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

“The guy’s a giant, he’s a genius, he is a great human being.Whenever he has advice, the administration is very interested.”

-Austan D. Goolsbee, counselor to President Obama

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Let us stop to ask ourselves a simple question: Can the Obama White House reform Wall Street ?

Its hard to see how when key presidential advisers are Wall Street creatures. When the post-mortem gets written on the current administration, it likely will reflect the President taking advice from the wrong advisers: Timothy Geithner and Lawrence Summers.

Who should he be listening to?

There are lots of other people whose advice the President should consider, but I am thinking about one in particular.

Who is he? Well, I’ll describe him:

• Chairman, president’s Economic Recovery Advisory Board
• Co-Campaigner with Mr. Obama
• Trusted adviser, widely perceived as standing apart from Wall Street, and critical of its ways
• Fed Chair, 1979 to 1987

I am obviously referring to Paul Volcker:

“Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.

The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.

Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.

“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.

The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.”

The sooner team O starts listening to Tall Paul, the better off they — and the country — will be . . .

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Source:
Volcker Has Obama’s Ear, but Not on Banks
LOUIS UCHITELLE
NYT October 20, 2009

http://www.nytimes.com/2009/10/21/business/21volcker.html

Hey, are there actually people that work for the SEC with a pulse?

When did that happen ?

“The U.S. Securities and Exchange Commission will propose toughening its limits on the amount of anonymous trading carried out on stock platforms called dark pools, according to two people familiar with the deliberations.

The commission will propose lowering the amount of daily volume in a company’s shares that can be executed on the networks before prices must be made public to 0.25% from 5% tomorrow, said the people, who declined to be identified because the discussions weren’t public.

The rule change may curtail the number of transactions on dark pools, off-exchange platforms run by firms such as Goldman Sachs Group Inc. and Getco LLC that have drawn scrutiny from Democratic Senators Ted Kaufman of Delaware and Charles Schumer of New York. The systems usually shut down trading in a security when they approach the current 5 percent limit.”

5% down to 0.25%? That is a 95% decrease.

Interesting development . . .

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Source:
Dark Pool Trade Limit Said to Be Cut 95% in SEC Plan
Jesse Westbrook and Whitney Kisling
Bloomberg, Oct. 20 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=azDE7Q.4qkTo

Brooksley Born finally gets to tell her story on national TV.  Note the pathetic apology by Arthur Levitt below for being part of the Greenspan-Rubin-Summers gang that tried to ruin Ms. Born’s career in Washington in the name of making the world safe for OTC derivatives.  And notice that this was one of the early good works of the President’s Working Group on financial services, an unconstitutional entity that should be outlawed.  Fortunately there has been enough continuing interest in the media to get the story out.   Chris

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FRONTLINE INVESTIGATES THE ROOTS OF THE FINANCIAL CRISIS

FRONTLINE Presents
The Warning
Tuesday, October 20, 2009, at 9 P.M. ET on PBS

www.pbs.org/frontline/warning

“We didn’t truly know the dangers of the market, because it was a dark market,” says Brooksley Born, the head of an obscure federal regulatory agency — the Commodity Futures Trading Commission (CFTC) — who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country’s key economic powerbrokers to take actions that could have helped avert the crisis. “They were totally opposed to it,” Born says. “That puzzled me. What was it that was in this market that had to be hidden?”

In The Warning, airing Tuesday, Oct. 20, 2009, at 9 P.M. ET on PBS (check local listings), veteran FRONTLINE producer Michael Kirk (Inside the Meltdown, Breaking the Bank) unearths the hidden history of the nation’s worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.

“I didn’t know Brooksley Born,” says former SEC Chairman Arthur Levitt, a member of President Clinton’s powerful Working Group on Financial Markets. “I was told that she was irascible, difficult, stubborn, unreasonable.” Levitt explains how the other principals of the Working Group — former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin — convinced him that Born’s attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was “clearly a mistake.”
Read the rest of this entry »

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Hat tip Larry Doyle’s Sense on Cents

A short list:

• The Energizer Rally: Contrarian analysis continues to reach bullish conclusions (Marketwatch)

• Which Came First: Government Ownership or Catastrophic Losses? (Big Money)

• Mortgage modification schemes see ‘disappointing’ results (FT)

• Homes: About to get much cheaper (CNN/Money)

• Bruce Bartlett: Supply-Side Economics, R.I.P.

• Battle of the Quants

• How to Grease a Palm: The $20 Theory of the Universe (Esquire)

What are you reading?

In 2 weeks, we will be in Dallas and Austin (the week of November 2nd).

I am looking forward to checking out our new office in Dallas, located in the beautiful Crescent Court complex. Now we are in the Dallas Business Community, I will be in Texas on a regular basis.

We will be meeting with current and future clients. Anyone in the Dallas/Ft Worth area or in Austin who would like to sit down one-on-one with us to discuss their investments, we still have some slots left. As we saw in LA, spaces for these meetings fill up quickly — if you are interested, please email Joe Fitzgerald with your contact information to schedule a time.

Additionally, any investment advisors/brokers who are looking for a better alternative and would like to learn more about the Fusion Advisor Platform, they can also meet with us. Advisors can email Eric Willer who heads our Dallas operations.

It’s not easy being a book publisher. In most other media businesses, high demand gives you pricing power. You pay full-freight to see a movie on the opening weekend and top dollar for hot concert seats. But with books, the best properties are used by retailers as loss-leading door-busters. That trend only got worse this last weekend as Amazon, Wal-Mart and Target all joined into a price war on select blockbuster books that introduces $8.99 into the equation.

Disaster, right? Publishers certainly think so:

The combination of slow sales and squeezed margins is enough to make any publishing executive queasy. Perseus CEO David Steinberger explained it to the Wall Street Journal: “If you are taking margin out of the supply chain, it will eventually put pressure on everyone in that chain.” Publishers are afraid that if Wal-Mart, Amazon, and Target can make that $9 price stick, they’ll be forced to lower their wholesale prices. They don’t think the big writers will take less money up front. So they’re freaking out that the lower price point will come out of their profit margin. Publishers need that margin to pay off all the overpriced advances that lie like a dead hand on publishers’ profits.

But lower hardcover prices could finally give publishers some leverage to re-structure their business model. Rather than fight the increased sales–which are subsidized right now by the retailers–publishers should start chipping away at the super-sized advances they pay. I won’t bore you with my argument here but, if you’re interested, you can read the rest at The Big Money.

Source:

It’s the End of the Book World As We Know It: And Publishers Should Feel Fine
MARION MANEKER
The Big Money, October 2o, 2009

http://www.thebigmoney.com/features/kindle-chronicles/2009/10/20/it-s-end-book-world-we-know-it

Here is an update from my earnings and revenue cheat sheet and the trends still remain similar to Q2 in that most companies are beating eps estimates while slightly more than half are beating revenue forecasts. The relative positive though is the amount of the beats are exceeding what was seen in Q2. I have 83% of companies beating eps estimates and 59% exceeding revenue estimates. In Q2 it was closer to 75% beating eps expectations with about half beating revenue estimates. The bigger rally in stocks from mid to July thru earnings season relative to what we’ve seen so far in response to Q3 was mostly due to the backdrop of a 7% fall from mid June heading into Q2 earnings reports in July that set the bar low. Also, there was more investor surprise to the Q2 earnings beats than there is so far for Q3, notwithstanding the statistical beats to estimates.

Earlier today, we noted that the seasonality effects of Housing were re-asserting themselves.

This is a very different phenomena than the ongoing crisis: That was caused by the credit bubble, which in turn led to wildly overvalued Housing, which was purchased by people who often could not afford them, which in turn led them to subsequently become delinquent, then default, and finally slide into foreclosure.

Along those lines, the following pair of charts (via Realpoint) should get your brains racing: It appears that despite the various voluntary foreclosure abatements, the problem has not yet been solved. Banks continue to rack up serious unpaid mortgages, which over time is very likely to lead to increased foreclosures . . .

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Future Workouts – Delinquency Categories

click for larger charts

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Unpaid Balance for 2005, 2006 and 2007 Vintage Transactions

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Source:
Monthly Delinquency Report – Commentary
Realpoint,August 2009

http://bit.ly/IOdxz

From a major NY trading desk:

European markets opened a few points above flat, fell by nearly -1%, and have since rallied back to the unchanged mark: DAX -0.1%; CAC -0.2%; FTSE -0.1%. Earnings season is now in full swing in the U.K. and on the continent. Dutch supermarket chain Ahold is modestly lower after a slight revenue miss, luxury retailer LVMH beat its estimates on Vuitton bag sales (the Chinese apparently scooped them up) and better demand for cognac (CFO Guiony: “we’re beginning to see some light at the end of the tunnel”).

Micronas Semi, the Swiss maker of semiconductors for the automotive and consumer goods industries, is flat after beating its revenue and Ebit numbers but missing on the bottom line. Swedish ball bearings maker SKF is down -3.4% after missing its sales estimate by a significant margin (Sek13.3 billion versus the consensus Sek15.4 billion). It’s a mixed bag sector-wise: financials are down, as are the miners and energy names, while food/grocers and telecoms are higher.

• Finnish unemployment fell to 7.3% in September from 7.6% in August.
• Dutch unemployment ticked up to 5.1% in September from 5% in August.
• Slovakian unemployment ticked up to 12.5% in September from 12.1% y/y in August.
• German producer prices fell -0.5% m/m in September, dragging the year-on-year rate down to -7.6% y/y from -6.9% y/y in August.
• Estonian producer prices rose 0.1% m/m in September, leaving the year-on-year rate little changed at -1.5% y/y.
• Slovenian producer prices fell -2.8% y/y in September, better than August’s -3.3% y/y decline.
• Austrian producer prices rose 0.6% m/m in August, improving the year-on-year rate to -2.7% y/y from July’s -3.4% y/y decline.
• Portuguese producer prices fell -0.3% m/m in September, enough to bump the year-on-year rate up to -5.2% y/y from -5.5% y/y in August.
• Hungarian wage growth slowed to 0.6% y/y in August from 1.5% y/y in July.
• Italian industrial orders fell -8.6% m/m in August, worsening the year-on-year rate to -27.5% from July’s -23.2% y/y decline.
• Italian industrial sales fell -1.4% m/m in August, enough to bump the year-on-year rate up to -21.2% from July’s -21.7% y/y decline.
• U.K. Public Sector Net Borrowing (the budget deficit) ticked up to Gbp14.8 billion in September from Gbp14.7 billion in August. That’s the heftiest borrowing requirement since 1993.
• U.K. money supply growth (M4) slowed in September to 11.3% y/y from 12.1% y/y in August.
• Euro zone construction output fell -0.4% m/m in August, dropping the year-on-year rate to -11.3% from July’s -9.8% y/y decline.

Source: Bloomberg