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

Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.

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I have never bought a car in my life. My wife has bought a lot of them. I’m just not that into cars. I have usually referred to the cars we own by their color. I’m taking the blue car or the gray car or whatever. I actually did lease a car once. Back in the heady days of Spears, Benzak, Salomon, and Farrell, we all leased fancy cars and took advantage of the tax code provisions. But I even faded on that one a bit by going to the dealership with one of my partners and leasing the same car he did.

My  most recent car was a Ford Escape (I had to ask — I thought of it as the dark gray car) with close to 100,000 miles on it. We swapped it and another we had no more need for since the kids are grown and gone, and I (we) got another SUV. It’s gray and American-made, and that’s as much as I know about it. The neat thing is it came loaded with XM satellite radio so I can now listen addictively to CNBC as well as addictively watch it. But only after Ken Prewitt and Tom Keene on Bloomberg radio. (They are the best.) I’m pretty sure we got XM for a year for free, as the dealer was desperate, or so my wife told me. If I get a bill though, XM is history.

We probably should have waited since my old car, which was fine by me, was a “clunker” and probably would have qualified for the “cash-for-clunkers” program soon to come out of Congress. Germany has registered a significant increase in new-car registrations since their program went into effect. Word from Britain is that, on the verge of their program being enacted, activity in showrooms is up substantially.

The U.S. House of Representatives has passed a plan and the Senate is likely to do the same this week. It looks like the plan would provide a $3500 subsidy to anyone trading in a car getting less than 18 miles per gallon as long as there is at least a 4-mpg improvement. (I think I got yardage on my old car, not mileage.) A 10-mpg improvement would get you another $1000.

So the car industry would be revitalized – at least a bit – and the environment would be aided. Here’s the hitch. Of the 9 or 10 most fuel-efficient vehicles being sold today – and presumably the
beneficiaries of such a program – four are built by Toyota, two by Volkswagen, one by Honda, one by Smart (never heard of that? it’s a Swiss-designed, Mercedes-owned, French produced mini-car) and one by a US-based company: Ford. Some of the others might be made on US soil, I don’t know. But is this really what we wanted to do?

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Vincent Farrell, Chief Investment Officer
Soleil Securities Corporation
May 18, 2009
Vincent Farrell | 212-380-4909 | vfarrell@soleilgroup.com

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Good Evening: U.S. stocks rose smartly today after some better than expected news on both the economic and earnings fronts. Financial stocks especially took flight after some generous comments from Treasury Secretary, Timothy Geithner, that seemed to ease some previous concerns about compensation limits. Whether emboldened by this change of heart at Treasury or not, a few Wall Street firms declared their intention to repay their TARP capital. In addition, both Lowe’s and the Housing Market Index reported upside surprises. These factors gave investors a bit more confidence today, the growing level of which was easy to spot in the prices posted at today’s close. And, if one considers the generous terms available to TALF participants, perhaps Mr. Geithner’s newfound kindness toward Wall Street on the bonus and TARP fronts is no fluke.

Aside from a huge rally in India over the re-election of the incumbent Congress party, I could find no decent explanation why U.S. stock index futures were well into the green before this morning’s open. Sure, Lowe’s 22% decline in earnings was better than expected, and they did indeed raise their ’09 guidance, but one company’s results do not mean housing has hit bottom. Still, market participants were in a chipper enough mood this morning to push the major averages more than 1% higher at today’s open.

Geithner Says Government Shouldn’t Set Limits on Pay
U.S. May Homebuilder Confidence Rises to Eight-Month High of 16
Goldman, Morgan Stanley Said to Apply for TARP Exit

These next three stories came out at different times of the day, and while they might not have had much impact in isolation, they all helped give investors confidence that the economic and investing climates were changing for the better. Addressing a particularly sore spot with many in Wall Street and a surprising number on Main Street, Secretary Geithner had the following to say about government’s role in setting compensation:

“I don’t think our government should set caps on compensation,” he said in answering questions at an event at the National Press Club today in Washington. “What I think we need to do is make sure we put in place some broad constraints on the incentives compensation systems create.” (source: Bloomberg article above)

housing-market-index-1995-to-present

The Secretary’s words may not represent a huge shift in policy, but they acknowledged at least some of the philosophical concerns so many have when they hear about government intrusion at the micro policy level. On top of these hopeful words, the Housing Market Index printed a slightly better than expected 16 versus last month’s 14. Some played up this release as more evidence of a bottom in housing, but it’s an awfully tough case to make if one looks at the long term chart of this index (see link to graph above). These figures are still horrendous (50 is “normal”), but better than expected is good enough these days.

Equities went from strength to strength all day, and there were no pullbacks of consequence. Stocks, especially the financial kind, received a final boost late in the day when the TARP payback story hit the wires. These firms have mentioned their desire to pay back TARP investments before, but today’s announcement implied the regulatory climate was thawing enough to make the paybacks seem more plausible. Friendless only last week, the BKX (+7.5%) spurted higher into the close and carried the other averages with it. No index was left behind as the gains logged fell somewhere between the Dow’s 2.85% and the Russell 2000′s 4%. Treasurys were dumped during the celebration, and yields fell between 6 and 12 bps as the curve steepened. Credit spreads confirmed today’s flight toward risk by tightening in many areas. The dollar couldn’t stand all the attendant chatter about prosperity and had a poor day, while commodities were firm. Only precious metals seemed to sit out the CRB’s nearly 1% gain today.

If the rise in junk email and the scams attached to a growing number of them are any indication, then the U.S. economy is definitely still struggling. Whether its the “U.K. Lottery” telling me I’ve won, or “Western Union” looking to send me cash, these emails trying to get my personal or financial information are usually and swiftly sent to the electronic version of purgatory. The one below caught my eye, however, due to the sender’s relatively high profile. It’s an obvious scam, one riddled with mistakes, but it does make one wonder whether emails like it will some day be sent out by the real Federal Reserve — the one in Washington, not New York. Quantitative Easing and all the money printing that come with it have raised the odds of this outcome from zero 18 months ago to some tiny number above zero at present. Here’s the actual email I received last week (Italics are mine and employed to distinguish the scam from the rest of these scribblings):

From: Ben S. Bernanke [mailto:BenBernanke78@live.com]
Sent: Thursday, May 14, 2009 7:46 AM
Subject: CONTRACT FUND CREDIT FROM BANK FEDERAL RESERVE BOARD

Chairman Federal Reserve Bank New York

It’s also not out of the realm of possibility that Treasury Secretary Geithner will soon have emails sent out under his name with a promise to send similar amounts to TALF participants. Our Treasury Secretary had already shown some kindness to the Street today, so the connection to the Bernanke email crystallized in my thoughts when a reader sent me the following article from Fortune Magazine:

Geithner’s gift to Wall Street

But, unlike the Bernanke email and its imagined ties to Quantitative Easing, the TALF is a real program where real participants can make a whole lot more than the figure quoted by the ersatz Fed chairman — and with a lot less risk! So if you are a qualified institutional investor and a kindly broker sends you an email touting the TALF, don’t delete it. Pluck it out of your spam folder and open it. The low risk and high returns embedded in this program may not be found in the economic textbooks, but it doesn’t take an MBA to see that only real risk is of the political variety. Taxpayers may be the ones who are on the hook for the TALF, but it’s the best example yet of just how generous Tim Geithner can be.

– Jack McHugh

“American Casino is a powerful and shocking look at the subprime lending scandal. If you want to understand how the US financial system failed and how mortgage companies ripped off the poor, see this film.”
–Joseph Stiglitz, Nobel prize-winning economist and writer

American Casino movie trailer from Leslie and Andrew Cockburn on Vimeo.

Dow tacks on a nice bounce following last week’s drop.

Major indices are up 3% across the boards.

Anything to add ? What was this about?

What say ye?

I was pleasantly surprised this morning when I woke up to find the first review of Bailout Nation was written, by Eddy Elfenbein of Crossing Wall Street.

It is very long and thoughtful and I am thrilled with it.

Excerpt:

In Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, Barry Ritholtz takes on that question with gusto and the result is a wonderfully engaging book. Bailout Nation describes not only what happened and what went wrong, but also why. Don’t worry, you don’t need an advanced degree in economics to follow the story. Bailout Nation manages to be both comprehensive and easy to read.

Ritholtz is already known to countless investors through his invaluable blog, The Big Picture. (Full disclose: He’s been a supporter of CWS from its earliest days.) I have to confess to having some initial reservations about Ritholtz’s book. What makes him a great blogger, I feared, might not transfer well to a 300-page sustained argument. Let’s just say that Ritholtz isn’t exactly a “shades of gray” kind of guy. When a rapier is needed, Ritholtz is fully willing to use a cluster bomb. If you don’t think it’s possible to get a true sense of moral outrage over, say, the latest BLS report, well…you haven’t read The Big Picture.

Fortunately, my fears were unfounded. Ritholtz does very well in book form. His editor, Aaron Task, served him well; the prose is compact and well-organized, though I’m fairly certain of the sentences where Ritholtz shook off all editorial changes. Where Ritholtz truly shines is in drawing connections between seemingly dispirit events; the fall of Bear Stearns, oleaginous mortgage brokers, the repeal of Glass-Steagall, the growth of credit default swaps, even the effects of reforming the Consumer Price Index, all play a role in this complex mess of unintended consequences, vicious cycles, ideological blindness and abject stupidity.

I can’t remember that last time I had so much fun reading about the Apocalypse

The whole review is here.

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Source:
The Strange Death of American Capitalism
Book Review of Bailout Nation by Barry Ritholtz
Eddy Elfenbein,
Crossing Wall Street, May 17, 2009

http://www.crossingwallstreet.com/archives/2009/05/the_strange_dea_1.html

Assuming no change by days end, the implied inflation rate in the 10 yr
TIPS is about to close at its highest level since late Sept at 1.595%,
exceeding the recent high of 1.58% 1 1/2 weeks ago. The price movement
today follows the action in the stock market in the belief that the
Fed’s aggressive (for better or worse) policies will be successful in
inflating our way to a better economy but watch over the next few
quarters if we reach a disconnect at some point where inflation concerns
remain sticky and the economy fails to gain any traction due to a
cautious consumer, aka stagflation. The selloff in bonds today is also
sending the FNMA 30 yr mortgage coupon back higher to 4% for the first
time since May 8th. There will be no free lunch.

A quick mention of the real job:

We are opening a new office in South Florida (Coral Springs) on June 1, 2009.

If any asset managers/retail brokers with substantial assets under management are looking for a new office, with a broad platform of macro research, quant tools, alternative investments, and asset allocation, please send your inquiries to Asset management hires @ FusionIQ

Additionally, we have a small but growing Boston office, and a larger Long Island/Suffolk County office that we are also expanding.

We are also looking for people to head up offices in the following locations:  Dallas, Long Island/Nassau County, San Francisco, LA, Chicago, Cleveland and possibly Charlotte, North Carolina (one of my partners loves to golf).

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UPDATE: We are not looking for any back office or research personnel at this time.

We are only interviewing managers /brokers with assets at this moment.

Of all the corporate bailouts that have taken place over the past year, none has proved more costly or contentious than the rescue of American International Group (AIG). Its reckless bets on subprime mortgages threatened to bring down Wall Street and the world economy last fall until the U.S Treasury and the Federal Reserve stepped in to save it.

So far, the huge insurance and financial services conglomerate has been given or promised $180 billion in loans, investments, financial injections and guarantees – a sum greater than the annual cost of the wars in Iraq and Afghanistan.

In return the U.S. taxpayers have been given a 79 percent equity stake in the company. We are now AIG’s largest shareholder. We have 116,000 loyal employees who had nothing to do with this mess, some valuable insurance assets, and a new CEO, Edward Liddy, who says his only mission is to get our money back.

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Source:
Steve Kroft Reports On The Troubled Insurance Giant, And Talks To Its New CEO
CBS, May 17, 2009

http://www.cbsnews.com/stories/2009/05/15/60minutes/main5016760.shtml

The May Nat’l Assoc of Home Builders index is 16, up two pts from April
but in line with expectations and is now 8 pts off the record low and at
the highest level since Sept. Both Present and Future expectations rose
while Prospective Buyers Traffic remained unchanged, with the biggest %
increase in the West where most of the foreclosures are occurring and
has been the biggest competitive threat to the builders. Tax incentives
were likely a help as for example California initiated a $10,000 tax
credit for home buyers of new homes ONLY. There is also a federal tax
credit of $8,000 for first time buyers and the California state credit
can be combined with this.

Very funny: