|
|
5:28 PM, July 15, 2009
With the appointment today of the 10 members of a congressional commission to investigate the financial meltdown, many people are hoping that the spirit of Ferdinand Pecora once again walks among us.
Pecora was the general counsel of the Senate Banking Committee who in 1933 and 1934 investigated, in spectacular fashion, the Wall Street hijinks that preceded the 1929 stock market crash. Sicilian-born, the hard-boiled Pecora showed not an ounce of deference to his quarries, who included J. Pierpont Morgan Jr. and the heads of such other august Wall Street families of the era as the Whitneys, Rockefellers and Lamonts.
Can the new Financial Crisis Inquiry Commission, which will be headed by former California Treasurer (and 2006 gubernatorial candidate) Phil Angelides, measure up?
 Here's the credit side of the ledger: The bipartisan panel (six Democratic appointees, four Republicans) has the explicit backing of the Democratic-controlled Congress and the White House. Among its members is a former financial regulator, Brooksley Born, ex-chair of the Commodity Futures Trading Commission, who tried unsuccessfully to tighten the regulation of the Wild West of derivatives trading in the 1990s.
And there's plenty to investigate. The roots of the economic and financial crisis can be found in the commercial banking, investment banking, mortgage trading, credit and derivatives industries. (Have I left anything out?) The behavior of Wall Street investment houses, which played both sides of many trades, enriching insiders while impoverishing retail investors and other outsiders, resembles the abuses Pecora identified in his hearings and his 1939 book "Wall Street Under Oath."
Yet there's room for pessimism. Several members have been inside the investment industry, including Angelides and Heather Murren, another Democratic pick. The ideological gulf on the panel is wide, from Angelides and former Sen. Bob Graham (D-Fla.) on the left to Douglas Holtz-Eakin, former economic advisor to GOP presidential candidate John McCain, and Peter Wallison, an executive of the conservative American Enterprise Institute, on the right. The risk is that the commission will either fragment along ideological lines or, in an effort to craft findings that garner unanimous approval, it will muffle its guns.
Pecora had more leeway. He was a lifelong renegade, an anti-Tammany Democrat who had supported Republican Teddy Roosevelt's breakaway Bull Moose presidential candidacy in 1912. Ron Chernow described him in his book "House of Morgan" as "fearless and incorruptible," and noted that he had turned away numerous job offers from Wall Street. Pecora was determined to hang some pelts on his wall. Among those he bagged was Charles Mitchell, chairman of National City Bank of New York (ancestor of today's Citigroup), who was forced to resign after Pecora (and others) laid bare his financial manipulations.
Two key questions: Will Angelides and the rest of the panel hire investigators smart enough to ferret out the modern-day Mitchells? And will the panel be willing to preside over a Pecora-style bloodletting?
-- Michael Hiltzik
Photo: Ferdinand Pecora on the cover of Time in 1933. Credit: Time Inc.
3:47 PM, July 15, 2009
SecondMarket Inc. today launched its online marketplace for California IOUs, as promised.
The New York firm, which operates a number of markets for illiquid assets, is offering its SecondMarket.com site as a venue where holders of the state’s scrip can sell to investors. The company is registered as a broker/dealer with the Securities and Exchange Commission and therefore is subject to the agency’s trading oversight.
Cash-short California began issuing IOUs this month to pay some of its creditors. The paper, known as registered warrants, will earn an annualized tax-free interest rate of 3.75% until the state redeems it. The scheduled redemption date is Oct. 2, although that could be moved up if Sacramento reaches a budget deal and state Controller John Chiang determines he has the cash needed to pay off the scrip.
It isn’t clear if much of a market for the IOUs will develop, but SecondMarket is giving it a shot. Buyers might include hedge funds and investors who might otherwise buy municipal notes or bonds.
The best news for potential sellers: They’ll be able to see what kind of offers are being made and what other sellers have received. Jeremy Smith, SecondMarket’s chief strategy director in New York, said the firm plans to show online the five most recent bids for IOUs and the five most recent asking prices, as well as the last 10 consummated trades – including their dollar values.
But he said the firm won’t start showing that data until it has "sufficient" trading volume in IOUs, which will be an in-house judgment. Smith said SecondMarket doesn’t want to publicly post trading data that could be misleading because it represents only a thin level of activity.
SecondMarket will charge buyers of the IOUs a transaction fee of 1% or less, but sellers won’t pay any trading fees. To complete a trade, the firm will handle collecting the payment for the seller and sending the IOU to the buyer.
-- Tom Petruno
1:52 PM, July 15, 2009
Bad day to be a bear.
Stocks surged, in the broadest advance since late March, as market bulls were heartened by a flurry of encouraging reports from major U.S. companies.
American Express Co. helped to juice today's rally after the charge-card giant said it may not suffer the level of credit write-offs it had previously forecast for the second half of the year.
Although Intel Corp.’s better-than-expected second-quarter sales announced late Tuesday drove an advance in technology shares today, financial issues were almost as strong. The financial-stock sub-index of the Standard & Poor’s 500 surged 4.1% while the tech-stock sub-index rose 4.2%.
From Bloomberg News:
Costs tied to uncollectible debt fell in June to 9.9% of managed U.S. card loans, compared with 10% for May, American Express said today in a federal filing. Loans at least 30 days overdue -- an indicator of future charge-offs -- fell to 4.4% from 4.7% in May.
 "Assuming delinquency and bankruptcy trends continue to be below previously expected levels, the company believes that it is highly likely" that write-offs for the third and fourth quarters on U.S. cards "will be better than previously forecasted," the filing said.
The report added to signs that record defaults by consumers on credit cards may be near a peak. JPMorgan Chase & Co. and Discover Financial Services also reported fewer soured loans today.
AmEx shares rocketed $2.76, or 11.3%, to $27.22.
This was a broad rally, by any measure. The number of rising stocks on the New York Stock Exchange came to 2,767, the most for any session since March 23. That will further stoke the bulls’ hopes.
The S&P 500 was up 26.84 points, or 3%, to 932.68 -- its highest close since the spring peak of 946.21 reached June 12. The recent pullback failed to reach the 10% threshold of a standard market "correction." At the S&P's low on Friday it was off 7.1% from the June 12 high.
The fast rebound this week is an obvious sign that too many people came into the third quarter expecting stocks to head south, particularly after the dismal June employment report on July 2. The market is doing what it does best: disappoint the crowd.
Now, with the S&P 500 up 6.1% since Friday, "short sellers" are getting squeezed and may be buying to cover some of their bearish bets.
All that the bulls wanted was a little encouragement from major companies’ second-quarter earnings reports, and they’ve been getting it -- from Intel, Goldman Sachs, Johnson & Johnson, railroad CSX and others.
Intel shot up $1.22, or 7.2%, to $18.05 today, its highest since Oct. 1.
Goldman Sachs rose $5.60, or 3.7%, to $155.26, the highest close since Sept. 11 -- just before Lehman Bros.’ collapse and the beginning of the fall market meltdown.
-- Tom Petruno
Photo credit: Karen Bleier / AFP/Getty Images
12:01 PM, July 15, 2009
Congressional leaders today announced the members of the special panel that will investigate the causes of the financial crisis, and the group includes some names that weren’t on many short lists.
Among the surprises: Democrats picked former California Treasurer Phil Angelides to chair the 10-member panel.
Brooksley Born, who chaired the Commodity Futures Trading Commission from August 1996 to mid-1999 and who pushed, unsuccessfully, to boost regulation of derivative securities, was tapped, as expected.
But fans of New York University economics professor Nouriel Roubini, who predicted much of what has happened to the economy, will be disappointed to find out that he won’t be on the panel.
Congress created the bipartisan Financial Crisis Inquiry Commission to launch a broad probe into the credit debacle and the resulting crash in financial markets. The commission’s final report will be due in December 2010.
The panel, which will have subpoena power, is supposed to be modeled on the Pecora Commission, which investigated the events that led to the 1929 stock market crash and the Great Depression.
The Democrats’ choices, announced by House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada:
 --- Angelides, a veteran California politician who was state treasurer from 1999 to 2007 and who unsuccessfully ran for governor in 2006. He now is chairman of Canyon-Johnson Urban Communities Fund, a partnership of Magic Johnson and Canyon Capital Realty Advisors that aims to invest in rental housing for working families in urban communities.
--- Born, who now chairs the board of the National Women's Law Center.
--- Byron Georgiou, a partner at Coughlin Stoia Geller Rudman & Robbins, the world's largest plaintiffs securities practice.
--- Former Florida Sen. Bob Graham. He was widely expected to be one of the Democrats’ picks.
--- Heather Murren, now chairwoman of the Board of Nevada Cancer Institute and a former Merrill Lynch securities analyst.
--- John W. Thompson, former CEO of security software firm Symantec Corp. in Cupertino, Calif.
The Republicans’ four choices for the panel, announced by House Republican Leader John Boehner of Ohio and Senate Republican Leader Mitch McConnell of Kentucky:
--- Former House Ways & Means Committee Chairman Bill Thomas, who will be vice chairman of the commission. He was expected to be a shoo-in as a GOP choice.
--- Keith Hennessey, an economic advisor to President George W. Bush from 2002-2007.
--- Doug Holtz-Eakin, former Congressional Budget Office director and Sen. John McCain’s advisor on domestic and economic policy in last year’s presidential campaign.
--- Peter Wallison, co-director for Financial Policy Studies at the conservative American Enterprise Institute.
-- Tom Petruno
Photo: Former California Treasurer Phil Angelides. Credit: Robert Durell / Los Angeles Times
6:00 AM, July 15, 2009
Clients of Bank of America Merrill Lynch (yes, that mouthful is the brokerage's official name now) can't say the firm is waffling on its economic outlook.
"The recession is over" Merrill declared in a report Tuesday authored by Michael Hartnett, chief global equity strategist.
The brokerage’s famed horned mascot is snorting again: "We are bullish on global equities," Hartnett says in the report.
 That might not sound like a surprising call for a major Wall Street player with securities to sell, but Merrill’s outlook on things in recent years had been extraordinarily dour (as it turned out, correctly so) under two of its long-time strategists: Richard Bernstein and David Rosenberg.
Bernstein, who was chief investment strategist, left in April; Rosenberg, the firm’s chief North American economist, quit in May.
Hartnett had been Merrill’s point man on emerging markets before becoming chief global equity strategist this spring.
His report on Tuesday says the economy has begun a "fragile recovery," but he sees the glass as half-full rather than half-empty: "This means fiscal, monetary and financial policies are likely to remain supportive of asset prices. For example, we forecast the Fed to keep the target [short-term] interest rate close to zero until 2011."
Investors sitting with loads of cash on the sidelines should be moving that money into stocks, Hartnett advises.
"An inflection point in the global economy should encourage investors to rebalance their portfolios to reduce cash and to look for opportunities to increase equity exposure while staying with high-quality bonds," he wrote.
His favorite investment themes include "growth" stocks in emerging markets and "value" stocks in developed markets; the largest U.S. export-oriented companies; "high-quality" technology firms; and investment-grade corporate bonds.
-- Tom Petruno
Photo: The Merrill Lynch bull
2:01 AM, July 15, 2009
China's foreign exchange reserves topped $2 trillion in June -- a new high -- fueled in part by foreign money inflows as global investors bet the economy would stay on a strong growth track.
From Bloomberg News:
The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People's Bank of China said today on its website.
 “Hot money is flowing back,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “China has the strongest prospects out of all major economies.”
The trade surplus was $34.8 billion in the second quarter and foreign direct investment was $21.2 billion, leaving the bulk of the increase in the reserves unaccounted for. Investment returns and currency movements also affect their size.
“The capital inflows have driven up stock and property prices,” said Yang Shengkun,a currency analyst in Beijing at China Citic Bank Co. “Speculators are favoring China because the government’s stimulus package is working quite well, which will help the country to be the first to recover globally.”
China's stock markets have soared this year and bank lending has rocketed as the government has pumped money into the economy to maintain growth, even as much of the rest of the world has fallen into a deep recession.
The market and banking-system booms also have fueled fears that Beijing is inflating a dangerous bubble. But if so, this is one bubble the rest of the planet should be grateful for at the moment, given the lack of any other significant force to pull up the global economy.
-- Tom Petruno
Photo: People's Bank of China headquarters in Beijing. Credit: Gao Xueyu / Associated Press
4:44 PM, July 14, 2009
Two out of three major bond-rating firms now agree: California's credit grade should begin with a "B" -- a dismal comment on the state's finances.
Moody’s Investors Service today cut the state’s debt rating two notches, to "Baa1" from "A2," warning that the risk is rising that California could have trouble paying its bondholders if the budget stalemate in Sacramento doesn’t end soon.
The firm said the state remained on its "watchlist" for further downgrades.
Moody’s "Baa1" rating is just three notches above the level at which California’s $59 billion in general obligation bonds would be considered "junk," or no longer investment-grade in quality. Next would be "Baa2," then "Baa3," then the junk rating of "Ba."
 The state has never had a junk rating before, and it may not come to that this time around. It’s highly unlikely that the rating firms want to cut California to junk because of the potential firestorm that could set off in the municipal bond market.
But the firms also don’t want to take the chance of failing to foresee a worsening crisis in the state’s finances.
Moody’s rival Fitch Ratings on July 6 cut its rating on the state's debt to "BBB" from "A-minus." Standard & Poor’s, the other member of the Big Three, still has California at "A."
Most states are rated either "AAA" or "AA." California has since early this year had the lowest credit grade of any state.
From Moody’s today:
"The downgrade reflects the increased risk to the legally or constitutionally required payments ('priority payments') as the state deadlock continues and the controller has begun to make certain payments that are not legally or constitutionally required to be paid on time with IOUs.
"Moody's believes that as the days and weeks go by without enacted solutions to the current cash crisis and the $26-billion budget gap, the risk to priority payments, and eventually debt service payments, is increasing. The downgrade incorporates the risk we believe exists at the current time, as well as the state's inability to solve the current difficulties in a timely fashion."
The firm said that a continued delay in balancing the budget "could result in a further downgrade in coming months." What’s more, Moody’s indicated that a budget resolution wouldn’t necessarily mean a rating upgrade from the current dismal level.
"If the state does take action, we will assess the likely impact of those actions: whether they improve liquidity, whether they improve budgetary balance [and] whether they provide long-term solutions or quick fixes," the firm said.
State Treasurer Bill Lockyer has insisted that California would never default on its bond debt. The state Constitution mandates debt payments, which must come before all other state spending except funding for education.
Despite the budget mess some investors have been lured back to the state's bonds this month, pushing down market yields on the securities.
-- Tom Petruno
2:49 PM, July 14, 2009
House Democrats today unveiled their massive healthcare reform proposal and detailed how they would pay for it. Included in the bill are proposed tax increases on high-income earners that are bigger than what was rumored last week.
The proposal calls for a 1% surtax on modified adjusted gross income between $350,000 and $500,000; a 1.5% surtax on income between $500,000 and $1 million; and a 5.4% surtax on income exceeding $1 million.
The income figures are for married couples filing jointly. In the case of a single filer, the thresholds would be 80% of the income levels listed above.
 The 5.4% "millionaire" surtax exceeds the 3% that House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.) last week indicated was the working number.
The top marginal federal tax rate now is 35% on taxable income above $372,950 for married couples.
The bill also includes a provision to raise the 1% surtax to 2%, and the 1.5% rate to 3%, in 2013 unless savings from federal healthcare reforms reaches preset levels. But if the savings exceeds certain targets the bill provides for a rollback of the tax increases.
Rangel said lawmakers chose the surtax on high-income earners because it "causes the least amount of pain on the least amount of people."
The centerpiece of the healthcare proposal, of course, is insurance coverage for Americans who don’t have it. All Americans would be expected to have some form of coverage. If you opt out, you'd pay a penalty tax of 2.5% of adjusted gross income above a specified level.
Go here for the Democrats’ summary of the plan, including proposed requirements for businesses and changes in Medicare coverage. (Curiously, the summary doesn't include the tax hikes, but they're in the 1,000-page bill.)
Bloomberg News has more, here, on how the political battle over the bill is shaping up.
-- Tom Petruno
Photo: House Democratic leaders, including Rep. Charles B. Rangel, second from right, at the unveiling of their healthcare plan today. Credit: Manuel Balce Ceneta / Associated Press
12:47 PM, July 14, 2009
SecondMarket, which connects buyers and sellers of illiquid assets, says it expects to have an online trading venue operating for California IOUs beginning on Wednesday.
But the firm still isn’t sure whether prices will be transparent -- i.e., whether anyone signing onto the SecondMarket.com website will be able to see what buyers are paying sellers for their IOUs to cash them out.
Jeremy Smith, SecondMarket’s chief strategy director in New York, noted that federal rules forbid making prices of certain asset transactions public, in cases where regulators deem that the information could be considered a "solicitation" to investors for whom the assets wouldn’t be appropriate.
 But by asserting last week that it has jurisdiction over trading of IOUs, the Securities and Exchange Commission ostensibly was trying to protect IOU recipients from ripoff artists. If that’s the goal, SecondMarket – and the SEC -- ought to support public price disclosure, so that anyone who wants to sell the state’s scrip can see what kind of discounts buyers are offering for the paper.
The only reason to sell at a discount to an investor, of course, is if an IOU recipient can’t find a bank or credit union to cash the thing for full value. IOU holders’ options became more limited this week as major banks stopped accepting them.
One decision SecondMarket already has made: Owners of IOUs won’t pay any fees to sell them on SecondMarket; buyers will pay a transaction fee of 1% or less.
The state has said it will redeem the IOUs for cash on Oct. 2. The paper is earning a 3.75% annualized tax-free interest rate until then.
-- Tom Petruno
Photo credit: Rich Pedroncelli / Associated Press
9:54 AM, July 14, 2009
The Obama administration's push to regulate derivative securities now includes a Justice Department probe of credit-default swaps, one of the most vilified types of derivatives.
From Bloomberg News:
The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks.
"Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets," spokeswoman Teresa Chick said [Monday] in an e-mailed statement in response to questions from Bloomberg News. She declined to comment on the nature of the investigation. "We will work with the Department to provide any information requested of us."
The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter.
U.S. lawmakers plan to regulate the $592-trillion over-the-counter derivatives market, which includes credit-default swaps blamed for helping worsen the biggest financial calamity since the Great Depression.
Swaps are contracts written between big investors, including investment banks, that can be used either to insure against a debt default by a company or to speculate that a default will occur. Critics have accused some Wall Street players of using credit-default swaps to gang-up on weak financial institutions and speed their failure.
From Bloomberg:
Justice Department investigators want to know if Markit’s bank shareholders received advantages as owners and providers of prices and trading patterns for credit-default swaps, said two of the people. The data from the market’s largest users is provided to more than 300 financial firms to set prices of the contracts in their portfolios, according to Markit’s Web site.
"I say Hallelujah that some authoritative body has finally stepped forward to investigate, in a small way, how Wall Street takes advantage of information for its own advantage," said William Cohan, a former JPMorgan Chase & Co. investment banker and author of "House of Cards," about the financial crisis. "The fact that they control Markit and it provides information about the prices of credit-default swaps, and they’ve benefited from this for many years without any challenge or investigation, was outrageous."
-- Tom Petruno
10:52 PM, July 13, 2009
Bernie Madoff's mailing address for the next 150 years: Butner, North Carolina.
From the Wall Street Journal:
The Federal Bureau of Prisons [Monday] sent the 71-year-old Mr. Madoff to the Butner Federal Correctional Complex, about 30 miles north of Raleigh, and an eight-hour drive from New York City.
It isn't where Mr. Madoff's lawyer, Ira Sorkin, had asked that his client be housed. He had requested the Federal Correctional Institution in Otisville, N.Y. U.S. District Judge Denny Chin, who handled Mr. Madoff's criminal case in Manhattan, indicated he would recommend that the Ponzi-scheme operator serve his time in the Northeast.
Butner includes two medium-security prisons and a low-security prison, as well as a medical facility.
Also doing time at Butner: Adelphia Communications founder John Rigas and his son Timothy, both of whom were convicted of securities fraud in 2004. They're in the low-security prison on the site, the Journal said.
-- Tom Petruno
12:16 PM, July 13, 2009
If you've got a California IOU you'd like to cash today, your options are much more limited than they were last week.
Major banks including Bank of America, Wells Fargo, Chase and Union Bank no longer will take the state's scrip from customers.
However, as my colleague Tiffany Hsu wrote on Saturday, Citibank says it will accept the IOUs (from customers) through Friday. Bank of the West says it plans to allow customers to deposit the paper indefinitely. Some smaller banks, and many credit unions, also continue to redeem the IOUs from members for full cash value.
 If you're tempted to try to sell an IOU to someone (say, online) to get cash before the state plans to pay off the paper on Oct. 2, you should at least know your rights. The Securities and Exchange Commission last week decided that the IOUs (officially known as registered warrants) are securities under U.S. law -- which means that someone acting as a dealer and trading the paper, as opposed to just buying and holding, is subject to federal anti-fraud statutes.
The SEC's decision means that someone trading in IOUs is supposed to comply with standards set by the Municipal Securities Rulemaking Board.
Here's what the MSRB said in a statement on Friday:
"The buying, selling and trading of California’s warrants by intermediaries are subject to all MSRB rules of conduct and fair practice," said MSRB General Counsel Ernesto Lanza. "The MSRB is particularly concerned about compliance with obligations with respect to the prices at which such intermediaries buy California warrants from citizens who may be in need of immediate cash," Lanza said. "Persons attempting to profit from the buying and selling of municipal securities must price those transactions based on their fair market value, and California’s IOUs are no exception."
MSRB rules require that prices for the purchase and sale of municipal securities, including the California warrants, charged by securities firms and banks must be fair and reasonable based on their best judgment of the securities’ fair market value. These intermediaries would violate this rule if they attempt to take advantage of their customers by offering to purchase warrants at deep discounts that do not reflect fair market value. Advertisements and published quotations for purchases and sales of California warrants also must meet MSRB standards.
In theory, this is supposed to protect cash-needy IOU recipients from ripoff artists.
But "fairness" in pricing any security is a subjective thing, of course.
If just having rules that call for fair pricing was enough to make it so, no one would ever feel that they got a bum deal buying or selling a thinly traded municipal bond in the broker marketplace. And we know that isn't true.
But by all means, if you're shopping around to sell an IOU, ask potential buyers if they're registered as securities dealers; if they're aware of the MSRB standards; how they're determining that the price they're offering is "fair;" and what fees are involved.
Note that once you sell, the buyer is entitled to the 3.75% annualized tax-free interest return the state says it will pay on the IOUs at maturity.
Photo: Printing IOUs in the state controller's office. Credit: Rich Pedroncelli / Associated Press
10:24 AM, July 13, 2009
McGraw-Hill Cos. wants to dump BusinessWeek magazine amid the deep slump in advertising, Bloomberg News reports:
McGraw-Hill hired Evercore Partners Inc., the boutique investment bank founded by Roger Altman, to sell the magazine, according to a person close to the situation, who declined to be identified because the information isn’t public. Spokesmen for McGraw-Hill and Evercore, which are both based in New York, declined to comment.
BusinessWeek was founded in 1929 and has almost 190 editorial staff, according to its website. It has about 4.8 million readers weekly in 140 countries. The weekly magazine’s 30% decline in second-quarter ad sales, to $43.9 million, compared with a 22% drop industrywide, according to Publishers Information Bureau data.
BusinessWeek’s ad pages declined 34% in the three months through June, while competitor Fortune posted a 45% drop. Forbes had a 40% decline, PIB data show.
McGraw-Hill's move follows Conde Nast's decision in April to fold its Portfolio business magazine after just two years in the marketplace.
Besides BusinessWeek, McGraw-Hill owns an educational publishing business, the bond rating and financial services information firm Standard & Poor's, other magazines including Aviation Week, and the consumer-products and business ratings service J.D. Power & Associates.
-- Tom Petruno
8:00 AM, July 13, 2009
Howard Marks, the chairman of Oaktree Capital Management in L.A., suggests that a change in investing terminology might be a good idea after the horrendous losses investors faced in the 2008 and early-2009 market meltdowns.
He writes in his latest letter to clients:
" 'Risk' has become such an everyday word that it sounds harmless -- as in 'the risk of underperformance' and 'risk-adjusted performance.' Maybe we should switch to 'danger' to remind people what’s really involved."
I think he's on to something -- because the statement, "I want to reduce the risk in my portfolio" really does mean "I want to reduce the danger in my portfolio."
 Marks, a veteran money manager who is well-known on Wall Street for his periodic essays on big-picture issues in the economy and finance, focuses in his latest letter on how investing practices "went off the rails" in the years leading up to the credit crisis and subsequent market crash.
Reaching into now-distant history, he laments that the 1990s bull market pulled so many Americans into the equity market in a huge way.
"It’s interesting to consider whether this 'democratization' of investing represented progress, because in things requiring special skill, it’s not necessarily a plus when people conclude they can do them unaided. The popularization -- with a big push from brokerage firms looking for business and media hungry for customers -- was based on success stories, and it convinced people that 'anyone can do it.' Not only did this overstate the ease of investing, but it also vastly understated the danger."
Marks also decries the more recent rise of "black box" investing -- i.e., leaving "buy" and "sell" decisions up to computer models:
"Many of the investment techniques that were embraced in 2003-07 represented quantitative innovations, and people seemed to think of that as an advantage rather than a source of potential risk. Investors were attracted to black-box quant funds, highly levered mortgage securities critically dependent on computer models, alchemical portable alpha, and risk management based on sketchy historical data. The dependability of these things was shaky, but the risks were glossed over.
"I’ve often argued that the key to successful investing lies in subjective judgments made by experienced, insightful professionals, not machinable processes, decision rules and algorithms. I love the way Einstein put it: 'Not everything that can be counted counts, and not everything that counts can be counted.' "
-- Tom Petruno
Photo: Howard Marks. Credit: Oaktree Capital
5:30 AM, July 13, 2009
We're back to a familiar game in the U.S. Treasury bond market: How low can rates go?
As pessimism about the domestic economy has deepened in the last few weeks, the Treasury market has been the best indicator of that mood shift. The annualized yield on the 10-year T-note dived to 3.3% by the end of last week -- down from an eight-month high of 4% just a month earlier.
Traders were amazed by investors' appetite for the $104 billion of two-, five- and seven-year T-notes the government auctioned the week of June 22, and for the $65 billion of three-, 10- and 30-year Treasuries sold last week. Now it looks those buyers made the right bets -- even though they know Uncle Sam has plenty more to sell this year.
"All those 'green shoots' guys realize they were too optimistic" about the economy, said Tom Tucci, head of Treasury trading at RBC Capital Markets in New York. "The reality of 'lower for longer' [on Treasury yields] has caught investors offside."
 Indeed, the big trade of the spring -- sell Treasuries, buy stocks -- has flip-flopped. While the Standard & Poor's 500 stock index has fallen 7% since June 12, the iShares Barclays 20-plus-year Treasury Bond exchange-traded fund has risen 7% in the same period, to $96.23 a share as of Friday.
The dive in Treasury yields has been so abrupt that some bond market pros have been reluctant to recommend that clients jump in at this point, fearful of whiplash if Wall Street gets a few days' worth of upbeat economic reports.
But investors who believe there is no economic recovery on the horizon may be quite content with a 3.3% yield on a 10-year T-note -- if no recovery also means that the major threat is deflation, not inflation.
If the inflation rate is zero, the 3.3% "real" return on a current T-note would be rich by historical standards. And it comes with a principal guarantee, if you can hold to maturity.
In the near term -- the next week or so -- the Treasury market could just be powered by its own momentum. If the stock market worsens, institutional money exiting equities could pour into government bonds, pushing yields even lower. A rally to 3% would just return the 10-year T-note to its level of last winter.
The first leg of the latest bond rally "was just a reality check," said George Goncalves, fixed-income rate strategist at brokerage Cantor Fitzgerald in New York. If stocks keep sliding that could be the "death knell" for risk-taking, further boosting Treasuries' appeal, he said.
But then, don't underestimate the resolve of the Obama administration and the Federal Reserve to do whatever it takes to keep Wall Street believing in a recovery. Treasury Secretary Timothy F. Geithner says there's no point in talking about a second economic-stimulus program so soon -- but that could change in a heartbeat.
-- Tom Petruno
5:39 PM, July 12, 2009
Treasury Secretary Timothy F. Geithner today sought to downplay the idea of a second economic stimulus plan, saying the need for another program is a decision the administration "can’t really make" now.
In an interview on CNN’s "Fareed Zakaria GPS," Geithner also was asked about reining in federal borrowing, whether tax increases would be needed and whether the administration should curb what critics say is its anti-business rhetoric.
Excerpts:
--- On whether a second stimulus plan is needed:
"I think all economists believe, and this was inherent in the design of the program, that the biggest thrust or force would start to take effect in the second half of this year. And we’re going to start to see that happen. But I don’t think that’s a judgment we need to make now, can’t really make it now prudently, responsibly."
--- On ballooning federal borrowing:
"It is very important both for the sustainability of recovery, for confidence, that the world understands, American people understand that this government will do what’s necessary to bring these deficits down to a sustainable level as soon as we’re confident we have a sustained recovery in place.
 "The president is absolutely committed [to] that. He deeply understands how important that is. His team . . . lived through a period where a remarkable period of fiscal discipline and response in the United States helped generate a long period of rising private investment, strong . . . growth, stronger dollar, lower interest rates, broad-based improvement in income standards. And so he understands deeply the importance of making sure we put in place a stronger foundation for recovery as a whole. And part of that will be our return to living within our means as a country."
--- But when asked whether "living within our means" will mean higher taxes to pare borrowing needs, Geithner gave a classic Washington non-answer:
"As a country, and there’s no mystery in this, we’re going to have to bring our resources and our commitments closer into balance. That is a necessary thing for us to do. And it’s going to be a hard thing for us to do. But it’s perfectly within our capacity as a country to do."
--- On whether the administration is beating up on business:
"If you listen to what the president says on this and of course I say this all the time, we, of course, deeply understand that the future of America -- the future strength of our economy -- depends on quality of innovation by business in the United States. On the judgments they make and their willingness to take risk again and put money at stake and building companies that are going to grow.
"There is no path on the road to the American economy that doesn't come with that. And of course the president deeply understands that."
-- Tom Petruno
Photo: Treasury Secretary Timothy F. Geithner. Credit: Jim Watson / AFP Getty Images
1:01 PM, July 12, 2009
Amid the worst global economic decline since the 1930s, the leaders of the major industrialized nations met last week in Italy and decided . . . well, not much.
High Frequency Economics’ Carl Weinberg, who believes that governments' response to the deep recession hasn't been strong enough, wrote in his Friday newsletter on the Group of 8 summit's results -- or lack thereof:
"G-Whatever Heads of State may have agreed to push for a conclusion to the Doha round of trade talks, but that will affect nations’ terms of trade a decade from now, not next week or next quarter. Keeping global warming limited to two degrees -- if that can be done, since no one was willing to commit resources to make it happen -- is an agreement to accept limited failure to protect our planet, rather than a success.
" So our core story about the world economy remains unaffected by the goings-on in Italy. World trade imploded by 35% over the eight months ended in March. Summiteers did not even discuss this! World industrial output decreased by 20%-to-30%, depending upon which country you consider. Unmentioned! Prices and wages are slowing in most countries, and already falling in some. . . . Among the world's largest economies, only China continues to grow. The world economy is severely damaged and recovery is nowhere in sight."
Maybe the summiteers are confident that we're beginning to see an upturn in trade, as May data on U.S. exports hinted. Their statement on the economy cited "signs of stabilization," but added that "the situation remains uncertain and significant risks remain to economic and financial stability."
Weinberg believes that major countries should be doing more specifically to re-stimulate trade, the revival of which is "a precondition to a return to global prosperity," he asserts.
Although slumping consumer spending in the developed world obviously explains much of the slide in trade, Weinberg believes there's more to it than that. He suspects that a big problem is a lack of financing for importers and exporters, a side-effect of the credit crunch. To fix that, "All that would be needed are public sector guarantees of trade credits written by any private sector bank," Weinberg writes. "This ought not to be a big leap for governments that have already guaranteed so much lending to shaky institutions around the globe."
-- Tom Petruno
Photo: French President Nicolas Sarkozy, Russian President Dimitri Medvedev and President Obama at last week's summit of world leaders. Credit: Vincenzo Pinto / AFP Getty Images
2:50 PM, July 10, 2009
House Ways and Means Committee Chairman Charles Rangel today got more specific about his plan to tax high-income-earners to pay for healthcare reform, including coverage of the uninsured.
From Dow Jones newswires:
The House of Representatives will propose a surtax on taxpayers with income above $350,000 to help fund a $1 trillion health-care overhaul, House Ways and Means Chairman Charles Rangel, D-N.Y., said Friday.
The tax will be graduated, so wealthier taxpayers will be subject to a higher rate. While the rates themselves have yet to be nailed down, Rangel indicated they would be in the range of 1% for married couples making $350,000, 2% for those with income above $500,000, and 3% for those with incomes over $1 million.
A bill is expected to take shape next week in the House.
In his 2007 healthcare plan, Rangel proposed an extra 4% tax on incomes above $200,000 and an additional 0.6% on incomes above $500,000.
Earlier in the week the rumor was that Rangel, this time around, wanted to impose higher taxes starting at income of $250,000. So he has raised the income threshold by $100,000.
The top federal tax rate now is 35% on taxable income above $372,950 for married couples.
See this story for more on how the battle is shaping up over healthcare reform and how to pay for it.
-- Tom Petruno
8:30 AM, July 10, 2009
Not that anyone in California should need more sobering-up about the state's economic outlook, but the scenario painted by blogger Gregor Macdonald, who describes himself as a veteran oil analyst and energy investor, is particularly stark.
In a summary of his piece titled "The Scholarship of Collapse," he writes:
"Without the two industries that characterized post-war growth in the U.S., housing and automobiles (and the financial industry that squatted on top of these) it’s hard to see how California -- and the U.S. by extension -- does not become a permanently smaller economy.
"I now foresee zero net physical infrastructure or housing growth in California for at least another 5 years. If housing units go up somewhere in California, they’ll be bulldozed someplace else. If new roads or highways are erected, they’ll be discontinued or dismantled somewhere else. Without California, there will be no sustainable U.S. GDP growth."
I’m not convinced that the U.S. can’t grow without growth in California. Texans probably had similar thoughts when their mini-Depression began in the mid-1980s, with the collapse of oil prices and real estate values. But obviously the long workout ahead for California will weigh on U.S. growth.
In a broader view, Macdonald sees California as emblematic of the tipping point faced by the U.S. economy overall:
"The United States, just like California, now sits astride massive, gargantuan post-war infrastructure that was built with cheap energy and leveraged with cheap energy, for over 50 years. . . . To make matters worse, the federal government is in the midst of one of the largest policy mistakes in U.S. history as it has chosen to make enormous new investments in car companies, cars, biofuels, roads, and highways to the exclusion of public transport. This is a classic, textbook example of the sunk cost effect in decision making and is a hallmark of the collapsed societies of antiquity."
-- Tom Petruno
5:30 AM, July 10, 2009
Investors' appetite for California municipal bonds has improved noticeably in the last few days, driving down market yields on the securities.
Unfortunately, that could send exactly the wrong message to the Legislature and Gov. Arnold Schwarzenegger, who are at a stalemate in budget negotiations. If they think falling interest rates mean investors have faith in the state’s financial outlook, there may be even less incentive to strike a budget deal soon.
Market yields on the state’s general obligation bonds began to surge in late May as the budget nightmare worsened and some spooked investors bailed out, pushing down the prices of the bonds. As the price of a fixed-rate bond fall its yield rises.
The annualized tax-free yield on 10-year California bonds jumped from about 4.4% on May 22 to nearly 5.25% by the end of June, the highest level since the massive sell-off in all muni bonds during the credit-market meltdown last fall.
 But renewed buying interest since July 1 has pulled the 10-year bond yield back below 5%. Bloomberg News data pegged the yield at 4.99% on Thursday. Some bond dealers were quoting yields just under 4.9%.
Market rates have pulled back on the state’s bonds across the board. The yield on five-year general obligation issues has fallen to about 3.8% from more than 4% two weeks ago.
"There are still a lot of sellers, but not as many as last week," said Joe Lee, a trader at De La Rosa & Co. in Los Angeles. That has allowed yields to come down as more individual investors have stepped into the market, he said.
Matt Fabian, senior analyst at research firm Municipal Market Advisors in Westport, Conn., recommended in late June that income-hungry clients begin to put some money into California bonds, citing their high yields.
For a couple in the 32% combined federal and state tax bracket in California (which begins at taxable income of about $94,000), a 5% tax-free muni yield is the equivalent of earning a yield of about 7.3% on a taxable investment, such as a corporate bond.
Fabian said the market has improved in part because of the turn of the calendar: Many dealers didn’t want to hold the state’s debt as of June 30 for accounting reasons, but have been willing to add to their inventories again with the start of the new quarter.
It also has helped the muni market that U.S. Treasury bond yields have tumbled in recent weeks.
Most muni market pros don't believe that California will default on its bonds, because debt repayment is mandated by the state Constitution. Still, the state's financial image is so tattered, bond yields are unlikely to drop substantially from here, says Parker Colvin, a trader at Stone & Youngberg in San Francisco.
"I think there’s definitely a limit" to the current rally, he said, with no budget deal in sight and the state issuing IOUs to pay many of its bills.
He also said that many nervous investors continue to shun California general obligation issues, and any bonds backed by property taxes, in favor of issues backed by revenue from essential services, such as water or power.
Ten-year bonds issued Thursday as part of a Culver City Wastewater deal paid a 3.95% yield -- about one full percentage point below what the state’s 10-year bonds are yielding, Colvin noted.
-- Tom Petruno
« Previous Posts
|
Tom Petruno
Tom Petruno has been chronicling financial markets' highs and lows since 1979, and has been the Times' financial columnist since 1990. He writes on markets, corporate finance and the economy, and how it all ties in to individual investors' portfolios.
|
Subscribe to this Blog
Angelides? What a mistake! Now I know we...
One would think that the state of Califo...
WHEN YOU ALLOW CORRUPTION IN THE STATES ...
Eurotrash, That sideline is comprised o...
Angelides woo hoo!...
Its amazing that instead of solving the ...