Wednesday, December 30, 2009

Year-End Wrap

I think we go into the Japan scenario.
I think there's no escaping.

[A lost decade.]


--Charles Nenner,
interviewed by John Thomas, 12-10-2009
(Hedge Fund Radio)

Cycle analyst Charles Nenner (see website) predicts that stocks and bonds will sell off beginning the second week of January, leading to a painful double-digit correction. Longer term, he sees a low- to no-growth economy for the next decade, a baked-in consequence of the debt bubble created during the past two decades.

It would be a mistake to think that all that bad debt has disappeared. Some has made it onto the Federal Reserve's balance sheet (see the powder-blue slice in the graph below). As James Turk explains in his Free Gold Money Report, for the past year the Fed has been buying toxic debt that nobody else wants--with "money" that did not even exist a year ago:

The Federal Reserve now owns over $1 trillion of mortgage-backed securities...[and has become] very highly leveraged, much more than most banks. It is carrying $2,157.0 billion of debt on $52.8 billion of capital, giving it a leverage of 40.8-times more debt than capital. The mortgage-backed securities it owns are 19-times greater than the Federal Reserve’s capital, meaning that if the true value of these assets is 5.3% less than their book value, the Federal Reserve’s capital is depleted, effectively making it another insolvent institution...It remains liquid because banks continue to provide it with funding and because people continue to accept in commerce and use without question the Federal Reserve’s liabilities, i.e., the paper currency it issues. But for how much longer? (

In addition to the $1 trillion in MBS purchased outright, there may be hundreds of billions more (a public audit would tell us for sure) offered as collateral for the loans pictured in green. This toxic brew is a ticking time bomb.

Happy New Year, indeed.

Monday, December 28, 2009

Wednesday, December 23, 2009

Weekly Wrap

This work week is abbreviated, and so was the "recovery." This morning brought a double dose of bad news for the housing industry, which is being counted on to lead the U.S. out of recession. First, the Mortgage Bankers Association Purchase Index (above), tracking mortgage applications for planned home purchases, made a U-turn south last week, declining over 11% from the week before, seasonally adjusted. The raw index was down almost 33% from the same week last year.

Then came a report from the Commerce Department that annualized sales of new homes in November declined over 11% (to 355,000) from the month before--even after October's figure was revised downward from 430K to 400K (the five months ending in October were running at 404K). The back-to-back announcements of double-digit drops from already depressed bases brought a screeching halt (at least for now) to this week's rapid rise in bond yields. Such a rise generally signals a pick-up in economic activity.

GDP growth in the third quarter was revised downward again, to 2.2% (after an earlier revision from the initially reported 3.5% to 2.8%). It has been estimated that the now- defunct Cash for Clunkers program added 1.5% to Q3 GDP, and a replenishing of inventories accounted for the remaining growth. Otherwise, GDP was flat. Again, from a depressed precursor. Despite massive government stimulus. Take that to the bank, why don't you.

Intent on further crippling the economy, President Obama continued his full-court press on Capitol Hill for healthcare reform. Needing two votes to invoke cloture in the Senate, the prez larded the bill with the "Cornhusker Kickback" and the "Louisiana Purchase," exempting Nebraska and Louisiana from any cost-sharing for future Medicaid expansions. The other 48 states can go [abuse] themselves. It is just this kind of horse-[trading] that gets me thinking about secession.

In last week's pep talk at the White House, the Big O told Senate Democrats that they were "on the precipice" of an historic accomplishment. The President is known for his careful choice of words:

1. An overhanging or extremely steep mass of rock, such as a crag or the face of a cliff.
2. The brink of a dangerous or disastrous situation: on the precipice of defeat.

Tomorrow at 7 a.m. the Senate will most likely pass its version of healthcare reform, taking us all one step closer to the edge.

Jobs will be hard to come by, with or without healthcare legislation. Late yesterday Cintas Corporation, the largest U.S. supplier of work uniforms, reported disappointing quarterly earnings. Today investors dumped the company's stock, sending the share price down by more than 11%. (What is it with this number eleven?) Clearly the company's fortunes are tied to job creation. When asked to provide guidance for upcoming quarters, CFO Bill Gale gave none, saying only that "we believe the current analysts' estimates are overly optimistic for the remainder of this fiscal year and into 2011." Get that? Two thousand eleven.

In other words, investors betting too soon on a recovery will lose their shirts.

Monday, December 21, 2009

History Harmonizes

[click to enlarge]

"History does not repeat itself, but it does rhyme."

--Mark Twain

Monday Muse

Linda Ronstadt

Blue Bayou

Friday, December 18, 2009

Weekly Wrap

The charade is over.
Citigroup's busted stock offering late Wednesday has exposed the banking industry's game of "extend and pretend." Flash back to last March, when investors recognized that Citi and many other banks were hopelessly undercapitalized for a coming tsunami of loan defaults in commercial and residential real estate and in consumer credit-card debt. Citi was trading at a buck, Bank of America at three. Wells Fargo traded briefly at a hat size, and the two Morgans, Stanley and Chase, were teenagers.

Then ensued a seven-month rally that saw these stocks triple, quadruple, even quintuple. The rally was aided and abetted by the U.S. Treasury Department, which first injected tens of billions of TARP dollars directly into the banks, then certified their health with feeble "stress" tests. The Federal Reserve helped by bidding for toxic assets, taking some off the banks' balance sheets and enabling an artificial mark-up of what remained. Smitten investors bought the lipstick. New share offerings were snapped up as investment banks bulled (and underwrote) each other's stock. For two quarters, losses turned to profits, thanks largely to inflated asset prices. The government's pump-and-dump scheme seemed to be working.

Treasury actually got cocky. Earlier this month Treasury Secretary Timothy Geithner blithely announced that almost all of the $370 billion jettisoned by TARP in last year's bail-out frenzy would be recovered. Then the Department reached for $90 billion of it just in the past week, allowing Bank of America, Citigroup, and Wells Fargo to repay government loans. Mission accomplished? Not yet, according to bank regulators, who remain unconvinced that the Three Amigos (particularly Citi) are ready for prime time on their own.

Which may be precisely the point. With a flood of foreclosures coming after the new year, Geithner must have realized that zombie investors will soon wake up, closing the window for new capital raises. He therefore fired his starting pistol, and the race to the window was on. Bank of America got there first, followed quickly by Wells Fargo. By the time Citi got there, the window, while not completely shut, was on the way down. Citi had to discount its shares by 20% to clear the merchandise.

Citi's $20.5 billion offering is the largest in U.S. history. There are now enough Citi shares in circulation to allocate four to every human soul now walking the planet. To placate regulators, Treasury had stipulated that Citi repay the TARP loan entirely with fresh capital--in sharp contrast to BofA and Wells Fargo, required to raise only half of their TARP refunds. Treasury still owns an equity stake in Citi and was hoping to ditch some of it on the heels of the offering, but postponed those plans when the new share price put its investment--our investment as taxpayers--underwater. My expectation is that Citi's stock price retreats from here, that we'll be so far underwater in the next six months that we'll be feeling the bends.

The Federal Deposit Insurance Corporation's budget for 2010 was approved by its board earlier this week, expanding from $2.6 billion in 2009 to $4 billion. Why the 54% jump? Simple. Bank failures will accelerate in the coming year because of the above-mentioned tsunami of loan defaults. The FDIC's job is to clean up the mess, transferring assets to healthy banks and making depositors whole.

The FDIC is an independent agency, funded not by Congress, but by premiums paid by banks and thrift institutions for deposit insurance coverage. Established during the First Great Depression, it is not part of the federal budget process and has its own fiscal year. The agency expects to boost its staff by 1,600 (23%) to handle the coming workload. Its job is to protect $4 trillion (with a "T") of deposits, and right now its Deposit Insurance Fund stands at--could this be?--negative $18.6 billion.

That's the new balance after seven more banks folded late today, bringing the total for 2009 to 140 (with an overall hit to the DIF of over $30 billion). As these magnificent seven were deep-sixed, a new concern arose: there may not be enough healthy banks left to take over the casualties. For two failed banks in Michigan and Illinois, temporary "bridge" banks were set up to handle customer accounts. The affected Michigan depositors will have 45 days to get their money out before the temp closes. Depositors at a failed Georgia bank will simply be mailed checks.

The new mantra for orphaned clients of a damaged industry: What's in your mattress?

Wednesday, December 16, 2009

Fat Cats Put on Diet

Riddle: How do you get an insolvent company to pay back the money it owes you? Answer: Threaten to cut the CEO's pay.

That's what "special master" Kenneth Feinberg (a.k.a. the Pay Czar) is doing. Appointed by the President, Feinberg is reviewing the executive compensation paid by firms receiving "exceptional assistance" last year from the Troubled Asset Relief Program, or TARP. He wields the kind of power that Huey Long-ed for 75 years ago.

Quick history lesson. Huey Long (pictured above) was a fiery populist from Louisiana who managed to serve as governor and U.S. Senator simultaneously. How's that for clout! He had such a stranglehold on state politics that he became known as The Kingfish. His popularity with the voters arose from his conviction that wealth in the U.S. should be distributed more evenly. He wrote a book titled Every Man a King and promoted a "Share Our Wealth" plan, calling for a guaranteed personal income of $2,000 and a maximum allowable income of $1 million. Anything over that would be subject to a 100% tax rate. An individual's accumulated wealth would also be taxed--at a rate of 0% for the first million, rising geometrically until it reached 100% for anything over $8 million. For the mathematically challenged, 100% is spelled C-O-N-F-I-S-C-A-T-I-O-N. (Multiply dollar threshholds by 15 to get today's inflation-adjusted equivalents.)

In 1935 Long was positioning for a third-party run for President, but then got himself shot to death in the state capitol building in Baton Rouge. By a doctor. Administering what they call high-velocity trans-abdominal lead therapy. Actually, there was no forensic examination to determine conclusively that Long was killed by his assailant, and not accidentally by one of his bodyguards, of whom he had many. Anyway, Huey was way larger than life. An estimated 100,000 mourners filed past his open casket in the state capitol rotunda.

But I digress. Today Ken-fish gets to finish what The Kingfish yearned to start: a whittling down of Wall Street salaries. In Round One, Feinberg went after the 25 most highly paid executives at each target firm. The cuts, announced in October, average 50% for total compensation (salary, stock, and benefits) and 90% for cash compensation. This week brings the bad news for second-tier executives, numbers 26 through 100, who are capped at $500,000 annually (no more than 45% to be paid in cash). Feinberg apparently can exercise some discretion. Exemptions may be granted for the most deserving, and the least deserving (think AIG) get hammered down further to $200K.

Huey must be salivating in his grave.

Sean Penn as Gov. Willie Stark in All The King's Men

Monday, December 14, 2009

Friday, December 11, 2009

Weekly Wrap

The Incredible Shrinking Paycheck
. Last week's announcement by Bank of America that it would pay back $45 billion in TARP money doled out by the feds a year ago was a desperate move to clear a salary cap imposed by pay czar Kenneth Feinberg. The cap was crimping the company's ability to hire a suitable replacement for outgoing CEO Ken Lewis. To stay competitive, Citigroup said this week that it would follow suit, returning $20 billion to TARP (another $25 billion had been converted to common stock, which the government plans to sell "in an orderly fashion" in 2010). So are bank execs home free? Not quite. Under pressure from shareholders, Government Sachs...sorry, Goldman Sachs (the first bank to exit TARP) revealed yesterday that its top managers would not be receiving cash bonuses this year, but rain checks instead, in the form of "shares at risk" that cannot be sold for five years and may be revoked for poor performance.

Speaking of TARP, Treasury Secretary Timothy Geithner said yesterday that the program would cost taxpayers $200 billion less than earlier projected, thanks to the paybacks of principal, dividends on outstanding investments, and proceeds from the sale of warrants (JP Morgan Chase warrants held by the government were just auctioned off for nearly $1 billion). Still, the program may not break even, as tens of billions allocated to AIG, GM, and Chrysler will not be coming back. Moreover, the TARP kitty is now treated by the Obama Administration as a revolving slush fund for additional economic stimulus. In other words, money successfully recovered will be put back at risk until it gets vaporized, all to buy your vote.

What should the TARP balance be used for? How about, as bank analyst Richard Suttmeier suggests, for rebuilding the Deposit Insurance Fund, which has gone negative in the last month? Every time the FDIC closes a bank, the DIF takes a hit. FDIC Chair Sheila Bair wants prepayment of three years' worth of premiums from insured banks to put the DIF back in the black. But with hundreds more banks likely to fail in the next 12-18 months (including three announced tonight), that won't be enough. An unfortunate consequence of the ongoing credit crunch is the subordination of depositors to derivative counterparties whenever a bank must liquidate. Of all people, savers should be made whole. They're already getting punished enough with dollar devaluation. Why should they have to stand in line behind zombie investors?

Maine revenues may be stabilizing. Yesterday the Legislature's Appropriations Committee received a report that General Fund revenues came in slightly over budget in November, a welcome contrast to the first four months of the fiscal year, when revenues were 8.3% under budget and down 9.3% year-over-year. Of course, one month does not a trend make. Furthermore, it was exactly one year ago when the state's revenues went into cliff-drop mode, so merely matching year-ago revenues going forward will be no big accomplishment. Certainly not a victory, but maybe we can stop retreating.

Still out of control on the expenditure side. Maine's very own public option, Dirigo Health, continues to bleed cash, so much so that it has had to borrow $25 million from other state accounts to maintain service to 8,636 Dirigo Choice subscribers (new applicants not wanted). Yesterday members of the Appropriations Committee asked when the $25 million would be repaid. "Search me," said Dirigo's executive director, Karynlee Harrington. Wrong answer, said an exasperated Bill Diamond, Committee Chair. "All the projected good news never seems to materialize," complained Diamond, a Democrat no less who is no doubt embarrassed that his party has owned this one since way before it was broken.

Exercising damage control, the governor's office wrote up a clarifying statement for Ms. Harrington, who late today passed the cut-and-paste job on to the press. The cash advance, the Harried One now insists, will be repaid by the June 30 due date, and in her (boss's) view legislators need not treat the missing money as a new liability to be added to the state's growing shortfall. So what exactly is the reason for the cash crunch? "Members are not terminating" fast enough, said the director on Thursday. (Does that mean not dying fast enough?) "Lower attrition than forecasted," said today's statement. In other words, the lower the enrollment, the healthier the balance sheet. Some business plan. Logical next step: reduce the enrollment to zero (not by everyone dying, but by taking the money away). As Tarren Bragdon has said, Dirigo should be Diri-gone.

Monday, December 7, 2009

Monday Muse

Christine McVie of Fleetwood Mac

Warm Ways

Friday, December 4, 2009

Light At the End of the Tunnel?

Perhaps not an oncoming train after all. Employment figures released this morning by the Bureau of Labor Statistics have everyone excited. The U.S. economy shed only 11,000 jobs in November. One must go back to December 2007 to find a better number than that. Moreover, job losses for September and October were revised lower by 159,000. The average work-week rose from 33.0 to 33.2 hours last month, while the unemployment rate dropped from 10.2% to 10.0%. These are all good signs.

Caution is still warranted, however. David Rosenberg of Gluskin Sheff points out that the raw number (not seasonally adjusted) was 80,000 jobs lost, coming in a month when traditionally 300,000+ jobs are added (holiday hiring and all that). Private-sector jobs dipped by 18,000 last month (and 4.7 million year-over-year), more than offsetting a gain in government jobs of 7,000. Since the former ultimately pay for the latter, we can deduce that government borrowing (how sustainable is that?) mitigated the overall erosion. The adjusted household survey showed a bleaker number: 109,000 jobs lost. And remember, the true "break-even" number for employment is not zero, but roughly +100,000. The economy must add that many jobs monthly to accommodate the growing workforce. Any fewer reduce hours worked per capita and, presumably, our collective standard of living.

Bank of America to repay TARP loan. Yesterday's headline, at first glance, suggests that things in the financial sector are getting back to normal. Don't be fooled. Sure, taxpayers are getting their $45 billion back, plus interest, which is cool for them. But risk has not been eliminated, just transferred back to BofA creditors and shareholders. The latter face further dilution with a new $19.3 billion stock offering, which, if you do the math, is not enough to replace the cash going back to Uncle Sam. The reduced Tier I capital ratio is not comforting news to bondholders.

Let's face it, the company had to repay Uncle Sam in order to create some wiggle room for executive compensation. With the TARP overhang, BofA's Board was simply unable to hire a replacement for CEO Ken Lewis, who wants to leave at the end of this month. Remember, the Adminstration's pay czar docked Lewis his entire salary for 2009. Who wants to take a job sparring with regulators, bankrupt customers, antsy bondholders, and aggrieved shareholders--all represented by legions of lawyers--for no pay?

How about the FDIC's Q3 Banking Profile? Released last week, the report revealed that the number of "problem" banks rose by 136 in the third quarter to a 16-year high of 552, with total assets at risk rising by 15% to $345.9 billion. Additionally, 50 banks failed during the quarter and are no longer counted. Think about it. For every bank that failed, nearly four more were added to the "problem" list (kind of like that mythological serpent Hydra with the nine heads: cut one off, and two grow back). Today is Friday, so we'll get to see how many more heads roll.

[update, 8 p.m.--Six more banks bite the dust, three in Georgia, one each in Virginia, Ohio, and Illinois. That makes a total of 130 in 2009, with three weeks to go.]

Also reported by the FDIC was a 10.5% increase in noncurrent loans and leases (90 or more days past due) to $366.6 billion, or nearly 5% of all loans and leases--the highest noncurrent rate in the 26 years that insured institutions have reported. Data from other sources detail the tenuous state of the union:

One in 7: home mortgages that are 30 days past due or in foreclosure.

One in 3: home mortgages with negative equity.

One in 5: mall storefronts that are vacant.

One in 8: Americans receiving food stamps.

One in 6: workers who are unemployed or under-employed.

One in 5: Americans eligible for Medicaid.

Monday, November 30, 2009

Friday, November 20, 2009

Maine Still Losing Jobs

[click to enlarge]

BLS news release, 11-20-09:

another 1,400 Maine jobs lost in October...
a total of 29,400 since the cycle peak.

[For an eye-catching time-lapse graphic on the rise in unemployment nationwide, go here.]

Wednesday, November 18, 2009

Mortgage Apps Rolling Over

MBA Purchase Index hits a 12-year low.

Wednesday is "Hump Day" for a reason.
That's the day we get our weekly reminder from the Mortgage Bankers Association that, for more and more Americans, the prospect of home ownership is a hill too high to climb. Featured periodically in this column, the MBA's Market Composite Index tracks the volume of loan applications for both new mortgages and the refinancing of existing mortgages. That index was down 2.5% from the week earlier on a seasonally adjusted basis.

Almost three of every four loan applications are for refinancing, not surprising given today's low interest rates. If we look only at applications for newly acquired homes, the figures are a source of concern for those looking for a "bottom" in housing. The MBA's seasonally adjusted Purchase Index (charted above) declined for the sixth straight week and 4.7% from the week earlier, reaching a level not seen since November 1997. The weakness was confirmed by data released this morning by U.S. Commerce Department on new-home construction: building starts tailed off 10.6% in October. It would seem that low interest rates (the average rate on a 30-year fixed-rate loan fell to 4.83% last week) are not stimulating sales to the degree hoped for by government officials.

"Now that the Fed’s program [to buy housing debt] has been extended and the government has extended its [first-time homebuyer's tax credit], I would expect things to improve,” economist Christopher Low told Bloomberg News. “If you don’t see an improvement within the next couple of weeks, that would indicate a problem."

[update 11-19-09:]
Let's turn our attention away from new home loans and examine the ones already outstanding. Today the MBA's chief economist, Jay Brinkmann, reported that 14.41% of all home mortgages in the third quarter were either in foreclosure or at least one payment past due. That's one in seven. Four million mortgages were at least 90 days past due or in foreclosure. These figures point to a huge shadow inventory of houses waiting to hit the market. Perhaps that explains the lull in new purchases. Buyers are waiting for fire-sale prices!

Tuesday, November 17, 2009

Meltdown Countdown, Part Deux

Liu Mingkang, Chairman of the China Banking Regulatory Commission, November 15, 2009:

The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation...[It has] seriously affected global asset prices, fueled speculation in stock and property markets, and created new, real and insurmount- able risks to the recovery of the global economy, especially emerging-market economies.

Thursday, November 12, 2009

Get Ready for the Second Wave

First the subprimes, now the option ARMs...

[John Hussman's weekly market comment, November 9, 2009:]

The problem is that these Option ARM and Alt-A structures were specifically designed as “teasers” – allowing loans to be made without documentation of creditworthiness, in return for post-reset interest terms that were generally higher than a documented lender would have paid... Similarly, Option ARM mortgages typically have very permissive payment schedules prior to the reset date, which have allowed homeowners to essentially live in these houses (at least temporarily) with fairly discretionary payments. The data suggest that most of these borrowers have allowed their mortgages to “negatively amortize,” allowing the loan balances to grow larger even as property values have depreciated. Once again, the resets on these are problematic for borrowers with questionable credit- worthiness, who bought the homes largely in anticipation of price appreciation. For these borrowers, the transition from discretionary payments to more demanding terms is unlikely to be smooth.

Tuesday, November 10, 2009

Investing in the Future? Not.

[analysis from Annaly Capital Management:]

Companies are not reinvesting at a fast enough pace to keep track with depreciation, i.e. they are getting smaller in the face of reduced sales. On bank balance sheets, we’re seeing loans falling as banks lend less (and companies demand less credit), but securities on the balance sheet are rising…the banks are playing the curve by buying up securities, not lending. Unless we see a serious resurgence in end demand, which would mean a serious resurgence in wages, employment and credit availability, you won’t see a GDP boost from capital may indeed see a pick-up in mergers and acquisitions, analogous to banks buying existing loans in the form of securities instead of making new loans.

Instead of investing in new projects and innovation, companies are cutting costs, buying each other, buying their own stock, or just hoarding cash...We cannot shrink ourselves to prosperity.

[update, headlines for November 12: General Electric sells its security business to United Technologies, 3Com sells itself to Hewlitt-Packard]

Monday, November 9, 2009

Twenty Years Ago Today...

...Checkpoint Charlie was opened, Nov. 9, 1989.
So began the dismantling of the 28-year-old Berlin Wall.

Boston Globe Photo Gallery

James Carroll: "the greatest date of our lifetimes"

Saturday, November 7, 2009

Rising From the Napalm

...where the green shoots are real.

The Mad Hedge Fund Trader gives a lesson in demographics:

Friday, November 6, 2009


Gone: another 190,000 jobs. So says this morning's press release from the Bureau of Labor Statistics. This number--the one that gets all the headlines--is from the "establishment" survey (CES), and it is plenty bad. Worse, though, is the "population" survey (CPS) number, which comes in three times higher at -589K. BLS tries to reconcile the two figures with the so-called "adjusted household survey." That one falls somewhere in between: -402K.

Does any of these numbers spell "recovery?" I didn't think so.

And now (thanks to Jake at EconomPic) for the number that has governors across the land reaching for their medication: hours worked per week per capita, now at 19.3. This means more dependents in a shrinking economy less able to support them.

Monday, November 2, 2009

TARP Money Goes Up in Smoke

Congress thought it had a better idea. A year ago it allocated $700 billion to a new Troubled Assets Relief Program to prevent a run on some of the nation's biggest banks. The Treasury Department used a good chunk of the $700B to buy preferred shares in those banks (think Bank of America and Citigroup), as well as in insurers (AIG) and other lenders (CIT). Taxpayers were sweet-talked into believing that these were "investments." TARP, it was said, would actually become a profit center for the federal government, with quarterly dividends generating an annual return of 5%. Not bad with real interest rates below zero.

Trouble is, many of the investments are turning sour. Yesterday, while most of the nation was diverted by NFL action, CIT announced that it is seeking bankruptcy protection. The resulting reorganization, once approved by the courts, will mean a 30-percent haircut for bondholders and a virtual wipeout for stockholders. Not only do we taxpayers lose our direct "investment" in CIT of $2.33B (as reported by Bloomberg), but as partial owners of Bank of America we lose another $2.25B in the debt swap. Meanwhile, 33 banks missed their TARP payments in August, up from the 15 who missed their May payments. Think we'll ever see any of that money?

TARP is scheduled to expire at the end of next month, which, as the Wall Street Journal pointed out last week, would be none too soon. Treasury treats TARP as a revolving fund, which means that as money is returned, it gets redirected back out again. It will keep getting "invested" in ever riskier enterprises until it doesn't come back. Congress can lock up the remaining money by doing nothing. But given its propensity to subsidize losers like Cash for Clunkers and Cash for Bunkers, nothing dollarable (as John Muir used to say) is safe.

Friday, October 30, 2009

Bringing the Boys Home--In Boxes


"Going back to Alexander the Great, no one has ever had success
fighting the locals in Afghanistan."

--David Verdi, Vice President of NBC News

Tuesday, October 27, 2009

quattrocelli plays Rumford

Muskie Auditorium, October 26, 2009

play Chitarri on StreamPad below

[more selections at quattrocelli's MySpace player here]

Monday, October 26, 2009

Bon Appetit

wheat futures heading up

From the Mad Hedge Fund Trader:

"During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields. Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won’t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. The net net of all of this is that food prices are going up, a lot."

Oh, and have a nice day.

Wednesday, October 21, 2009

The Punch Bowl Gets Taken Away

Home sales in the U.S. have been artificially supported by the First-Time Buyer's Credit, which is due to expire at the end of next month. Because of the time necessary to process new mortgage applications, the window has already effectively closed. Look (above) at what happened to mortgage apps last week. According to survey data released this morning by the Mortgage Bankers Association (MBA), its Market Composite Index, a measure of mortgage loan application volume, decreased 13.7 percent on a seasonally adjusted basis from one week earlier. Without the adjustment for the Columbus Day holiday, the index actually decreased 22.4 percent. Oops.

[update, one week later:]

Realtors, lenders, and builders will undoubtedly point to the latest kink in the data series as proof that the Buyer's Credit should be extended. The $8,000 credit essentially covers the down payment for a cash-strapped purchaser. But Rex Nutting at MarketWatch argues that the subsidy is wasteful. Of the million-plus claims that have been filed so far, as many as two-thirds have been for transactions that would have taken place anyway, with or without the credit. Subtract those out, and the real cost to the government of each additional sale under this program is $43,000. "The last thing we need in this country," says Nutting, "is more houses, or a temporary floor under prices or more government incentives to buy a home without putting any of your own money at risk."

Actually, Rex, the very last thing we need in this country is more fraud. It is bad enough that banks are ripping off taxpayers; now taxpayers are ripping off each other. The $43K figure mentioned above does not capture the costs of weeding out fraudulent claims, which (as reported by the Wall Street Journal here) could be one of every ten. In testimony to Congress, the Treasury Inspector General for Tax Administration recommends that the Internal Revenue Service demand more thorough documentation before granting the credits. No credits before closing, no credits for second homes, no credits for 4-year-olds.

A handout meant to grow green shoots creates red tape instead. I know, hard to believe.

Saturday, October 17, 2009

Junior At Eleven Weeks

Worthley Pond, 10-17-09
[compare to one month earlier]

Friday, October 16, 2009

Shrinkage at G.E.

General Electric is a blue-chip "tell" for the U.S. economy as a whole. A more diversified company than 20th-century stalwart General Motors ("what's good for GM is good for the country"), GE has five major divisions, including Energy Infrastructure, Technology Infrastructure, NBC Universal, Capital Finance, and Consumer & Industrial. In 2007 the company pulled in revenues of $173 billion and netted $22.5 billion in profits. If GE is working, so is the U.S.

We now know from GE's third-quarter earnings, posted this morning, that good cheer alone will not turn the economy around. Remember, this was the quarter when GDP growth was supposed to turn positive, officially ending the recession. If that happens, it will be because of increased government spending, not because of recovery in the private sector. Q3 revenues at GE of $37.8 billion were down 20% from a year earlier and 3% from Q2.

The biggest drag came from G.E. Capital Services, the company's lending arm, accounting for one-third of total revenues. In 2007 GECS generated more than half of the company's profits, or roughly $3 billion each quarter. Those days are gone, as CEO Jeffrey Immelt revealed plans to shrink the balance sheet at GECS by 25%. [Memo to President Obama: contracting balance sheets in corporate America spell S-T-A-G-N-A-T-I-O-N.] Last quarter, GECS managed to break even only with the help of a $1 billion tax credit.

This bad news for the U.S. financial sector was compounded by Bank of America's announcement, also this morning, of a $2.2 billion loss in Q3 (after preferred dividends, some to Uncle Sam). (A page from BofA's financial summary documenting the relentless growth in nonperforming assets may be viewed here.) Citigroup yesterday announced a loss of $3.3 billion, despite underfunding its loan-loss reserve. Nonperforming loans are surging there, too.

The financial crisis is not over.

Bloomberg TV interviews Harvard prof Niall Ferguson here.

Wednesday, September 30, 2009

MBA Index Rolling Over?

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending September 25, 2009. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.8 percent on a seasonally adjusted basis from one week earlier.

The twin peaks in the graph above are your "green shoots." Since early summer we have been mired in a lending brownfield, which may turn to quicksand with the expiration of the Federal First-Time Buyer's Tax Credit at the end of November. Recovery, anyone?

Friday, September 25, 2009

Tuesday, September 22, 2009

Here Come De Judge

Legislators won't do it.
Neither will regulators. So how do we proceed with pest control on Wall Street? I'm talking about the investment bankers who have spent the past two decades padding their compensation by peddling risky derivatives to zombie investors. Their financial "engineering" (too good a word, as it implies that they actually made something useful) resulted in a dangerous shortening of time horizons, a dysfunctional allocation of resources, massive job destruction, a generational delay in economic innovation, and a crushing tax burden amortized in perpetuity. Other than that, good job, guys.

Throughout 2008 I held up Merrill Lynch as the arch symbol of this over-the-counter culture. When 2008 expired, so did Merrill Lynch, at least as a stand-alone company. But the culture lives on. By all rights Merrill would have--and should have--failed, just as Lehman Brothers did a year ago. But Bank of America, prodded by an oligarchy anxious to keep the game going, decided to take Merrill over.

The merger almost fell apart when, upon more careful examination, Merrill's assets proved too toxic even for an acquirer the size of BofA. Then came a comical sequence wherein the Three Stooges--Treasury Secretary Henry Paulson, Fed Chair Ben Bernanke, and BofA CEO Ken Lewis--slapped each other silly with threats and counter-threats. Ken-Doll thought about pulling out of the deal before the shareholder vote in December. Take this, said Hammerin' Hank, handing him an envelope stuffed with $25 billion in TARP dough. Not enough, said Lewis. Then we'll up the ante, said Paulson, throwing in another $20 billion in taxpayers' money and a guarantee to cover as much as $118 billion in Merrill assets. Still not enough, repeated Lewis. Look, you good-for-nuttin' empty suit, said Helicopter Ben, just take the money and keep your trap shut, or we'll fire you AND your entire board.

O.K., O.K., that's enough, concluded Lewis. BofA shareholders approved the deal, blissfully unaware that Merrill was ringing up billions in losses and paying billions in executive bonuses. Since then the Securities and Exchange Commission, embarrassed into action by New York's Attorney General, has accused BofA executives of withholding material information from shareholders. Convinced that its work was complete, the SEC then agreed to a settlement whereby BofA would pay the government a fine of $33 million while admitting no wrongdoing.

Here come de judge! (Remember that refrain popularized by comedian Flip Wilson forty years ago?) Last week U.S. District Judge Jed Rakoff threw out the settlement, finding it ridiculous that the victims of the alleged wrongdoing--the shareholders who own the company--would ultimately pay the fine (the judge's dissatisfaction is documented here). Instead, he ordered the case to trial. The SEC, having already blown the Bernie Madoff affair, has no choice but to proceed. It must prove the misconduct and identify the perpetrators, who presumably would then be subject to punishment. Yesterday the SEC pledged to "vigorously pursue" the case against Bank of America.

Pending the trial, Lewis continues to make out like a bandit, thanks to the largesse of the federal government. The various bailout programs enacted by Congress (TARP, TALF, TLGP, etc.) have boosted the stock prices of all the major banks. Lewis has seen his 4.7 million shares of BofA stock more than quintuple in value since March. So confident is he of his firm's recovery that he has arranged to cancel the $118 billion asset guarantee provided by the feds for the Merrill mess. Generous to a fault, Uncle Sam is accepting an exit fee of $425 million, or less than a tenth of the real value of the insurance as originally negotiated.

It will be interesting to see if the discovery process which Judge Rakoff demands finally assigns accountability for the ongoing financial calamity that threatens any meaningful economic recovery.

[update, 09-30-09:]
Lewis announced today that he will retire from Bank of America at the end of the year. He will leave with $135 million in pension benefits, stock, and other compensation. So what if Social Security goes bust!

Monday, September 21, 2009

Young Loon Now a Tween

Loon offspring at seven weeks, Worthley Pond, 09-20-09

Posted by Picasa

Friday, September 18, 2009

Turn-around Ahead?

[click for a larger view]

The S&P 500 stock index
oscillates around its 200-day moving average, regularly reverting to the mean. The S&P is now trading at 20 percent above the 200-day MA, typically a level which triggers a turn back down. Fasten your seat belts.

Friday, September 11, 2009

Banks Are Ill-Prepared for the Coming Tsunami

Up, Up, and Away? That's what the stock market seems to be saying, but the line above is pointing in the other direction. ALLL stands for "Allowances for Loan and Lease Losses," and the graph indicates that only 20% of all bank assets reside in banks with sufficient allowances set aside to cover their nonperforming loans. In other words, as more and more loans become delinquent, banks are under-reserving for possible defaults. Instead, they are puffing up their current earnings in hopes of appeasing regulators and attracting investors (and, of course, paying their top executives).

A new wave of defaults will arrive in 2010 as option ARMs (adjustable-rate mortgages) do what they were designed to do: explode. These are teaser loans that start borrowers off at absurdly low monthly payments for the first few years. The payments might be interest-only (leaving the principal untouched) or even less (allowing the balance owed to increase). Then, once the introductory period expires, the payments on principal begin. That's when the rubber finally meets the road.

These products were perfect for speculators flipping properties in an overheated market. Borrowers could sell for a profit before the loans re-set. But option ARMs will prove deadly to homeowners who have suddenly lost their jobs and, thus, the income to cover the higher payments due after the re-set. The U.S. economy has shed jobs for twenty months in a row (a total of 6.9 million) and is expected to continue doing so at least until the middle of 2010. The mortgages, alas, allow no grace periods for unemployed borrowers. [Hours after I posted this, FDIC Chair Sheila Bair revealed in a statement that "the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months." The initiative applies to banks that have acquired failed FDIC-insured banks and would offer relief to "unemployed and underemployed" borrowers.]

Almost $100 billion in option ARMs will reset between now and the end of 2010. Mounting foreclosures are inevitable, and hundreds of banks will be forced to close. Surviving banks will be hit by the feds with a double whammy: "special assessments" to help indemnify insured deposits as well as stricter capital-reserve requirements to backstop defaults. Turning a profit will be a tall order (as described here). Lending to entrepreneurial start-ups--and creating jobs--will be out of the question.

But bank CEOs don't mind. They already have theirs.

Thursday, August 27, 2009

Photo Retrospective: Ted Kennedy

[click for slide show]

Also, the Boston Globe has a video timeline here.

Sunday, August 16, 2009

Where Exactly Is All That TARP money?

Not here. As far as savings go, Americans have gotten religion. We now owe less money collectively than we did a year ago, as the graph above shows. Not only do we want to get out from under; lending institutions are forcing us to submit to tighter discipline. They are making money less freely available now to protect themselves from risky borrowers.

But this is bad news for an economy built on expanding consumer debt. The reduced demand for goods and services has resulted in massive layoffs during the past nineteen months, feeding a vicious cycle of lost incomes and delinquent loans. Policy makers in Washington last fall tried to stanch the bleeding with the infamous TARP, a program designed to force $700 billion through the nation's banks into the hands of tapped-out consumers. It was a frantic attempt to keep the debt addiction going.

A funny thing happened on the way to recovery:

[THERE it is...]

Instead of recycling the money as intended, the banks are sitting on it. Notice (above) how excess bank reserves have soared since September's meltdown in the credit markets. Once burned, banks are now twice shy about building their balance sheets on the backs of distressed consumers. Instead, they are hunkering down until the storm passes.

TARP was supposed to mitigate the pain. It has not done that, nor has it helped to spread the pain evenly. It has selected and protected a privileged group of survivors, a class that, more than made whole, is actually profiting from the crisis. During the Obama relief rally, banks have made money by underwriting each other's stock offerings and trading each other's stock. They have not made it by making new consumer loans or modifying existing ones.

They said that taking TARP money was the patriotic thing to do. They lied.

Friday, August 7, 2009

Population Grows, Workforce Doesn't

For the first time since World War II, the U.S. Gross Domestic Product has shrunk for four straight quarters (and five of the last six). Another post-WW2 first: we are completing a ten-year period with no net new jobs (see chart above). Wages and salaries, which drive recoveries in spending (not to mention tax collections), fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960. In other words, we have more dependents than ever before in a shrinking economy less able to support them.

Today brings the "good" news from the Bureau of Labor Statistics that "only" 247,000 jobs were lost in July. Numbed by monthly losses twice as large earlier this year, we are coaxed by the media to accept that a quarter-million new pink slips somehow bespeak an imminent recovery. I again remind you that the BLS data are "adjusted," and perhaps this month adjusted more than usual in order to pump up consumer and investor psychology (see Chris Martenson's take here). For now we have an Economy of Hope, but not yet one of results.

[update, September 4: Sure enough, the BLS has revised the July number to 276,000 jobs lost, a number nearly 12% uglier than the preliminary estimate. The final "official" number will not be known for another month.]

Sunday, August 2, 2009

Lake Umbagog Slide Show

Begin here
(courtesy Boston Globe)

Wednesday, July 22, 2009

How To Destroy a Currency

Deficit Spending 101
[Thanks to Jake at EconomPic Data]

Friday, July 17, 2009

70 Years Ago Today...

...Donn Fendler disappeared on Mount Katahdin. Nine days later he emerged from the woods battered and bug-bitten. He has been writing and talking about his ordeal ever since. Today's Bangor Daily News has a retrospective here.

Monday, July 6, 2009

Double Dip?

May flowers bring June showers, according to the latest unemployment data from the Bureau of Labor Statistics. Because "only" 322,000 jobs were lost in May, incurable optimists were persuaded that the worst of the recession was behind us. After all, the hit was at least twice as big for each of the months in the December- March period. But Thursday's press release was grim. 467,000 jobs were lost in June, as the unemployment rate rose to 9.5%. There are fewer people working in the U.S. today than when former President George W. Bush first took office, even though the workforce has grown by 12.5 million since then.

Almost as bad, the average work-week declined another tenth of an hour to 33.0. Big deal, you might say, what's a measly six minutes? Well, six minutes spread across the entire workforce is the wage-equivalent of tens of thousands of jobs. Take it from Uncle Sam, who sees the difference in payroll withholdings that come into the Treasury.

The attenuated work-week bodes ill for a quick job recovery, as there is significant slack capacity building up among the workforce still employed. When business begins to improve, employers will add back hours to the workers on hand before they re-hire laid-off workers. Another damper on job creation will be a ten percent increase in the federal minimum wage scheduled for later this month, from $6.55 to $7.25 an hour. Congress thought it was doing workers a favor when it legislated the increase two years ago, but the intervention instead will have employers calculating twice before expanding payrolls. Bet Congress would like to have that one back.

While unemployment data are traditionally viewed as lagging indicators, this time may be different. Credit is being crunched faster than the Fed can print it, depressing consumption. This de-leveraging will make employers extra cautious about hiring. They'll need to see not just green shoots, but a veritable rain forest before they make the leap. Meanwhile, the shrinking purchasing power of the American consumer perpetuates a vicious cycle, as illustrated below.

Sunday, June 28, 2009

Deja Vu

Source: Eichengreen and O'Rourke (2009) and IMF

Another Great Depression?
It is still to early to tell, but so far the current decline in global industrial output is closely tracking what took place 80 years ago (see graph above). Here in the U.S., we are running at less than two-thirds capacity. In fact, we are seeing a utilization rate last seen in the 1930s:

There will not be a bunch of new investment in industrial capacity until utilization gets back into the 80s. Meanwhile, employers appear loath to hire back laid-off workers. The average layoff has reached 24.5 weeks, a 60-year high:

Indeed, almost half of all displaced workers now collecting unemployment insurance will exhaust their benefits before returning to work (unless, that is, Congress borrows yet more money to extend the benefit period a second time). As a result, delinquent consumer loans, from credit cards to home mortgages, will likely increase, further pressuring the banks carrying those loans on their balance sheets.

Bank failures are becoming THE story in 2009. On Friday the Federal Deposit Insurance Corporation continued its weekly ritual of Whack-a-Bank, closing five more and bringing the year-to-date total to 45 (complete list here). Despite going on a hiring binge a year ago, the FDIC stills does not have enough bank examiners to keep up with the growing caseload. Thus, the implosion of the banking sector will play out in slow motion for at least the rest of this year--and probably beyond.

[update, July 31: The FDIC announced today the closing of five more banks. The total for 2009 now stands at 69, at least until next Friday.]

All of which makes the odds of an upside divergence in the topmost graph rather remote. [For a more detailed discussion of the headwinds facing the economy, check out John Mauldin's latest weekly newsletter--The End of the Recession?--and scroll down to The New Normal...]