I walked by the Bear Stearns office tower yesterday and there was quite a commotion. A TV crew was on the scene and a hoard of folks had gathered around a large cardboard illustration (like what might be propped up for a kid’s Bar Mitzvah or someone’s anniversary party) of former Bear CEO James Cayne. The idea was that Bear employees would walk out of the building, sign the poster-board and then the artist would auction it off on E-Bay.
I was mesmerized by the board. I leaned in to read all of the comments, some of which can not be printed here. What was interesting was the vast divergence of feelings that were shared. Yes, there were the expletives and the bitter salvos (these were probably the people who purchased t-shirts 5 feet away that said, “I worked at Bear Stearns for 20 years and all I got was Cayned!”), but more often, there was nostalgia. “Thanks for the great years, Jimmy!”, “It was an amazing ride” and “I wish it did not end on March 17th!”
All of this was interesting in light of the three-part series about the collapse of Bear Stearns that was published this week in the Wall Street Journal. If you have not read it, I urge you to do so (www.wsj.com). Reporter Kate Kelly’s attention to detail and ability to paint a vivid story is remarkable. Like a fine journalist, Ms. Kelly is able to rivet the reader, even though we know the ending of the story.
Each participant in the deal was painted with multiple layers, so that it was impossible to come away with a simple “they are all a bunch of thieves” attitude. In fact, the overriding sense I had was that while there were lots of mistakes along the way, the guys running Bear Stearns at the time were desperately seeking ways to save the company. The fact that they allowed themselves to get into the situation in the first place was bad, but each seemed to truly care about the organization.
That is the sentiment that was echoed by my lunch date, who has worked at Bear for 18 years. He recounted his personal experience with me of that fateful week in March – the initial fear that as a 56-year old, he would have to find another job; that he was just another “dopey boomer” who had not saved enough; and then acceptance that although he loved the company, they had screwed up and paid a terrible price. When we returned from lunch, he checked his Blackberry “Well, the deal is done…15 minutes later, the 85-year old Bear is history now.” And those are the Bear facts.
Friday, May 30, 2008
Thursday, May 29, 2008
While you were watching oil
Who isn’t attracted to a story like the rise of oil? It not only has great significance for investors, it also touches our daily lives in many ways. So let me start this column that is not about oil with a snapshot of what occurred in the oil market yesterday: crude oil for July delivery added $2.18 to $131.03. As much as everyone wanted to see continued downside selling, rebels in Nigeria continued to attack oil installations there.
While everyone was watching the oil market (note all of the jazzy new graphics announcing “America’s oil crisis”), an equally important milestone was reached yesterday. The 10-year US Treasury bond dropped in price and closed above 4% (4.01% actually) for the first time since the end of last year. Why should you care about the unsexy bond market? Because not only can the yield of bonds affect the cost of borrowing for individuals and companies, it is also an interesting indicator of where some investors believe the economy is headed.
Perhaps the most startling aspect of the slowdown/recession/credit crunch/energy crisis of 2007-08 is the lack of really bad economic news outside of housing. The data show the US economy is not doing as poorly as we all think or feel it is. That is attributable to a weak dollar, which has helped US exporters sizzle; a consumer who has not totally collapsed yet; and non-financial corporations whose balance sheets are squeaky-clean after the internet bubble burst and are still earning money.
Yesterday, the economic news that confounded economists and analysts was found in the durable goods report. The Commerce Department reported that orders fell 0.5% last month, compared to the consensus estimate of a 2% drop. The stronger-than-expected number was good news in that it shows some strength among businesses despite slow growth in the broader economy, but with strength comes the idea that maybe the Federal Reserve really is done with its rate cut campaign after all.
The reaction among the bond traders was to sell the 10-year Treasury. Because bond prices and yields are inversely related, when you hear that prices are dropping, that means that yields are rising. So if you own a bond fund, you will likely see a dip in its value from the peak reached in mid-March. My guess is that the move down in the Treasury market may impact the average portfolio at least as much as rising oil, but without the nifty graphics!
While everyone was watching the oil market (note all of the jazzy new graphics announcing “America’s oil crisis”), an equally important milestone was reached yesterday. The 10-year US Treasury bond dropped in price and closed above 4% (4.01% actually) for the first time since the end of last year. Why should you care about the unsexy bond market? Because not only can the yield of bonds affect the cost of borrowing for individuals and companies, it is also an interesting indicator of where some investors believe the economy is headed.
Perhaps the most startling aspect of the slowdown/recession/credit crunch/energy crisis of 2007-08 is the lack of really bad economic news outside of housing. The data show the US economy is not doing as poorly as we all think or feel it is. That is attributable to a weak dollar, which has helped US exporters sizzle; a consumer who has not totally collapsed yet; and non-financial corporations whose balance sheets are squeaky-clean after the internet bubble burst and are still earning money.
Yesterday, the economic news that confounded economists and analysts was found in the durable goods report. The Commerce Department reported that orders fell 0.5% last month, compared to the consensus estimate of a 2% drop. The stronger-than-expected number was good news in that it shows some strength among businesses despite slow growth in the broader economy, but with strength comes the idea that maybe the Federal Reserve really is done with its rate cut campaign after all.
The reaction among the bond traders was to sell the 10-year Treasury. Because bond prices and yields are inversely related, when you hear that prices are dropping, that means that yields are rising. So if you own a bond fund, you will likely see a dip in its value from the peak reached in mid-March. My guess is that the move down in the Treasury market may impact the average portfolio at least as much as rising oil, but without the nifty graphics!
Tuesday, May 27, 2008
The New National Pastime
At last year’s Memorial Day BBQ, the talk surrounded the slumping Yankees and a housing market that was beginning to show significant signs of distress. But this year was different…no talk of baseball, houses and barely a whisper about the endless primary season. Almost everyone at the BBQ spoke extensively about gasoline prices---where they were the highest, lowest and the outlook for the future.
I listened for clues as to whether people were changing their habits as a result of $4+ per gallon prices at the pump and was pleasantly surprised. A number of the attendees noted that they were taking public transportation more often and many of the soccer moms and dads are now trying to coordinate carpools for kids’ activities. Even my sister, a slave to her massive SUV, is considering scrapping the big car for a more efficient one. The data confirms the BBQ chatter—according to the Federal Highway Administration, the amount Americans drove fell 4.3% in March compared with a year earlier, the first time driving has fallen since 1979. But there is more to the price spikes than US consumer behavior.
While the US consumes a massive amount of energy, our use alone can not account for the price of oil more than doubling in 18 months, or for that matter, the six-fold rise in the past seven years. We already know that the biggest driver of new demand has been emerging economies, whose entry in the global economy has created a new consumer. What you may not realize is that the rules of economics do not apply in many of these places. A quarter of the world’s gasoline consumption is subsidized and in terms of population, half of the world uses energy subsidies.
That means that even as we change our behavior here in the US, energy consumers in China, the Middle East and Russia, have no incentive to make similar types of shifts because much of the cost increases have not been passed on to consumers. These subsidies have artificially raised inflation in the developed world through artificially high oil prices and suppressed inflation in the developing world, where inflation would have been even higher in the absence of subsidies. The net result is that the customary forces of supply and demand have yet to play out on the world stage. The good news is that the situation is unlikely to remain indefinitely. As fiscal pressures mount, some countries will be forced to incrementally remove these subsidies. The net result should be lower energy prices for the globe. Until then, however, expect to hear more about gas prices on the BBQ circuit.
I listened for clues as to whether people were changing their habits as a result of $4+ per gallon prices at the pump and was pleasantly surprised. A number of the attendees noted that they were taking public transportation more often and many of the soccer moms and dads are now trying to coordinate carpools for kids’ activities. Even my sister, a slave to her massive SUV, is considering scrapping the big car for a more efficient one. The data confirms the BBQ chatter—according to the Federal Highway Administration, the amount Americans drove fell 4.3% in March compared with a year earlier, the first time driving has fallen since 1979. But there is more to the price spikes than US consumer behavior.
While the US consumes a massive amount of energy, our use alone can not account for the price of oil more than doubling in 18 months, or for that matter, the six-fold rise in the past seven years. We already know that the biggest driver of new demand has been emerging economies, whose entry in the global economy has created a new consumer. What you may not realize is that the rules of economics do not apply in many of these places. A quarter of the world’s gasoline consumption is subsidized and in terms of population, half of the world uses energy subsidies.
That means that even as we change our behavior here in the US, energy consumers in China, the Middle East and Russia, have no incentive to make similar types of shifts because much of the cost increases have not been passed on to consumers. These subsidies have artificially raised inflation in the developed world through artificially high oil prices and suppressed inflation in the developing world, where inflation would have been even higher in the absence of subsidies. The net result is that the customary forces of supply and demand have yet to play out on the world stage. The good news is that the situation is unlikely to remain indefinitely. As fiscal pressures mount, some countries will be forced to incrementally remove these subsidies. The net result should be lower energy prices for the globe. Until then, however, expect to hear more about gas prices on the BBQ circuit.
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