You have got to hand it to the good ol’ US of A—when we do something, we do it BIG. Whether it’s our big cars or our big spending, we do it up right. That’s why I am not surprised by the extent of our housing collapse—it’s not just bad, it’s horrendous. Two pieces of data this week prove what we all know—the party is not just over for real estate, it has morphed into one heck of a hangover.
Yesterday, the Commerce Department reported that sales of new US single-family homes fell 2.5% in May to a seasonally-adjusted annual rate of 512,000. New-home sales were down over 40.3% compared with a year ago and the median sales price was $231,000, down 5.7% from a year earlier. The report came on the heels of a disappointing Case-Shiller home price index, which noted that US home prices in 20 of the largest markets are now back to where they were in the summer of 2004. (Now aren’t you glad you didn’t buy in 2005 when everyone else was?) The index showed that prices have dropped a record 15.3% in the past year and are now down 17.8% from the peak two years ago. Adding to this not-too rosy report is the knowledge that with so much inventory flooding the market and foreclosures rising, prices are likely to keep falling for a while.
For those who never counted the 2003-2006 house price surge of 52% and do not have to sell their homes any time soon, this may all be moot. But we all need to care about these numbers because the data is pushing lawmakers towards legislation for which we are all going to pay. It was reported this week that Congress is about to approve a massive housing bill, including a refinancing program aimed at rescuing hundreds of thousands of homeowners in danger of foreclosure. According to the New York Times, the legislation is “the most sweeping government overhaul of mortgage financing since the New Deal.” The rescue-refinancing plan would allow distressed borrowers and their lenders to stem losses by allowing qualified owners to refinance into more affordable, 30-year fixed-rate loans with a federal guarantee. (A note here—if the homeowners are so qualified, then why are they in trouble?)
I should probably feel happier about this because it will help the economy recover. The problem is that when you were among the many who did not indulge at the frat-house party, it is a bit annoying to have to take care of those who did and are experiencing the terrible headaches and spins. I am not passing judgment on the partiers—it must have been great fun—but I wish it was not my responsibility to chip in for the Tylenol!
Thursday, June 26, 2008
Wednesday, June 25, 2008
Fed Day Off for You
Here we go again-another Federal Open Market Committee meeting that the industry keeps saying is really important. It’s almost like we are begging you to pay attention, pleading, “No really, this time is different!” The good news today is that I am giving you permission to blow off this meeting and just tune out because I do not think that we are going to learn anything important from the Fed action, nor is there likely to be a big surprise on the accompanying statement.
Considering that the economy is in the tank, people are losing jobs, house prices are still falling and the price at the pump has crossed the $4 per gallon threshold, it is hard to believe that the Fed is about to raise short-term interest rates. The conventional wisdom from March through May was that the Fed was dealing with a rattled financial system and shaky economy first and would worry about inflation later. Then on June 3rd, Fed Chief Ben Bernanke implied that later may be now.
He said, “The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”
With that one paragraph, Bernanke shifted financial markets and investors’ perceptions about the Fed’s future intentions. After the June 3rd statement, the fed-funds futures market priced in at least three rate increases by year's end; stocks and bonds tumbled as fear of rate hikes knocked the wind out of the recovery; and in general, investors were thrown into a tizzy. Once cooler minds prevailed -- and an alleged tiny leak to the press by some Fed officials occurred, most agreed that a rate hike was not in the cards today, although futures markets continue to price-in a 43% chance of a ¼-point Fed rate hike at the August meeting.
While you relax and ignore the hullabaloo, we will parse the decision and the accompanying statement, but I really do not believe that the Fed sees inflation as a greater concern than the weak economy. I expect there will be a subtle shift to a neutral bias, allowing the central banks a bit of wiggle room as more data emerges before the next meeting in August. If something different occurs, I’ll let you know.
Considering that the economy is in the tank, people are losing jobs, house prices are still falling and the price at the pump has crossed the $4 per gallon threshold, it is hard to believe that the Fed is about to raise short-term interest rates. The conventional wisdom from March through May was that the Fed was dealing with a rattled financial system and shaky economy first and would worry about inflation later. Then on June 3rd, Fed Chief Ben Bernanke implied that later may be now.
He said, “The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”
With that one paragraph, Bernanke shifted financial markets and investors’ perceptions about the Fed’s future intentions. After the June 3rd statement, the fed-funds futures market priced in at least three rate increases by year's end; stocks and bonds tumbled as fear of rate hikes knocked the wind out of the recovery; and in general, investors were thrown into a tizzy. Once cooler minds prevailed -- and an alleged tiny leak to the press by some Fed officials occurred, most agreed that a rate hike was not in the cards today, although futures markets continue to price-in a 43% chance of a ¼-point Fed rate hike at the August meeting.
While you relax and ignore the hullabaloo, we will parse the decision and the accompanying statement, but I really do not believe that the Fed sees inflation as a greater concern than the weak economy. I expect there will be a subtle shift to a neutral bias, allowing the central banks a bit of wiggle room as more data emerges before the next meeting in August. If something different occurs, I’ll let you know.
Tuesday, June 24, 2008
Preparing for the Worst
Headlines announced “the latest sign of bloodletting on Wall Street,” as many financial companies started slashing their headcount. Citigroup, Goldman Sachs and Morgan Stanley are among the largest firms mentioned in the press, but in this environment, no employee should feel safe. Given the slowdown in the US economy, there are steps you should take right now to prepare for the worst, while hoping for the best.
Step 1: Accumulate a healthy cash account: I always recommended that people keep an emergency reserve fund that is invested in cash or cash equivalents. The amounts that are quoted in the industry are anywhere between 3-6 months of living expenses, but when the economy hits the skids, it would be preferable to keep a little extra money set aside, because if you were to lose your job, it may take longer to find a new one in a tight labor market.
Step 2: Always be networking: This may seem onerous to shy people, but the ability for you to create a network of professionals to whom you could turn is helpful if you were to suddenly find yourself jobless. Even if you do not need a job today, maintaining your connections may prove invaluable in the future. If you have created and nurtured these relationships when times were good, chances are that your calls will be returned when the economic tide turns.
Step 3: Work Hard: I was with a big mucky-muck from a large investment bank and here is a direct quote: “When I have to cut 20 people from my department, I start with those who don’t work so hard. You know -- the ones that think that working 9-5 is acceptable and that doing the job is the same thing as getting the job done.” He said that the best thing about a “RIF” (reduction in force) is that it allows employers to clean house. My takeaway is that now might not be the best time to skate along. When times are tough and managers have to make difficult decisions, they are apt to keep those employees who they value as good worker-bees.
Step 4: Loyalty is important…to a point: “John” was asked to interview for a new job a few years ago and felt guilty about doing so, noting that he did not want to seem disloyal. My friend and I convinced him to go on the interview, if only to understand his worth in the marketplace. After four meetings with the prospective employer, he said, “Here I was worried about loyalty to ABC firm, when XYZ is willing to pay me 40% more!” Not only did he take the new job, but a year after he left, his old company shut down his entire unit. How’s that for loyalty?
Step 1: Accumulate a healthy cash account: I always recommended that people keep an emergency reserve fund that is invested in cash or cash equivalents. The amounts that are quoted in the industry are anywhere between 3-6 months of living expenses, but when the economy hits the skids, it would be preferable to keep a little extra money set aside, because if you were to lose your job, it may take longer to find a new one in a tight labor market.
Step 2: Always be networking: This may seem onerous to shy people, but the ability for you to create a network of professionals to whom you could turn is helpful if you were to suddenly find yourself jobless. Even if you do not need a job today, maintaining your connections may prove invaluable in the future. If you have created and nurtured these relationships when times were good, chances are that your calls will be returned when the economic tide turns.
Step 3: Work Hard: I was with a big mucky-muck from a large investment bank and here is a direct quote: “When I have to cut 20 people from my department, I start with those who don’t work so hard. You know -- the ones that think that working 9-5 is acceptable and that doing the job is the same thing as getting the job done.” He said that the best thing about a “RIF” (reduction in force) is that it allows employers to clean house. My takeaway is that now might not be the best time to skate along. When times are tough and managers have to make difficult decisions, they are apt to keep those employees who they value as good worker-bees.
Step 4: Loyalty is important…to a point: “John” was asked to interview for a new job a few years ago and felt guilty about doing so, noting that he did not want to seem disloyal. My friend and I convinced him to go on the interview, if only to understand his worth in the marketplace. After four meetings with the prospective employer, he said, “Here I was worried about loyalty to ABC firm, when XYZ is willing to pay me 40% more!” Not only did he take the new job, but a year after he left, his old company shut down his entire unit. How’s that for loyalty?
Monday, June 23, 2008
Three months
Three months can feel like an eternity or can fly by in no time. For investors, the past ninety days started with extreme fear, followed by relief that the painful period had passed; to euphoria that maybe there would no need to feel the enormity of the March lows again; to resignation that in fact, most often markets revisit painful periods before moving forward.
Friday’s drubbing brought stocks around the globe back in time to March of this year, when Bear Sterns was nearing collapse. The Dow Jones Industrial Average settled at 11,842 on Friday, the first close under 12,000 since March 17th and perilously close to the March 10th low of 11,740. The Dow and the S&P 500 are now down over 10% year-to-date.
What brought about this test of the lows? To some extent, there has not been a lot of fresh news, but financial companies have continued to tell us that the unwinding of the credit crisis is claiming more victims. At first, it was the big investment banks, which culminated in the Bear Sterns sale to J.P. Morgan, while last week, there were worries about smaller regional banks that have extended credit to less-than-stellar borrowers. Stocks will have a hard time recovering until this confessional period is complete.
On top of the financial sector kiss-and-tell over the past three months, the period has also seen a renewed sense that inflation is on the move. Between oil and food spikes, it is understandable that consumers would come under pressure. But the big question with regard to inflation is what the world’s central banks intend to do about it. Thus far, the European Central Bank (ECB) has responded to headline inflation with tight policy—unlike the Fed which cut rates from 5.25% to 2%, the ECB has held its target rate at 4% since the credit crisis erupted last August, because of concerns about inflation.
Meanwhile, the US Fed has pursued an easy monetary policy because the economy is weak and the financial system is still in distress. The problem is that when the central bank's benchmark rate is well below the current inflation rate, it can be a recipe for disaster. The reason is that it encourages people to borrow today, invest in something that's going up in price, and pay back the loan in devalued dollars. Yet the Fed is not convinced that inflation is a long-term problem and will likely recede as demand falls. That’s why Fed bankers are left with the policy of talking about inflation, rather than doing anything about it.
To some extent, the outcome of this re-test period rests on the actions of central banks: if they tighten too much and are wrong about inflation, it could choke off economic recovery and things could get ugly. Conversely, if the Fed’s view is correct---that pervasive and widespread inflation is impossible when wages are stagnant, then inflation will moderate as financial companies complete their “’fessing up” on losses, allowing the system to recover from this unpleasant de-leveraging process. That would amount to stocks passing this current test and could resume the grind higher.
Friday’s drubbing brought stocks around the globe back in time to March of this year, when Bear Sterns was nearing collapse. The Dow Jones Industrial Average settled at 11,842 on Friday, the first close under 12,000 since March 17th and perilously close to the March 10th low of 11,740. The Dow and the S&P 500 are now down over 10% year-to-date.
What brought about this test of the lows? To some extent, there has not been a lot of fresh news, but financial companies have continued to tell us that the unwinding of the credit crisis is claiming more victims. At first, it was the big investment banks, which culminated in the Bear Sterns sale to J.P. Morgan, while last week, there were worries about smaller regional banks that have extended credit to less-than-stellar borrowers. Stocks will have a hard time recovering until this confessional period is complete.
On top of the financial sector kiss-and-tell over the past three months, the period has also seen a renewed sense that inflation is on the move. Between oil and food spikes, it is understandable that consumers would come under pressure. But the big question with regard to inflation is what the world’s central banks intend to do about it. Thus far, the European Central Bank (ECB) has responded to headline inflation with tight policy—unlike the Fed which cut rates from 5.25% to 2%, the ECB has held its target rate at 4% since the credit crisis erupted last August, because of concerns about inflation.
Meanwhile, the US Fed has pursued an easy monetary policy because the economy is weak and the financial system is still in distress. The problem is that when the central bank's benchmark rate is well below the current inflation rate, it can be a recipe for disaster. The reason is that it encourages people to borrow today, invest in something that's going up in price, and pay back the loan in devalued dollars. Yet the Fed is not convinced that inflation is a long-term problem and will likely recede as demand falls. That’s why Fed bankers are left with the policy of talking about inflation, rather than doing anything about it.
To some extent, the outcome of this re-test period rests on the actions of central banks: if they tighten too much and are wrong about inflation, it could choke off economic recovery and things could get ugly. Conversely, if the Fed’s view is correct---that pervasive and widespread inflation is impossible when wages are stagnant, then inflation will moderate as financial companies complete their “’fessing up” on losses, allowing the system to recover from this unpleasant de-leveraging process. That would amount to stocks passing this current test and could resume the grind higher.
Friday, June 20, 2008
Livin’ on a Prayer
“Whooah, were half way there
Livin on a prayer
Take my hand and well make it - I swear
Livin on a prayer.”
-Jon Bon Jovi
I kept humming this song as I thought about US consumers. Earlier this week, I discussed the urgent need to save more for retirement (“Payback Approaches”, June 17, 2008) but I should have started with a simple statement: WAKE UP AND STOP SPENDING! This is obviously not directed towards everyone reading, but there are indeed a few who might take this to heart—the ones who have spent their tax rebate checks not on gas, but on stuff or even worse, the folks that continue to use home equity lines of credit to postpone their day of reckoning.
These people seem to be living on a prayer—and not just one. The prayer here is multi-fold and it includes lower prices at the pumps; a rebound in real estate; a rise in wages; and lower interest rates on everything from school loans to mortgages. Let’s examine the possibility of each of these prayers and determine whether they will be answered.
Price at the pumps: This one may actually turn into reality. Although crude oil has gone parabolic and has caused great pain at the nation’s pumps just as the summer driving season arrives, there is evidence that demand is weakening among developed nations. Some suggest that oil prices will finally crack after the Olympics. The reason is that in advance of the games, China has idled most of their coal plants to clear the skies. With coal offline, China’s demand for oil has increased. Once the Olympics passes and coal plants re-start, we may see a dip in Chinese demand, which would help prices globally.
A rebound in real estate: Data has thus far not been too rosy, but there will eventually be a bottoming in housing. The problem is that the amount of housing inventory suggests that even if prices stop falling, they are unlikely to rise any time soon.
A rise in wages: As corporations feel the pinch of the slowdown, there is very little hope for this one. For most, not losing the low-paying job you have may be a victory in and of itself.
Lower interest rates: When inflation is the headline across the nation’s papers, you can pretty much count of interest rates rising. Despite inflation concerns, I do not think that the Fed will raise short-term rates any time soon, nor do I think that despite persistent economic weakness, that they will lower rates. That said, longer term rates have already started to climb. Because mortgages and student loans tend to be tied to longer term rates, the outlook for consumers on the rate front is that we may have already passed the cheapest rates of the cycle.
If any one of those prayers turned into reality, it would be great, but the way people are spending indicates that all would need to turn simultaneously to justify the rate of spending that is still occurring.
Thursday, June 19, 2008
Mom is usually right
Women of a certain age might relate to the following: at some point in your life, you realize that your mother is right about a number of issues. From the obvious—“I don’t like your hair”, to the more practical, “Take a sweater to the movies because it’s always cold in the theater”, our mothers tend to consult the same manual when guiding us through life. There is one other area where my mother was particularly dead-on with her analysis: “Don’t count other people’s money…you never really know how much someone has and you certainly can’t judge your neighbor’s net worth based on the house in which he lives or the car she drives.”
I thought about this after hearing the story of an acquaintance—I will call him “Ned”. Ned lost his “big” job at a major Wall Street investment bank and called me to help him develop a game plan for moving forward. I will admit that I had fallen prey to the old trap of assuming that Ned had a lot of money. After all, he lived in a big house in a fancy suburb; drove an expensive sports car; and his wife was dripping in beautiful jewelry.
What I subsequently learned is that while Ned had previously amassed a tidy sum, he is nowhere nearly as wealthy as I would have thought he was, especially given the appearance he had so diligently created for the world. Compounding the problem was the fact that Ned made an amateur mistake: he held far too much of his net worth in his employer’s stock-when the company’s shares tumbled by over 60 percent over the past year, so too did Ned’s nest egg. And now, he had also lost his mid-six figure job with few prospects of becoming re-employed any time soon.
We talked about how he allowed himself get ensnared in this situation-he sheepishly said, “I was just greedy and have nobody to blame but myself. I got caught up in the toys, the image and the belief that I was impervious to the problems that plagued others. I am coming to you for a reality check – for perspective, and to put together a plan for getting to a better place…at age 45, it’s time for me to grow up and act more responsibly.” I am consistently surprised by how many smart people allow themselves to get into bad situations that are avoidable with just a tiny bit of discipline. Learning that lesson in your twenties or thirties is tough, but doing so in your forties and fifties can be life-altering.
So the next time you drive by your neighbor’s house and see his Porsche parked in the driveway, you may think of Ned and remember what your mother told you, “Don’t count other people’s money…for all you know, he could be broke!”
I thought about this after hearing the story of an acquaintance—I will call him “Ned”. Ned lost his “big” job at a major Wall Street investment bank and called me to help him develop a game plan for moving forward. I will admit that I had fallen prey to the old trap of assuming that Ned had a lot of money. After all, he lived in a big house in a fancy suburb; drove an expensive sports car; and his wife was dripping in beautiful jewelry.
What I subsequently learned is that while Ned had previously amassed a tidy sum, he is nowhere nearly as wealthy as I would have thought he was, especially given the appearance he had so diligently created for the world. Compounding the problem was the fact that Ned made an amateur mistake: he held far too much of his net worth in his employer’s stock-when the company’s shares tumbled by over 60 percent over the past year, so too did Ned’s nest egg. And now, he had also lost his mid-six figure job with few prospects of becoming re-employed any time soon.
We talked about how he allowed himself get ensnared in this situation-he sheepishly said, “I was just greedy and have nobody to blame but myself. I got caught up in the toys, the image and the belief that I was impervious to the problems that plagued others. I am coming to you for a reality check – for perspective, and to put together a plan for getting to a better place…at age 45, it’s time for me to grow up and act more responsibly.” I am consistently surprised by how many smart people allow themselves to get into bad situations that are avoidable with just a tiny bit of discipline. Learning that lesson in your twenties or thirties is tough, but doing so in your forties and fifties can be life-altering.
So the next time you drive by your neighbor’s house and see his Porsche parked in the driveway, you may think of Ned and remember what your mother told you, “Don’t count other people’s money…for all you know, he could be broke!”
Wednesday, June 18, 2008
Scapegoats
I overheard the following snippets of conversation over the past few days:
“Hillary Clinton’s campaign is using sexism as a scapegoat for a poorly run campaign.”
“Lehman Brothers used Erin Callan and Joseph Gregory as scapegoats—of course Fuld knew the deal, but he let those two take the fall to save his own hide!”
“As usual, Congress seeks to scapegoat speculators for any problem that arises in financial markets.”
That’s a lot of scapegoat-ing for one weekend, so I thought it was time to dive into the idea of it and the roots of the word. According to Merriam Webster, the word scapegoat is intended as translation of Hebrew and the modern interpretation is “one that bears the blame for others” or “one that is the object of irrational hostility.” You get the idea. Since I do not get paid to articulate my political views, I will leave the Hilary conversation aside. I am interested in the other two instances of “scapegoat-ing.”
The idea that the junior professional gets the ax instead of the boss is not a new one, but it seems more dramatic when everyone involved is at a high level. Lehman Brothers announced that Erin Callan has been shuffled aside from her role as CFO for some amorphous position "in a senior capacity." After John Mack’s firing of his star pupil Zoe Cruz at Morgan Stanley for more proof, it is a little strange to see another woman fall, considering there don’t seem to be many left in the executive suite at major Wall Street firms. First there was a dust-up at Fidelity where the boss’ daughter was passed over, then Sally Krawchek at Citi was demoted, then Zoe Cruz and now Erin Callan. My takeaway is that as soon as the New York Times or Wall Street Journal start writing about you, look out below! All of these women had major puff-pieces published within moments of their demotions/firings. I don’t actually think that sexism was the issue here, but few CEOs are willing to fall on their swords when the pressure cranks up.
When it comes to speculators, well, they are the easiest targets. Who likes the people who make money by inserting themselves between buyers and sellers? I DO! I was a speculator once—a young trader on the floor of the Commodities Exchange, skimming dimes and nickels out of the marketplace in a perfectly legal manner. The common wisdom holds that speculators are responsible for high gas prices, food increases and volatility -- lawmakers must have gotten tired of blaming the Chinese.
Here is my two cents: speculation may play a role, but so too does supply and demand. Without the liquidity provided by speculators, day traders and yes, hedge funds, these markets may not work as smoothly. Maybe some of the margin requirements should change, but I get nervous when one group or person becomes the target of such a large problem.
The issues surrounding dramatic events that occur in companies, financial markets and the economy are far too complex to blame on any single individual or group. Take the scapegoat-ing with a grain of salt, knowing that there are likely a variety of explanations for the situation at hand.
“Hillary Clinton’s campaign is using sexism as a scapegoat for a poorly run campaign.”
“Lehman Brothers used Erin Callan and Joseph Gregory as scapegoats—of course Fuld knew the deal, but he let those two take the fall to save his own hide!”
“As usual, Congress seeks to scapegoat speculators for any problem that arises in financial markets.”
That’s a lot of scapegoat-ing for one weekend, so I thought it was time to dive into the idea of it and the roots of the word. According to Merriam Webster, the word scapegoat is intended as translation of Hebrew and the modern interpretation is “one that bears the blame for others” or “one that is the object of irrational hostility.” You get the idea. Since I do not get paid to articulate my political views, I will leave the Hilary conversation aside. I am interested in the other two instances of “scapegoat-ing.”
The idea that the junior professional gets the ax instead of the boss is not a new one, but it seems more dramatic when everyone involved is at a high level. Lehman Brothers announced that Erin Callan has been shuffled aside from her role as CFO for some amorphous position "in a senior capacity." After John Mack’s firing of his star pupil Zoe Cruz at Morgan Stanley for more proof, it is a little strange to see another woman fall, considering there don’t seem to be many left in the executive suite at major Wall Street firms. First there was a dust-up at Fidelity where the boss’ daughter was passed over, then Sally Krawchek at Citi was demoted, then Zoe Cruz and now Erin Callan. My takeaway is that as soon as the New York Times or Wall Street Journal start writing about you, look out below! All of these women had major puff-pieces published within moments of their demotions/firings. I don’t actually think that sexism was the issue here, but few CEOs are willing to fall on their swords when the pressure cranks up.
When it comes to speculators, well, they are the easiest targets. Who likes the people who make money by inserting themselves between buyers and sellers? I DO! I was a speculator once—a young trader on the floor of the Commodities Exchange, skimming dimes and nickels out of the marketplace in a perfectly legal manner. The common wisdom holds that speculators are responsible for high gas prices, food increases and volatility -- lawmakers must have gotten tired of blaming the Chinese.
Here is my two cents: speculation may play a role, but so too does supply and demand. Without the liquidity provided by speculators, day traders and yes, hedge funds, these markets may not work as smoothly. Maybe some of the margin requirements should change, but I get nervous when one group or person becomes the target of such a large problem.
The issues surrounding dramatic events that occur in companies, financial markets and the economy are far too complex to blame on any single individual or group. Take the scapegoat-ing with a grain of salt, knowing that there are likely a variety of explanations for the situation at hand.
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