Get Ready for Round 2

September 19, 2011

Last week returns were robust as the Europeans and US announced a dollar swap program to help stabilize Europe. After a weekend when investors realized that this “kick the can down the road” strategy may only stave off the problems for a few months, global markets are getting roiled today. As an unnamed analyst said over the weekend “Never underestimate the European’s ability to disappoint.”

Markets are still pricing in a 96% probability of Greece defaulting. The Greeks are trying to show their EU partners that their austerity program is in place and starting to work so they can receive their 6^th tranche of loans to prevent default.

If you enjoyed the summer joust between Congress and the President, get ready for Round 2. After unveiling the stimulus portion of his plan two weeks ago, the President will announce later today his deficit reduction package, which will include offsets to his stimulus plans. The White House has released the nuts and bolts of the plan, which is targeting tax increases of $1.5 trillion, targeted at “the rich”, and a similar level of spending cuts. There are no changes to Medicare or Social Security outside of some miniscule reductions in Medicare over the ensuing decade.

I really don’t understand how this keeps happening, but Kweku Adoboli was arrested last week for engaging in unauthorized trade while employed at UBS. Mr. Adoboli, an ETF trader, rang up an estimated $2-$2.3 billion in losses from his illegal trades. The irony is that the only reason the bank found the illegal trades is because he confessed to his boss. The lack of controls inside these large banks is shocking.

Former Fed Chairman Alan Greenspan has been speaking up quite a bit lately in an effort to shed light on his failed policies. In an unusual moment of candor, the Former Chairman said “There were unintended consequences to almost every action I was involved in. If we anticipated the unintended consequences that were going to happen, we might have changed the policy.” Duh.

Research in Motion announced earnings last week, and the results weren’t pretty. Unit sales were down, and after missing multiple product cycles, the company has promised it will be releasing new models earlier than planned. I hate to say this because I am a long time Blackberry user and have known the management team for a long time, but this is starting to remind me of Nokia, or worse Motorola.

Barney Frank is proposing legislation to remove the independent Regional Board Presidents from the FOMC and replace them with more Presidential appointees. Mr. Frank’s contention is that since the independent members have been voting against the Chairman recently they should be replaced and the Board should be composed entirely of Presidential appointees so as to ensure elected officials, and therefore the people, are being fairly represented by the voting members. Possibly Mr. Frank has forgotten that the Fed is supposed to be independent of political persuasion?

Speaking of the Fed, they will be meeting in an extended session this week to address the US economy. Markets are anticipating the Fed will institute Operation Twist, a plan to extend the maturity of their holdings. The impact would be to lower longer term interest rates and hopefully bring down consumer and corporate lending rates. What the plan won’t address is the inability for many consumers to refinance their homes due to imposing refi costs, declining home values which have pressured LTV ratios, and other lending requirements designed to avoid a repeat of the sub-prime mortgage crisis.

It’s always a good weekend when the Trojans win and both the Buckeyes and Bruins lose. UCLA is having nightmares about an annual game with Texas should the Longhorns join the conference as both Oklahoma and Texas are considering joining the Pac-12, a move which could also add Texas Tech and Oklahoma State. Syracuse and Pitt are planning to leave the Big East for the ACC, making TCU’s recent commitment to the Big East a bit circumspect. Oregon is now officially under NCAA investigation for questions about its recruiting.

BTW- I think I may have found the answer as to why UCLA can’t seem to recruit better, even with USC on probation. I overheard two high school athletes, both 2012 recruits, discussing colleges. One said they’d love to go to Oklahoma State because they had “cool helmets.” UCLA is in major trouble in that department.

Have a great day

Ned