Tuesday's market created a trading volume of over 9 Billion shares. That's hard to imagine. Looking at it from a historic standpoint, big volumes like this have often - not always - been the precursor to a market bottom. I do know that, at some point, we will have hit the ultimate bottom and we'll have a bounce that will daze and amaze everyone.
In Tuesday's trading, the market would be up 50 points, down 50 and then up 125, off 75 - all within minutes. All driven by news, rumor and innuendo - not earnings or anything so mundane - or real. To the point, unless you are a professional trader, (which is some manic human with lots of computers and phones or maybe like that little kid on the TV ads), you're better off just standing aside and watching the waves come and go.
So, in that light, as you meditate on the meaning of life in the markets, let me offer you these bits of insight and advice...
Rule #1 - never watch the daily market, unless you are one of those hair on fire traders. The daily market is not unlike the daily weather. As the folks in Texas can tell you, one day, it's a hurricane - the next, it's clear and sunny.
Rule #2 - never, ever try to make sense out of the market's daily gyrations.
Rule #3 - talking head extrapolations based on the day's activities are worth the air that creates them - nothing more.
Rule #4 - look out the window...did the world end?
According to my window - we're still okay...
Wednesday, September 17, 2008
Too big to fail
In a showdown, the belief is that whomever blinks first is the loser. Well, the Feds sure blinked with the AIG deal. I think they blinked so much and so fast that they blew papers off the table...
There will be more than a few who will suggest that the "American taxpayer" - as opposed to the European taxpayer, I'm assuming - is being fleeced / taken advantage of and otherwise getting the short end of that stick on this. Well, before we rush to judgment or the next news break, let's see what we can see.
Background
AIG (American International Group Inc.) is - well, was - our country's largest insurer. The fine folks at RBC Capital Markets estimate that "losses industrywide could have totaled $180 billion if AIG collapsed." The global chaos factor, much higher costs of borrowing for everyone, the impact on other smaller companies and the national economy as a whole was not deemed to be worth the risk. I have to agree.
The Federal Reserve has made an agreement to lend "as much as $85 billion" to AIG. The company has seen its credit ratings cut to "lend you money; you must be kidding me" levels and its stock price drop 79% in just this past week. Unlike Lehman and Bear Stearns, this company could not be allowed to just collapse for the reasons mentioned above.
What does it mean?
AIG has a two year period during which these funds will assist it "in meeting its obligations as they come due." So said the Feds.
What this enables AIG to do is to self-liquidate at something other than fire sale prices. The company will pay back the loan from the sale of these assets. For what it's worth, I think that the assets should create a nice chunk of money for the Feds/us when sold.
Additionally, it means that if you're a common or preferred shareholder, you probably have some rather expensive wall paper right now. The Feds have retained the right to veto any dividend payments to those holders and, since it's being cut up, shareholders really don't have any equity to fall back on.
In a good deal for the Fed, AIG will be liable to pay interest on any outstanding loan balance at the prevailing 3 month London Interbank Offering Rate (LIBOR) - plus 8.50%. Based on current levels, that would mean about 11.30%. That can be some serious money, so I don't think AIG is going to dither about getting rid of assets.
And the fine folks who brought us this mess? Rumor has it that "management" will be replaced as part of the deal. I suspicion that they won't leave empty handed - unfortunately.
Ramifications?
Well, contrary to what the talking heads may suggest, nobody really knows. I think it will be okay for the markets and all but the employees and shareholders. More of the deleveraging process.
My concern is that other entities may also try to hold themselves up as "too big to fail" and come looking for the government parachute. I don't think it'll work again. Companies will be "allowed" to go into bankruptcy and reorganize - I won't be surprised to see that attempted by a few.
Personally, I subscribe to what economist Joseph Schumpter wrote. He believed that the process of "creative destruction" is essential for a market to operate.
As Andrew Mellon said before him, and as he echoes, "for innovation to flourish and the standard of living of the populace to improve, the market must be free to reward success and punish failure."
You can't have one without the other...political meddling notwithstanding.
There will be more than a few who will suggest that the "American taxpayer" - as opposed to the European taxpayer, I'm assuming - is being fleeced / taken advantage of and otherwise getting the short end of that stick on this. Well, before we rush to judgment or the next news break, let's see what we can see.
Background
AIG (American International Group Inc.) is - well, was - our country's largest insurer. The fine folks at RBC Capital Markets estimate that "losses industrywide could have totaled $180 billion if AIG collapsed." The global chaos factor, much higher costs of borrowing for everyone, the impact on other smaller companies and the national economy as a whole was not deemed to be worth the risk. I have to agree.
The Federal Reserve has made an agreement to lend "as much as $85 billion" to AIG. The company has seen its credit ratings cut to "lend you money; you must be kidding me" levels and its stock price drop 79% in just this past week. Unlike Lehman and Bear Stearns, this company could not be allowed to just collapse for the reasons mentioned above.
What does it mean?
AIG has a two year period during which these funds will assist it "in meeting its obligations as they come due." So said the Feds.
What this enables AIG to do is to self-liquidate at something other than fire sale prices. The company will pay back the loan from the sale of these assets. For what it's worth, I think that the assets should create a nice chunk of money for the Feds/us when sold.
Additionally, it means that if you're a common or preferred shareholder, you probably have some rather expensive wall paper right now. The Feds have retained the right to veto any dividend payments to those holders and, since it's being cut up, shareholders really don't have any equity to fall back on.
In a good deal for the Fed, AIG will be liable to pay interest on any outstanding loan balance at the prevailing 3 month London Interbank Offering Rate (LIBOR) - plus 8.50%. Based on current levels, that would mean about 11.30%. That can be some serious money, so I don't think AIG is going to dither about getting rid of assets.
And the fine folks who brought us this mess? Rumor has it that "management" will be replaced as part of the deal. I suspicion that they won't leave empty handed - unfortunately.
Ramifications?
Well, contrary to what the talking heads may suggest, nobody really knows. I think it will be okay for the markets and all but the employees and shareholders. More of the deleveraging process.
My concern is that other entities may also try to hold themselves up as "too big to fail" and come looking for the government parachute. I don't think it'll work again. Companies will be "allowed" to go into bankruptcy and reorganize - I won't be surprised to see that attempted by a few.
Personally, I subscribe to what economist Joseph Schumpter wrote. He believed that the process of "creative destruction" is essential for a market to operate.
As Andrew Mellon said before him, and as he echoes, "for innovation to flourish and the standard of living of the populace to improve, the market must be free to reward success and punish failure."
You can't have one without the other...political meddling notwithstanding.
Tuesday, September 16, 2008
So, here's another fine mess you got me into
That famous line used by Stan Laurel in his ongoing commentary with Oliver Hardy back in the 20s and 30s seems appropriate as a way to encapsulate the feeling of investors about the markets. Investors conveniently forgetting that they are, in fact, the market...
A guy could get his eye poked out what with all the fingers being randomly pointed about trying to assign blame. It's because of this policy or that government boondoggle or climate change or, of course, "Bush did it". Wrong to all of the above.
Understatement is not in danger
My Associated Press buddies who never met a challenge they couldn't embellish were using phrases like, "Wall Street mauled", " a meltdown in the US financial system" and "chaos is rocking financial markets", to describe Monday's action. Crikey. I hope someone took a breath in all that. It must have been buy an adjective day in the press room.
I think they overstate the problem a bunch. We've had worse - much worse -and I'm not talking about the Depression. We're nowhere near such a thing, in spite of fevered talk along those lines. Only people with no economic sense or knowledge say things like that. You don't get over 2% GDP growth over the past year in a depressed economy. Hello?
Perspective
The Standard & Poors 500 is off 23% since the high last October. (We're still among the top performers of all markets in the world - it's all relative.) Hey, I'm not favoring drops like this. While it makes for a great conversation starter in the future along the lines of, "do you remember when...", it also makes it hard to keep client's eyes on the big picture. It is, nonetheless, the price one pays for the rewards that come later. Before I get too far afield with that, let's see how a not altogether distant past "crisis" may help us put this in its place.
Way back in the seemingly dimly recalled 80s and 90s, we had a little problem with what we liked to call the S&Ls - savings and loans. Loose regulations and easy money (low interest rates) combined to get more than a few of these crosswise with prudent lending and business practices and - oops - they blew up. Continental Illinois, the previous holder for biggest bankruptcy, was the most noteworthy casualty. The Feds made depositors with $100,00 or less whole but the rest suffered the consequences of their greed. It was then - as it is now - primarily a financial problem. Not one of the overall economy.
Poor lending practices and the suspension of belief about how leverage works have caused the problems you're reading about now. When the easy money caused overbuilding and the supply outstripped the demand for houses, the chubby lady was heard warming up on the sidelines. Ashes, ashes - all fall down...
Had you heard?
Guess what the APers forget to mention? 95% of our economy is NOT related to housing. What's that, you say? Based on what you read from the AP and others, the entire economy must be based on the housing market.
The housing boom really didn't impact the whole economy all that much. So, conversely, it's diminishment doesn't affect it much either. It affected - and affects - people in a way they can relate to but the big picture has eluded them. Financial companies have been and continue to be penalized for being - in a word - stupid about the easy money. That'll stop at some point - as it has before.
Another reason the market is off is that the shares of energy and commodity based companies are also being steamrolled. Why? Well, their underlying assets are falling like water over the Niagara. Gold, corn and, oh yes, oil prices are seemingly having a race to see which can drop the most - and quickest.
Oil hit a seven month low of under $92 a barrel on Monday. That's down almost 40% just since July and back to where it was at the beginning of the year. Don't you think that this will have a rather positive ripple effect on our economy as those lower prices spread out?
Another reason is that the general "feeling" is that a slowing global economy will see decreased demand. Granted. Don't need a Rhodes scholarship to figure that out.
The implication though is that there is one economy. Wrong again. While related, the major economies are still separate. My point is that we suffered first so we'll benefit first from these lower oil and commodity prices, as well as the use of significantly less leverage, and lead the global economies back.
A former Secretary of the Treasury has the insight on this
Andrew Mellon, who had the job under three presidents in the 20s and 30s, had this advice when asked how to avoid the financial panic in the early 1920s. He said: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."
Even then, politicians couldn't make the hard choices and they didn't follow his advice but it does illustrate the point. Let the markets find order on their own as they have done since time immemorial.
As long as the government steers clear of tax hikes, tight money and the always misguided protectionism, the economy should continue to function.
A guy could get his eye poked out what with all the fingers being randomly pointed about trying to assign blame. It's because of this policy or that government boondoggle or climate change or, of course, "Bush did it". Wrong to all of the above.
Understatement is not in danger
My Associated Press buddies who never met a challenge they couldn't embellish were using phrases like, "Wall Street mauled", " a meltdown in the US financial system" and "chaos is rocking financial markets", to describe Monday's action. Crikey. I hope someone took a breath in all that. It must have been buy an adjective day in the press room.
I think they overstate the problem a bunch. We've had worse - much worse -and I'm not talking about the Depression. We're nowhere near such a thing, in spite of fevered talk along those lines. Only people with no economic sense or knowledge say things like that. You don't get over 2% GDP growth over the past year in a depressed economy. Hello?
Perspective
The Standard & Poors 500 is off 23% since the high last October. (We're still among the top performers of all markets in the world - it's all relative.) Hey, I'm not favoring drops like this. While it makes for a great conversation starter in the future along the lines of, "do you remember when...", it also makes it hard to keep client's eyes on the big picture. It is, nonetheless, the price one pays for the rewards that come later. Before I get too far afield with that, let's see how a not altogether distant past "crisis" may help us put this in its place.
Way back in the seemingly dimly recalled 80s and 90s, we had a little problem with what we liked to call the S&Ls - savings and loans. Loose regulations and easy money (low interest rates) combined to get more than a few of these crosswise with prudent lending and business practices and - oops - they blew up. Continental Illinois, the previous holder for biggest bankruptcy, was the most noteworthy casualty. The Feds made depositors with $100,00 or less whole but the rest suffered the consequences of their greed. It was then - as it is now - primarily a financial problem. Not one of the overall economy.
Poor lending practices and the suspension of belief about how leverage works have caused the problems you're reading about now. When the easy money caused overbuilding and the supply outstripped the demand for houses, the chubby lady was heard warming up on the sidelines. Ashes, ashes - all fall down...
Had you heard?
Guess what the APers forget to mention? 95% of our economy is NOT related to housing. What's that, you say? Based on what you read from the AP and others, the entire economy must be based on the housing market.
The housing boom really didn't impact the whole economy all that much. So, conversely, it's diminishment doesn't affect it much either. It affected - and affects - people in a way they can relate to but the big picture has eluded them. Financial companies have been and continue to be penalized for being - in a word - stupid about the easy money. That'll stop at some point - as it has before.
Another reason the market is off is that the shares of energy and commodity based companies are also being steamrolled. Why? Well, their underlying assets are falling like water over the Niagara. Gold, corn and, oh yes, oil prices are seemingly having a race to see which can drop the most - and quickest.
Oil hit a seven month low of under $92 a barrel on Monday. That's down almost 40% just since July and back to where it was at the beginning of the year. Don't you think that this will have a rather positive ripple effect on our economy as those lower prices spread out?
Another reason is that the general "feeling" is that a slowing global economy will see decreased demand. Granted. Don't need a Rhodes scholarship to figure that out.
The implication though is that there is one economy. Wrong again. While related, the major economies are still separate. My point is that we suffered first so we'll benefit first from these lower oil and commodity prices, as well as the use of significantly less leverage, and lead the global economies back.
A former Secretary of the Treasury has the insight on this
Andrew Mellon, who had the job under three presidents in the 20s and 30s, had this advice when asked how to avoid the financial panic in the early 1920s. He said: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."
Even then, politicians couldn't make the hard choices and they didn't follow his advice but it does illustrate the point. Let the markets find order on their own as they have done since time immemorial.
As long as the government steers clear of tax hikes, tight money and the always misguided protectionism, the economy should continue to function.
Monday, September 15, 2008
So, what did you do over the weekend?
Can you top these activities? Did you file Chapter 11? Get bought by a bank? If neither of these apply, then you aren't going to get much attention around the water cooler today.
Chapter 11
As I discussed last week, I didn't think that the Feds would bail out Lehman Brothers - and they sure didn't. Lehman was undone by the market it had a big part in starting and supporting - that of mortgage-backed securities. It was further compounded by the fact that the firm's management didn't want to sell the firm at rock bottom prices.
With the market driving its stock price down about 94% over the year, they got painted into a corner and now will be forced to sell assets at prices below what they were willing to consider - even a week ago. Chapter 11 is particularly tough on financial services firms, so the 150+ year old firm will soon be a trivia question.
The brokerage portion of the firm is not included in the filing but the investment bank and most other assets are. Their clients are not at risk for their investments either. I'd guess that Lehman will try to sell the brokerage piece to another firm as that is definitely a valuable asset and can raise cash for them.
According to Bloomberg, the bond mutual funds of PIMCO, Fidelity and Vanguard are most negatively impacted by the Lehman filing in terms of the holdings in their respective portfolios.
Bought by a bank?
While it will be pretty much a non-event for Merrill Lynch's clients, there is no fate worse for a brokerage firm than to be owned by a bank - I speak from personal experience. You know the old adage, "don't let a banker on your board"? Imagine a whole board dominated by bankers. Imagination and forward thinking are not part of their gene pool. The challenge is that they really don't understand how the investment business works. They may grasp the numbers but they sure don't grasp the attitudes and approaches that advisors use.
Add to that the fact that Merrill is, politely, infused with hubris. Mighty Merrill, the largest brokerage firm, is now a bank subsidiary. What a comedown for their employees. I can't even imagine all the variations on "tell me it isn't so" rippling through their firm at all levels.
On the other hand, there is more than a little chortling going on at other firms at this turn of events - see the previously mentioned hubris reference. I predict that many, many Merrill advisors will be shifting to other, non-bank affiliated, firms in the near future.
For BankAmerica, they got the firm really cheap. Together with all the other assets they've recently purchased, (MBNA, LaSalle Bank and Countrywide Financial), they are either setting themselves up to be unsuccessful cat herders or will look really smart in a couple years.
Socialization of risk
Ever since the start of deposit insurance for banks created in response to the bank failures of the 1930s, we've moved more and more toward such risk being "unacceptable". We had many subsidies created over the 80s and 90s to encourage mortgage debt - one of the contributors to the current challenges. If there haven't been outright bailouts like Chrysler and now Fannie and Freddie, fiscal and monetary policies have, in many other instances, prevented real harm to the system and many other parties who should have been penalized.
There may well be a time when the pieces may have to fall where they may. There has to be a risk v. reward component to the bailout thinking. In other words, what's the real risk - other than votes - to letting whatever go down.
I don't know if we have any politicians with the cojones to do so - even the Governator of California came up short in addressing the ongoing challenges in that state's budget. It's not a bailout but no one there is willing to cut "programs" to help ease the pressure.
I believe that with many of these weak links being eliminated, real risk is being further wrung out of the system.
As is the case in life, in the markets, only the strong survive. The case for staying with quality has simply been reinforced by these events.
PS One presidential candidate was heard to blame Mr. Bush for Lehman going down. If that's indicative of the quality of his financial acumen, we would be in very bad shape. He and his "advisors" obviously have no grasp of reality.
Chapter 11
As I discussed last week, I didn't think that the Feds would bail out Lehman Brothers - and they sure didn't. Lehman was undone by the market it had a big part in starting and supporting - that of mortgage-backed securities. It was further compounded by the fact that the firm's management didn't want to sell the firm at rock bottom prices.
With the market driving its stock price down about 94% over the year, they got painted into a corner and now will be forced to sell assets at prices below what they were willing to consider - even a week ago. Chapter 11 is particularly tough on financial services firms, so the 150+ year old firm will soon be a trivia question.
The brokerage portion of the firm is not included in the filing but the investment bank and most other assets are. Their clients are not at risk for their investments either. I'd guess that Lehman will try to sell the brokerage piece to another firm as that is definitely a valuable asset and can raise cash for them.
According to Bloomberg, the bond mutual funds of PIMCO, Fidelity and Vanguard are most negatively impacted by the Lehman filing in terms of the holdings in their respective portfolios.
Bought by a bank?
While it will be pretty much a non-event for Merrill Lynch's clients, there is no fate worse for a brokerage firm than to be owned by a bank - I speak from personal experience. You know the old adage, "don't let a banker on your board"? Imagine a whole board dominated by bankers. Imagination and forward thinking are not part of their gene pool. The challenge is that they really don't understand how the investment business works. They may grasp the numbers but they sure don't grasp the attitudes and approaches that advisors use.
Add to that the fact that Merrill is, politely, infused with hubris. Mighty Merrill, the largest brokerage firm, is now a bank subsidiary. What a comedown for their employees. I can't even imagine all the variations on "tell me it isn't so" rippling through their firm at all levels.
On the other hand, there is more than a little chortling going on at other firms at this turn of events - see the previously mentioned hubris reference. I predict that many, many Merrill advisors will be shifting to other, non-bank affiliated, firms in the near future.
For BankAmerica, they got the firm really cheap. Together with all the other assets they've recently purchased, (MBNA, LaSalle Bank and Countrywide Financial), they are either setting themselves up to be unsuccessful cat herders or will look really smart in a couple years.
Socialization of risk
Ever since the start of deposit insurance for banks created in response to the bank failures of the 1930s, we've moved more and more toward such risk being "unacceptable". We had many subsidies created over the 80s and 90s to encourage mortgage debt - one of the contributors to the current challenges. If there haven't been outright bailouts like Chrysler and now Fannie and Freddie, fiscal and monetary policies have, in many other instances, prevented real harm to the system and many other parties who should have been penalized.
There may well be a time when the pieces may have to fall where they may. There has to be a risk v. reward component to the bailout thinking. In other words, what's the real risk - other than votes - to letting whatever go down.
I don't know if we have any politicians with the cojones to do so - even the Governator of California came up short in addressing the ongoing challenges in that state's budget. It's not a bailout but no one there is willing to cut "programs" to help ease the pressure.
I believe that with many of these weak links being eliminated, real risk is being further wrung out of the system.
As is the case in life, in the markets, only the strong survive. The case for staying with quality has simply been reinforced by these events.
PS One presidential candidate was heard to blame Mr. Bush for Lehman going down. If that's indicative of the quality of his financial acumen, we would be in very bad shape. He and his "advisors" obviously have no grasp of reality.
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