The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

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Source:
Central Banks Are Creatures of Financial Crises
JUSTIN LAHART
WSJ, JANUARY 27, 2009

http://online.wsj.com/article/SB123302236816918321.html

Inside Look: A Severe Global Economic Contraction

Bloomberg, January 27, 2009

As expected, William Dudley was named NY Fed Prez, and others were also named to key posts:

William C. Dudley was named today to serve as President and Chief Executive Officer of the Federal Reserve Bank of New York. His appointment by the Board of Directors of the New York Fed, succeeding Timothy F. Geithner who was sworn in as Secretary of the Treasury yesterday, was approved by the Federal Reserve Board of Governors.

Stephen Friedman, chairman of the New York Fed’s Board of Directors and of the search committee that selected Mr. Dudley, said, “We were fortunate to have an exceptional slate of candidates for the post. The board is very pleased with the selection of Bill Dudley. His deep economics background, extensive working knowledge of the markets and hands-on policy making role make him an outstanding choice to succeed Tim Geithner.”

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WSJ’s Kelly Evans talks with S&P senior economist Beth Ann Bovino about what the latest round of corporate job cuts signal about prospects for a recovery in the U.S. economy.

1/26/2009

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Source:
Home Price Declines Continue as the S&P/Case-Shiller Home Prices Indices Set New Record Annual Declines
New York, January 27, 2009

http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,2,1,0,0,0,0,0.html

Today’s Case Shiller report for November 2008 showed a 18.2% decline y/o/y for the 20 city Home Price Index. This is the biggest decline in this cycle, and is now down 25% from its price highs of July ’06.

In contrast to the FHFA (formerly OFHEO) home price index, Case Shiller is a 20 city composite index that includes housing at all price levels, including jumbo’s but also foreclosures and distressed properties.

David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s said:

“The freefall in residential real estate continued through November 2008. Since August 2006, the 10-City and 20-City Composites have declined every month – a total of 28 consecutive months. Every region was down in excess of 1% for the November/October period, with eight of the regions recording record monthly declines. Phoenix and Las Vegas were the worst performers for the month at -3.4% and -3.3%, respectively, and also have the lowest returns over the one-year period, returning -32.9% and -31.6% respectively. Overall, more than half of the metro areas had record annual declines.”

Case Shiller Home Price Index:

via S&P

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Source:
Home Price Declines Continue as the S&P/Case-Shiller Home Prices Indices Set New Record Annual Declines
New York, January 27, 2009

http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,2,1,0,0,0,0,0.html

via Dilbert.com

I couldn’t agree with this article more: Madoff Enablers Winked at Suspected Front-Running. I look at Madoff as a Sociopath — he is a sick individual. The enablers, on the other hand, were simply greedy hacks who didn’t, (and probably couldn’t) do the suitable investigation and due diligence into Madoff’s asset management business.

Were they Corrupt? Incompetant? Both? Who is to say. The bottom line is they lost all of their clients’ monies, and need to be held accountable.

Excerpt:

If the 70-year-old money manager was running a con, then his marketers like Access International, wittingly or not, were part of the scam.

The purported mission of such feeder funds was to vet hedge funds for wealthy clients. Instead, the line between victim and perpetrator was blurred. Middlemen like Littaye funneled billions of dollars to Madoff, even, in some cases, when they suspected he was engaged in questionable trading practices. In return, they reaped hundreds of millions of dollars in client fees.

Lower Returns: Wolfer says he heard of traders trying to replicate the split-strike conversion strategy Madoff told investors he used — buying shares of large U.S. companies and entering into options contracts to limit the risk — and getting far lower returns. He also says he heard Littaye and other middlemen talk about how Madoff may have used the knowledge he gained from his market- making firm, New York-based Bernard L. Madoff Investment Securities LLC, to get in and out of stocks ahead of market swings.

That’s front-running, a term usually applied to brokers’ trading for their own account — and profit — ahead of clients. It’s also applicable to Madoff’s purported practice, says Peter Henning, a law professor at Wayne State University in Detroit and a former federal prosecutor.

“Front-running isn’t who’s getting the benefit; it’s who’s paying the price,” says Henning, noting that Madoff’s market- making customers expected the firm to obtain the best price available when buying or selling stocks. Instead, their interests were apparently subordinated to those of Madoff’s investment clients.

Front-Running: While front-running is illegal, it didn’t horrify Madoff’s champions.

“They were convinced that the risk was only that the Securities and Exchange Commission would do something about breaches of the Chinese wall in the Madoff organization,” Wolfer says. In the worst case, he says, “what could be expected was that at a certain point the SEC could say stop.”

Weasels all. I sincerely hope that the Trustee looks to confiscate the Funds of Fund managers’ houses, cars, watches, jets and boat — as the illegal proceeds of a crime. Auction ‘em off, put the proceeds into a fund for the scam’s victims.

The Madoff investors themselves aren’t blameless — as Paul Kedrosky asked, “why so many smart people get suckered into losing billions on an implausible con” remains a mystery of the Madoff affair. But they are far less culpable than the Do-No-Due-Diligence fund of fees funds managers . . .
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Source:
Madoff Enablers Winked at Suspected Front-Running
John Helyar, Katherine Burton and Vernon Silver
Bloomberg, Jan. 27 2009

http://www.bloomberg.com/apps/news?pid=20601109&sid=au4Y7Cudw2Xo&

They Knew What They Were Getting Into
Paul Kedrosky
Daily Beast, December 16, 2008 | 7:36am

http://www.thedailybeast.com/blogs-and-stories/2008-12-16/how-madoff-made-off-with-the-money/

From 80 to 18 degrees:  Settling back in after last week’s travel. I’ll see if I can get some photos posted later this week.

More posts later

Good Evening: A day of mixed news led to a day of mixed results in Wall Street. Stocks initially rose on word of a large pharma deal and better than expected economic data, but large layoff announcements during the trading session took the starch out of the equity rally. Given the large competing forces at work, forecasting the rest of 2009 should be akin to throwing dice. But, as we will see, GMO’s Jeremy Grantham and BAC/MER’s David Rosenberg toss out their latest views in spite of all the uncertainty. They both point out that only thing we can know for sure is that it is dangerous to allow bubbles to ever inflate.

U.S. stock index futures were pointing to a lower open early this morning when word came that Pfizer had entered a definitive agreement to buy Wyeth (see below). That any M&A can take place in this environment, especially one that involves some borrowing, was construed as an immediate positive. Stocks rallied 1% to 2% soon after the opening bell rang, and they levitated further upon the release of the day’s only economic data. Existing home sales were actually 6.5% higher in December (month over month; sales were down 3.5% year over year). Also, leading indicators also posted a positive surprise, gaining 0.3% instead of an expected decline of the same magnitude. The major averages popped to new highs (up 2% to 3%), but those levels turned out to be the high water mark.

The “good” news items described above had, unfortunately, a darker side to them. Existing home sales were boosted in no small part by foreclosure sales, while leading indicators would have fallen sharply without a huge swelling of the U.S. money supply. Even the Pfizer deal had warts, since the two companies announced they would be laying off almost 20,000 people as part of their cost-cutting strategy. PFE was hardly alone, either, since Caterpillar also announced a 20K layoff, and they were joined by Sprint, Home Depot, and ING (see below). The job cuts announced just today totaled 77,000 — an amount normally seen during an entire month, according to Challenger, Grey, and Christmas.

As analysts and investors took into account this less rosy view of today’s news flow, equities promptly sprang a leak. A trickle at mid day, the leak expanded after lunch until almost every major average was down on the day. A late rally and dip left the averages with modest gains ranging from a fractional advance in the Dow Transports to a 1.25% rise in the Russell 2000. Treasury securities were on the defensive for most of the day, and their yields rose between 2 and 6 bps. The dollar also went down, leaving the dollar index 1.4% the worse for wear at day’s end. The sagging greenback didn’t help crude oil (-1.6%), but it did help the metals complex. Overall, the CRB index managed to post a gain of 0.6%.

The final two links below represent the views of both Merrill’s David Rosenberg and GMO’s Jeremy Grantham (free registration is required to view the Grantham piece). Making absolutely no apologies to Al Gore, Mr. Rosenberg’s “Some Inconvenient Truths” is a somewhat lengthy attempt to describe our current economic environment. He pulls no punches in detailing why he thinks the U.S. economy is “likely enduring a depression today”. Not content with a startling headline, Mr. Rosenberg then goes on to lay out his reasons why the U.S. will be stuck with very sub par growth in the years ahead. I won’t list all of his reasons here, but layoffs of the type announced just today are a big source of concern to Mr. Rosenberg. As for a restart of lending and borrowing, it is his view that the over-indebted U.S. probably needs to extinguish some $6 Trillion of debt before financial balance sheets can support a new lending cycle.

Continued delevering of this size and scope will take quite a bit of time, thinks Mr. Rosenberg, and he is joined in this concern by Mr. Grantham. The longtime head of GMO goes even further, though, and thinks “somewhere between $10 to $15 Trillion in debt will have to disappear”. He also rails at the forces that allowed the massive build up of debt that will have to be “stranded” and he fingers our central bankers as the prime culprits. He has few kind words for almost anyone in charge during the past 10 years, saying anyone who proclaims either to not be able to recognize an inflating bubble or who thinks bubbles can be popped and then mopped up is simply delusional. It’s a marvelous rant.

Taken together with Mr. Rosenberg’s views, it is easy to see why I’ve been saying 2009 has more work to do to the downside in the equity markets. We may see periods of advancing stock prices when the crowd believes government stimulus can save the day, but such moves will likely only help cushion the fall. It was to warn investors about the potential consequences of a credit bubble that caused the likes of Jeremy Grantham, David Rosenberg, Nouriel Roubini, Barry Ritholtz, Bill Fleckenstein, Jim Grant and others to write about it while it was expanding from 2003 to 2007. They properly maintained that bubbles, especially ones blown against the collateral of residential real estate, are simply too dangerous to let inflate.

Mr. Grantham reminds us that there are really only three ways to deal with a broken credit bubble: 1) liquidate (the deflationary route the U.S. took after 1929, 2) stimulate enough to allow for a long sideways period of repair (a la Japan after 1989), and 3) inflate enough to reduce the real value of the debt burden. He mentions a fourth way out — blow an even larger bubble in another asset class (e.g. housing). Unfortunately for all of us, this was the path chosen by Alan Greenspan when faced with the broken equity bubble of 2000-2002. Instead of allowing our economy to face the music back then, he set in motion (and even cheered) the events that have led us into our current predicament before retiring to the lucrative lecture circuit. Perhaps we should all take the time to pen a note to the Maestro and offer him what golfer Nick Faldo once said to the irritating British press: “Thanks from the heart of my bottom”.

– Jack McHugh

Caterpillar, Sprint, Pfizer Slash Jobs as Sales Fall

Pfizer Bids About $68 Billion for Wyeth; Boards Meet

Obama and the Teflon Men, and Other Short Stories. Part 1. Jeremy Grantham (Free Registration Required for Access)

Some inconvenient truths.pdf