January 25, 2010
“My choice in life was either to be a piano player in a whorehouse or a politician. And to tell the truth, there’s hardly any difference.”—Harry S. Truman
Weekly percentage performance for the major indices
Based on last Friday’s official settlement...
I have been accused of many things since I began writing this note, but I still laugh about the email that criticized me for being a capitalist. Hello, McFly! That’s the point! So why, you may ask, am I using the title of this week’s note to applaud the most anti-capitalist President any of us has seen in our investing lifetimes? Because he’s at least giving lip service to a regulation that actually make sense. I’ve been around the block enough to know that a) this President is a populist and he’ll say anything to the public he feels will help his opinion polls and b) announcing an idea (which wasn’t even his, it belongs to Mr. Paul Volker) is a far cry from enacting legislation. What did the gifted oracle from Illinois say to earn my praise? He spoke this past week of separating banking and other risky behaviors such as proprietary trading, hedge funds, and private equity. I’ve long called for a repeal of the Gramm-Leach Bliley act of 1999, which stupidly repealed the key portions of Glass-Steagall. While the President’s commentary falls short of repealing the handiwork of Senator Phil Gramm (you may remember him as Senator McCain’s crack economic advisor who felt the recession was all in people’s heads), it will be a step in the right direction if they can get it past the TARP funded lobbyists in DC.
After a month of relatively boring market action this past week finally had its share of drama. Coming off the MLK holiday the market suffered steep declines and, lo and behold, the big volume increases that market observers have desired. The President’s comments were credited by a few irresponsible publications with triggering the downturn, however lending related comments from China, mixed to weak economic data, and a market that has bounced some 70% from its March lows were more than likely bigger contributors to the correction. We discussed China last week, but as a reminder they plan to increase their monitoring of banks and have “advised” banks not to exceed loan limits to ensure their economy or housing market don’t overheat. Evidently enough to trip up this market.
The entire carry-trade looks like it began to unwind last week. There was a flight to quality (at least quality as defined before this crisis) as treasuries and the dollar rallied during the week. Losers included commodities, risky assets including US and emerging market stocks, and gold.
A final concern undoubtedly impacting the market is the status of Fed Chairman Ben Bernanke. Theoretically this will be Mr. Bernanke’s last week in office as his term expires January 31. He faces a Senate confirmation vote next week, which has become ever more contentious as politicians have learned that bankers, even central bankers, make easy cannon fodder. A handful of Democrats have announced their opposition to confirming the Chairman for a second term. The Chairman needs 60 votes to retain his position, which means some Republicans will have to throw their support behind Helicopter Ben to keep him in office. Personally I’m not a fan of Mr. Bernanke’s, however; I’d like to see who a viable candidate might be before supporting the decision to block his confirmation. I wonder if Mr. Volcker would consider a return to the role?
Actual Consensus Prior
Building Permits 653K 580K 589K
Housing Starts 557K 572K 580K
Core PPI 0.0% 0.1% 0.5%
PPI 0.2% 0.0% 1.8%
Initial Claims 482K 440K 446K
Continuing Claims 4599K 4598K 4617K
Leading Indicators 1.1% 0.7% 1.0%
Philadelphia Fed 15.2 18.0 22.5
Housing starts came in below consensus while building permits were above consensus. The measures have been bouncing around for the past 7-8 months, possibly attempting to find a bottom. As we have discussed in the past, another leg down seems likely, although it hinges significantly on the Fed’s plans with their MBS program, which expires at the end of March. The weakness in starts was focused in single family starts; however, permits rose to the highest level since September 2008. This is mixed news as inventory is still running high; however, the builds should help GDP.
The Leading Economic Indicators for December came in above consensus, however, much of the rise is being attributed to a one time administrative problem in processing the December jobless claims. Based on the big jump in this week’s number it looks like the data has caught up with reality.
Reported jobs data is continuing to benefit from people giving up looking for work. According to the Orange County Register, the County’s unemployment rate dropped from 9.6% to 9.1% as 11.1K people stopped looking for work versus 600 new hires.
Sixteen states now have unemployment rates exceeding 10%.
Edward Kennedy was the Senator from Massachusetts for longer than I’ve been alive, and most Dems felt the seat actually belonged to the late Senator. During the recently concluded election to replace Senator Kennedy, Democratic candidate Martha Coakley made the mistake of referring to the seat as “Senator Kennedy’s” during a debate, and Republican Candidate Scott Brown pounced on the opening, declaring the “seat belongs to the people of Massachusetts.” Mr. Brown, the former centerfold, is now the 41st Republican Senator, which breaks the Democrats filibuster-proof stranglehold on the Senate.
As I’ve written and proven in the past, gridlock in Washington DC is good for business and the stock market. This upset, in the face of heavy partisan support from both the sitting President and the former President (you know, the one married to a current cabinet member), shows that the people, while generally gullible, recognize that single party control is akin to sleeping with the devil, albeit without the benefits. Hopefully this will provide some sanity in DC and we can say goodbye to this monstrosity known as health-care reform and some of the other ridiculous, anti-business and anti-taxpayer legislation floating around our nation’s capital.
As I mentioned earlier, health care stocks again led the market this week, partially helped by Mr. Brown’s election.
Finally Some Common Sense from DC!!
Earlier we mentioned the President’s proposal to limit proprietary trading, etc, by firms receiving government guarantees. While this is a very populist proposal, and will no doubt lead to more banker bashing as the Dems attempt to reverse their slide in popularity (bankers have a lower public opinion rating than Congress), there could be many unforeseen consequences of any legislation-and these will be the ones that concern us. The financial services industry spends more on lobbyists than any other industry, and, let’s faces it, have outsmarted the guys in DC for decades.
Once again, let’s credit Mr. Volcker and the Group of Thirty with this concept. A year ago, Mr. Volcker issued a report from the Group of Thirty, a panel of former central bankers, finance ministers and academics, calling for separation between commercial banks and businesses that engage in speculative risk-taking such as hedge funds and proprietary trading. “The point is that they present added risk and virtually unmanageable conflicts of interest with more essential customer relationships,” Volcker said.
As a fund manager I favor regulations that restrict those firms with which I do business from also competing against me, all the while benefiting from a cheaper source of capital and a government backstop.
China vs. Hillary
China sharply criticized comments by Secretary of State Hillary Clinton on the issue of Internet freedom, saying they had "harmed U.S.-China relations."
"We urge the U.S. side to respect the facts, and stop using the so-called 'Internet freedom' issue to make groundless charges against China," foreign ministry spokesman Ma Zhaoxu said in a statement posted on the ministry's Web site.
On Thursday, Clinton said in a speech that the U.S. and China "have different views" on the issue of Internet freedom, and that "we intend to address those differences candidly and consistently. Countries that restrict free access to information or violate the basic rights of Internet users risk walling themselves off from the progress of the next century," Clinton said.
So much for the improved image of the US in international communities. Can anyone say “Axis of Evil”?
Keep Spending Like a Drunken Sailor and You Might be Viewed as one
Dow Jones reported that Senate Democrats are seeking an increase to the federal government's borrowing limit by $1.9 trillion, raising the total US debt to $14.3 trillion. The borrowing hike comes fast on the heels of a $290 billion increase to the debt ceiling agreed to by lawmakers at the end of 2009.
Credit spreads widened by 6 bps in the later half of the week as investors started moving away from riskier assets. Six bps is actually a very large move on a spread, the largest since late in the fall. Emerging market bonds also fell during the week and credit default swaps (bets that companies will be unable to pay their debt) rose.
Bloomberg reported this week that US banking supervisors haven’t been waiting for new regulations, but instead are using EXISITING AUTHORITY to raise standards for capital, liquidity and risk management. They are contemplating raising capital requirements to offset the risk of trading losses.
As I have maintained since this crisis began, we don’t need a ton of new regulation, just someone with enough political will to enforce the existing regulations.
I had a lot of calls and emails after last week’s note about positioning given my concerns about a correction. I typically don’t discuss specific positions unless they are ETF’s, long short positioning, or sector calls. On Tuesday I purchased the QID, which is an ETF that is double short the NASDAQ 100. I positioned roughly 20% of my portfolio here as a way to offset a net long position that had grown too large over the past four months.
Earning reports began flying in this week, and while there hasn’t been discernable trend yet, few stocks were able to overcome the market weakness and close up on the week, regardless of their earnings report.
Companies beating numbers included Google, Starbucks, Skyworks, Xilinx, eBay, F-5 Networks, Panera Bread, Seagate Technology, American Express, and General Electric.
Corporations have been restricted for 100 years from directly spending in political campaigns, however, the Supreme Court this week struck down that restriction. Corporations are now able to spend an unlimited amount of capital to help elect or defeat federal candidates. Labor unions may also spend more. Both of these groups will gain political power at the expense of individual voters.
This may have a long term impact on Congress, which during my lifetime has primarily been an “anti-business” political body. Additionally, this ruling could impact the lobbying industry, which relies upon corporate funding. Laura Martin, media analyst at Needham, thinks all ad driven companies will benefit, especially CBS.
President Obama, who obviously was not happy with the decision because it reduces his internet based fundraising advantage, announced that he would work with Congress to enact “a forceful response” to the ruling.
Forceful? Is he going to bomb the Supreme Court?
It’s not Different This Time Because It’s the Same People
According to a report by Professor Emma Coleman Jordan of the Georgetown University Law Center one simple issue might help to explain why change has been so elusive at the bailed out banks: Their people.
Jordan notes that the folks who run the major banks today, the senior executives, directors, managers, etc, are essentially the same people who ran them (into the ground) 5 and 10 years ago:
“The prospects for a robust prudently guided financial sector have been substantially clouded by the fact that both the corporate governance structure and the executive leadership of the financial sector remain largely unchanged—92% of the management and directors of the top 17 recipients of TARP funds are still in office.”
Thanks to the Big Picture for this.
Real Estate and the FHA
The Washington Post is reporting that in an effort to bolster its increasingly shaky financial condition, the FHA plans to require a bigger down payment from some borrowers, increase the fee for mortgage insurance, and restrict the amount sellers can contribute to closing costs. For many buyers, the down payment would continue to be as little as 3.5%, but borrowers with a low credit score would be required to pay at least 10%. The insurance premium paid at closing would rise from 1.75% to 2.25% of the loan value.
It still seems a bit irresponsible to me that the FHA’s mission has been to allow borrowers with the weakest credit, and therefore the highest probability of default, to take on the most leverage.
Credit Cycle Improvement
Bank of America, Wells Fargo and other U.S. banks reported fourth-quarter results that show losses on consumer loans are beginning to moderate. Bank executives said they expect the turnaround to continue this year but cautioned that slow economic growth and high unemployment will continue to pressure consumers. "We are encouraged by signs the economy is improving," said Brian Moynihan, CEO of Bank of America. "[But] economic conditions remain fragile, and we expect high unemployment levels to continue."
Word from the Wise
Former Senator and Presidential Candidate Paul Tsongas once said “If anyone believes the words ‘government’ and ‘efficiency’ belong in the same sentence, we have counseling available.”
After proof reading this week’s note I realize that there was a lot of political noise this week. I don’t seek it out; it just seems to find me. I try to only discuss the political issues that impact the market, and of course those which continue to demonstrate the sheer stupidity and corruption of our political system, or should I say those who inhabit it.
Have a great week.
“The baleful reality is that the big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed.”--David Stockman, former director of OMB.
Last week I published a chart from www.chartoftheday.com, and didn't properly provide the link to their website.