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

Caterpillar: 20,000

Pfizer: 19,000 (10% reduction), plus additional layoffs due to merger with Wyeth:

Sprint Nextel: 8,000

Home Depot: 7,000

Philips: 6,000 jobs

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Bloomberg reports 74,000 job cuts today alone as “sales withered and construction slowed amid a global economic recession.”

Before today, at least 15 companies announced they planned to eliminate 93,000 positions so far in January, Challenger Gray said. In the U.S., the firings brought the number of job eliminations this month to at least 150,500, according to Chicago-based executive search firm Challenger Gray & Christmas.

Did I miss any ? Use comments to create a running total

Bianco: The Dow is Distorted
January 21, 2009 James A. Bianco, CEO of Bianco Research, LLC

Comment – The Dow Jones Industrial Average (DJIA) is a price weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company’s market capitalization.

Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night’s close (January 20), The DJIA had the following stocks less than $10…

Citi (C) = $2.80
GM (GM) = $3.50
B of A (BAC) = $5.10
Alcoa (AA) = $8.35

If all four of these stocks went to zero on today’s open, the DJIA would lose only 157.3 points.

The financials in the DJIA are…

Citi (C) = $2.80
B of A (BAC) = $5.10
Amex (AXP) = 15.60
JP Morgan (JPM) = $18.09

If every financial stock in the DJIA went to zero on today’s open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).

If you want to add GE into the financial sector, a debatable proposition, then:

GE (GE) = $12.93

If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.

The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks and the financials are so beaten up that they cannot push the index much lower.

So what is driving the index? The highest priced stocks:

IBM (IBM) = $81.98
Exxon (XOM) = $76.29
Chevron (CHV) = $68.31
P&G (PG) = $57.34
McDonalds (MCD) = $57.07
J&J (JNJ) = $56.75
3M (MMM) = $53.92
Wal-Mart (WMT) = $50.56

For instance if all the sub-$10 stocks listed above, all the financials listed above and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.

If IBM opens at zero, it loses 652.95 points. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE and Alcoa combined.

The DJIA is not normal as the Index committee is not doing their job during this crisis, possibly because of the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos.

We thank Jim Bianco for giving us permission to share his firm’s research with our readers.
James Bianco, Chief Executive Officer, Bianco Research, LLC

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Source:
Lending Drops at Big U.S. Banks
DAVID ENRICH
WSJ, JANUARY 26, 2009

http://online.wsj.com/article/SB123293041915314113.html

Time to Nationalize Banks? A “Bad Bank” for Toxic Assets? What is the FDIC’s Role? – Roundtable Discussion with Josh Rosner of Graham Fisher & Co., Catherine Mann of Brandeis International Business School, and Mark Sunshine of First Capital

Bloomberg, January 24, 2009

We’ve been repeatedly noting that the fastest, fairest, cheapest, most efficient way out of the current credit and financial mess is Nationalization.

As we have seem over the past few weeks, the country’s biggest banks — Bank of America and Citigroup — are deteriorating rapidly. They will need far more bailout money beyond the $350 billion of taxpayer cash and guarantees they have already received.

Note that the money already dumped into the black holes of these two financial institutions far exceeds their net worth. And in exchange for this foolish investment, taxpayers have received just 6% of Bank of America, and 7.8% of Citigroup. This is absurd. How a 120% of a company’s market cap yields a single digit ownership stake is beyond my comprehension.

The solution to the banks problems, as well as this ridiculous investment posture, is relatively simple: Nationalize the banks, appoint new management, give them 6 months to spin out 10% of each of the separate viable pieces, with the taxpayer retaining the rest as passive investors. For Bank of America, they can spin out 5 major pieces: BoA, Merrill, Countrywide, a Toxic holdings company, and a Good holdings company. The derivative exposure gets wiped out, put into the toxic holding section.

Stock holders get nothing; Since bond holders would receive some pro-rata share in a liquidation, they get a convertible preferred in the new debt free firm, as well as an opportunity to lend to the new banks at an generous convertible rate.

The NYT looks at this question this morning. Excerpt:

“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.”

“I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”

So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.

Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next . . .

The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.

Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.”

The current bailouts have shown themselves to be expensive, ineffective, and replete with Moral Hazard and other corrupting abuses. Not only are we wasting vast sums of money, but all too often, we are rewarding the incompetent management teams that created the mess in the first place. Its time to move past them.

Nationalize Now.

>

Source:
Nationalization Gets a New, Serious Look
DAVID E. SANGER
NYT, January 25, 2009

http://www.nytimes.com/2009/01/26/business/economy/26banks.html

Below is a letter from Neil Barofsky, Special Inspector General of the Troubled Asset Relief Program to Rep. Spencer Bachus (R-AL).  The TARP IG will be requesting TARP recipients to provide –

· a narrative response outlining [their] use or expected use of TARP funds.

· Copies of pertinent supporting documentation to support the response

· a description of their plans for complying with applicable executive compensation restrictions; and

· a certification by a duly authorizes senior executive officer of each company as to the accuracy of all statements, representations, and supporting information provided.

TARP recipients should be receiving letters very soon.  Moreover, Treasury has requested that the special TARP reports be submitted by January 31^st.

TARP IG Letter to Spencer Bachus

The viewing stands from the inaugural parade are still coming down, but the White House is already open for business and alive with activity.

My pal JP notes that the iPod wannabe had an utterly disasterous quarter:

Overlooked in the carnage of Microsoft’s second quarter was the performance of the company’s Zune platform. Which was, quite simply, atrocious. Seems that $10 to $20 holiday discount didn’t do much good at all.

According to Microsoft’s latest 10-Q, “Zune platform revenue decreased $100 million or 54 percent reflecting a decrease in device sales.”

A precipitous decline. And one that stands in stark contrast to the record 22,727,000 iPods Apple (AAPL) shipped during its latest quarter, representing three percent unit growth over the year-ago quarter. Can’t really blame this one on the economy, can we Microsoft (MSFT)?

That is just a horrific comparable. It just goes to show you that Microsoft, without the advantages of the Windows/Office monopoly, is simply just another ordinary company — nothing special, nothing innovative.

What do you expect from a big bloated monopolist whose history is dominated by decades of a corporate culture that was more interested in stealing versus creating, in bullying versus cooperating.

Onwards! Their long slide into irrelevance continues . . .

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Source:
Zune to Be Forgotten
John Paczkowski
Digital Daily, 12:00 AM PT on January 24, 2009

http://digitaldaily.allthingsd.com/20090124/zune-to-be-forgotten/

Four-day weeks are notoriously volatile, and the past few days were no exception. But despite a daily dosage of grim economic news and a deterioration in the investment outlook, the headlines were captured by the inauguration of the US’s 44th president, Barack Obama.

Commentators were in agreement that Mr O commenced his tenure against the worst economic background in living memory and that his Administration had its work cut out to resurrect the US from its economic malaise (also see “Obama’s honeymoon faces daunting tasks“). As a result, good viewing material was produced with the likes of Warren Buffett, David Swensen, Bill Gross, John Mauldin, John Bogle, Stephen Roach and Joseph Stiglitz in attendance.

A few of the more interesting video clips that attracted my attention are shared below.

But before we lend our ears to some of the familiar voices deliberating the outlook for the economy and financial markets, spend a few minutes viewing the first two parts of Max Keiser’s delightful new BBC series. Entitled “The Oracle” the videos take a fresh look at the causes and consequences of the financial crisis.

BBC News: The oracle with Max Keiser

“Back in 2006, when bankers and hedge-fund managers strode the world, Max Keiser predicted that a crisis in the global banking system would be triggered by subprime debt. How right he was. Now, he’s bringing his predictive powers to BBC World News in a new series called The Oracle – starting with an entertaining and irreverent look at the global economic crisis. “

Click here or on the image below for part 1 of the interview.

Click here for part 2 of the interview.

Source: BBC News (via YouTube), January 16, 2009.

NBR: Warren Buffett reminisces about Wall Street

The Chairman & CEO of Berkshire-Hathaway sat down with NBR’s Susie Gharib to discuss the past, present and future of Wall Street.

Source: NBR, January 22, 2009.

Charlie Rose: A conversation with David Swensen

Source: Charlie Rose, January 21, 2009.

CNBC: Barack Obama’s inaugural address

Source: CNBC, January 20, 2009.

CNBC: Warren Buffett – Barack Obama will help the economy, but don’t expect short-term miracles

Click here for the article.

Source: CNBC, January 18, 2009.

John Authers (Financial Times): Without a watchful eye

“Following the successive eight-year terms of Bill Clinton and George W. Bush, markets probably agree with President Obama’s call for a ‘new era of responsibility’.”

Click here for the article.

Source: John Authers, Financial Times, January 20, 2009.

CNBC: Obama & the TARP=

Debating the use of the TARP for foreclosure diminution with Barney Frank, House Financial Services Committee Chairman, and Joseph Stiglitz, Columbia University & Nobel Prize-winning economist.

Source: CNBC, January 19, 2009.

Bloomberg: Gross – $500 billion in deficit spending needed

“Bill Gross, manager of the $132 billion Total Return Fund at Pacific Investment Management Co, talks with Bloomberg’s Kathleen Hays from Newport Beach, California, about prospects for deficit spending as the federal government attempts to fund efforts to stimulate the economy. Gross also discusses the outlook for Treasuries, municipal bonds and corporates.”

Source: Bloomberg, January 21, 2009.

Yahoo Finance: Mauldin says government will keep spending until economy reflates

“Barack Obama’s stimulus package has now grown to $825 billion, news that comes as no surprise to John Mauldin, president of Millennium Wave Advisors.

“‘We are in uncharted waters. But the captains of the boats are all Keynesians,’ Mauldin says, meaning they believe government spending is key to fighting the downturn. ‘They will keep spending until the economy reflates.’

“Mauldin, who has been notably bearish on the economy and stocks in his popular Thoughts from the Frontline e-letter, does not believe the government will be successful in turning the economy anytime soon; ‘this recession is going to be the longest in anyone’s memory,’ he writes. ‘It is going to seem like it is never going to end.’

“Still, he does believe the government spending will prevent the most dire economic outcome and that from the rubble of Wall Street a new, private banking system will emerge – even as the government continues to prop up the old, failed model.”

Source: Aaron Task, Yahoo Finance, January 16, 2009.

Yahoo Finance: John Mauldin’s 2009 outlook – deflation, recession, new market lows

“John Mauldin, president of Millennium Wave Advisors, was one of the few analysts whose forecasts for 2008 proved accurate (and worth repeating). Mauldin made bullish bets on gold and Treasuries, and remained wary of stocks. Although he did believe the US was in recession heading into 2008, which wasn’t consensus at the time, Mauldin readily admits he wasn’t negative enough on the economy (again distinguishing himself from most forecasters who never seem to admit their failures).

Looking out into 2009, Mauldin’s forecast can be summed up in two words: Deflation and Recession – with new lows for the stock market thrown in for good measure.

“‘We have a structural program in that deflation has the potential to get some very real traction going forward,’ he writes in his popular Thoughts from the Frontline e-letter. ‘Why? Because not just in the US, but all over the world, we built too much of almost everything. And when demand due to the recession drops as well, prices fall as producers try to stay in business.’

“As discussed in the accompanying video, Mauldin’s baseline scenario features:

Deep recession throughout 2009 and a ‘muddle through’ scenario in 2010 and 2011, the earliest he believes housing inventories can be worked off.

The potential for a short-term rally in stocks as money redeemed from hedge fund comes back into the market (directly or via other managers) but new lows in the summer as earnings continue to disappoint.

The potential for a 1974-like bottom in late 2009 as valuation compression generates selective opportunities.

“This outlook, it should be noted, presumes government stimulus prevents a more dire economic outcome.”

Source: Aaron Task, Yahoo Finance, January 16, 2009.

CNBC: Outlook for the O-Conomy

“A look at the future of the economy, with John Bogle, The Vanguard Group founder/former CEO, Greg Valliere, Stanford Financial Group, and Dennis Gartman, The Gartman Letter.”

Source: CNBC, January 20, 2009.

CNBC: Roach – Worst is ahead for the US

“The worst is ahead for the real economy in the US, says Stephen Roach, chairman, Asia at Morgan Stanley. As he sees no V-shaped recovery there, he tells CNBC’s Martin Soong & Sri Jegarajah what to expect on the US consumption and employment front.”

Source: CNBC, January 19, 2009.

CNBC: Stiglitz – spending versus tax cuts

“Debating the merits of tax cuts versus spending with Joseph Stiglitz, Columbia University & Nobel Prize-winning economist.

Source: CNBC, January 19, 2009.

Financial Times: UK announces new bank bailout

“The UK government on Monday announced a raft of measures in an effort to promote bank lending and rescue the economy. Peter Thal Larsen, FT’s banking editor, tells Daniel Garrahan that the first bailout of British banks was oversold by Gordon Brown and the government could yet be forced to step in and take full control over the banking sector.”

Click here for the article.

Source: Financial Times, January 19, 2009.

CNBC: Richard Branson on UK bailout

“Virgin Group President Sir Richard Branson famously missed out on buying Northern Rock last year, after the UK government rejected his consortium’s offer. Branson speaks to CNBC about the latest bailout package.”

Source: CNBC, January 19, 2009.

CNBC: Trichet hints at further rate cut

“European interest rates have not necessarily bottomed at 2%, European Central Bank President Jean-Claude Trichet told CNBC Wednesday. ‘We have a very important rendezvous in March,’ he said.”

Source: CNBC, January 21, 2009.

John Authers (Financial Times): Thinking the unthinkable for China

“With a Chinese economic contraction now at least thinkable, new data could stoke the fears that already stalk the financial system.”

Click here for the article.

Source: John Authers, Financial Times, January 21, 2009.

CNBC: Roach – Asia is in big trouble

“Asia is not going through a cyclical or inventory correction, says Stephen Roach, chairman, Asia at Morgan Stanley. He tells CNBC’s Martin Soong and Sri Jegarajah that export-dependent Asia, especially China, is in big trouble as it has failed to stimulate internal private consumption.”

Source: CNBC, January 19, 2009.

Financial Times: Barclays Capital’s Larry Kantor says emerging-market crisis looms

“The stress in the developed world has infected the emerging world. Latin America is likely to come out of the crisis relatively well, but countries in Eastern Europe could be affected the worst. The most vulnerable countries are those that depend most on trade, with big current account deficits. China is getting hit hard but, like the US, it has the determination to take significant action. The two countries in the world where recovery could come first are the US and China.”

Source: Financial Times, January 18, 2009.

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Below is the link to the NYT column today by Gretchen Morgenson regarding Credit Default Swaps.  I really appreciate her attention to me and my firm, but more for leading with Sylvain Raynes and also including Robert Arvanitis, both of whom have helped me enormously over the past year to sharpen my distinctions on risk.

Time to Unravel the Knot of Credit-Default Swaps

http://www.nytimes.com/2009/01/25/business/25gret.html

Of interest, I agree with Bob’s view that as much as half of the remaining CDS is not an issue since many of these positions do match against opposite exposures, but the remainder is a rancid pile of under-collateralized wagers on default events that are all heading toward 1 in terms of P(D).  Thank to the FASB and the SEC for accelerating the deflation via fair value accounting!  Who would have thought that accountants, who are some of the nicest, smartest people you will ever know, would destroy the world!

One of the key insights I have gained from my conversations with Bob Arvanitis over the last year is the high-beta character of CDS and the way in which this fact only grows overall market risk.  The NYT editors greatly simplified Mogenson’s piece for the level of the generalist reader, but there are some powerful issues raised in the article that will be part of the public debate.

Here are the last two comments we posted on CDS last week FYI.

‘To Stabilize Global Banks, First Tame Credit Default Swaps’, Janury 21, 2009

‘Does Fair Value Accounting + Credit Default Swaps = Global Deflation?’, January 23, 2009

I am especially interested in your comments on

1) the issue of what to do with CDS written against the top four money center banks, which are all under de facto public ownership as will become apparent as loss rates eat remaining private common and preferred; and

2) how to bifurcate the functionality of current CDS into a) an exchanged traded, index like product that tracks the spread/volatility of a corporate single name issuer and b) an exchange traded form of bond insurance with minimum 50% collateral vs net exposure (par less current estimated recovery rate, which will vary with spreads).

Thoughts?

Chris