“Fannie Mae shook up its senior management in a move it said was designed to ‘drive’ the mortgage company’s efforts to conserve capital and contain a surge in costs stemming from defaults by homeowners.” (WSJ “Fannie Names New Officers in Shake-Up” August 28). Given that Fannie’s stock is down 90% from a year ago, this move is akin to the Captain of the Titanic naming a new First Mate two hours after hitting the iceberg.
CEO Daniel Mudd, who has presided over Fannie Mae since the embarrassing accounting scandal that ended Franklin Raines’ tenure in 2004, said that the move to replace CFO Stephen Swad and Chief Business Officer Robert Levin was intended to restore investor confidence in the mortgage giant, as if a shuffle would do that! After logging billions of dollars of losses ($9.4B, to be exact) over the past four quarters, isn’t it interesting that the guy who was in CHARGE still has a job? It makes me hearken back to Merrill Lynch’s Stan O’Neal, who after presiding over Merrill’s decline, at least had the decency to step down.
Shady dealings at the top of Fannie must be a job requirement. When fudging the numbers doesn’t work, just put the political pressure on to ensure that the regulatory environment is lax. (With enough money, your new BFF Barney Frank’s got your back!) With the Feds lying low, you then assume boatloads of risk and if the bet goes bad, “shake up” your staff, but preserve your own precious job.
As Fox Business News’ Elizabeth MacDonald recently put it (check out her excellent blog at http://emac.blogs.foxbusiness.com/):
“The way these two companies [Fannie Mae and Freddie Mac] recklessly built and operated their Ponzi-type business model boggles the mind. Teetering atop their combined $54 billion net worth is a breathtaking pyramid of debt and assets, $5 trillion. That capital amounts to less than 1% of the mortgages they either own or back…Instead of shutting the spigot off, the two bought subprime and Alt-A securitizations through 2007 when the housing bubble burst, picking up the slack for banks when Wall Street shut down its printing press factory cranking out a drunken daisy chain of asset-backed paper. This is beyond impenetrably stupid. It’s obscene.”
And what may be most obscene is that CEO Daniel Mudd still has a job. If or when the government intervenes to bail out Fannie Mae and Freddie Mac, which looks more and more likely with each day, the first order of business should be to remove the CEO’s who knew exactly what was going on and allowed the mess to go on well beyond any reasonable time horizon. If Mr. Mudd truly believes his own words, “As we move through the bottom of this cycle, maintaining capital, managing credit and driving revenues are priorities and we have to organize the staff accordingly,” then he would do more than replace his convenient scapegoats: he would be a man, take responsibility for his actions and step down. At this point, these actions are just not enough of a shake up.
Friday, August 29, 2008
Thursday, August 28, 2008
A Good Night’s Sleep
The stock market is likely to rise…and soon. I do not say that because of any empirical data or analysis. I know that because JB called me yesterday to request that we go to cash in all of her investment accounts. “We just can’t take it anymore and we’ll re-evaluate in six months.”
When I heard the voice mail, I literally said aloud, “well, here’s the beginning of a bull market!” The reason I know this is that JB has done this before, only last time she did not even talk to me—she went behind my back and instructed someone else in the office to do the deed. By the time she actually took my call and I convinced her that it was imprudent to get out, the stock market had already started to rise. At our meeting at the end of last year, she thanked me for pushing her. Almost a year later, JB is about to make the same mistake.
Before getting on the phone, I pulled up the account performance. With the US stock market down approximately 12% through the prior session’s close, JB’s total accounts were down half as much. Although nobody likes to lose, the damage has certainly been contained. I then reviewed the notes from our last meeting and confirmed that JB would not need to access any money from the account for five years. Armed with that information, I was ready to make the phone call.
I thought that the conversation would go as the previous one did. I would talk about the fact that they did not need the money for five years and more importantly, that it is never a good idea to bail out completely because it is nearly impossible to get back in until after the market has gone up and by that time, you may have missed the best part of the rebound. I would then trot out my five survival tips for a bear market:
1. Part of being an investor is going through these nasty times. Without the downs, there can be no ups.
2. Because you have a diversified portfolio, you are not suffering nearly as much as the overall markets. Turn off CNBC and relax.
3. Since WW II-2007, the S&P 500-stock index has risen by an annual average of 9.1% and there were lots of bad times included in that time horizon.
4. You are purchasing shares at low prices, which should benefit you over the long term.
5. You were smart enough to keep an emergency reserve fund set aside that is not invested in the stock market.
But after talking to JB, new information emerged. JB explained that her husband was ill and that she just could not bear the thought of worrying about him and the portfolio at the same time. “I just want to try to be able to sleep at night.” I dutifully reduced the risk in the portfolio and made a note to check back with JB in three months. The experience was just another example of how emotions creep into the investment world…sometimes it’s worth listening because sometimes a good night of sleep is far more important than any potential gains in a portfolio.
When I heard the voice mail, I literally said aloud, “well, here’s the beginning of a bull market!” The reason I know this is that JB has done this before, only last time she did not even talk to me—she went behind my back and instructed someone else in the office to do the deed. By the time she actually took my call and I convinced her that it was imprudent to get out, the stock market had already started to rise. At our meeting at the end of last year, she thanked me for pushing her. Almost a year later, JB is about to make the same mistake.
Before getting on the phone, I pulled up the account performance. With the US stock market down approximately 12% through the prior session’s close, JB’s total accounts were down half as much. Although nobody likes to lose, the damage has certainly been contained. I then reviewed the notes from our last meeting and confirmed that JB would not need to access any money from the account for five years. Armed with that information, I was ready to make the phone call.
I thought that the conversation would go as the previous one did. I would talk about the fact that they did not need the money for five years and more importantly, that it is never a good idea to bail out completely because it is nearly impossible to get back in until after the market has gone up and by that time, you may have missed the best part of the rebound. I would then trot out my five survival tips for a bear market:
1. Part of being an investor is going through these nasty times. Without the downs, there can be no ups.
2. Because you have a diversified portfolio, you are not suffering nearly as much as the overall markets. Turn off CNBC and relax.
3. Since WW II-2007, the S&P 500-stock index has risen by an annual average of 9.1% and there were lots of bad times included in that time horizon.
4. You are purchasing shares at low prices, which should benefit you over the long term.
5. You were smart enough to keep an emergency reserve fund set aside that is not invested in the stock market.
But after talking to JB, new information emerged. JB explained that her husband was ill and that she just could not bear the thought of worrying about him and the portfolio at the same time. “I just want to try to be able to sleep at night.” I dutifully reduced the risk in the portfolio and made a note to check back with JB in three months. The experience was just another example of how emotions creep into the investment world…sometimes it’s worth listening because sometimes a good night of sleep is far more important than any potential gains in a portfolio.
Wednesday, August 27, 2008
Good News that isn’t Good Enough
This week we have had some housing information that should have lifted moods on Wall Street and Main Street. Sales of previously-owned and new homes were better-than-expected and the S&P/Case-Shiller home price indexes showed that on a monthly basis, home-price declines in the nation's largest cities slowed in June. Unfortunately, in each case, the news was just not good enough.
The National Association of Realtors said that existing-home sales, which make up approximately 85% of all home sales, increased by 3.1% in July from the previous month to a seasonally-adjusted annual rate of five million units, the highest rate since February. The results were better than the expected 1.2% contraction. Yet on the day of the announcement, the stock market tumbled. The problem was with the swelling number of homes for sale, which has forced prices down. At the current sales pace, there is an 11.2 month supply of homes for sale, which is about twice the inventory-level that occurs in more normal times. Not surprisingly, much of the sales activity is occurring in the areas that have been hardest hit by the housing crisis—Florida and California saw spikes up in sales activity as foreclosed homes flooded the markets and created rock-bottom pricing for bargain hunters.
New Home Sales, which the Commerce Department unveiled yesterday, showed some improvement, due to aggressive price-cutting by homebuilders and a significant retrenchment in new construction. Sales of new homes rose by 2.4% in July to a seasonally adjusted annual rate of 515,000 units after falling to a revised, 17-year low in June. The good news was that inventory levels declined for the second month in a row to 10.1 months' supply at the current sales pace. Again, that’s not quite good enough because the number of unsold homes remains at historically high levels.
In every part of the market, there are still too many units for sale, which is forcing down prices. Proof of that was seen in the S&P/Case-Shiller report, which noted that prices dipped 0.6% on average from the month before after falling by 1% in May. The numbers are an improvement from monthly drops of 2% to 2.5% that occurred earlier this year. But prices in 10 major metro areas in June fell 17% from the year before, though the declines appear to be moderating. The broader 20-city index showed similar patterns.
This is great news if you are in the market as a buyer and rotten if you are a seller. Compounding the housing market’s woes is the fact that the mortgage lending pendulum has swung dramatically. It’s not the rates that are so worrisome, although those have increased to an average of almost 6.5% on a 30-year fixed rate, but the ability to secure a loan has become more difficult. Mortgage lenders have shifted from being far too willing to lend to being tough on every aspect of the loan process. Tighter lending standards, higher interest rates and massive inventory levels do not indicate that a housing bounce is around the corner. Like all bubbles, the rise continues longer than expected and so too does the recovery process.
The National Association of Realtors said that existing-home sales, which make up approximately 85% of all home sales, increased by 3.1% in July from the previous month to a seasonally-adjusted annual rate of five million units, the highest rate since February. The results were better than the expected 1.2% contraction. Yet on the day of the announcement, the stock market tumbled. The problem was with the swelling number of homes for sale, which has forced prices down. At the current sales pace, there is an 11.2 month supply of homes for sale, which is about twice the inventory-level that occurs in more normal times. Not surprisingly, much of the sales activity is occurring in the areas that have been hardest hit by the housing crisis—Florida and California saw spikes up in sales activity as foreclosed homes flooded the markets and created rock-bottom pricing for bargain hunters.
New Home Sales, which the Commerce Department unveiled yesterday, showed some improvement, due to aggressive price-cutting by homebuilders and a significant retrenchment in new construction. Sales of new homes rose by 2.4% in July to a seasonally adjusted annual rate of 515,000 units after falling to a revised, 17-year low in June. The good news was that inventory levels declined for the second month in a row to 10.1 months' supply at the current sales pace. Again, that’s not quite good enough because the number of unsold homes remains at historically high levels.
In every part of the market, there are still too many units for sale, which is forcing down prices. Proof of that was seen in the S&P/Case-Shiller report, which noted that prices dipped 0.6% on average from the month before after falling by 1% in May. The numbers are an improvement from monthly drops of 2% to 2.5% that occurred earlier this year. But prices in 10 major metro areas in June fell 17% from the year before, though the declines appear to be moderating. The broader 20-city index showed similar patterns.
This is great news if you are in the market as a buyer and rotten if you are a seller. Compounding the housing market’s woes is the fact that the mortgage lending pendulum has swung dramatically. It’s not the rates that are so worrisome, although those have increased to an average of almost 6.5% on a 30-year fixed rate, but the ability to secure a loan has become more difficult. Mortgage lenders have shifted from being far too willing to lend to being tough on every aspect of the loan process. Tighter lending standards, higher interest rates and massive inventory levels do not indicate that a housing bounce is around the corner. Like all bubbles, the rise continues longer than expected and so too does the recovery process.
Tuesday, August 26, 2008
Let the Next Games Begin
The Democratic Convention has started and with it, the next major event after the Olympics will fill our media outlets. Although we are still months away from the election, now is as good a time as any to highlight the differences between the candidates in terms of their view of the economy.
Rarely in my voting life have the differences between the two presidential candidates’ visions on the economy been so stark. Let me boil down the difference between the candidates with one sentence: Barack Obama wants to introduce redistributive tax policies into the economy (increase taxes for the rich—defined as income more than $118,000 or more than $250,000, depending on how you slice and dice the plan—and cut taxes for everyone else) and John McCain intends to grow the economy through supply-side tax cuts (cut taxes for everyone, but give the richest taxpayers the biggest benefits.)
Essentially, Obama believes that as the world’s greatest power, it is the government’s responsibility to address the deepening economic disparity among the citizenry. He is tapping into a multi-decade trend, which has accelerated in the past eight years under President Bush. New York Times economics columnist David Leonhardt noted that “for the first time on record, an economic expansion seems to have ended without family income having risen substantially. Most families are still making less, after accounting for inflation, than they were in 2000. For these workers, roughly the bottom 60 percent of the income ladder, economic growth has become a theoretical concept rather than the wellspring of better medical care, a new car, a nicer house — a better life than their parents had.”(NYT Magazine, August 24, 2008). Obama is hoping by helping those who have been “left behind” by the economic expansion, he will garner votes—enough to exceed the wealthier voters who will be hurt by his plan and may vote for McCain instead.
John McCain has embraced Ronald Regan’s supply-side economics which focuses on providing tax cuts to stimulate the nation's prosperity. Indeed, McCain sounded positively Regan-esque when he said “Wealth creates wealth,” during a primary debate in Michigan last year. This is a significant shift from the Senator who considered himself a deficit hawk and was a critic of the massive tax cuts launched in 2001 by the Bush administration. Supply-siders believe that when tax rates are high, as they were when President Reagan entered office in 1980, there is little incentive for wealthy people to put capital to work because so much of it goes to the government. Supply-siders contended that cutting taxes encourages investment and stimulates the economy, which benefits all taxpayers, regardless of wealth.
That’s about as stark a contrast as you can imagine. In the coming weeks and months, I will spend some time on the details of each candidate’s economic platform and under which administration you might find yourself in better financial shape.
Rarely in my voting life have the differences between the two presidential candidates’ visions on the economy been so stark. Let me boil down the difference between the candidates with one sentence: Barack Obama wants to introduce redistributive tax policies into the economy (increase taxes for the rich—defined as income more than $118,000 or more than $250,000, depending on how you slice and dice the plan—and cut taxes for everyone else) and John McCain intends to grow the economy through supply-side tax cuts (cut taxes for everyone, but give the richest taxpayers the biggest benefits.)
Essentially, Obama believes that as the world’s greatest power, it is the government’s responsibility to address the deepening economic disparity among the citizenry. He is tapping into a multi-decade trend, which has accelerated in the past eight years under President Bush. New York Times economics columnist David Leonhardt noted that “for the first time on record, an economic expansion seems to have ended without family income having risen substantially. Most families are still making less, after accounting for inflation, than they were in 2000. For these workers, roughly the bottom 60 percent of the income ladder, economic growth has become a theoretical concept rather than the wellspring of better medical care, a new car, a nicer house — a better life than their parents had.”(NYT Magazine, August 24, 2008). Obama is hoping by helping those who have been “left behind” by the economic expansion, he will garner votes—enough to exceed the wealthier voters who will be hurt by his plan and may vote for McCain instead.
John McCain has embraced Ronald Regan’s supply-side economics which focuses on providing tax cuts to stimulate the nation's prosperity. Indeed, McCain sounded positively Regan-esque when he said “Wealth creates wealth,” during a primary debate in Michigan last year. This is a significant shift from the Senator who considered himself a deficit hawk and was a critic of the massive tax cuts launched in 2001 by the Bush administration. Supply-siders believe that when tax rates are high, as they were when President Reagan entered office in 1980, there is little incentive for wealthy people to put capital to work because so much of it goes to the government. Supply-siders contended that cutting taxes encourages investment and stimulates the economy, which benefits all taxpayers, regardless of wealth.
That’s about as stark a contrast as you can imagine. In the coming weeks and months, I will spend some time on the details of each candidate’s economic platform and under which administration you might find yourself in better financial shape.
Monday, August 25, 2008
The “Spitz-Phelps” Indicator
By all accounts, the Beijing Olympics was a smashing success. NBC was happy to discover that we all needed a break from politics and beach volleyball was the perfect antidote; advertisers were pleased for the same reason; Americans were delighted to know that we can still win events and the Chinese were proud that they could win more gold than everyone else. In other words, winners abounded this August.
We all have our favorite special interest stories of the games—maybe the wrestler with the illegal immigrant parents; the weight lifter who carried a photo of his recently-deceased wife with him; or the over-the-top commentary that Bela Karoyi provided to liven up Bob Costas’ measured approach to gymnastics. For my money, Mark Spitz was my absolute favorite part of the 2008 Olympics and he did not even compete!
I can’t believe that it was thirty-six years ago that Spitz glided into my life. I remember how our house went crazy for Spitz—a Jewish guy winning in swimming! After Spitz won those seven medals, I hung a poster up on my wall, alongside the photos of two other great Jewish athletes, Sandy Koufax and Hank Greenberg. I was only seven, but I was an avid athlete who thought somehow if these guys could make it in sports, then why not a nice, Jewish girl from the suburbs? (A girl can dream, can’t she? It took another 15 years before I was done competing in sports, but I sure did have fun!)
Given my admiration of Spitz, I was happy to see that he was quite gracious as Michael Phelps surpassed him by winning eight gold medals in Beijing. Then I wondered if there could be something magical about it all with regard to the stock market. There has been the Super Bowl indicator and market predictions based on which baseball league wins the World Series, so why not an Olympic indicator?
I went back and found that in 1972, the year that Mark Spitz won, the Dow Jones Industrial Average finally crossed the 1000 mark (on Nov. 14, 1972) for the first time ever! Maybe this could mean that 2008 will finally turn around for investors and that we can put the bad news behind us. No so fast…before we draw similar conclusions to US stocks today, it should be noted that in 1972, the economy was doing well, inflation was moderate and interest rates were low. We only have one of those ingredients right now—the low interest rates. Clearly the economy is staggering and inflation, although slowing, has spiked this year.
The again, the “Spitz Effect” was short-lived. Not long after the industrial average punctured the 1000 mark, a recession occurred and the brutal bear market of 1973-74 set in, pushing the average all the way down to 577.60 in December 1974. It would be late 1982 -- a full decade after the 1000 milestone was first passed-- before the industrials rose above 1000 to stay. While it is unlikely that it will take a decade for us to recover, there are still problems to unwind in both the economy and in the stock market. I guess that the “Spitz-Phelps” indicator is not going to work any magic soon.
We all have our favorite special interest stories of the games—maybe the wrestler with the illegal immigrant parents; the weight lifter who carried a photo of his recently-deceased wife with him; or the over-the-top commentary that Bela Karoyi provided to liven up Bob Costas’ measured approach to gymnastics. For my money, Mark Spitz was my absolute favorite part of the 2008 Olympics and he did not even compete!
I can’t believe that it was thirty-six years ago that Spitz glided into my life. I remember how our house went crazy for Spitz—a Jewish guy winning in swimming! After Spitz won those seven medals, I hung a poster up on my wall, alongside the photos of two other great Jewish athletes, Sandy Koufax and Hank Greenberg. I was only seven, but I was an avid athlete who thought somehow if these guys could make it in sports, then why not a nice, Jewish girl from the suburbs? (A girl can dream, can’t she? It took another 15 years before I was done competing in sports, but I sure did have fun!)
Given my admiration of Spitz, I was happy to see that he was quite gracious as Michael Phelps surpassed him by winning eight gold medals in Beijing. Then I wondered if there could be something magical about it all with regard to the stock market. There has been the Super Bowl indicator and market predictions based on which baseball league wins the World Series, so why not an Olympic indicator?
I went back and found that in 1972, the year that Mark Spitz won, the Dow Jones Industrial Average finally crossed the 1000 mark (on Nov. 14, 1972) for the first time ever! Maybe this could mean that 2008 will finally turn around for investors and that we can put the bad news behind us. No so fast…before we draw similar conclusions to US stocks today, it should be noted that in 1972, the economy was doing well, inflation was moderate and interest rates were low. We only have one of those ingredients right now—the low interest rates. Clearly the economy is staggering and inflation, although slowing, has spiked this year.
The again, the “Spitz Effect” was short-lived. Not long after the industrial average punctured the 1000 mark, a recession occurred and the brutal bear market of 1973-74 set in, pushing the average all the way down to 577.60 in December 1974. It would be late 1982 -- a full decade after the 1000 milestone was first passed-- before the industrials rose above 1000 to stay. While it is unlikely that it will take a decade for us to recover, there are still problems to unwind in both the economy and in the stock market. I guess that the “Spitz-Phelps” indicator is not going to work any magic soon.
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