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

Be sure to catch Brian Williams deadpan at the end . . .

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“We believe there is an excellent chance that we can repay the government.”

-AIG Chief Executive Officer Edward Liddy

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I find the above exceedingly hard to believe; Here is the full context:

“American International Group Inc., the insurer bailed out by the U.S., has an “excellent chance” of repaying the government, outgoing Chief Executive Officer Edward Liddy said today at the company’s annual meeting. AIG plans to reduce its debt under a Federal Reserve credit line by $25 billion by handing over stakes in two non-U.S. life insurance units, the insurer said last week. The New York-based company has tapped about $40 billion from the line.

AIG has received four bailouts, totaling $182.5 billion, after agreeing in September to turn over a majority stake to the U.S. when the company was overwhelmed by losses on bets tied to the housing market. In addition to a $60 billion credit line, the rescue includes $52.5 billion to buy mortgage-linked assets owned or insured by the company, and an investment of as much as $70 billion.

Why is that doubtful? Well, in 2006, they had revenues of $113 billion and profits of $14 billion — about 25% of her profits were due to AIG FP.

Now, with their reputation in tatters and their revenues cut in half, their “Enterprise Value” at a mere $91 billion, and a market cap at just over $3 billion, they are going to pay back $182.5 billion?

I’m not holding my breath . . .

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Source:
AIG Has ‘Excellent Chance’ To Repay U.S., Liddy Says
Hugh Son, Erik Holm, and Tian Huang
Bloomberg, June 30 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4rJdEHwyE9E

Paul Krugman and John B. Taylor debate the origins of the financial crisis and the proposed health care plan:

This has to be my favorite “brown shoots” story yet:

“How bad is this recession? Even sex doesn’t sell.

That’s the glum assessment of those in the adult entertainment industry, hundreds of whom gathered last week for the annual Cybernet Expo conference in San Francisco. The industry, now a multibillion-dollar online business, has discovered that people just aren’t willing to click-to-pay for vice the way they once did . . .

A lot of companies have been bouncing checks,” performer Annie Cruz said. “Some people have quit the business. A lot of companies have cut back shooting. There are a lot of girls who have not worked in a month.”

Sorry ’bout the headline, it was the tamest bad pun I could come up. (You guys can have fun with it in comments)

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Source:
This recession is so bad not even sex sells
John Boudreau
Mercury News, 06/29/2009 05:26:22 PM

http://www.mercurynews.com/topstories/ci_12716498

Hopes that Asia is going to be the new engine of the global economy are overblown at this point, cautions Stephen Roach, chairman at Morgan Stanley Asia. He tells CNBC’s Martin Soong, Karen Tso & Sri Jegarajah why.

Airtime: Mon. Jun. 29 2009 | 7:31 PM ET

Consider the components of equity returns

The raison d’être of investment or wealth management is to maintain, or hopefully improve, one’s standard of living, i.e. to earn a real return on the investment amount. This sounds easy enough if one considers that the S&P 500 Index (and its predecessors prior to 1957) delivered a nominal return of 8.7% per annum from January 1871 to June 2008. With an average inflation rate of 2.2% per annum over the period, this meant a real return of 6.5% per annum.

Yes, I can hear many readers arguing that much better returns can be generated by “playing” the market cycles, especially given the fact that the S&P 500 has made no headway since 1998. Ah, the art of market timing! Perhaps, but keep in mind that very few people have succeeded in consistently outperforming the market over any extended period of time, especially once costs and taxes are factored in.

Let’s go back to the total nominal return of 8.7% per annum and analyze its components. We already know that 2.2% per annum came from inflation. Real capital growth (i.e. price movements net of inflation) added another 1.8% per annum. Where did the rest of the return come from? Wait for it, dividends – yes, boring dividends, slavishly reinvested year after year, contributed 4.7% per annum. This represents more than half the total return over time!

Have a look at the following chart:

The numbers are summarized below in table format.

Source: Plexus Asset Management (based on data from Prof Robert Shiller and I-Net Bridge)

In an environment characterized by increasingly shorter investment horizons, the concept of compounding sounds so passé, but it remains one of the most important principles governing investment. The time has perhaps come to look beyond the short-term noise and focus on good old stock picking, and specifically those companies with strong balance sheets that will be growing their dividends over time with a reasonable degree of certainty. After all, compound growth has not without reason been referred to as the eighth wonder of the world.

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I meant to get to this from last week — but given that its a 140 year chart, I guess one week won’t matter much (via Ron Griess of The Chart Store):

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click for bigger graph

Fed President Bullard is giving a speech on exit strategies for the Fed and begins by saying “monetary policy is very accommodative now…It will remain very accommodative for an extended period…This is appropriate, given low inflation and weak economic conditions.” He believes the liquidity facilities that are in place should “wind down naturally” as they are used less. On asset purchases, he acknowledged the Fed is “printing money” as this is “one way to move inflation higher in an environment where inflation is ‘too low.’ The “short term goal is to avoid a deflation trap in 2009″ but expanding the monetary base “rapidly” is a future threat and said an exit “may have to rely on selling assets as appropriate…a policy feedback rule for asset purchases should be the goal.” I wish there was some mechanism spelled out on the timing of the exit but they are relying on “judgement calls” which I interpret as a form of winging it which I find somewhat unsettling since what they’ve done to the monetary base is “unprecedented in US postwar monetary history,” according to Bullard.

Consumer Confidence was 6 points less than expected at 49.3 and down from 54.8 in May as both the Present Situation and Expectations components fell. The overall # is still about twice the lows of Feb but the improvement has been almost solely due to Expectations. This # has risen to 65.5 from 27.3 in Feb while the Present Situation (how people feel today as opposed to their optimism for the future) is at 24.8, up just 2.9 points from the low in March. Those that said jobs were Plentiful fell to 4.5 from 5.8, the lowest level since Feb ’92 and those that said jobs were Hard to Get rose about 1 pt but is 4 pts off its March high. Those that plan to buy a home within 6 months fell to 2.7 from 2.8 and those that plan to buy a car fell to 4.6 from 5.7. Those that think business conditions will get better 6 months hence fell a touch at 21.2 but are well above the low of 8.5 in Feb. Net-net, high debt levels and a tough labor market remain the overhang for the US consumer.

The June Chicago PMI was a touch better than expected at 39.9 and up from 34.9 in May and the 1980 low of 31.4 in March. New Orders rose 4.3 point to 41.6 and is the 2nd highest reading going back to Sept ’08 and backlogs rose more than 11 points to 37.6, the highest since Oct ’08 but both still remain firmly below. The Employment component rose 4 points to 28.9 but also remains well below 50. Prices paid rose almost 7 points, following the recent rise in commodity prices. Inventories rose for a 2nd month and it likely reflects the end of the massive destocking that occurred in Q4 and Q1 with the question of when restocking begins still unanswered. Bottom line, it’s clear that the economy is not getting any worse (for now) with the inventory response on the part of manufacturers holding the key for the timing and degree of any upturn, particularly in the auto sector. The ISM tomorrow will reconcile the regional surveys.

The economy will not recover until housing prices stabilize. Housing affects not just American families but banks, credit markets and construction business and jobs. Economics editor David Wessel explains.