Read It Here First: Buy What You Hate

You may recall I mentioned a recent trade in Citigroup, and Bank of America, posted under the headline “Buy What You Hate.”

Following the edict that good artists copy and great artists steal, Dilbert creator Scott Adams suggests in the WSJ that you “put your money on the companies that you hate the most.”


“When I heard that BP was destroying a big portion of Earth, with no serious discussion of cutting their dividend, I had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy their stock. And so I did. Although I should have waited a week.

People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How’s it feel to be a disgruntled victim?

I have a theory that you should invest in the companies that you hate the most. The usual reason for hating a company is that the company is so powerful it can make you balance your wallet on your nose while you beg for their product. Oil companies such as BP don’t actually make you beg for oil, but I think we all realize that they could. It’s implied in the price of gas.”

The entire article is a hoot, and well worth your time — even if the theme is purloined. I steal enough Dilbert cartoons that I have nothing to say.


Betting on the Bad Guys
WSJ, June 5, 2010

Art Laffer: Make Up Your Own Facts Here

To a man whose only tool is a hammer, pretty soon everything begins to look like a nail.

I couldn’t help but be reminded of that aphorism as I read the most popular article on yesterday — Tax Hikes and the 2011 Economic Collapse — a screed on the Laffer curve and Supply Side Economics by none then than Art Laffer.

If either the WSJ OpEd page or Mr. Laffer had foreseen the most recent economic collapse we just lived through, or the credit crisis, or the housing collapse, or the derivatives problem, or any of the other economic disasters that befell the country I might give their warnings some credence. (I give credit to Laffer for discussing the possibility of a recession in Feb 2008 — way ahead of most right wing economists) But considering all this occurred with their man in the White House for 8 years, and they somehow missed it, leads me to one of two conclusions: Either they are extremely bad economists, or they are extremely partisan observers.

Given that so many of the dismal set missed all of the above, we should give them the benefit of the doubt. Let’s not simply assume they are bad economists — instead, this looks like just another money-losing partisan screed.

In his OpEd, Mr. Laffer confuses causation with correlation, ignores market history, makes spurious argument, and simply make up crap as he goes along.

It is, to any thinking person, an embarrassment. Consider:

• “The nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates.”

This is mostly true, but misleading.

First, 7 states have no income tax; the other two tax — New Hampshire and Tennessee — only tax dividends and interest income.

Many of the states without income taxes — think Texas, and Alaska — are blessed with natural resources. (Nevada’s blessing is Innumeracy). They don’t have income taxes because the lease licenses to the mining and oil industry throw off so much revenue, that these taxes are not needed. Confusing correlation for causation is a Freshman college error, and we should expect better from Laffer.

Note: 5 of the 9 have a corporate business tax: Alaska has a state corporate income tax, Florida has a corporate income tax (5%); New Hampshire has a Business Profits Tax (8.5%); South Dakota has a financial institutions income tax; Washington has a Business and Occupation Tax. Since these are the fastest growing states according to Laffer, is the lesson to other states to add a corporate tax?

• “Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains?”

What unmitigated and embarrassing nonsense.

As everyone else in America is well, aware, both Gates and Buffett have committed their vast wealth to charitable foundations. Hence, the issue of “nontaxed unrealized capital gains” is simply irrelevant.

And of course, Laffer is aware of this — he is simply engaging in pedantic rhetoric when he makes this claim. (I believe the vernacular term for this form of argumentation is “full of shit.”)

It really throws a monkey wrench into the ideological dogma when the wealthiest Americans, those who have benefited the most from economic freedom and entrepreneurial opportunities recognize and criticize the growing wealth disparity in America as a very real problem.

• “At the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984.”

Again, factually accurate but totally misleading.

Reagan had the good fortune to take office at the tail end of a 16 year secular bear market, just as Paul Volcker fed the economy its distasteful medicine. Inflation was broken, and interest rates began their 25 year slide towards zero.

To ignore the reality of these factors, and credit tax cuts as the sole cause of the 1980s and 90s expansion is simply to discard reality because it does not fit your neat ideological universe.  That is a surefire recipe for losing money as an investor . . .

• “Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy”

After their many deductions, special legislative favors, un-repatrioted overseas profits, and too clever by half accounting, US corporations pay a very small percentage of their profits as taxes.

Decades of lobbying has created massive loopholes. Consider the total taxes paid to the US Treasury by any of the major banks and brokerages, the special tax treatment for hedge fund managers, the energy industry deductions, inadequate licensing revenue, etc.

This isn’t a question of MORE taxes — but basic Tax fairness. When American firms don’t pay their fair share of taxes, that means American citizens must make up the difference.

If you are against high taxes, you may want to consider what the total corporate tax base of America has looked like over the past 30 years — as profitability continues to go higher.

It is not just me who noticed the absurdity of the OpEd, Northern Trust’s Asha Banglore also calls out Mr. Laffer’s analysis as wanting:

“Assuming the tax cuts are allowed to expire, the forces that may prevent strong economic growth in 2011 are entirely different from tax increases.  The headwinds from the financial sector, by way of a severe credit crunch, lackluster job growth, and housing market challenges are factors that will influence the near term path of the economy.  The evidence presented here suggests that Mr. Laffer’s story is selective and incomplete…”

Basing your investments on “selective and incomplete” analyses is how you lose money in the captial markets.

Indeed, I have railed in these pages against the ideological, fact-free OpEd in the WSJ — not because of the politics, but because they have been such consistent money losers. That would not matter so much if it were the NYT or the Podunk Press, but this is the Journal, for crying out loud, It is supposed to be the paper of record for investors.

That the money losing OpEd page of the WSJ produces its most well read articles goes a long way in explaining one thing: Why 80% of money managers underperfom every year. Filling your head with Ideology, becoming a “magical thinker,” ignoring data, making up your own facts — these are a recipe for under-performing asset managers.

If I were to create a list of questions to ask potential managers of my money, one of them would be: “Do you read the WSJ OpEds?”

If the answer were yes, I would not walk but run in the opposite direction.


Ignore the prior bear market and Paul Volcker — nothing matters but Tax Cuts!


Revisiting “The Obama Economy” (March 4th, 2010)

WSJ Jumps the Shark (January 22nd, 2010)

Tax Hikes and the 2011 Economic Collapse
WSJ, JUNE 7, 2010

Thoughts on Doing a Video/Podcast

One of the regular requests into the Big Picture inbox is the idea of doing some sort of regular broadcast — a radio show, an audio podcast, a video segment.  I am intrigued by the idea, but there are a few hurdles that need to be overcome:

• I have zero interest in doing anything lo-fi. (Skype is out !)

• This should be about the people I have access to (everyone from Rosie to Ratigan) and not about me.

• The production values need to be decent — a desk and 2 chairs are fine — but I want to have the ability to show charts and graphs and the like.

• It needs to satisfy clients who get perturbed when we “give it away.”

One reader suggestion was to do a 30-45 minute video podcast, sell the full show on iTunes, but put 3-5 minute snippets up on the blog. (Not a bad idea) A friend suggested doing an audio simulcast, which is smaller, lighter and cheaper.

I looked into this, and the costs of shooting, editing and hosting are about $5k per week. (You can do it cheaper, but it looks worse). This can be paid for via advertisements, or by subscriptions. All of this can be done on iTunes, and then migrated to YouTube for free 12 Months later.


What are your thoughts on this? Is it worthwhile to explore? What is something like this worth per month — an audio podcast for full video show — if anything ?

Best . . . Headline . . . Ever . . .

How can you not adore the lunatic headline writer behind this soon to be legendary Bloomberg article:

Porn Stars in 3-D Lure Consumers to New Sony, Panasonic TVs


There are money quotes all over the place:

“I want to try it out,” said Satoshi Miyazaki, 33, who pays about 2,000 yen a month to watch adult cable channels. “I need something dramatic to justify replacing my TV. This could be the motivation.”

Dude sounds like he needs a girlfriend, badly.

Here’s more from Bloomberg:

“Porn star Mika Kayama is at the frontier of a push to develop videos and content in Japan that Sony Corp. and Panasonic Corp. need to lure customers for their new 3-D televisions.

Kayama and Yuma Asami, the top actresses of adult-movie maker S1 No.1Style, will star in the country’s first DVDs for the 3-D format TVs, providing content analyst Yuji Fujimori says can trigger the success of the new sets. Sales of adult videos in Japan were 108.6 billion yen ($1.2 billion) in 2009, according to Takashi Kadokura, an economist who runs Yokohama- based BRICs Research Institute. That represents about 30 percent of the overall video market in the nation, according to Kadokura. . .

Closely-held S1 No.1Style will offer “3D X Mika Kayama” on June 7 and “3D X Yuma Asami,” Japan’s first pornographic titles in the new format, on June 19 to coincide with the release of Sony’s 3-D Bravia models, with more titles to follow this year, according to the producer, who uses the professional name of Sakon . . .

S1 No.1Style spent three months making its first 3-D films, triple the time for a normal production, said 29-year-old Sakon.

Actors Moves: “It was a different filming experience using a new camera,” he said. “Actors needed to move more slowly, furniture had to be relocated and lighting rearranged to make it work. But it was worth it. We’ll make a profit out of this.”

Toshiya Shimizu, a 28-year old Tokyo resident, said he may wait for the cheaper 3-D computer.

“I want to rent the DVD first to see how good the image is,” he said. “I’d like to watch Yuma Asami in 3-D.”

TBP has a commentator named Peter North — I wonder if this will give his career a hand? No well, um another spurt? some lift? more life ?


Porn Stars in 3-D Lure Consumers to New Sony, Panasonic TVs
Mariko Yasu and Maki Shiraki
Bloomberg, June 2 2010

Virgin Links

Ok, not quite virginal — but I am on Virgin America, which has WiFi on their planes, so the travel day isn’t a total loss.

I am over the Rockies as I type this, and the ski trails and mountain tops are still snowy white, despite the June 1st date.

Here’s what I have been whiling the hours away with, winging westward:

• Greece urged to give up euro (UK Timesee also ECB warns of ‘hazardous contagion’ (FT)

• Sorkin: Answers on Credit Ratings Long Overdue (NYT)

Well, which is it?
. . . . . -Beijing in a sweat as China’s economy overheats  (Telegraph)
. . . . . -China economy slows on tightening and seasonal factors (Reuters)

• Spill wipes $23 billion off BP (Reuters)

• Shorting Reform  (Michael Lewis)

• In 1979, Less Complicated Oil Leak Took 10 Months To Stop (TPM)

• The Impact of the Irrelevant on Decision-Making (NYT)

• How Craig McCaw Built a 4G Network on the Cheap (BusinessWeek)

• How to Reboot Your Sleep Cycle (LifeHacker)

• Apple’s Lesson: Be Cool With Capital  (WSJ)

• WikiLeaks Founder’s Mission: Total Transparency (The New Yorker)

• 7 mega-engineering projects by Shimizu (Pink Tentacle)

Finished watching Inglorious Basterds (eh) and now I am going to attack season 1 of Mad Men (I never saw a single episode!).

Any other linkage worth mentioning?

Jon Stewart vs Fox News

This has gone totally viral, even causing a NYT article on Stewart vs Fox: “Jon Stewart’s Punching Bag, Fox News.


Jon apologizes for criticizing Bernie Goldberg and Fox News, but it’s only because they’re a terrible, cynical, disingenuous news organization.

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Bernie Goldberg Fires Back
Daily Show Full Episodes Political Humor Tea Party


See also:
Jon Stewart’s Punching Bag, Fox News
NYT, April 23, 2010

Have Bloggers Reinvented Financial Journalism?


I am on this provocatively titled NYFWA panel this evening:

PARASITES OR WATCHDOGS: Have Bloggers Reinvented Financial Journalism?

The New York Financial Writers Association is sponsoring a panel on financial news blogging, its impact and its future, on Tuesday, April 27, 2010 at 7 PM at CUNY Graduate School of Journalism, 219 West 40th Street, Room 308.


· Barry Ritholtz, author, blogger and financial analyst
· Jesse Eisinger, senior writer, ProPublica
· Todd Harrison, founder
· Eric Starkman, owner, Starkman Associates


Dan Colarusso, Managing Editor, Bloomberg Television

All invited. RSVP:

Should be fun. If you want to attend, be sure to RSVP.

Fortune 500 Cover DK’d

Chris Ware is a graphic artist with a specific style and a very specific point of view. He was asked to create a cover for the May issue of Fortune, specifically about the Fortune 500.

Apparently, what he turned in did meet the editors approval. Indiepulp observed:

“He accepted the job because it would be like doing the 1929 issue of the magazine, and he filled the image with tons of satirical imagery, like the U.S. Treasury being raided by Wall Street, China dumping money into the ocean, homes being flooded, homes being foreclosed, and CEOs dancing a jig while society devolves into chaos.”

Surprise! Fortune rejected the cover. (What a bunch of wimps!)

click for truly ginormous graphic

Hat tip kottke

The Return of Ben Stein

After spending several years writing money-losing columns that were lacking in any insight into Wall Street for the New York Times, Ben Stein has returned.

After his NYT dismissal for becoming the pitchman for scam site, enough time has elapsed that Stein seems to have landed a gig with Bloomberg owned BusinessWeek.

We will see which direction of wrong Stein heads in this time. His former free market absolutism out of favor, he seems to be tacking in the direction of populist outrage.

This is another column not worthy of much dissection, but one sentence leapt out: “Goldman can make money by creating a scam synthetic security, as the SEC’s complaint alleges…

No, that is not what the SEC complaint alleges — the legal charge is GS and Tourre engaged in fraud, made material misrepresentations about the security for sale, and had omissions of material facts.

Once this faux outrage passes, I expect to see the same old money losing lack of insight we’ve come to know and love about Ben Stein . . .


Farewell To Ben Stein (January 29th, 2008)

Good Riddance, Ben Stein (August 7th, 2009)

Goldman Sachs SEC Fraud Lawsuit Makes My Eyes Burn
Ben Stein
Business Week, April 20, 2010

Herb Greenberg Returning to CNBC !

In what can only be as described as a victory for Reality-Based news programming, I am delighted to see that my buddy Herb is coming back to CNBC !

Herb was one of the rare non-cheerleaders at CNBC. he never drank the Kool Aid, and always had a skeptical view of Wall Street. His presence will balance out some of the more extreme views (fantasy based economics) and be more factually driven.

Herb is a long standing investigative Journalist, rather than doing news flavored chat.

CNBC senior vice president of business news Jeremy Pink said:

We are delighted to have Herb and Kate join the CNBC team. They are two of the smartest, savviest, and well-respected business journalists anywhere.

Greenberg added:

I’m excited to return to CNBC as a full-time member of the best team in business journalism. I look forward to reconnecting with astute viewers and can’t wait to rejoin the good friends I’ve worked with over the years.

Source: MediaBistro, CNBC

Stan O’Neal Builds a Straw Man

Let’s shift gears a bit, and move from Goldman to Merrill.

Specifically, Merrill Lynch’s retired deposed CEO, Stan O’Neal. About 18 months after getting the boot, O’Neal has crawled out from under his $161 million rock. He found a sympathetic ear in Fortune contributing writer William Cohan, who assisted his spinning a new narrative as to his days at Mother Merrill.

Not surprisingly, the new version that portrays him in a much more favorable light.

O’Neal now joins a long list of former Masters of the Universe trying to burnish their badly tarnished reputations by taking their “Who?  Me?” tour on the road.  As with just about all of the others, it is unlikely to work.  The essence of O’Neal’s argument:  “Hey, I might have run the company into the ground, but it was that damn Cribiore who prevented me from getting a better price for my shareholders.”

From Cohan’s article story:

The magnitude of the [CDO] problem “hadn’t been apparent in ways it should have,” O’Neal tells Fortune in his first on-the-record interview since he was forced to resign in October 2007.

As O’Neal dug into the issue from his vacation home off the coast of Massachusetts, he was flabbergasted by what he discovered. “A few things became clear,” he says. “One is the complexity of it was far beyond what I would have imagined. Second, the number of people who actually understood the aggregated view of this — not just in terms of size and scale but the potential complications associated with it — were few and far between.

When O’Neal finally came to grasp what the “aggregated view” meant, he realized his firm was facing an increasingly dire threat.

The NY Times is apparently buying some of the fertilizer that Mr. O’Neal is selling:

“The revelation of this [Cribiore's opposition to a sale of the company] could go some way to salvaging Mr. O’Neal’s reputation which, Fortune wrote, had been reduced to the tag line: “C.E.O. who played golf alone while his firm struggled to survive.”

Contrary to O’Neal’s take on the matter, the magnitude of the problem was apparent. At least, it was to Merrill people like Jeff Kronthal and his colleagues, who voiced their concerns about the degree of risk the firm was taking on.

They were summarily kicked to the curb.  (See here, here: “…many have said that had Kronthal and the other sacked fixed-income veterans not left, the bank might not be in the shape it is today. According to the Journal, Kronthal received a standing ovation when he appeared on a Merrill trading floor yesterday.” (here and here. )

Kronthal was subsequently asked back by O”Neal’s replacement, John Thain.

Sorry, Stan, take your hoocoodanode elsewhere, because there were folks who knew, and you canned them, which is exactly why “the number of people who actually understood the aggregated view of this — not just in terms of size and scale but the potential complications associated with it — were few and far between.”  Most of them had involuntarily left the building, and you’d surrounded yourself with yes-men.  Puh-leeze.

And by the way, who was responsible for the stellar $1.3 billion purchase of subprime mortgage originator First Franklin at the top — the absolute pinnacle – of the real estate market?

All references to the purchase have been purged from the press release archives at Bank of America, but are still readily available through The Google, and this excerpt from the press release appears in a previous BP post:

“First Franklin is one of the nation’s leading originators of non-prime residential mortgage loans through a wholesale network.  [Ed. note: And this was considered a good thing?] [...]

“This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area [Ed note:  Remarkably, they're proud to announce they've bought not just one, but four steaming turds.] and enhancing our ability to drive growth and returns. We look forward to working with the experienced teams at these companies to serve their clients and leverage our broad range of mortgage products and services.” — Dow Kim, president of Merrill Lynch’s Global Markets & Investment Banking Group.”

Merrill, of course, was shuttering First Franklin not long after buying it, and subsequently whined like babies that National City had “misrepresented” the deal (“You didn’t tell us it was this big a piece of shit, or we would have paid even more for it!”).

By the way, did I mention that O’Neal had a Chief North American Economist, one David A. Rosenberg, who was warning of an inflating housing bubble in late 2004?  But what did Rosie know, eh?  Well, he knew this:

In this report, we assess the likelihood that the housing market has entered into a “bubble” phase.

But I digress.

The gist of the story is that due to the intransigence of one board member — Alberto Cribiore — the ultimate price Merrill fetched ($50 billion) was about $50 billion less than what O’Neal tried desperately to get as the firm’s positions deteriorated.  Of course, this begs the question as to why Merrill had to be sold in the first place, and the reason for that — the firm’s toxic CDO book — rests squarely on one person’s shoulders, and it ain’t Alberto Cribiore. Mr. O’Neal can say what he’d like about the extreme, heroic steps he took to sell the firm at a premium price, but the fact remains that no sale would have been necessary if he’d been a competent leader.

From the Fortune Q & A:

How did Merrill Lynch end up with so much exposure to the CDOs that ultimately sank it?

It was never my intent that we would take risk other than the intermediation risk in the mortgage business. If you package, structure, and sell what you buy, or if you originate it yourself, presumably you can control the quality of the credit a little bit better. But if you do that, you’re going to have warehousing risk and inventory risk. … It should have been more like $10 billion for us and probably was around $10 billion at the end of ‘06, but by April of ‘07 they’d run to $45 billion. It didn’t grow much from that point, but it was too late.

“They’d run to $45 billion.”  “They,” as if “they” had done it on their own.  How did “they” do it (in just a few months, no less), and how did “they” ramp up by an astonishing $35 billion without you knowing about it?  Or, put another way — if you did know about it, you were incompentent, and if you didn’t know about it, you were negligent.  Your call.

As the firm was on the verge of its sale to Bank of America (December 2008), Win Smith (as in Merrill Lynch, Pierce, Fenner & Smith) spoke at the gathering of shareholders on the day of the vote:

Today did not have to come.[...]

This is the story of failed leadership and the failure of a Board of Directors to understand what was happening to this great company, and its failure to take action soon enough.

I stand here today and say shame to both the current as well as the former Directors who allowed this former CEO to wreak havoc on this great company.

Shame on them for allowing this former CEO to consciously and openly disparage Mother Merrill, throw our founding principles down a flight of stairs and tear out the soul of the firm.[...]

Shame on these Directors for allowing this former CEO to rid the firm of thousands of years of experience. Shame of them for allowing this former CEO to surround himself with many people who did not have the perspective of other market cycles and the experience of time. Shame for allowing this CEO to surround himself with many people who did not share the same values that made us great and appreciate our winning culture. Shame on them for allowing this CEO to cut costs and businesses so severely and bluntly for the sake of short term earnings that he cut out future growth. Shame on them for allowing him to over leverage the firm and fill the balance sheet with toxic waste to create short term earnings. Shame of them for allowing good people like Dan Bayly and a few others to be used as scapegoats to settle the US Government’s Enron case against Merrill Lynch and for allowing these wonderful human beings and loyal Merrill Lynchers to go to Federal Prison unjustly. Fortunately, the Court of Appeals overturned the sentence.[...]

Shame, shame, shame for allowing one man to consciously unwind a culture and rip out the soul of this great firm. Shame on them for allowing this former CEO to retire with a $160 million retirement package and shame on them for not resigning themselves.

So reviled had O’Neal become — inside the firm and out —  that I know of advisors whose clients, unsolicted, sold their shares in Alcoa when O’Neal was appointed to that company’s board.

In retrospect, how prophetic that Stifel Nicolaus CEO Ron Kruszewski told Registered Rep in 2007, “Merrill Lynch will go before Stifel Nicolaus.”  To the extent O’Neal was even aware of that comment, he probably dismissed it with an arrogant, pompous, egomaniacal smirk.

Afternoon Linkage

Some of the more interesting reads today:

• Merrill Lynch’s $50 billion feud (Fortune)

• This Market Has Its Freq On (WSJ)

• Forget Newsweek — Roubini’s popularity may be a contrary indicator (Ekonomi Türk)

My favorite headline of today: ‘Jerk’ Insurance Soothes Property Sellers Amid Recovery Signs (Bloomberg)

• Defaults Rise in Loan Modification Program (NYT) See also Federal aid is forestalling only a fraction of foreclosures, report says  (Washington Post) Is anyone still surprised by this?

• A Partisan Scrum on Fannie, Freddie (WSJ)

• Puget Sound Business Journal Live blogs the WaMu hearings

• How not to choke when the big game is on the line (Frontal Cortex)

• Video games: the addiction (Guardian)

• Welcome to… If you created or worked at an internet technology company during the 1990s, we invite you to tell us about your experiences

Whats on your browser?

Newsweek Cover: Contrary vs. Contrary Indicator ?

I was at a book party last week, and I overhear a conversation where someone (literally) is introduced as “the guy who put Jeff Bezos on the cover of Time (December 1999) as the man of the year.”

I immediately butt into the conversation, saying “That cover made me tons of money– thanks!” We then proceed to discuss the magazine cover indicator, and what it means for the markets.

Which leads me to my buddy Paul of Infectious Greed. I think he commits a contrary indicator faux pas (S’okay, We’re Good. America’s Back) when he calls the Newsweek cover “a classically contrarian magazine cover indicator.”

I beg to disagree.

The magazine cover contrary indicator works when it reflects a fairly long lasting, well understood concept that is reaching a climax. By the time the editors of a major non business publication recognizes the well established trend, it is has already peaked. The grand daddy of all of these is BusinessWeek: The Death of Equities — after a 15 year bear market.

Have a look at the June 13 2005 Time Falling Home Price Magazine Cover in which they explain “Why we’re gaga over real estate.” That was as close to the ringing of the real estate bell at the top as you will ever see.

So why isn’t this a contrary indicator after a 75% market rally? Three reasons:

1) It refers to an economic turnaround — not the stock market

2) It does not follow a trend that has been in place for a long time

3) It does not represent a broad societal belief

I suspect some of you disagree; feel free to explain your positions in comments.


Here’s the Newsweek cover in question:

Update: Henry Blodget interviews Dan Gross on the Newsweek cover here.


BusinessWeek: The Death of Equities (August 13th, 1979)

Understanding Contrary Indicators (May 31st, 2008)

Falling Home Price Magazine Cover (August 12th, 2009)

An Improved Version of Bailout Math

The New York Times one ups the Wall Street Journal, taking a more philosophical — and broader — look at the Treasury’s Bailout Math.

It is still incomplete, but a significant improvement. Recall yesterday we criticized the WSJ’s wide approach  (Light At the End of the Bailout Tunnel) as so much happy talk.

The Time’s Andrew Ross Sorkin followed our advice. In addition to a snarkier tone (Uncle Sam down $89 billion? “It’s enough to make us all feel rich, isn’t it?”) his article included the following bullet points:

• Probable losses from American International Group = $48 billion
• Losses from Fannie Mae and Freddie Mac = about $320 billion
• The Federal Reserve virtually interest-free loans to Wall Street = $1 trillion dollars
• Moral Hazard: Numbers don’t help avoid another financial mess in the future
• Last, its about right and wrong.

Its a more skeptical improvement over other less critical takes on the success of the Bailouts. Still, Sorkin’s piece is also incomplete, leaving out:

• Depleted FDIC reserves;
• FASB 157 suspension allowed banks to hide losses
• Bad loans on bank balance sheets
• General Motors & Chrysler Bailouts
• Ongoing Foreclosures and Housing Problems
• Highly concentrated banking sector/lack of competition

I believe the best we can honestly say about the bailouts (without any spin or bias) is that, so far, the worst case scenarios have not played out, and that the return on investment is in the top quartile of expectations. Further, we still do not know what the final costs will look like, given a variety of factors such as housing, economy, etc. Also, we have no idea what the longstanding repercussions and moral hazard will end up doing in the future. Lastly, we have created a less competitive banking system, and allowed banks to fabricate their balance sheets.

But other than that Mrs, Lincoln . . .


Imagine the Bailouts Are Working
NYT, April 12, 2010

Farewell To The Most Widely Anticipated IPO Ever?

If there was ever a more widely anticipated and publicized IPO than PALM, a commenter will have to remind me what it was.  [BR: Google?]

As I recall all too well, no CNBC talking head could do a segment without at least a dozen or so mentions of PALM.  No guest could be interviewed without being asked about the upcoming offering’s impact on our very existence — no matter the guest’s area of expertise may well have been offshore drilling.  Or foreign policy.  The hyperventilating,  drooling, and shortness of breath was worthy of a brothel.  I recall the “Countdown to Palm” timer, a little “bug” in a television’s corner which kept tabs — to the thousandth of a second — of when the market would open, notwithstanding the fact that PALM would have a delayed opening due to all the frenzy.  (Note to CNBC:  Viewers generally don’t need a countdown timer to anything. We especially don’t need it down to thousdandths of a second, unless you plan to start covering 100m dashes.  Thank you.)

It was, we now know, the top of the market.

Now, ten years later, PALM has apparently put itself up for sale.

CNBC, of course, has gone on to obsess about countless other issues over the years.

Declining Bailout Costs or Bad Math ?

There is a bizarre article in this morning’s WSJ. It declares that the bailouts will cost less than initially feared. It is notable not for what it includes, but what it managed to completely ignore.

The 2008 Emergency Economic Stabilization Fund passed by Congress was over $700 billion dollars — not $250B.

There is no mention of the trillions of dollars on the Federal Reserve’s balance sheet. The ongoing costs of the Federal rescue of Fannie and Freddie — indeed, the complete takeover of $5 trillion in mortgages by Uncle Sam — is glossed over. The journal also seems to have forgotten about the cost of bailing out Chrysler and GM (they mention GM possibly going public, but just barely).

Foreclosure trends are increasing; second liens are defaulting in greater numbers. Banks now have over $30 billion in bad home equity loans. Somehow, these are not mentioned in determining the health of rescued banks.

Depleted FDIC reserves? Not mentioned. Bad loans on bank balance sheets? Ignored. FASB 157 authorizing fantasy bank accounting? Never mind.

The newly concentrated banking sector’s lack of competition is apparently too abstract for discussion. Nor does this final calculation so much as consider any future problems caused by moral hazard (its not so much as mentioned). Future inflation? US Dollar debasement? What TF are they?

Here’s the WSJ:

“The U.S. government’s rescue of wobbly companies and financial markets is starting to look far less expensive or long-lasting than once feared.

As momentum grows at companies that looked like zombies just a few months ago to repay taxpayers for lifelines they got during the financial crisis, the projected cost of the bailout is shrinking to just a fraction of previous estimates. Treasury Department officials say the tab is likely to reach $89 billion, which includes the Troubled Asset Relief Program, capital injections into Fannie Mae and Freddie Mac, loan guarantees by the Federal Housing Administration and Federal Reserve moves such as buying mortgage-backed securities and propping up the commercial-paper market.”

You can read the article, but you might notice it has a hole or two . . .


Total Bailout Costs = $89B! WTF?


Light At the End of the Bailout Tunnel
WSJ, April 12, 2010

Profit for Banks Dimmed by Home-Equity Loss Seen at $30 Billion
Dakin Campbell and David Henry
Bloomberg, April 12, 2010

Consumers Climb Out of Their Bunkers . . .

From the “It-Aint-That-Bad” file comes the most recent reports of consumer spending.

As we have previously exhorted, the consumer is “not quite dead, yet.” Indeed, the data suggests that after falling into a state of frozen panic during the credit crisis, there are signs of pent up demand being satisfied slowly but surely.

The perma-bears and recessionistas are loathe to admit this, but the data continues to gradually improve. I will be the first to admit that the year over year comparisons are against absurdly low levels, but it is improvements nonetheless. Data reflect a very gradual month-over-month improvement, and show huge gains on a year-over-year level.

It will be some time before we return to the peak levels of 2006-07, when Houses were used more as equity structures than shelter. But that does not mean we won’t see marked improvements over the coming quarters.

Consider these data points:

• Luxury sales rose 22.7% (Mastercard SpendingPulse)
• Furniture sales rose 13.8% and appliance sales rose 6.9%
• Auto sales gained 24% from year ago levels (AutoTalk)
• March was the 7th consecutive month of increasing retail sales growth
• Cargo volume at major ports imports is trending towards an 8% increase in April
• Commerce Department’s personal consumption expenditures was $34.7 billion in February, an increase of 0.3% over January — the fifth monthly gain in a row.
• Gasoline demand continues to rise — +1.2% — before the summer driving season.

Two last things to consider:

Ignore the plus 10% nonsense from the International Council of Shopping Centers — it has more to do with the Easter calendar shift than actual change in consumer behavior.

Second, DJMT calls “shenanigans” on the NYT happy talk. While I don’t completely agree, I will concede that Paul Vigna  raises a valid point as to both the NYT and the WSJ. As we noted yesterday, everybody talks their book.

While the universe is not nearly as rosy as the front page of the Times (Jobs and now Retail) proclaims, it is also not as dire as the usual survivalists (MREs, Ammo, and bottled water) have claimed.

A slow, painful recovery still awaits us . . .


Upbeat Signs Revive Consumers’ Mood for Spending
NYT, April 6, 2010

No, Treasury Bailout Profits Are Not 10 Billion Dollars . . .

Why doesn’t anyone understand what a profit is? It is the total revenue minus the total costs. Which is why this FT headline is our second dumb headline of the day:

US Treasury’s bail-out profits top $10bn

“The US government has made more than $10bn so far on banks’ repayments of bail-out funds, according to a new analysis that suggests taxpayers might turn a profit on the unprecedented help extended to the financial sector during the crisis . . .”

No, they have not made $10 billion dollars. As the article later states, “Treasury still expects to lose $117bn on the entire Tarp Programme, which includes investments in the car industry and AIG, the insurer.

To determine profits, we have to look at the total costs — TARP, bailouts, all rescues, etc.


US Treasury’s bail-out profits top $10bn
Francesco Guerrera
FT, April 5 2010