, Bernard L. Madoff Investment Securities is a leading market maker in off-exchange and after-hours trading of U.S. stocks, including all companies in the S&P 500 and 200 leading Nasdaq stocks. It is also one of the largest market makers in convertible bonds, preferred stocks, warrants, units and rights. Madoff Securities has over $300 million in firm capital and currently ranks among the top one percent of U.S. securities firms. But it took some time to get there.
Back in the 1970s, the Madoffs found that NYSE Rule 390-which was only recently rescinded-gave them the advantage of being able to trade NYSE-listed stocks away from the floor, which NYSE members could not do. The Madoffs accessed those stocks through the National Market System (NMS) which was mandated by the Securities Acts Amendments of 1975 to stir competition in U.S. equity markets.
Subsequently, the Intermarket Trading System (ITS) was developed, an order-routing system linking the regional stock exchanges with the NYSE, AMEX and OTC market. In order to enhance the liquidity of their trading pool, the Madoffs became involved with Nasdaq and the Cincinnati Stock Exchange, which facilitated links to other exchanges.
The need to embrace technology early on just to get in the game has served the Madoffs well over the years. They were one of the first firms to automate when they hired TCAM Systems to develop execution software that would read the consolidated quote feed showing all specialists bids and offers on the regional exchanges, the NYSE and the AMEX. Because the executions were totally automated, faster and more efficient, and because the firm guaranteed to match the national best bid and offer for orders up to 5,000 shares-and price improvement if the spread was higher than the minimum increment-Madoff Securities Inc. began to attract significant order flow from regional and discount brokerage firms.
With such activity at the office, it's no wonder business found its way to the dinner table at home. "All of his family members grew up with this being our lives. When it is a family operated business you don't go home at night and shut everything off, so you take things home with you, which is how all of us grew up," says Mark Madoff, director of listed trading at Madoff Securities.
Mark joined the family team in 1986 when he graduated from the University of Michigan. By that time, he was the third family member to jump on board. Peter Madoff, senior managing director and head of trading, began at the firm in 1965 and graduated from Fordham Law School in 1967. That same year Peter had a daughter named Shana. She joined the firm in 1995 after graduating from the same law school her father attended and currently serves as in-house council. Following Peter came Charles Wiener, the son of Bernie's sister Sandra. Charles joined Madoff Securities in 1978 and now serves as director of administration. After Mark joined in 1986, Andrew Madoff, Bernie's youngest son, started in 1988 having graduated from the University of Pennsylvania's Wharton School of business and is currently director of Nasdaq trading. Peter's son Roger Madoff joined Primex Trading in 1999-Primex is an alternative trading system formed from a partnership of four large investment banks and Madoff Securities. "What's nice is that everyone has their own area, I have compliance, Mark has listing, Andy has Nasdaq. So even though we can work together, we're not all thrust into one position fighting over something to do," says Shana.
Mark says, "What makes it fun for all of us is to walk into the office in the morning and see the rest of your family sitting there. That's a good feeling to have. To Bernie and Peter, that's what it's all about." -Anthony Guerra
Friday, December 12, 2008
Wednesday, December 10, 2008
Volatility? Huh
From Art Cashin's UBS note this morning.
Last Wednesday, I cited some work produced by Paul Leming, who is an associate of my friend, Vince Farrell. Paul's work showed that in the 14,284 trading days since January 1, 1950, there were 68 days that had moves of 4% or more. Further, 28 of those 68 (41%) have occurred in the last three months. Since I wrote of that, we've had two more 4% days. Now it's 30 out of 70 (43%). The volatility remains historic, and nerve-wracking.
Last Wednesday, I cited some work produced by Paul Leming, who is an associate of my friend, Vince Farrell. Paul's work showed that in the 14,284 trading days since January 1, 1950, there were 68 days that had moves of 4% or more. Further, 28 of those 68 (41%) have occurred in the last three months. Since I wrote of that, we've had two more 4% days. Now it's 30 out of 70 (43%). The volatility remains historic, and nerve-wracking.
Undervalued?
ANNANDALE, Va. (MarketWatch) -- It is one of the ironies of stock-market timing that it is easier to forecast where the market will be in several years than where it will be in several days.
And, according to a valuation model from a research firm with an excellent long-term record, the stock market is likely to be significantly higher in several years' time -- regardless of whether the final low of the last year's bear market has been seen.
The firm in question is Ford Equity Research of San Diego. This firm is on my radar screen because it publishes a newsletter entitled Ford Equity Research Investment Review. And its market-timing model deserves to be on your radar screen because it has a good long-term record.
Ford bases its model on an analysis of individual stocks' valuations. For each of several thousand issues, Ford calculates a so-called price-to-value ratio, which "is computed by dividing the price of a company's stock by the value derived from a proprietary intrinsic value model."
According to Ford, "A [price-to-value ratio] greater than 1.00 indicates that a company is overpriced while a [ratio] less than 1.00 implies that a stock is trading below the level justified by its earnings, quality rating, dividends, projected growth rate, and prevailing interest rates." After calculating a price-to-value ratio for each of the several thousand stocks that it monitors, Ford calculates an overall average.
Since 1970, when Ford started calculating the ratio, this average's record high level was 1.81, which it hit at the end of September 1987, three weeks prior to the worst crash in U.S. stock market history. Its second highest level, 1.79, was registered at the end of February 2000, just a couple of weeks prior to the bursting of the Internet bubble and the beginning of the 2000-2002 bear market.
Today, this average stands at 0.68. That's the lowest since December 1974, when it got slightly lower, to 0.61. Other than that December 1974 reading, the current level of this average is the lowest since 1970, when Ford began calculating it.
In addition, the current level is well below the four-decade average, which stands at 1.17.
This would certainly appear to be good news for the stock market.
To test whether Ford's model has statistical significance, I fed the monthly values for the average price-to-value ratio into my PC's statistical package, along with data on how the stock market performed. As expected, I found an inverse correlation between where the Ford average stood and the stock market's performance over the subsequent one-, three-, and five-year periods.
That is, higher price-to-value ratios were more often than not followed by lower market returns, and vice versa. And these correlations were significant at the 95% confidence level that statisticians often use to judge whether a correlation is genuine.
Can the Ford data be used to forecast anything shorter term?
Ford's analysts pointed out in a recent special report prepared for their clients that the average price-to-value ratio of U.S. stocks "dropped below 1.0 [only] seven previous times - April 1973, April 1976, April 1980, September 1990, August 1993, August 1998, and June 2002. In each of these cases, the market made an initial low within the first three months" after breaking below that 1.0 level.
In the current bear market, the 1.0 level wasn't broken until October. As a result, Ford's analysts conclude that, "We should expect to see that the market has bottomed by year-end."
Sunday, December 7, 2008
Unemployment Comparison 74 vs. 08
1974 (Half of the work force)
November - 368K
December - 602K
January -360k
February -378k
March -270k
April -186k
May +160k
June -104k
2008
November - 533K
Stay tuned.
November - 368K
December - 602K
January -360k
February -378k
March -270k
April -186k
May +160k
June -104k
2008
November - 533K
Stay tuned.
Wednesday, December 3, 2008
Tuesday, December 2, 2008
Tuesday, November 25, 2008
Case-Shiller survey shows 16.6% annual decline in summer months as housing picture continues to deteriorate.
NEW YORK (CNNMoney.com) -- The home price plunge stayed on a record pace this summer, according to a widely watched gauge of national real estate markets released Tuesday.
The S&P Case-Shiller Home Price national index recorded a 16.6% decline in the third quarter compared with the same period a year ago. That eclipsed the previous record of 15.1% set during the second quarter.
Prices in Case-Shiller's separate index of 10 major cities fell a record 18.6%, while its 20-city index dropped a record 17.4%.
With foreclosures soaring at record rates, the economic picture dimming and job losses ramping up, all the elements were in place to push prices lower.
"The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals." said David Blitzer, Standard & Poor's spokesman for the indexes, in a press release. "All three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. . . . Prices are back to where they were in early 2004."
The 10-city index is now 23.4% off its peak price, which came in June 2006; the 20-city index is down 21.8% from its July 2006 high and the national index has fallen 21% since the third quarter of 2006.
Green and beautiful without utility bills!
Home prices in the 10-city index have fallen for 26 consecutive months. The decline has broadened over the past 12 months, with prices dropping in every city of the 20-city index during September.
In the weakest market, Phoenix, the 12-month loss came to 31.9%. Las Vegas prices plummeted 31.3% and San Francisco recorded a 29.5% decline. The best performing markets, Dallas and Charlotte, N.C., still posted drops - 2.7% in Dallas and 3.5% in Charlotte.
With San Francisco and Las Vegas, the other members of the 10-city index are: Miami, down 28.4% year-over-year; Los Angeles, down 27.6%; San Diego, down 26.3%; Washington, down 17%; Chicago, down 10.1%; New York, down 7.3%; Boston, down 5.7%; and Denver, down 5.4%.
In addition to Phoenix, Dallas, Charlotte and the cities in the 10-city index, the 20-city index is made up of: Detroit, down 18.6%; Tampa, Fla., down 18.5%; Minneapolis, down 14%; Seattle, down 9.8%; Atlanta, down 9.5%; Portland, Ore., down 8.6%; and Cleveland, down 6.4%.
Foreclosures continue to take a heavy toll, with sales in some cities dominated by properties repossessed by banks and then put back on the market, often at bargain prices. In Las Vegas and Cleveland, for example, about half of all homes for sale are bank-owned properties, according to the real estate Web site, Trulia.com.
"Foreclosures are clearly a part of the market now," said Blitzer.
He added that the national index price trends tend to be more moderate because they encompass many more exurban and rural areas, where, in many cases, home prices never skyrocketed as they did in some of the hotter, urban markets.
Karl Case, the Wellesley economics professor who is the Case in Case-Shiller, said during a news conference about the latest index report that he would hesitate to put a number on how much further prices could fall, but the increasing job losses will surely worsen the situation.
"There's no cushion against unemployment," he said.
And Pat Newport, an economist with Global Insight, pointed out that the latest numbers don't even capture the impact of some of the events of the past couple of months.
"The real economy took a sharp turn for the worse towards the end of the third quarter," he said. "Since then, housing permits are down, the National Association of Home Builders index of activity dropped to a record low in November and purchase loan applications were down 15%. That's telling us the housing market has worsened a lot."
Add to that a jumping unemployment rate and more bank woes and it adds up to lousy home price numbers for months to come, according to Newport.
"As bad as the latest Case-Shiller numbers appear to be, they are bound to get a lot worse," he said.
The S&P Case-Shiller Home Price national index recorded a 16.6% decline in the third quarter compared with the same period a year ago. That eclipsed the previous record of 15.1% set during the second quarter.
Prices in Case-Shiller's separate index of 10 major cities fell a record 18.6%, while its 20-city index dropped a record 17.4%.
With foreclosures soaring at record rates, the economic picture dimming and job losses ramping up, all the elements were in place to push prices lower.
"The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals." said David Blitzer, Standard & Poor's spokesman for the indexes, in a press release. "All three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. . . . Prices are back to where they were in early 2004."
The 10-city index is now 23.4% off its peak price, which came in June 2006; the 20-city index is down 21.8% from its July 2006 high and the national index has fallen 21% since the third quarter of 2006.
Green and beautiful without utility bills!
Home prices in the 10-city index have fallen for 26 consecutive months. The decline has broadened over the past 12 months, with prices dropping in every city of the 20-city index during September.
In the weakest market, Phoenix, the 12-month loss came to 31.9%. Las Vegas prices plummeted 31.3% and San Francisco recorded a 29.5% decline. The best performing markets, Dallas and Charlotte, N.C., still posted drops - 2.7% in Dallas and 3.5% in Charlotte.
With San Francisco and Las Vegas, the other members of the 10-city index are: Miami, down 28.4% year-over-year; Los Angeles, down 27.6%; San Diego, down 26.3%; Washington, down 17%; Chicago, down 10.1%; New York, down 7.3%; Boston, down 5.7%; and Denver, down 5.4%.
In addition to Phoenix, Dallas, Charlotte and the cities in the 10-city index, the 20-city index is made up of: Detroit, down 18.6%; Tampa, Fla., down 18.5%; Minneapolis, down 14%; Seattle, down 9.8%; Atlanta, down 9.5%; Portland, Ore., down 8.6%; and Cleveland, down 6.4%.
Foreclosures continue to take a heavy toll, with sales in some cities dominated by properties repossessed by banks and then put back on the market, often at bargain prices. In Las Vegas and Cleveland, for example, about half of all homes for sale are bank-owned properties, according to the real estate Web site, Trulia.com.
"Foreclosures are clearly a part of the market now," said Blitzer.
He added that the national index price trends tend to be more moderate because they encompass many more exurban and rural areas, where, in many cases, home prices never skyrocketed as they did in some of the hotter, urban markets.
Karl Case, the Wellesley economics professor who is the Case in Case-Shiller, said during a news conference about the latest index report that he would hesitate to put a number on how much further prices could fall, but the increasing job losses will surely worsen the situation.
"There's no cushion against unemployment," he said.
And Pat Newport, an economist with Global Insight, pointed out that the latest numbers don't even capture the impact of some of the events of the past couple of months.
"The real economy took a sharp turn for the worse towards the end of the third quarter," he said. "Since then, housing permits are down, the National Association of Home Builders index of activity dropped to a record low in November and purchase loan applications were down 15%. That's telling us the housing market has worsened a lot."
Add to that a jumping unemployment rate and more bank woes and it adds up to lousy home price numbers for months to come, according to Newport.
"As bad as the latest Case-Shiller numbers appear to be, they are bound to get a lot worse," he said.
Friday, November 21, 2008
Marc Faber Nov. 20 2009
Well, I think we have reached extreme points in the sense that asset markets are, by and large terribly oversold, whether these are gold mining shares, or commodities, or equities. On the other hand, we have an overbought U.S. dollar and overbought U.S. Treasury bonds. So I think that volatility will continue. But what you could get within the next 3 months is a very strong rebound in asset markets, in equities, and a sell-off in bonds, and eventually a selloff in the dollar.
http://www.cnbc.com/id/27835292/
http://www.cnbc.com/id/27835292/
Wednesday, November 19, 2008
Friday, November 14, 2008
Thursday, November 13, 2008
Tuesday, November 11, 2008
Banks!
Perhaps if Goldman Sachs goes belly up, the government will stop appointing guys from that firm to run the Treasury. The models that permeate throughout Wall Street got us into this mess. We need some original thinking from outside lower Manhattan to get us out.
I continue to have a bullish stance near-term, given both the tremendous negativity in the market and extreme oversold levels. But days like today make it tough.
I contend that what would surprise money managers the most is not the S&P 500 hitting 750 but rather the S&P 500 hitting 1150. The unrelenting bearishness I am hearing is deafening.
The last time we had a 35% decline over two months as we did from the close on August 28 to the close on October 27 was in 1937. In fact, there have only been 13 occasions since 1928 when the market fell by 35% or more from any given daily close out of 20,305 trading days.
The first eight occasions all occurred around the crash of 1929, with a two-month decline of 35% occurring on October 29, 1929, November 6, 1929, and each day from November 11 through 18, 1929.
A month after October 29, the market was up 2.5%. The nadir was on November 13, with the market having been cut in half from its peak in August. Stocks then rallied 23% over the next month.
On October 5, 1931, the market was down 34.9% compared to the previous month (thus not making it one of the 13 in the sample). Stocks bounced 23% a month later.
On May 3 and May 5, 1932, the market had also fallen at least 35% over two months. However, returns were negative a month later, with declines of 22% and 14% respectively. Two other 35% declines occurred on May 31 and June 1 of that year. The market was flat a month later, with a loss of 0.7% and a gain of 2.5% respectively.
The final two-month decline occurred on October 18, 1937. A month later, stocks were up 6%.
For what it’s worth.
The positive news today? NYSE Composite volume was 4.38 billion, down from 4.79 billion on Friday. That is the lowest volume since September 24, and one the lowest volume days in months. Also, breadth was 2.3:1, the lowest negative breadth on a down day in nearly a month. Generally, the selling as of late has been program driven, with negative breadth on down days more likely to be 10:1 or 20:1.
More good news? The 2-year swap spread ticked down to 1.07%, although it was below 1% at the open this morning.
LIBOR was down. However, the TED spread ticked up because 3-month T-bills hit a yield of 0.20%, nearing the multi-year lows set in September and October.
I asked our bond guys why the T-bill yield was so low. Short-term interest rates are hitting lows seen during the panic in October. We are not panicking now. In fact, spreads are narrowing. So why are short-term interest rates dropping like a stone? They called around the Street to ask but nobody seemed to know.
We came to the conclusion that the low yield is probably because of cash hoarding to meet redemptions. As I understand it, most hedge fund investors have until November 15 to ask for their money back at the end of the year. Rather than selling after the fact, funds are liquidating pro-actively. Mutual funds have also been selling to meet expected redemptions. Pension funds, which have been caught in highly illiquid asset-backed commercial paper in their cash accounts, are over-invested in T-bills. In other words, large investors are sitting in the most liquid asset available to meet expected capital calls.
This leads to an interesting proposition - what if redemptions are not as large as funds expect? One contact told me that their prime broker is saying that hedge fund redemption request are coming in a bit higher than expected. However, there appears to be a great deal of liquidity floating around.
Staying on fixed income, here is a graph of the yield curve.
Usually, this means that the economy is going to be okay. The bears will argue that is because the long-end of the curve is either a.) discounting inflation, or b.) deluded and will eventually fall.
The VIX is interesting here.
It may be in the process of tracing out a lower high. Perhaps the chart is forming the right shoulder of a head-and-shoulders pattern those technicians like to see. Or maybe it is the process of re-testing the highs. We will know over the next few days.
Speaking of the technicals, we may be seeing positive divergences in MACD and RSI for the market.
The RSI at the top may be hitting higher lows while MACD at the bottom is nowhere near the levels experienced last month.
Make your conclusions accordingly
I continue to have a bullish stance near-term, given both the tremendous negativity in the market and extreme oversold levels. But days like today make it tough.
I contend that what would surprise money managers the most is not the S&P 500 hitting 750 but rather the S&P 500 hitting 1150. The unrelenting bearishness I am hearing is deafening.
The last time we had a 35% decline over two months as we did from the close on August 28 to the close on October 27 was in 1937. In fact, there have only been 13 occasions since 1928 when the market fell by 35% or more from any given daily close out of 20,305 trading days.
The first eight occasions all occurred around the crash of 1929, with a two-month decline of 35% occurring on October 29, 1929, November 6, 1929, and each day from November 11 through 18, 1929.
A month after October 29, the market was up 2.5%. The nadir was on November 13, with the market having been cut in half from its peak in August. Stocks then rallied 23% over the next month.
On October 5, 1931, the market was down 34.9% compared to the previous month (thus not making it one of the 13 in the sample). Stocks bounced 23% a month later.
On May 3 and May 5, 1932, the market had also fallen at least 35% over two months. However, returns were negative a month later, with declines of 22% and 14% respectively. Two other 35% declines occurred on May 31 and June 1 of that year. The market was flat a month later, with a loss of 0.7% and a gain of 2.5% respectively.
The final two-month decline occurred on October 18, 1937. A month later, stocks were up 6%.
For what it’s worth.
The positive news today? NYSE Composite volume was 4.38 billion, down from 4.79 billion on Friday. That is the lowest volume since September 24, and one the lowest volume days in months. Also, breadth was 2.3:1, the lowest negative breadth on a down day in nearly a month. Generally, the selling as of late has been program driven, with negative breadth on down days more likely to be 10:1 or 20:1.
More good news? The 2-year swap spread ticked down to 1.07%, although it was below 1% at the open this morning.
LIBOR was down. However, the TED spread ticked up because 3-month T-bills hit a yield of 0.20%, nearing the multi-year lows set in September and October.
I asked our bond guys why the T-bill yield was so low. Short-term interest rates are hitting lows seen during the panic in October. We are not panicking now. In fact, spreads are narrowing. So why are short-term interest rates dropping like a stone? They called around the Street to ask but nobody seemed to know.
We came to the conclusion that the low yield is probably because of cash hoarding to meet redemptions. As I understand it, most hedge fund investors have until November 15 to ask for their money back at the end of the year. Rather than selling after the fact, funds are liquidating pro-actively. Mutual funds have also been selling to meet expected redemptions. Pension funds, which have been caught in highly illiquid asset-backed commercial paper in their cash accounts, are over-invested in T-bills. In other words, large investors are sitting in the most liquid asset available to meet expected capital calls.
This leads to an interesting proposition - what if redemptions are not as large as funds expect? One contact told me that their prime broker is saying that hedge fund redemption request are coming in a bit higher than expected. However, there appears to be a great deal of liquidity floating around.
Staying on fixed income, here is a graph of the yield curve.
Usually, this means that the economy is going to be okay. The bears will argue that is because the long-end of the curve is either a.) discounting inflation, or b.) deluded and will eventually fall.
The VIX is interesting here.
It may be in the process of tracing out a lower high. Perhaps the chart is forming the right shoulder of a head-and-shoulders pattern those technicians like to see. Or maybe it is the process of re-testing the highs. We will know over the next few days.
Speaking of the technicals, we may be seeing positive divergences in MACD and RSI for the market.
The RSI at the top may be hitting higher lows while MACD at the bottom is nowhere near the levels experienced last month.
Make your conclusions accordingly
Sunday, November 9, 2008
Jeremy Grantham: Letter to investors
On October 10th we can say that, with the S&P at 900, stocks are cheap in the U.S. and cheaper still overseas. We will therefore be steady buyers at these prices. Not necessarily rapid buyers, in fact probably not, but steady buyers. But we have no illusions. Timing is difficult and is apparently not usually our skill set, although we got desperately and atypically lucky moving rapidly to underweight in emerging equities three months ago. That aside, we play the numbers. And we recognize the real possibilities of severe and typical overruns. We also recognize that the current crisis comes with possibly unique dangers of a global meltdown. We recognize, in short, that we are very probably buying too soon. Caveat emptor…
Rounds I and II – the asset bubbles breaking and the credit crisis – will soon be mostly behind us, but the effect on the real world of economic output lies, unfortunately for all of us, almost entirely ahead. Employing our usual historically loaded armchair technique, we have been writing for several quarters that global economic weakness will be substantially worse and will last substantially longer than the official forecasts. We maintain that view even though official forecasts have dropped considerably. The global economy is likely to show the scars of this crisis for several years. In particular, the illusion of wealth created by over-inflated asset prices has been dramatically reduced and, though most of this effect is behind us, a substantial part of the housing decline in some European countries and the U.S. is still to occur…
This reversal of the illusory wealth effect added to deleveraging will be felt worldwide, but especially in the so-called Anglo-Saxon countries, and will be a permanently depressing feature of the next decade or so compared with the last decade. It is indeed the end of an era.
Rounds I and II – the asset bubbles breaking and the credit crisis – will soon be mostly behind us, but the effect on the real world of economic output lies, unfortunately for all of us, almost entirely ahead. Employing our usual historically loaded armchair technique, we have been writing for several quarters that global economic weakness will be substantially worse and will last substantially longer than the official forecasts. We maintain that view even though official forecasts have dropped considerably. The global economy is likely to show the scars of this crisis for several years. In particular, the illusion of wealth created by over-inflated asset prices has been dramatically reduced and, though most of this effect is behind us, a substantial part of the housing decline in some European countries and the U.S. is still to occur…
This reversal of the illusory wealth effect added to deleveraging will be felt worldwide, but especially in the so-called Anglo-Saxon countries, and will be a permanently depressing feature of the next decade or so compared with the last decade. It is indeed the end of an era.
Saturday, November 8, 2008
Galbraith on Economists' Inability to Forecast the Credit Crisis
Do you find it odd that so few economists foresaw the current credit disaster? Some did. The person with the most serious claim for seeing it coming is Dean Baker, the Washington economist. I saw it coming in general terms.
But there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis? Ten or 12 would be closer than two or three.
What does that say about the field of economics, which claims to be a science? It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.
But there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis? Ten or 12 would be closer than two or three.
What does that say about the field of economics, which claims to be a science? It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.
Wednesday, November 5, 2008
Morgan Stanley strategist points to buy signal
The strategist who warned investors to sell equities in June 2007, just before the credit crisis, is saying the market is sending its strongest buy signal for six years.
The last time Morgan Stanley flagged a "full house buy" for European equities was in September 2002, just before a five-year bull market began.
Teun Draaisma, European equity strategist at Morgan Stanley, said yesterday that full house buy signals had a near-perfect track record and had been very good at indicating when markets were nearing a turning point.
He said that "each of the four indicators [valuation, capitulation, risk, fundamentals] tell us to buy.
"The latest elements that pushed us there have been a capitulation among retail investors, purchasing managers and sell-side analysts, as measured by record mutual fund outflows, ISM new orders below 40 and analysts' revisions collapsing . . . When these three groups know about the bad news, equity prices are probably already reflecting it."
Mr Draaisma warned that full house signals had sometimes been early but had only been wrong once, in November 2001. This was later followed by all indicators giving a sell signal in April 2002.
"Despite the bad fundamental outlook, prudent investors should not be short equities," he said.
The bank believes the market is in the worst earnings recession for 40 years but that the bad news is already priced in.
"We see 15 per cent upside to our 12 month target for MSCI Europe."
Mr Draaisma believes the "severe part of the bear market is over" even though he points to many short-term risks.
The FTSE Eurofirst 300 yesterday completed its first five-day winning streak since October 2007 as expectations grew the the ECB would cut rates.
"The more prudent investor may wish to stay in cash and not be overweight equities, but our advice is not to be short or underweight any more," Mr Draaisma said.
"Our advice is also for long-term investors to keep on averaging in at these and lower levels."
The last time Morgan Stanley flagged a "full house buy" for European equities was in September 2002, just before a five-year bull market began.
Teun Draaisma, European equity strategist at Morgan Stanley, said yesterday that full house buy signals had a near-perfect track record and had been very good at indicating when markets were nearing a turning point.
He said that "each of the four indicators [valuation, capitulation, risk, fundamentals] tell us to buy.
"The latest elements that pushed us there have been a capitulation among retail investors, purchasing managers and sell-side analysts, as measured by record mutual fund outflows, ISM new orders below 40 and analysts' revisions collapsing . . . When these three groups know about the bad news, equity prices are probably already reflecting it."
Mr Draaisma warned that full house signals had sometimes been early but had only been wrong once, in November 2001. This was later followed by all indicators giving a sell signal in April 2002.
"Despite the bad fundamental outlook, prudent investors should not be short equities," he said.
The bank believes the market is in the worst earnings recession for 40 years but that the bad news is already priced in.
"We see 15 per cent upside to our 12 month target for MSCI Europe."
Mr Draaisma believes the "severe part of the bear market is over" even though he points to many short-term risks.
The FTSE Eurofirst 300 yesterday completed its first five-day winning streak since October 2007 as expectations grew the the ECB would cut rates.
"The more prudent investor may wish to stay in cash and not be overweight equities, but our advice is not to be short or underweight any more," Mr Draaisma said.
"Our advice is also for long-term investors to keep on averaging in at these and lower levels."
Thursday, October 30, 2008
Wednesday, October 29, 2008
Jeremy Grantham is buying
U.S. pension funds are crying in their soup now, but they can at least find some solace in the fact that, for the first time in 20 years, we’re looking at all global equities being modestly cheap,” said Mr. Grantham. Some are substantially cheap, which has left GMO looking to add to its holdings, he said. “Catching a falling knife is never without pain, (but) the prime directive is to buy cheap assets.”
There’s no need to rush, however. CFOs should phase back into equities “with all deliberate slowness, as opposed to all deliberate speed,” Mr. Grantham warned. Even though the S&P 500 is trading below GMO’s fair value estimate for that index of 975, markets typically overshoot on the downside by 20% or more, he noted. If the market panics, that bottom could be reached in days or weeks. If it’s a more orderly affair, it could take until 2010, as investors digest a likely stream of wretched economic news, he said.
There’s no need to rush, however. CFOs should phase back into equities “with all deliberate slowness, as opposed to all deliberate speed,” Mr. Grantham warned. Even though the S&P 500 is trading below GMO’s fair value estimate for that index of 975, markets typically overshoot on the downside by 20% or more, he noted. If the market panics, that bottom could be reached in days or weeks. If it’s a more orderly affair, it could take until 2010, as investors digest a likely stream of wretched economic news, he said.
Tuesday, October 28, 2008
SPX vs Consumer confidence
Is there any connection between weak consumer confidence readings and bullish reversals in the stock market? To decide, have a look at the following quick-and-dirty overview (which includes all data going back to the Feb-67 start of the confidence series):
Monday, October 27, 2008
VIX closed at record
With the VIX under 75 and only ten minutes left in the trading day, it looked like volatility was on the wane, but aggressive selling into the close dropped the DJIA 200 points and helped to push the VIX up over the 80 during the extra 15 minutes of index options trading.
This is the first time the VIX has closed over 80 and the 8th time in the past 16 trading days that the VIX has registered a new record close.
Posted by Bill Luby at 1:34 PM 3
This is the first time the VIX has closed over 80 and the 8th time in the past 16 trading days that the VIX has registered a new record close.
Posted by Bill Luby at 1:34 PM 3
Friday, October 24, 2008
Thursday, October 23, 2008
Wednesday, October 22, 2008
一个小故事
今天和BETSY去吃饭，说到公司历史， 她说我们的创始人本是个富家子弟，绝顶聪敏但整天不干正事，他父亲开了个广告公司让他管， 他就天天去混混， 1929大萧条，股市崩盘他还是天天吊儿郎当。至到有一天， 公司楼下的Pain Webber老板来找他， 说我的SalesMan都快饿死了， 你想个产品给他们卖卖吧。 公子哥良心大发， 开始进入金融市场， 他发现几家当时算高科技的Utility sector势头很足，于是就把公司改成Asset Managment Firm, 建了几个ＵＴＩＬＩＴＹ的债卷基金，让Pain Webber做销售。 结果大获成功。
Tuesday, October 21, 2008
Jeremy Grantham: U.S. Stocks Now 'Very Reasonable Buys for Brave Value Managers'
Jeremy Grantham of GMO has released Part I of his Q3 letter (.pdf, dated October 17, 2008). Here's how Grantham sees the market at this juncture:
At under 1000 on the S&P 500, U.S. stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10th prices, but even more so.
History warns, though, that new lows are more likely than not. Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look okay for now, but the pound does not.
Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry! Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows.
As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower.
At under 1000 on the S&P 500, U.S. stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10th prices, but even more so.
History warns, though, that new lows are more likely than not. Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look okay for now, but the pound does not.
Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry! Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows.
As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower.
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