For the past five years—before the housing and credit bubbles burst and everyone was making money—the so-called “Masters of the Universe” (aka Wall Street CEOs, Congressional leaders and federal regulators) fed us an almost daily helping of good news. Risk was nigh; profits were practically sure and if you did not join the party, well then you were a kill-joy. Now that the script has been re-written, the group as a whole seems to be among the most frightened of the current state of affairs.
Perhaps they should be, because while the growing economy allowed many participants to earn a decent buck, these guys were amassing fortunes. We need not recount the stories of airplanes, boats and “Lifestyles of the Rich and Famous” to know that these guys probably made a heck of a lot more money than any of their clients or shareholders. And so it was a grain of salt that I took their comments at this week’s Merrill Lynch Financial Services Conference.
The host of the conference, John Thain, Chairman and CEO of Merrill Lynch started it off with a not-so-reassuring assessment of the current economy. He noted that “This is not like '87, it's not like '98, it's not like 2001. The contraction that's going on is bigger than that. I think we will in fact look back all the way to the 1929 period to see the kind of slowdown we are experiencing now. And the great degree of uncertainty in the marketplace is how deep, how long and what are the governments around the world going to do to try to provide a stimulus to the environment." Hmmm…he skipped right over the 1981-2 recession and brought us to 1929—nice. Still, the 1929 environment creates “opportunities” for Merrill Lynch and Mr. Thain is “cautiously optimistic that things are starting to get better in financial services.” Does anyone else see inconsistencies in these statements?
Next up at the conference was Bank of New York’s Chairman & CEO Robert Kelly, who made this breakthrough statement: “We need a securitization market to get started again where you have simpler instruments, where you have stronger underwriting standards than the past.” That’s funny because I would bet that Mr. Kelly and his cohorts were not singing this tune a few years ago. In fact, most of these guys told us that the products that were being created were disseminating risk and that the counterparties all understood them, so no need for regulation.
And finally, the current Goldman Sachs wonder boy, CEO Lloyd Blankfein said that Goldman was not changing its long-term strategy and that he is happy with the current lines of business that Goldman has. Really? That’s not what the rest of us are seeing, but hey, you guys at Goldman are really different, aren’t you? At least that’s what you have told us, before this year convinced us that you were mere mortals.
In the end, the Gurus spoke and a day after their horrendously downbeat comments, the US stock market soared by over 6%. It was a wonderful reminder that the weight of the Gurus’ words must be diffused through a more realistic prism…it’s about time.
Friday, November 14, 2008
Thursday, November 13, 2008
Best Bye-Bye?
This has been a sobering week for the nation’s retailers and only three trading days have passed! It started with a double-shot of grim news: Starbucks reported that its net income dropped 97% from a year ago and the Circuit City filed for Chapter 11 bankruptcy protection. Then yesterday, Best Buy’s Chief Executive Brad Anderson said
"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen." Ouch!
As everyone gears up for the 2008 holiday season—it is crazy to see the decorations appearing in the windows this early—the question is whether beleaguered consumers will dramatically reduce their spending as they face a serious economic downturn. The answer is likely to be a resounding yes and evidence is clear wherever you look—in the auto industry, where sales of new vehicles have dropped 32% in the third quarter or in surveys that indicate that consumer spending is likely to fall in 2009 for the first year since 1980. In fact, last week, retailers reported the worst monthly sales decline in over thirty years, prompting them to kick off the season earlier than usual and with more dramatic discounts than previously expected.
America’s Research Group (ARG)/UBS Christmas Survey asked consumers what they intend to do for the holidays and the results were rough: 40.1% of consumers interviewed said they will spend less this year than last and 35.3% said they will buy fewer gifts. ARG Chief Executive C. Britt Beemer predicts that retail sales will be negative compared to last year for the first time in 23 years of conducting these surveys.
Downbeat forward-looking data is prompting retailers like Best Buy to batten down the hatches and quickly. The nation’s largest consumer electronics chain warned that its revenues would suffer and lowered its future profits as it retools operations to adjust to the new consumer reality of tighter purses. Best Buy’s President and Chief Operating Officer Brian Dunn said, "In 42 years of retailing, we've never seen such difficult times for the consumer. People are making dramatic changes in how much they spend, and we're not immune from those forces."
There is some good news buried in the bad stuff. The first is that consumers will benefit from lower prices this season. If you are lucky enough to have a steady job and the money available to purchase a flat screen TV, the best bet is to shop around, compare prices and wait for the drastic mark-downs, because they are sure to come. The price pressure is likely to be intense, especially among electronic retailers because failures like those at Circuit City and Tweeter will create large inventory levels throughout the sector. The other interesting benefit of these bankruptcies is that the survivors like Best Buy and even Wal-Mart, should benefit from shoppers who want to purchase merchandise and gift cards from stores that they believe will survive the current downturn. For now, I am hopeful that Best Buy will not morph into Best Bye-Bye.
"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen." Ouch!
As everyone gears up for the 2008 holiday season—it is crazy to see the decorations appearing in the windows this early—the question is whether beleaguered consumers will dramatically reduce their spending as they face a serious economic downturn. The answer is likely to be a resounding yes and evidence is clear wherever you look—in the auto industry, where sales of new vehicles have dropped 32% in the third quarter or in surveys that indicate that consumer spending is likely to fall in 2009 for the first year since 1980. In fact, last week, retailers reported the worst monthly sales decline in over thirty years, prompting them to kick off the season earlier than usual and with more dramatic discounts than previously expected.
America’s Research Group (ARG)/UBS Christmas Survey asked consumers what they intend to do for the holidays and the results were rough: 40.1% of consumers interviewed said they will spend less this year than last and 35.3% said they will buy fewer gifts. ARG Chief Executive C. Britt Beemer predicts that retail sales will be negative compared to last year for the first time in 23 years of conducting these surveys.
Downbeat forward-looking data is prompting retailers like Best Buy to batten down the hatches and quickly. The nation’s largest consumer electronics chain warned that its revenues would suffer and lowered its future profits as it retools operations to adjust to the new consumer reality of tighter purses. Best Buy’s President and Chief Operating Officer Brian Dunn said, "In 42 years of retailing, we've never seen such difficult times for the consumer. People are making dramatic changes in how much they spend, and we're not immune from those forces."
There is some good news buried in the bad stuff. The first is that consumers will benefit from lower prices this season. If you are lucky enough to have a steady job and the money available to purchase a flat screen TV, the best bet is to shop around, compare prices and wait for the drastic mark-downs, because they are sure to come. The price pressure is likely to be intense, especially among electronic retailers because failures like those at Circuit City and Tweeter will create large inventory levels throughout the sector. The other interesting benefit of these bankruptcies is that the survivors like Best Buy and even Wal-Mart, should benefit from shoppers who want to purchase merchandise and gift cards from stores that they believe will survive the current downturn. For now, I am hopeful that Best Buy will not morph into Best Bye-Bye.
Wednesday, November 12, 2008
I Heart Sheila Bair
My love of regulators is newly found. After all, I work in an industry that is often at odds with the folks who are supposed to oversee us. I have been frustrated in the past because sometimes these folks make a huge deal out of something pretty puny, but then miss the elephant in the room. Not so with my most favorite regulator of all, Sheila Bair, the Chairman of the Federal Deposit Insurance Corp (FDIC). Ms. Bair is the cream of the crop and I want to be the first to say it in public: I heart Sheila Bair.
My infatuation developed when she spoke articulately about what she perceived as the problem with TARP: it did not go to the root of the problem at hand, that is, the collapsing real estate market and the rapid advance of foreclosures. She noted in an interview with the Wall Street Journal (10/22/08) that she was frustrated that the government was providing “massive assistance at the institutional level” to the lenders (i.e. the financial institutions) but not enough help to the borrowers who were in trouble and potentially facing foreclosure. Ms. Bair had hoped for relief to come in the form of how she managed the loans that failed IndyMac Bancorp Inc. held. After the FDIC took over that bank in July, Ms. Bair said it would halt foreclosures on the mortgages it owned and would try to modify loans for struggling homeowners.
Well it only took four months, but it looks like there are others who are seeing the wisdom in Ms. Bair’s approach. Yesterday Fannie Mae and Freddie Mac, along with U.S. officials, announced plans to modify hundreds of thousands of loans held by the massive entities in order to prevent foreclosures. The effort will be available to those borrowers who meet certain criteria: the homes must be owner-occupied, escrows for real estate taxes and insurance must be established, the loans must be 90 days or more past due; the borrowers would need to owe 90 percent or more than the home is currently worth; and they would have to provide a statement or affidavit showing that they have encountered some sort of hardship that has impacted their ability to pay their mortgage. The program would only apply to loans made on or before Jan. 1, 2008, and borrowers will be disqualified if they file for bankruptcy.
The goal of the program is to reduce the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates, extending the life of the loan and in some cases forgiving portions of principal debt. While officials did
not have an estimate of how many people would qualify, estimates range in the hundreds of thousands. According to the most recent data from the Mortgage Bankers Association at the end of June, more than 4 million American homeowners, or 9% of mortgagees were either behind on their payments or in foreclosure.
The Fannie/Freddie program would augment similar plans announced by Citigroup, JP Morgan Chase and Bank of America. Citigroup plans to not only renegotiate loans that have already reached a critical point, the bank also plans to contact 500,000 homeowners, or 1/3 of all mortgages that it owns, who are on the verge of falling behind. The bank will create a team of 600 salespeople to assist the targeted borrowers by adjusting their rates, reducing principal or increasing the term of the loan. Late last month, JPMorgan Chase & Co expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 customers and Bank of America, meanwhile, has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial Corp. as part of an $8.4 billion legal settlement reached with 11 states last month.
It looks like the industry has caught on and realized that Ms. Bair was right on in her assessment of what needs to get done. Yes, it was important to secure the financial system, but it is equally important to focus on where the problems began and address them head on. The world is catching on to my great admiration of Ms. Bair—on Monday, the Wall Street Journal named Bair the Number One Woman to Watch in 2008. I think that I speak for the WSJ when I say that we all heart Sheila Bair!
My infatuation developed when she spoke articulately about what she perceived as the problem with TARP: it did not go to the root of the problem at hand, that is, the collapsing real estate market and the rapid advance of foreclosures. She noted in an interview with the Wall Street Journal (10/22/08) that she was frustrated that the government was providing “massive assistance at the institutional level” to the lenders (i.e. the financial institutions) but not enough help to the borrowers who were in trouble and potentially facing foreclosure. Ms. Bair had hoped for relief to come in the form of how she managed the loans that failed IndyMac Bancorp Inc. held. After the FDIC took over that bank in July, Ms. Bair said it would halt foreclosures on the mortgages it owned and would try to modify loans for struggling homeowners.
Well it only took four months, but it looks like there are others who are seeing the wisdom in Ms. Bair’s approach. Yesterday Fannie Mae and Freddie Mac, along with U.S. officials, announced plans to modify hundreds of thousands of loans held by the massive entities in order to prevent foreclosures. The effort will be available to those borrowers who meet certain criteria: the homes must be owner-occupied, escrows for real estate taxes and insurance must be established, the loans must be 90 days or more past due; the borrowers would need to owe 90 percent or more than the home is currently worth; and they would have to provide a statement or affidavit showing that they have encountered some sort of hardship that has impacted their ability to pay their mortgage. The program would only apply to loans made on or before Jan. 1, 2008, and borrowers will be disqualified if they file for bankruptcy.
The goal of the program is to reduce the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates, extending the life of the loan and in some cases forgiving portions of principal debt. While officials did
not have an estimate of how many people would qualify, estimates range in the hundreds of thousands. According to the most recent data from the Mortgage Bankers Association at the end of June, more than 4 million American homeowners, or 9% of mortgagees were either behind on their payments or in foreclosure.
The Fannie/Freddie program would augment similar plans announced by Citigroup, JP Morgan Chase and Bank of America. Citigroup plans to not only renegotiate loans that have already reached a critical point, the bank also plans to contact 500,000 homeowners, or 1/3 of all mortgages that it owns, who are on the verge of falling behind. The bank will create a team of 600 salespeople to assist the targeted borrowers by adjusting their rates, reducing principal or increasing the term of the loan. Late last month, JPMorgan Chase & Co expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 customers and Bank of America, meanwhile, has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial Corp. as part of an $8.4 billion legal settlement reached with 11 states last month.
It looks like the industry has caught on and realized that Ms. Bair was right on in her assessment of what needs to get done. Yes, it was important to secure the financial system, but it is equally important to focus on where the problems began and address them head on. The world is catching on to my great admiration of Ms. Bair—on Monday, the Wall Street Journal named Bair the Number One Woman to Watch in 2008. I think that I speak for the WSJ when I say that we all heart Sheila Bair!
Tuesday, November 11, 2008
Ninety Years Later
With the election over, we are now left with a certain feeling that I can only describe as emptiness—gone are the cool graphics and techno-maps of red and blue, not to mention the nightly parsing of each of the four candidates’ days. All of the sudden, there is no distraction from the plain truth: the global economy is feeling a world of hurt.
Proof of the damage was seen yesterday in the action of General Motors. Analysts at both Deutsche Bank and Barclays set a downbeat tone when they cut their target prices and investment ratings on the stock-Barclays is anticipating that the company will trade at a buck, while the more dour Deutsche Bank thinks that GM is heading out of business quickly due to the fact the company is burning over $2 billion month. The two reports drove down the price of the US automaker 23% to $3.36, after hitting a 62-year low of $3.02 in the trading session.
Did you catch that? We are talking 1946—the year that “It’s a Wonderful Life” lost the Academy Award to “The Best Years of our Lives”. I know that you may be thinking that life just doesn’t seem so wonderful right now. Well, don’t tell that to anyone who actually lived through the year 1946 and the ten or fifteen years that preceded it. While we obsess about the gyrations of the stock market and the problems in the economy, which are of course serious and significant, I fear that we may forget about an important milestone: today is Veteran’s Day.
World War I, known as “The Great War” or “War to End all Wars,” officially ended when the Treaty of Versailles was signed on June 28, 1919, in the Palace of Versailles in France. However, fighting ceased seven months earlier when an armistice (a temporary cessation of hostilities) between the Allied nations and Germany went into effect on the eleventh hour of the eleventh day of the eleventh month. For that reason, November 11, 1918, is generally regarded as the end of the war. As a result, President Woodrow Wilson proclaimed November 11 as the first commemoration of Armistice Day with the following words: “To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…"
The purpose of Veterans Day was to set aside a day to honor America's veterans for their patriotism, love of country, and willingness to serve and sacrifice for the common good. Ninety years later, as the United States fights wars in Iraq and Afghanistan, today is a reminder that we owe our soldiers a debt of gratitude. And so for just a moment today, please take the time to put aside your concerns about your 401(k) account or the value of your house and send a blessing to our servicemen and women who are currently serving and who have served our country so honorably.
Proof of the damage was seen yesterday in the action of General Motors. Analysts at both Deutsche Bank and Barclays set a downbeat tone when they cut their target prices and investment ratings on the stock-Barclays is anticipating that the company will trade at a buck, while the more dour Deutsche Bank thinks that GM is heading out of business quickly due to the fact the company is burning over $2 billion month. The two reports drove down the price of the US automaker 23% to $3.36, after hitting a 62-year low of $3.02 in the trading session.
Did you catch that? We are talking 1946—the year that “It’s a Wonderful Life” lost the Academy Award to “The Best Years of our Lives”. I know that you may be thinking that life just doesn’t seem so wonderful right now. Well, don’t tell that to anyone who actually lived through the year 1946 and the ten or fifteen years that preceded it. While we obsess about the gyrations of the stock market and the problems in the economy, which are of course serious and significant, I fear that we may forget about an important milestone: today is Veteran’s Day.
World War I, known as “The Great War” or “War to End all Wars,” officially ended when the Treaty of Versailles was signed on June 28, 1919, in the Palace of Versailles in France. However, fighting ceased seven months earlier when an armistice (a temporary cessation of hostilities) between the Allied nations and Germany went into effect on the eleventh hour of the eleventh day of the eleventh month. For that reason, November 11, 1918, is generally regarded as the end of the war. As a result, President Woodrow Wilson proclaimed November 11 as the first commemoration of Armistice Day with the following words: “To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…"
The purpose of Veterans Day was to set aside a day to honor America's veterans for their patriotism, love of country, and willingness to serve and sacrifice for the common good. Ninety years later, as the United States fights wars in Iraq and Afghanistan, today is a reminder that we owe our soldiers a debt of gratitude. And so for just a moment today, please take the time to put aside your concerns about your 401(k) account or the value of your house and send a blessing to our servicemen and women who are currently serving and who have served our country so honorably.
Monday, November 10, 2008
Obamarkets
Before the election, someone argued that one of the reasons that stocks had lifted from the October 10th lows was that it was becoming clearer that the President would be Barack Obama. I countered that despite the excitement about the election on both sides I did not think that the stock market was trading on politics. Others contended that if McCain were to pull out a come-from-behind victory, that there would be anarchy, an idea that frankly demeans the American people.
Now that we have elected Mr. Obama, I am more convinced than ever that while traders like to know presidential outcomes, last week’s action did not jibe with the clarity of the Presidential and Congressional victories. Indeed, the biggest Election Day rally ever faded quickly, as the subsequent two-day drubbing supplanted “yes we can” with, “maybe we can’t”. Was it disappointment with the Obama victory or a more visceral reaction to the dour economic news and massive hedge fund redemptions? I put my vote on the latter.
In addition to a new president, last week saw additional proof that the economy has continued to deteriorate. This fact was confirmed by retailers whose October same-store sales fell more than they have any time in this decade; the Institute for Supply Management, whose index dropped to its lowest level since 1980; the auto industry which reported that sales skidded to their worst pace since February 1983; and the Labor Department which said that the jobless rate spiked to a 14-year high of 6.5% in October, and another 240,000 jobs were lost, bringing the total number of jobs lost to 1.2 million for the year. It is likely that the convergence of bad news rather than the election spurred net selling on the week for stocks, with all of the major indexes closing down approximately 4% for the five trading sessions.
I am sorry to say that the outcome of the election will probably not calm markets any time soon, rather the antidote to the extreme moves is likely to be found in something simpler: sheer exhaustion could set in. As the excellent Jason Zweig noted in the Wall Street Journal over the weekend, “In the 10 years ended Dec. 31, 2007, the Dow never once swung by more than 9% during the course of a trading day. So far in 2008, with less than eight weeks to go, there have been six such giant swings. Over the entire decade through the end of last year, the Dow bounced around by more than 5% in a single day a total of 14 times. So far this year, that has happened 20 times; what used to take place barely more than annually has occurred once every 11 trading days in 2008.”
Zweig notes that there have been previous times of extreme price movement, but US stocks have not “been this volatile, day after day, since the 1930s.” Like a winded ballplayer, markets will need to take a break from the action to recover. Clearly the election was not the much-needed half-time show.
Now that we have elected Mr. Obama, I am more convinced than ever that while traders like to know presidential outcomes, last week’s action did not jibe with the clarity of the Presidential and Congressional victories. Indeed, the biggest Election Day rally ever faded quickly, as the subsequent two-day drubbing supplanted “yes we can” with, “maybe we can’t”. Was it disappointment with the Obama victory or a more visceral reaction to the dour economic news and massive hedge fund redemptions? I put my vote on the latter.
In addition to a new president, last week saw additional proof that the economy has continued to deteriorate. This fact was confirmed by retailers whose October same-store sales fell more than they have any time in this decade; the Institute for Supply Management, whose index dropped to its lowest level since 1980; the auto industry which reported that sales skidded to their worst pace since February 1983; and the Labor Department which said that the jobless rate spiked to a 14-year high of 6.5% in October, and another 240,000 jobs were lost, bringing the total number of jobs lost to 1.2 million for the year. It is likely that the convergence of bad news rather than the election spurred net selling on the week for stocks, with all of the major indexes closing down approximately 4% for the five trading sessions.
I am sorry to say that the outcome of the election will probably not calm markets any time soon, rather the antidote to the extreme moves is likely to be found in something simpler: sheer exhaustion could set in. As the excellent Jason Zweig noted in the Wall Street Journal over the weekend, “In the 10 years ended Dec. 31, 2007, the Dow never once swung by more than 9% during the course of a trading day. So far in 2008, with less than eight weeks to go, there have been six such giant swings. Over the entire decade through the end of last year, the Dow bounced around by more than 5% in a single day a total of 14 times. So far this year, that has happened 20 times; what used to take place barely more than annually has occurred once every 11 trading days in 2008.”
Zweig notes that there have been previous times of extreme price movement, but US stocks have not “been this volatile, day after day, since the 1930s.” Like a winded ballplayer, markets will need to take a break from the action to recover. Clearly the election was not the much-needed half-time show.
Subscribe to:
Posts (Atom)
