Tuesday, March 31, 2009

Excel, Sell? Sell!!

This is one of my favorite cartoons about Wall Street. I first saw this cartoon many years ago in the office of my Sr. Analyst (hat tip to Bernie).

Monday, March 30, 2009

Changing landscape for banks

This is an amazing graphical representation of the shift in the global banking landscape put together by the good people at the Financial Times.

Consider that 11 of the 20 largest financial institutions in the world were based in the US (and 15 of 20 were either US or UK based). Today that number has fallen to just 3 of 20 and the three largest banks are now based in China.

Now this probably signals that China has experienced a substantial asset bubble and that some US banks may have suffered excessively, but it's still a stunning swing in 10 short years.

Does this sound like anywhere you've seen recently (hint the city name starts with a W and rhymes with down)?

"The county's population about doubled during the housing boom, to some 100,000 residents in 2008 from roughly 55,000 in 2000. As people moved in, starter homes and shopping centers rose among worn barns and silos.

Now, as the housing bust and recession has turned the exurbs from engines of growth to economic laggards, many of these families have the worst of both worlds. They are still on the fringes but have no equity. In many cases the amenities they hoped would follow -- new shopping centers, movie theatres -- have ceased construction or opened with only a few stores."

Finally a bit of good news. Apparently according to this projection if we can figure out a way to live for another 250 million years it appears that according to this map NNY will have the climate of Cuba thanks to continued continental drift. Sweet.


Mark to Market, Boston Real Estate.

Look for the mark to market debate to re-enter the conversation later this week as FASB (the financial accounting standards board) reluctantly caves to congressional pressure and allows banks to make a judgement call as to the value of their assets.

This could provide a sharp artificial boost for banking stocks because they may not have to realize substantial Q1 losses. However, the long-term ramifications of this move are very negative. I don't know how anyone could invest in stock where the asset values are subject to the company's interpretation. The CFA Institute (I'm a card carrying member since 2001!) and a number of the smartest analysts on the street think this is a terrible idea. However, the lobbyists have steamrolled FASB and Congress so reason has left the building.

This article probably provides a great overview of the situation and more accounting talk than any one human should ever be exposed to - sorry.

The strangest twist in the story though is that while it may change the real losses into artificial gains for a short time, the more lasting impact may be on the financial system as a whole. Remember way back when Sec Geithner announced the PPIP (7 days ago) and the markets soared because the banks might be able to unload some of their bad loans? Well, that plan is premised on private investors getting a fair price for the bad loans. If the banks are able to show the bad loans as not quite so bad on their books, this means the banks aren't going to sell the loans and there will be no change in lending. When Sec. Geithner said there is no other plan and the PPIP is the last plan to stimulate lending I'm not sure he realized that this plan might be DOA if FASB changes it's rules. Ooops.

"While helping lenders report higher earnings, FASB’s changes may hurt Treasury Secretary Timothy Geithner’s plan to remove distressed assets from bank balance sheets, Dietrich said. Allowing companies to hold on to assets without writing them down could discourage them from selling the securities, which would work against Treasury’s objective to resuscitate markets, he said.

“It’s one of the unintended consequences of having the FASB bow to political pressure,” Dietrich said."

The Hancock building in Boston is about to go up for auction and might sell for HALF of it's selling price in 2006. This is clearly a distressed sale by a bankrupt firm, but selling the premier commercial property in Boston for half it's price just 3 years ago seems a bit extreme.

This fits with my thinking that commercial real estate values are going to continue their steep decline in 2009-10 and this will ultimately lead to another wave of credit defaults and banking woes.

Market update...

Most outlets seem to be focused on the GM news as the driver of the markets today. I don't think that is the case. Rather I think people are finally coming to realize that the troubles with the banks continues and the news flow in the financial industry has turned negative. Consider the recent news items in the last 48 hours......

1) Geithner says some banks need "large amounts" of additional assistance.
2) Talk that UBS might cut 8,000 more jobs and writedown billions.
3) Talk that much of the bank profitability in Jan/Feb was due to AIG unwinding trades. These unwinds may have been extremely profitable to the banks at your (the taxpayer) expense.

This blog has a fairly detailed account of the allegations of AIG passing profits through to Goldman, Citi, etc. If any of this is true, Sec. Geithner is toast.

Here is the money quote: "AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG.

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary."

I keep hoping the banks and financial firms will get their act together, but it seems like more of the same from Wall Street.


Sunday, March 29, 2009

A house should be a home, not a retirement plan....

I think I've made the point a couple of times that the primary driver behind purchasing a home should be an individual's preference to own not some fantasy that your house will be your lottery ticket.

There are a number of flaws with this chart that I'll address below, but it's interesting to note on an inflation adjusted basis the median home price in the US is now on par with prices from the 1980.

"In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (1.6% loss). Not an impressive performance considering that nearly three decades have passed."

There are a number of issues with this chart -

Pros for home ownership despite the flat return on investment
1) There are tax benefits of home ownership
2) Rent payments have a 0% return on the money spent.
3) Personal preference toward home ownership.

Cons against home ownership
1) Property taxes
2) Maintenance costs - roof, HVAC, etc.

The morale of the story enjoy your home (especially, on warm March weekends), but don't plan on funding your retirement, kid's college education, or purchase of that 1966 Shelby Cobra 427.

This is just one canary in the coal mine, but I find in interesting that hedge funds in London are threatening to leave.

Financial firms - investment banks, hedge funds, private equity, etc - bear much of the blame for creating the current economic crisis. However, they are massive employers with many high wage earners and as we head down the slippery slope of more regulation of financial firms, I think there is an outside shot that a country with more lax enforcement might become a haven for hedge funds and the new class of investment banking start-ups. Is some small, warm island nation decided to follow the Bermuda/reinsurance business model they could potentially steal many, many high wage jobs from London, Boston, NYC, etc.

As one hedge fund manager says in the article "We don't have to be in London".

Friday, March 27, 2009

Put some of your trading profits to work!!

Clearly, you picked the bottom of the S&P three weeks ago and you've been enjoying the massive rally that has ensued. Well, now it's time to do your part to stimulate the economy and spend some $$$....
Friday's best web deals.....
Buy.com still offers the JVC 5.1-Channel Home Theater Speaker System, model no. SX-XSW6000, for $49.99 with free shipping. Features include five satellite speakers, 100-watt 6-1/2" powered subwoofer, speaker cable, and more.

A refurbished 8MB Olympus Camera for $60


Wednesday, March 25, 2009

New home sales jumped 5%!!! All is well, Thunderdome and Citibank/Bank of America games.....

The problem with understanding economic data is that you go through a lot of TV's when you throw random objects at the screen when you here another talking head misrepresent the data on TV.

Yes, new home sales did grow slightly in February, but new home sales are an insignificant piece of the market. New homes represent just 10% of total sales in the US. This is like saying the average temperature in the US was up 5% in February to 82 degrees, because the average temp in Miami rose.

It's also important to note that while the number of new homes sales did rise in Feb to roughly 30,000 units / month, the sales number rose from a historical low in January and February's data still represented the second worst new home sales number ever posted. Since the volume of new home sales is so low and so small (an extra 50 new homes sold in every state equals a 5% jump!!) this number is likely to be volatile.

Finally, the data reported mentions a 5% increase in units sold. What all of the blaring headlines failed to mention is that 48% of all new homes sold last month, sold for less than $200k, up from 33% last year. The $8,000 first time home buyer credit (coupled with a $10,000 credit in California) means that half of these homes sold could have been eligible to get at least 4-9% back in tax credits. This clearly has driven some low-end demand for new homes.

Simple, affordable homes are the new normal. Oversized, overpriced McMansions are soooo 2007.

Flint, MI --- Youngstown, OH --- Thunderdome...

I don't think this a real solution, but be aware that it's at least on someone's radar.

"Property abandonment is getting so bad in Flint that some in government are talking about an extreme measure that was once unthinkable -- shutting down portions of the city, officially abandoning them and cutting off police and fire service.

The city is getting smaller and should downsize its services accordingly by asking people to leave sparsely populated areas, he said.

Last year, the city of Youngstown, Ohio, proposed incentives to encourage people to move out of nearly empty blocks and relocate to more populated areas closer to the heart of the city. Some people were offered upward of $50,000, according to news reports."

Yesterday, I wondered out loud if Citibank and Bank of America would consider bidding on their own toxic assets in an effort to game the system and drive up prices of the assets hedge funds and taxpayers are going to take off their books.

Right now this is just hearsay via a trader quoted in the NY Post of all places, but.......

"One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

This raises serious questions about how the banks are using TARP funds. Instead of stimulating the economy by making new loans, B of A and Citi seem to be spending money to buy up old loans. That's probably a bet that the Geithner plan will create renewed demand for toxic assets."

If this is true and someone can develop an accurate paper trail, this is could be a bombshell story.


Durable goods fools everyone...

Durable goods orders is perhaps the worst data point issued by the government. It is notoriously volatile and subject to substantial revisions. January for example was revised DOWN to -7.3% from an initial number of -5.2%. No one pays attention to the revisions however.

Do you really think there was a 15% swing in durable goods orders in a month? Not likely. Not when companies like United Technologies are cutting 15,000 jobs. The market is still looking for any reason to rally. Durable goods! It's 42 degrees in NYC! Etc, etc.

Enjoy these rallies, but understand that they are built on toothpicks.

These are the guys that are going to save our financial system?

I've said for some time that if you think the money paid to AIG exec's is excessive you haven't followed the hedge fund industry very closely (for a balanced view of the AIG bonuses from an AIG exec, I think everyone should read this op-ed at the NY Times). The hedge fund guys (and gals) make real money.

The old hedge fund model was that if you give me $100 to invest, I take $2 today to cover my cost and if I earn $15 dollars for you in 2008, then I get to to keep 20% of that gain (another $3). So in theory you are happy with your 10% and I'm happy with my $5. Now assume that I'm not managing $100, but $20 billion and you can see how the pay scale can really ramp up.

Alpha magazine put out their annual list of top hedge fund earners in 2008 (article here). The earnings are down substantially this year, but they are still eye-popping. The 9th guy on this list made more than A-Rod will make in his career, but you've probably never heard of him.

Rank: 1 James Simons Est. 2008 earnings: $2.5 billion
Rank: 2John Paulson Est. 2008 earnings: $2 billion
Rank: 3John D. Arnold Est. 2008 earnings: $1.5 billion
Rank: 4George Soros Est 2008 earnings: $1.1 billion
Rank: 5Ray Dalio Est. 2008 earnings: $780 million
Rank: 6Bruce Kovner Est. 2008 earnings: $640 million
Rank: 7David Shaw Est. 2008 earnings: $275 million
Rank: 8Stanley Druckenmiller Est. 2008 earnings: $260 million
Rank: 9 (tie)David Harding Est. 2008 earnings: $250 million
Rank: 9 (tie)John Taylor Jr.,Est. 2008 earnings: $250 million
Rank: 9 (tie)Alan Howard Est. 2008 earnings: $250 million

I don't begrudge anyone making what the market will pay. Kudos to these guys for making $2 bil/year in this economy.

The problem with Sec. Geithner's plan is that he is dependent upon private money ie, Hedge Funds, to step up and buy assets off the banks books. If the plan works, these same ultra-wealthy are poised to make the Robber Barrons look like public servants. Do you think that might cause a bit of an uproar in Detroit or Phoenix or LA?


Tuesday, March 24, 2009

Update Debt to GDP Chart, Japanese Exports, and the Great Curry Bailout

This is a Morgan Stanley breakdown of the same debt chart, I showed yesterday. The stunning jump in household and financial debt really jumps off the page. The really scary fact is that GDP hasn't really taken a huge decline yet (like it did during the Great Depression).

Not much to add here... Japanese exports tumble 49%!

"Japan’s exports plunged by a record in February as deepening recessions in the U.S. and Europe sapped demand for the country’s cars and electronics.
Overseas shipments fell 49.4 percent from a year earlier, the sharpest decline since at least 1980.

“There’s been a structural shock to the manufacturing sector,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “So yes, the government can create demand temporarily, but that can’t fill the export gap forever.”

Exports of automobiles tumbled 70.9 percent from a year earlier and shipments of semiconductor parts and devices slid 51.1 percent, the ministry said. "

Wow - 71% decline in auto exports. I find it funny that the Japanese can be frank about government stimulus be a temporary fix - the gov't can create demand temporarily, but that can't fill the export gap forever."
Just when you thought no one else could line up for a bailout - enter the Great Curry Bailout in the UK.

"Owners of Indian restaurants in the east Midlands town of Leicester, which has a large minority of Indian origin, have started a campaign at the local and national levels to urge the government to come to their rescue in the same way it supported failing banks."

That's precious. When Applebee's and The Olive Garden line up for a US bailout, I'm heading to New Zealand.

Monday, March 23, 2009

Via Mish at Mish's Global Eco Trends....

Five Misconceptions

Myth - The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it.

Myth - The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back.

Myth - Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are.

Myth - Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they'll sit there and say they are lending while waiting for the economy to bottom.

Myth - Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years.
Below is a pretty popular chart - Total Credit Market Debt as a % of GDP. It's apparent to me that MORE debt is not the answer to this crisis.

Enjoy the bear market rally while it continues but keep your eyes open at all times....

Well, I guess that scorching rally answers one question...

the banks and the markets like the plan. This is the plan that we have and we have to accept it. This rally is likely to extend for the foreseeable future. The end of the quarter will force many mutual funds that have sat the rally out to buy before 3/31 so it doesn't look like they were sitting on their hands as the markets soared.

I'll repeat though that this plan has too many ways for the banks to game the system. Consider this scenario that was put forth today....

I am Hedge Fund XYZ. I get to be one of the bidders on bank assets covered by the program.

Citi holds $100mm of face-value securities, carried on their books at $80mm.

The market bid on these securities is $30mm.

I bid $75mm for the assets. I put up $2.25mm or 3%, Treasury funds the rest. I also buy $10 million credit defaul swap for $1 million.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

Hedge fund XYZ loses $2.25mm of principal, but gets $9mm net in CDS proceeds ($10 million policy - $1 million fee), so I recover a net of $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm

Great program.

It’s just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (hedge fund XYZ) to effectively money launder the transaction.

One would have to be a criminal to participate in this."

I'm not sure I'd go so far as to call it money laundering, but it's close. This is an accounting gimmick that is almost certain to end up costing you, the taxpayer, billions more.

The real question remains: Who is beating down the doors of the banks to borrow? Not refinancing, but real, new debt? I've said from day one, that this is not a crisis of liquidity, but a crisis of loan demand. Demand for money has permanently declined and no amount of stimulus or accounting charades will change that.

The market may rally for some time (remember many of the most powerful rallies occur in the midst of bear markets), but just when you think you can see the light at the end of the tunnel you might find out it's a freight train bearing down on you.

Sunday, March 22, 2009

Heckuva job, Timmy!

Our country's view of smart has become interchangeable with complex. Instead of building a simple system that works we need to over think the problem and develop the most complex system possible. The more complex, the smarter the solution right? Not always. I think the latest treasury program (which I initially heard good buzz about) is an example of using bad data, flawed assumptions, and more of your money to reflate the next debt bubble.

In a nutshell here is the problem with the banks. They have assets that no one wants to buy and they think these assets are worth 60 cents on the dollar. There might be a real market for these assets at 20 or 30 cents on the dollar, but selling the assets at this price would cause another massive round of losses for the banks. The new Public/Private Investment Plan will make up the gap between what the market value for the assets is and what the banks would like to sell them for. This is another massive give-away to the banks. I've said for sometime that for all the praise of Sec. Geithner, I think he has a fatal faith in the banks. This allegiance to the banks is costing you billions.

Some of the best observations of the plan so far....

24/7 Wall St.
It may be the most complex set of programs in the history of the federal government.

The taxpayers exposure of these programs is significant for two reasons. The first is that the government will, in many cases, provide loans to private capital firms so that they can buy toxic assets. These will be “non-recourse” loans. If the value of the assets being purchased falls sharply, the government absorbs most of the losses beyond what private capital firms have invested to buy the assets.

The other potential problem is that private capital firms will have to negotiate with banks for the prices to buy toxic assets. If two parties cannot agree on price, what happens? The troubled paper could remain on bank balance sheets, which defeats that purpose of the entire set of programs, or, the government can “bridge” the difference by offering to offset the amount between what banks will take for toxic paper and what private equity will pay for them. That puts taxpayers at greater risk for losses. Sine the taxpayer has become the lender of last resort for the entire
financial and credit system bailout, that should come as no surprise.

From Paul Krugman - NY Times

In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

I'm not sure what Wall Street's take on this will be. Clearly it's a bad deal for taxpayers, the US government and frankly, capitalism as a whole. However, it seems like a sweetheart deal for the banks and so, their stocks could rise and the banks have been driving the markets over the last two weeks.


Friday, March 20, 2009

Does Congress hate your investments?

The TARP Bonus tax bill that was rushed through the house apparently attached to pitchforks and torches is the height of foolishness.

If you are outraged at the TARP bonus pools (a justifiable outrage for the most part), then you should be equally upset with this bill. Like or not, we've made the decision as a country that Citigroup, AIG, etc were the financial version of Y2k. The world was going to end if they went under (not my opinion, but certainly the opinion of many). Now thanks to our many bailouts, we own huge chunks of these companies.

All of my years on Wall Street taught me one important lesson - a firm is only worth the sum of it's people and this bill passed by the house is almost certain to drive the best and brightest out of the TARP companies. So, we'll be left with a pool of zombie banks being run by the least qualified people. I'd say that's a recipe for disaster for our investment in these banks.

There is a caveat that apparently the 90% bonus tax only kicks in when a bonus is paid. It seems like it would take someone about 1.2 seconds to decide that instead of getting a $200k in salary and $500k in bonus, they'd like to take $700k in salary. Avoiding this tax by simply reclassifying the income might make this bill a joke.

I've already heard grumblings about smart people getting ready to launch a new investment bank to scoop up all of the best talent. If you had the capital this would be an amazing time to launch a new money center/investment bank.


Thursday, March 19, 2009

Housing prices always go up, right?

Any long range forecast is inherently flawed because it relies on too many variables to produce an accurate result. However, I found this news from NJ's leading real estate expert interesting...

"Because of job losses, housing will continue to contract,” Otteau told a hotel ballroom full of real estate agents in East Hanover, at his twice-yearly seminar on home prices.

Otteau said home prices may start rising in spring 2010 as the economy recovers, but will increase slowly — around 3 percent a year — in the first few years of the housing market’s rebound. As a result, New Jersey home prices will not return to the peaks reached in 2005 until 2020, he predicted."

So, by this estimate if you bought a home in 2005 in New Jersey, you've only got to wait 11 more years to break even.

I'd offer up a couple of qualifiers - I think interest rates could be much, much higher in 2010-2012 and as a result home affordability will be cut dramatically if this scenario play out. Also, I'm not convinced that there will be any meaningful economic recovery in 2010.

The stock market has mostly yawned at the Fed Reserve's massive new actions to manipulate .... I mean, stabilize the markets. However, I think it's interesting to note the move in Gold since the Fed's announcement yesterday. Gold has soared more than $80/ounce or about 8% since yesterday! This is clearly a sign that the inflation bugs think the Fed's new programs will eventually be inflationary and devalue the US dollar.

I'm not entirely convinced, but I think there is a very real chance that the Fed could be faced with inflation in 2010 and will be unable to react appropriately. If they move rates upward to thwart inflation it will lead to massive spikes in the cost of borrowing for the US government. If they don't move rates up we could be staring at double digit inflation. All of the scenarios are probably under 30% probability right now, but what probability would you have assigned last year to Lehman, AIG, Bear Sterns, Merrill, blowing up and the Dow falling below 8,000?


Terrafugia - A local connection

Terrafugia is a Woburn, MA company that has been working on car/plane/Jetson vehicle that can be seen at their website.
They have been doing the press circuit today promoting their "Transition" plane which apparently had it's maiden voyage at Plattsburgh Int'l Airport about two weeks ago (link here for video/photos). I love the fact that we can claim Plattsburgh as part of NNY despite the fact that it's almost 200 miles from here to Plattsburgh.
This is clearly a neat concept, my 8 year-old would go crazy over one of these, but the commercial applications seem silly - $194,000 for a plane that can only fly 500 miles and only goes 115mph so you can avoid that tiresome task of
"having to switch your bags from your plane to your car after you land".
That is seriously their top selling point. If it's raining when you land you can just pull up the wings and drive away from the airport without having to get wet while walking to your car. Seems like that's worth about $200k.
Either way, it's an interesting story with a local twist.

Citigroup economist heading to Treasury...

One of my big complaints with the Treasury is that they seemed to be in bed with all of the big banks. The Treasury works for you, not for the banks, but you'd be hard pressed to know that given Sec. Geithner's moves to save the banks at all costs.

Well at least this economist seems to have a really good grasp on the economy....

"Citigroup Inc.'s chief economist is leaving the company for a job at the Treasury Department, according to an internal Citigroup memo.

Lewis Alexander, who has been at Citigroup since 1999 and before that worked at the Federal Reserve, will head to the Treasury "to work on domestic financial issues," said the Citigroup memo, which was sent Tuesday.

Mr. Alexander's role as Citigroup's chief economist didn't entail significant management responsibilities. But his optimistic economic forecasts colored executives' views that the U.S. was unlikely to face a prolonged slump.

"I think that's not going to spill over more broadly into the economy, and so I think we're going to have a normal kind of housing cycle that's going to last through the middle of this year," Mr. Alexander said in a 2007 interview on PBS."


Low mortgage rates + Miami + Lamborghini =

SOLD! Maybe I should have checked with my wife first, but when I saw this deal online yesterday, I said enough with frugal living.....I want CHANGE I can believe in. So I put down a 0.001% down payment on a new condo in South Beach and got a Lamborghini Gallardo Spyder for FREE!!

Now my tax accountant wife is going to spoil all of my fun by telling me that the Lamborghini is a taxable benefit and that I have to pay tax on the $260k retail value of the car.

Checkout the link here...... if you'd like to be our new neighbor in South Beach.

"Only seven of the 28 South of Fifth residences remain to be sold. Purchase one of the last seven ocean front units and receive a Lamborghini Gallardo Spyder 2008."

* Full disclosure - this is of course a joke. My wife would send a team of snipers from NJ to Clayton in about 0.0024 seconds if I had purchased a condo (particularly a ridiculously overpriced condo in Miami) without consulting her :)

Jobless claims, More Fed plans...

The markets seem to like the fact that "only" 646k Americans filed for initial jobless claims last week. This is the 7th straight week where jobless claims exceeded 600k and the important thing to note is not week to week variations, but the trend. The trend remains negative.

On a related topic, the trend in the market remains positive despite the bad news (consider Federal Express last night). For example, consider yesterday's news from the Federal Reserve.

"To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."

This is a fairly complex situation but understand that the Fed buying Fannie/Freddie debt and Treasuries is designed to lower interest rates. This will work in the short-term and if you have a mortgage your opportunity to refinance is definitely approaching. If you lived within your means and saved over the past few decades well enjoy your 0.1% interest rate you commie -- Don't you know it's UnAmerican to live within your means?

Like I've repeated many times DEBT is what got us in the mess we are in. DEBT (or as Chmn Bernanke and Sec Geithner like to call it CREDIT) is not going to fix our problems. The demand for debt is falling not because interest rates are too high, but because people fear for their future employment prospects.

Enjoy the rally while it lasts, but I think people around the world are starting to get an uneasy feeling that we have no plan to really fix our system.

However, this rally feels very much like the early rally in 2003 when we had a different perp walk every day (Ken Lay/Madoff, Worldcom/AIG). The faux-public outrage can be a real driver in the markets.


Tuesday, March 17, 2009

The luck of the Irish, AIG, housing starts,

The rally caps were evident on Tuesday as all the traders pushed the market higher so they could enjoy a St. Patrick's day happy hour. The technicians and traders seem to be seizing on every small uptick in data to push the markets higher. If we rally again tomorrow we could continue to go higher in the very short-term, but be aware that this is option expiration and that can lead to some crazy trading at the end of the week.

People seem to be grasping at straws indicating that the rally was due to an uptick in housing starts. If anyone bought stocks today because of the housing start data they should have their stock accounts closed and control handed to a sane 3rd party. Yes, the number did move up slightly in February but it was almost all due to new condo construction (who in there right mind is building condos today?) and the number remains down 50%+ from the levels just one year ago.

AIG remains a disaster and the news continues to disappoint, but lost in the parade of bailouts and bonuses is the fact that if you were day trading this penny stock you could have probably retired on the moves this past week. The stock has gone from 35 cents to 96 cents IN A WEEK! How in the world could that happen with all of the bad news out there?

Well, as I've said, the one thing that Secretary Geithner has made clear is that he is not a fan of admitting a mistake. Despite all of the backlash, it is apparent that the government is not going to let AIG go bankrupt this week. Thus, the stock has soared. I won't speculate where the stock is going, but I think AIG's equity may eventually prove to nearly worthless.

Finally, this would be very funny if it wasn't our money they were talking about...

"American International Group Inc., the insurer under fire for handing out bonuses after its $173 billion government bailout, budgeted $57 million in “retention” pay for employees who will be dismissed". $57 million in RETENTION for people that were to be dismissed? AIG really is starting to act like a branch of the Federal Government :)

Finally, a bit of innovation from Europe. These kids built a camera for $100, strapped it to a balloon and sent their camera to the edge of space. Unfortunately, in the US their balloon would have been shot down by a border patrol drone. Here's the link to the story...

Monday, March 16, 2009

A few more thoughts on the stimulus

There's a great interactive chart over at the WSJ that covers the state by state breakdown of the stimulus spending. A couple of observations - Governor Corzine of NJ (former head of Goldman Sachs) must have some pull with someone in Washington in order to have managed to receive $135,000 per square mile and my previous concerns that the stimulus is merely plugging holes in state budgets seem to be confirmed.

- Education - "for state education budgets"
- Pell Grants - "to meet the federal student loan program's shortfall for 08-09"
- Medicaid - "federal relief for state programs"

Compare and contrast our stimulus moves with those of the Chinese government in this article. I've mentioned before the immense risks facing the Chinese economy -- mainly the fact that they are very good at making low quality, mass produced, consumer goods --- but if they are smart with their investing dollars, they could invest like 100 Warren Buffett's - buying the best assets at distressed prices.

Case in point --- "Alcoa has agreed to sell its investment in Rio Tinto Group to Aluminum Corp. of China for $1 billion and is seeking to sell other businesses to raise additional cash." More on Alcoa below...

"Guangdong province alone, here in southeastern China, is quadrupling its vocational training program this year to teach four million workers engaged in three-month or six-month programs.

The main comparable program in the United States, under the Workforce Investment Act, has been training fewer than 250,000 a year, although President Obama’s stimulus program provides funding that could double the number of American workers in training programs.

The Guangdong training programs are half in the classroom and half in the factory, usually the business that plans to employ the trainees. By increasing productivity, training programs can hold down corporate labor costs per unit of production for years to come."

The power of a training program that puts feet in the field is much more valuable than generic skills training.

A final note on stimulus -- stimulus plans designed to boost the whole economy can lead to some poor decision making at the corporate level.

The anticipated uptick in demand for steel as a result of the US and Chinese stimulus programs, led numerous Chinese steel manufacturers to increase production. However, there has not yet been an uptick in demand so the market is being flooded with steel that it can't absorb, thus, prices are actually falling. Falling prices in a weak economy = more trouble for the global steel market. Not exactly the stimulative result everyone was hoping for....

Also, the many green initiatives anticipated in the US led to a substantial increase in the hype around solar companies. However, according to the California Solar Initiative......

"new applications were running over 1,000 a month for the last five months of 2008, but have since taken a tumble: 608 in January, and 646 in February. And March is shaping up to be even worse, with just 188 applications received through March 11."

Many solar installations are not eligible for tax rebates until after you file your taxes for 2009, so the demand for solar installations might be back-end loaded, but the trend seems to be negative right now.

Finally, just a quick note on Alcoa since it is a large local employer. The company remains stuck with a moderate cost structure and falling prices for their products. The moves announced today - cutting the dividend, selling stock and debt, cutting capital expenditures - will likely enhance their near-term viability, but it could be painful for the shareholders (the stock sale alone might take 15-20% out of the stock). After gaining 8% today, the stock was down 11% after the market closed.


Job sharing/part-time/cut backs.

Sunday, March 15, 2009

DId I mention I worked at AIG....

Ok, it was back in the early 90's and I worked in the insurance side which was unrelated to the financial derivatives business but still it's my connection to the corporate version of Bernie Madoff.

Wow, consider the Sunday headlines on AIG.....

Fury as AIG pays $450 million to staff who nearly broke firm

AIG lists firms that got money from taxpayers

While the bonuses are clearly going to get the attention of most people, these bonuses are contractual obligations and unless you want AIG to go bankrupt (and clearly the treasury isn't going to let that happen), then AIG is obligated to make good on the bonuses.

However, I think the fact that bailout money flowed through AIG to other financial firms (US and foreign) is clearly the bigger story here.

"Financial companies that received multibillion-dollar payments owed by A.I.G. include Goldman Sachs, Merrill Lynch and Wachovia.

Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion)."

I think maybe the Treasury might want to start filling those empty offices before AIG causes anymore embarrassment.


Keep current w/me on twitter....

Kwik-Fill's buy American ads...

We're a bit out of the normal range for Kwik Fill service stations that service Pittsburgh, Rochester, etc., but their recent "Buy American Made Gas" campaign raised flags on my deceptive advertising meter.

The ad is simple enough - American consumers taking a stand. Buy American made gas and by inference stop supporting foreign providers of petroleum. It sounds nice and may play well in Peoria, but I'm afraid the company is probably playing a little loose with the facts.

1) United Refining Company, Kwik Fill's parent company, definitely sells gas made in America (refined into gas in Warren County, PA). The problem with that statement is that by default almost all gas sold in America is "American made". There is very little gasoline imported into the US. Most petroleum products are shipped as crude that is refined -- or "made" if you will -- into gasoline on American soil. In 2004, it was estimated that less than 10% of all gasoline sold domestically was imported as gasoline or put another way, 90% of gas sold in America is American made. This is kind of like asking us to buy American coal or American corn. There aren't a lot of other alternatives.

2) For all of the talk of buying American made gas, Kwik Fill conveniently forgets to mention that the oil they use to make their gas is not American, but rather Canadian. Again, this is not uncommon as Canada is our largest supplier of crude. However, the implication that by buying "American made" gas, you are buying American oil is a false one.

I'll say that I've only seen these ads once and before spending 15 minutes researching info online I'd never given Kwik Fill a second thought. It's clearly a clever ad and I commend them on doing something that most companies do - get their oil from Canada and refine into gas in the US - and marketing it as some sort of competitive advantage.

However, I prefer the truth to clever marketing any day of the week.


Friday, March 13, 2009

What if the stimulus become a band-aid?

When the stimulus package was finally passed one of my big questions was -- How do we measure if the spending is stimulative or simply plugging the gaps in state budgets?

Well, NY made a mention of the stimulus money offsetting the need for new taxes yesterday.

From the NY Times - "By swapping the proposed tax hikes for $1.3 billion in stimulus money—funds that are technically allocated to states’ Medicaid budgets but can also be diverted to other programs."

Also, Wisconsin is facing a budget gap but "the Governor's job is being made easier with the state expecting $3.5 billion in federal stimulus money."

There are similar stories running from California to Utah to New Jersey as states look to plug their budget gaps in the most pain-free way.

I'm becoming increasingly concerned that the "stimulus" will be used, not to stimulate the economy, but to maintain the status quo. It may be spent by the states to avoid hard spending cuts, avoid consumption taxes, etc, etc.

Unfortunately, we might look back in Jan 2010 and say how did we waste $800 billion???

Mr. Market hears no evil, sees no evil......

We're still in a vacuum of real news but the markets are still soaring around the world. This is going to be our third major bear market rally (remember there were some massive upward moves in the market back in the 30's as well) in the past 8 mths.

The markets have now reversed above a number of technical level and most fast money traders will probably try to ride this for another 100 points to the upside (however, there is some risk that many will sell their positions and try to take their profits for the week).

China continues to warn us about our debt levels (which have truly exploded in the past few months) but until they really stop buying our treasuries, I don't see their words having much bite.

"China’s Premier Wen Jiabao said he’s concerned about the safety of U.S. government debt.

Ten-year notes headed for a weekly decline as Japan and China signaled they will take additional measures to boost their economies. China, the U.S. government’s largest creditor, is asking “the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets,” Wen told reporters today in Beijing."

Over the next two weeks we will start hearing from companies that are concerned about their first quarter results. That may take some wind out of the sails of the market.


Thursday, March 12, 2009

Retail sales skewed by gas prices again...

If you just flip through the headlines today you'll see drivel, like "Consumers respond to discounting and keep buying!!", "Retail sales hold", blah, blah.

Last month, you'll remember that I took issue with the "spike" in January sales because it was all driven by higher gas prices. Well, apparently no one took notice because the same thing happened in February and it was little noticed again.

"People are responding to discounting” as companies seek to get rid of surplus inventory, Roger Kubarych, chief U.S. economist at UniCredit Global Research in New York."

No, No, No......it's just not true...

"A jump in receipts at service stations as gasoline prices rebounded led gainers. Filling station sales climbed 3.4 percent. The average cost of regular gasoline rose 14 cents to $1.92 a gallon in February from January, and is holding near that level so far this month, according to AAA.

Excluding gas, retail sales decreased 0.4 percent."

So, the estimate for the month was that retail sales would fall 0.5% and ex-gas, that is about what happened, but don't let the facts get in your way.

Markets continue to soar because GE's rating reduction wasn't as bad as expected. The expectation for a bear market rally could be 10-20% (maybe even more) over 2-3 months. We've rallied 10% in 3 days. We'll see if reality begins to sink in by Friday.


Google Earth vs. Microsoft's Maps.live.com

I love playing around with Google Earth and Google's Streetview but for rural areas like Upstate NY it's just not practical for Google Streetview to photograph every stretch of highway.

Microsoft has done almost no promotion for their maps program (www.maps.live.com) which means it will likely die a slow death inside Mister Softee. However, the Birds Eye View available on their maps puts Google's Satellite images to shame.

Consider this image of the Thousand Islands Bridge.... Beautiful aerial shots of the 1000 Islands Region.


Wednesday, March 11, 2009

Is the USA the next AIG?

It's a bit of stretch to make that comparison just yet, but there has been a significant shift in the little understood Credit Default Swap market as it relates to the US debt.

Credit Default Swaps are basically insurance that a buyer of debt purchases to protect their investment. The lower the risk of default, the cheaper the insurance. As concern grows about the viability of the debtor grows, the cost of the insurance grows.

Thus, this little noticed story might have some big implications for us in the future.....

The cost of buying protection against the risk that the United States will default on its mounting debt has surged in the past months, outpacing the rise in corporate-credit costs, now that the government has absorbed more private-sector debt.

The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year, to a level roughly in line with those of France, according to data supplied by Markit.

So we're a comparable credit risk to France and the cost of insuring our debt has jumped 700% in a year. I wouldn't suggest that the US is about to default on any debts, but I think it bears watching as we progress through 2009.

JP Morgan Chase made headlines today when it was leaked that they intend to increase outsourcing to India by another 25% and spend up to $400 million on IT services in India every year. This has ruffled plenty of feathers among the protectionist crowd, but since we own a big piece of JPM, I'm happy to see them seeking out low-cost IT services.

On a related subject, I read this story in amazement - in the midst of the greatest economic contraction in probably 75 years, Infosys (an Indian software company) is hiring 20,000 new engineering students. 20,000!!! That's 20,000 new competitors banging out code on the other side of the world. Oh, and their paying 8% more this year --- starting salary $6,000/year.

Welcome, to the flat new world.....


Tuesday, March 10, 2009

Well, I expected a little pop, but not all in one day...

Everyone with two nickels in the market was expecting a bear market rally (a sharp violent move upward in the midst of a bear market) and today's move might be the first step in that rally. Sharp moves were seen across the board in almost every sector. I anticipated a "close the books" sell-off at the end of the day that never came.

This rally has carried over into Asia tonight, but I'll leave with just a couple of quick questions if you get lulled into thinking Citigroup's comments mean we've turned the corner -

1) If Citigroup is truly experiencing a great resurgence in their business, maybe they might want to return some of the $45 billion that we've given them. Hmm, what do you say? I bet the Federal Government would take a payback in small unmarked bills.

2) On the same day as the rally occurred - The Wall Street Journal ran a piece saying, Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize Citigroup if its problems mount.”

But this seems to fly in the face of the CEO's comments. Hmmm, maybe when the CEO talked about operating profits he conveniently forgot to mention pending write-offs and toxic assets. Oooopsie......My bad.........

Affluenza - This term has been out for sometime but I just stumbled upon it in Tom Friedman's "Hot, Flat and Crowded". I've never seen a term that so perfectly encompasses the excesses over the past 25 years.

Per wikipedia - Affluenza, n. a painful, contagious, socially transmitted condition of overload, debt, anxiety and waste resulting from the dogged pursuit of more.

affluenza, n. 1. The bloated, sluggish and unfulfilled feeling that results from efforts to keep up with the Joneses.

On a day when the markets soar this seems like a strange time to discuss this Metlife study but the findings are stunning.

Half of Americans now say they are only one month or less away from not being able to meet their financial obligations if they were to lose their job — just two paychecks or less.

And of these, more than half — 28 percent of all Americans — say they could not survive financially for more than two weeks without their current job.

One additional reason why the banking crisis has not likely abated is that this survey showed that following a job loss, 59 percent of survey respondents said they’d be somewhat or very concerned about having to file for bankruptcy, and 64 percent would be concerned about losing their home.

Even the “mass affluent” — those making $100,000+ in income per year, according to the MetLife study — haven’t been saving enough, with more than one-quarter (29 percent) saying that they couldn’t meet their financial obligations for more than one month following a job loss.

In an economy that is shedding 600-700k jobs a month these statistics should keep everyone up at night.

Citigroup, uptick and mark-to-market rule the day...

This rally has held up well so far, but I think the end of the day will be interesting. One only needs to look back to yesterday or Friday to see a sharp intraday reversal as big investors aim to be flat (ie, own almost nothing) overnight. If you've been lucky enough to get a 30% gain in Citigroup today many traders will see that as a win and may sell out before the markets close. Alternatively, people on the sidelines might see this as the beginning of a big bear market rally and rush to get in before the close. The last 30 minutes will tell the story today.

One question I've had today is "What exactly did Citigroup say that fueled this run?".

Here is the link to the full disclosure to the SEC....

"In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. In January and February alone, our revenues excluding externally disclosed marks were $19 billion."

Importantly, this speaks to the operations of Citigroup. I don't think that anyone is concerned that their operations are losing money. The market's concern lies with the assets on their balance sheet and future charges that my come from the balance sheet. Many of these charges won't be incurred until the end of March.

The second little pop to the rally today came after Rep. Barney Frank suggested that the government might re-institute the uptick rule as a way to stop people from shorting a falling stock. Many studies have been done to indicate that this has little real value but it gave the "let's rig the system" crowd something to cheer about.

Finally, the mark-to-market bashers have been out making the rounds lately and that seems to be getting some traction again. Without getting too detailed, mark to market says you must value an asset at its market price today - not what you think it's worth - but what someone will pay. No one had a problem with Mark-to-market accounting when asset prices were soaring over the past decade, but when they fell suddenly it became an archaic rule that needs to be washed off the books.

Mark-to-market is one of the key principles of accounting and removing it will false hope in the financial sector. For a really good analysis of the mark-to-market issue see John Tanny's piece at realclearmarkets.com.

Thanks to all the visitors today from wwnytv.com and newzjunky.com

Morning video...

Many thanks to the good people at WWNY for hosting a markets/economics conversation this morning. The people working at the station in the AM deserve a lot of credit getting up at that hour of the day, especially after we just adopted daylight savings time.

You can find the video here - WWNY - TV - Kudos to the tech people at WWNY as well. The new site looks great.


Rally Caps

V. Pandit's comments that Citigroup is having it's best quarter since 2007 has goosed an already lofty market this morning which has shrugged off news from United Technologies. Now I could make some snarky comment about what a brilliant job Mr. Pandit has done predicting Citi's future operations over the past 18 mths, but I'll try to hold off.

Separately, beyond today's rally (which could be the start of the bear market rally so many are calling for) what lies on the horizon?

Just as everyone keeps sounding the alarm that we have to "get credit flowing", we get word that banks are pulling credit cards as fast as they can. I think is a further indication that the consumer is not going to lead any recovery. Facing job losses and stagnant wages, consumers are feeling the pinch as banks pull available credit. Consider this from uber-analyst Meredith Whitney --

"Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon. While those numbers look small relative to total mortgage debt of over $10.5 trillion, credit-card debt is revolving and accordingly being paid off and drawn down over and over, creating a critical role in commerce in America.

Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010."

If her estimates turn out to be true up to 55% of credit available to consumers could be gone by the end of 2010. I'd add, that banks face huge writedowns from credit cards and commercial real estate in the coming months.

I'm not trying to be a wet blanket on the high speed train for upstate NY but does this remind anyone of the Fast Ferry out of Rochester? You're proposing to build something for a need that doesn't exist. Meet a real market need and people will beat down your door trying to buy the product.

I'd argue that very few people in the NNY are as familiar with the Watertown/Syracuse to NYC route as my family. We've tried every possible form of transportation - train, car, plane, gondola, covered wagon, etc., and guess what, nothing beats driving.

Let's assume under the best case scenario - the train cuts the trip in half from 5 1/2 hours to 3 hours in 10 years. I think my wife will chuckle at that estimate because on 5 of the 6 trips she's taken from NYC to Syracuse the average delay has run well over 75 minutes. But assuming that you can get the trip cut to just 3 hours with a 150 mph train how much of an improvement is that over a car trip? Syracuse to lower Manhattan is 195 miles which at an average of just 65 mph (You know you can't speed anymore on 81, right? Speed traps every 10 miles in NYS and on Rt. 80 in NJ) conveniently works out to a ........... 3 hour trip!!

A good portion of the funding seems directed toward freight traffic and that is probably a wise investment, but it insults our intelligence to blame the plight of upstate NY on inadequate passenger rail service.

Finally, I'm not opposed to spending, let's just be smart about it. How about hiring a finance professional to teach personal finance to high school kids? Maybe bike paths that would encourage kids to ride to school? Hey, if everyone else is asking for their pork, sign me up, I want the whole pig :)

Monday, March 09, 2009

What's not to L-U-V about the recession?

This is the great question facing all economists and market watchers - will this recession be:

L-shaped - steep drop followed by a prolong period of stagnation (like Japan in the 90's)

U-shaped - a slow drop followed by a slow but steady recovery.

V-shaped - a sharp drop followed by a sharp snap back.

The debate really focuses on L vs. V. Will the stimulus and financial recovery plans be sufficient to encourage consumer spending, stem job losses, jump start corporate spending, etc? Or will we eventually find a bottom in stock prices and then bounce along that bottom for many years to come. There doesn't seem to be any consensus forming as of yet but you will hear these terms with increasing frequency in the days and weeks ahead.

I've mentioned before the coming crisis facing the nations pensions. If the stock market doesn't experience a sharp increase (50-100%) soon, these pension costs are going to create a real drag on earnings that is likely to hamper any recovery in stock prices.

Consider the following chart which lists pension liabilities of some major US corporations.

Canadian Dollar at a 4 1/2 year low vs. US Dollar

Here's a nice little perk for Americans living along the northern border. Remember that large frozen land to our north that you used to visit way back in 2003 when a Tim Horton's coffee cost just $0.72 US?

Well, thanks to the collapse of energy prices (which are recently rebounding) and the flight to safety in the US Dollar, the Canadian dollar has fallen to an exchange rate of about $1 US to $1.30 Canadian.

This is a far cry from the days (last year) when the Canadian dollar traded at par (equal) to the US dollar.

However, this is probably a zero-sum game for the North Country because the benefits you see personally from lower costs associated with your visit to Canada may be offset by fewer Canadian tourists and shoppers crossing our the border to visit Watertown and the 1000 Islands.


Civics Monday...

This is way off-topic, but I heard over the weekend that Sandra Day O'Connor was making the rounds of the news circuit saying that:

"Only a third of Americans can name the three branches of government. That's scary," O'Connor told "Good Morning America" today. "But 75 percent of kids can tell you 'American Idol' judges."

Okay, without hitting up "the Google" can you name the three branches of government? Of course you can, because you are obviously well read and intelligent if you have found your way to Grindstone Financial :)

I commend fmr. justice O'Connor for sounding the alarm on the lack of civics understanding in the US. A really good advocacy group - Common Core - has put together a terrific quiz to gauge the level of understanding among high school students in the US of American history and literature. The average score across the US the last time this test was issued ---- D which means they missed roughly 1 out of every 3 questions.

Here's the link to the test......

Take the test yourself and quiz the kids in your house.

Most of the questions are so obvious that it's hard to imagine anyone getting even one wrong let alone getting a D (disclosure - I went 33 for 33 in my first time through the test, but I'll admit to guessing on #22).


Sunday, March 08, 2009

What country is the largest manufacturer?

This often comes as a surprise to people but would you believe that by the best measure available - value added manufacturing output - the United States still accounts for 36% of the global value of manufactured goods. China is closing the gap but still represents just 25% of global value added goods.

How can that be you ask? The US doesn't seem to make anything anymore. Well, it's important to note that many of the products you see or use every day are not made in the US but many high dollar value items are still manufactured here. Consider aircraft, defense systems, pharmaceuticals, heavy capital equipment, and precision scientific equipment.

So, knowing Grindstone Financial like you do, there must be a catch and yes, wise readers, here's the bad news --- while the US is still the global leader in value added manufacturing, manufacturing as a whole has shrunk to just 18% of global GDP. Services now account for 67% of global GDP. Unfortunately, the great regression is going to take the wind out of the services sector for the foreseeable future.

But at least you have a cool bit of trivia that you can use to impress your friends at the water cooler today.

AIG's making news again and not in a good way.

One quick observation after perusing the Sunday talk shows - the leaders on both sides of the aisle are completely clueless as to the complexity of the challenges facing our financial system.

I know it's not feasible but I'd love to add a fourth branch of government to handle our finances.

Speaking of complex financial situations - word broke over the weekend that big firms like Goldman Sachs (isn't it funny how often that name comes up?) and Deutsche Bank were recipients of some big payouts from AIG after AIG had already taken taxpayer dollars. When you hear people speak of the SYSTEMIC RISK to the financial system if AIG goes under what they are really saying is that these counter-parties (the other side of AIG's trade) would suffer large losses if AIG went under.

"The beneficiaries of the government’s bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany’s Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.

More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.”

I'm not one to whip up populist angst, but billions in taxpayer money to avoid losses at a German bank, a French bank, a Scottish bank and a Hong Kong bank might turn into a pretty good campaign ad for someone in 2012.


Friday, March 06, 2009

Jobs Report Follow-up...

There's always an interesting chart buried inside the jobs report labeled Table A-12: Alternative measures of labor underutilization.

This chart takes the unemployed and -

adds discouraged workers (the unemployed that have stopped looking)

adds marginally attached workers (the unemployed that aren't looking but are willing to work)

adds part-time workers working part-time for economic reasons (the part-time employees that would work full-time if it was offered).

This is an important measure because it really creates a measurement of not just the unemployed but the underemployed (discouraged, marginally attached and part-time). In February 2008, this broader measure reported 9% rate of labor underutilization. Today's number hit 14.8% or more than one in seven members of the American labor force.

While, the 8.1% unemployment rate will garner all of the headlines, I think the A-12 number is an important number to follow.



TRAFFIC UPDATE!!! Wow another record week thanks to a sputtering Dow, links by Newzjunky and followers on Twitter/facebook.

Monday-Thursday traffic - 3,452 visits!

Thanks for visiting and tell your friends!

The glory of the internets...

I'm not a pet owner so I'm not sure if this is common but this video of a sleepwalking dog is hard to watch with a straight face....


Jobs report.....

Well, the jobs number is mixed, but I suspect the market may be happy with it. Another 651k jobs lost in February which was slightly better than the forecast. The unemployment rate however cracked 8% as a result of revisions to past month's data.

Only places adding jobs - government, education and healthcare.

Bloomberg has the full story.... Futures are virtually unchanged.

I just heard a pretty interesting take on the catch 22 that the US and China find themselves in right now.

China's economy is clearly suffering a dramatic downturn as a result of the pullback of the US consumer. In an effort to stimulate their own economy China may need to repatriate some of their investments (from US dollars back to Chinese Yuan).

This will mean that there is potentially less money available to buy US debt,

which means that US Government spending might be curtailed,

which may prolong the recession,

which will further hamper China's economy,

which will leave less money to buy US debt.....

wash, rinse, repeat.

There are only a couple of ways to break this cycle -

1) For the Chinese it means moving up the food chain in manufacturing from making consumer goods for Walmart to making high value add products (similar to the move that Covidien is making). Obviously, this isn't a good option for Americans, but it's a possible outcome.

2) For the US it means we may have to once again become the financial backer of our government. We already shoulder most of the burden via our taxes, but I think we need to institute a program similar to the old War Bond programs in the 40's. I'm not sure anyone has a lot of extra money to lend to the US right now, but I'd rather we control our own destiny rahter than let China decide when they are going to stop lending to us.