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

Ron Griess of The Chart Store shows the relative value of the SPX versus GDP

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Today’s must read article is in on the Swedish model of crisis repair:

“When it comes to rescuing banks, the Swedes are earning a reputation as trendsetters. First they set a standard for recovering from disaster; now they want to export their idea for how to pay for it.

The country went through its own crippling banking crisis during the early 1990s, after the bursting of a domestic credit bubble. It rebounded relatively smoothly through an aggressive bailout policy built around nationalization and carving the troubled assets of banks off into a so-called bad bank.

That blueprint was followed to varying degrees over the last year or so in the United States [WTF?], Japan [Really?], Britain, the Netherlands and other countries.

Now, others are looking at Sweden’s latest idea to protect its lenders, enacted at the end of 2009 — a “stability fee,” or direct tax on banks so that they pay for their own bailouts. . .”

Good stuff . . .

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Source:
Swedish Bank Fee Sets Example for America
MATTHEW SALTMARSH
NYT, January 22, 2010

http://www.nytimes.com/2010/01/22/business/global/22levy.html

• House Committee on Financial Services – Frank Statement on the President’s Financial Reform Proposals
  “I welcome the President’s strong support for additional provisions in the financial reform legislation to address the too big to fail problem. The President’s initiatives build on provisions that originated in the House Financial Services Committee and were included in the Wall Street Reform and Consumer Protection Act, which passed the House on December 11. By adopting the amendment offered by Rep. Paul Kanjorski, we included provisions in this bill to give the regulators the power to do everything the President has proposed. Those measures were very controversial and were unanimously opposed by Committee Republicans. Now, with the President’s strong support, I believe we should be able to overcome this resistance and take the next step. While our bill gave the President’s appointees the power to do everything that his proposal would do, the advantage of doing them legislatively is that a future administration would not be able to ignore or undo them. I also want to note that the powers that we gave them would be at the discretion of the regulators and go beyond those that the President would mandate. This works well because if the regulators think that circumstances require that more should be done then they will have the power to do so. Paul Volcker has long advocated these measures, and I am delighted that the President agrees with him.”
• BusinessWeek – Simon Johnson:  Obama’s Plan To Be Judged By A Goldman Breakup
  As we drill down into the details of ideas for breaking the economic and political power of oversized banks, we need this litmus test against which serious suggestions should be judged: Does a proposal, at the end of the day, imply that Goldman Sachs should break itself up into at least four or five independent pieces, with the biggest being no more than 1 percent of gross domestic product, or roughly $150 billion? If the answer is yes, we are making progress in moving our financial system back toward where it was in the early 1990s, when it worked fine (and Goldman was a world-class investment bank) and was much less threatening to the global economy. If the answer is no, we are merely repainting — ever so gently — the deckchairs on the Titanic.
• Bloomberg.com – Obama Bank-Plan Impact Hinges on How to Define Client Trades
  President Obama’s plan to curb risk- taking by banks hinges on how rigidly regulators define proprietary trading at firms such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. Goldman Sachs, which generated at least 76 percent of 2009 revenue from trading and principal investments, gets the “great majority” of transactions from customers, according to Chief Financial Officer David Viniar. About “10-ish percent” of the New York-based firm’s revenue comes from “walled-off proprietary business that has nothing to do with clients,” he said on a conference call yesterday. The plan to curb proprietary trading at banks is among proposals that Obama said yesterday will strengthen the U.S. financial system and help prevent a repeat of the credit crisis. Other restrictions would prohibit banks from investing in hedge funds and private companies and put new limits on banks’ borrowings, according to the White House. JPMorgan, Goldman Sachs, Citigroup Inc. and Bank of America Corp. tumbled more than 4 percent in New York trading, leading the S&P 500 Financials Index down 3 percent, its biggest decline since October. All the banks are based in New York except for Bank of America, which is in Charlotte, North Carolina.
• Bloomberg.com – Rich Miller: Obama Bank Curbs May Not Leave U.S. Financial System Much Safer
  President Barack Obama’s proposal to impose limits on commercial banks may win him support on Main Street and shake up Wall Street without doing much to make the financial system safer overall. The plan, which is still lacking in details and must be approved by Congress, aims to make the banks more secure by forcing them to minimize the trading they do on their own account and give up their stakes in hedge funds and private equity firms. “It’s the right direction,” said Henry Kaufman, president of Henry Kaufman & Co. in New York and a former vice chairman of Salomon Inc. The danger is that such risky activities could simply migrate to big non-bank financial institutions, leaving the system as a whole no better off. Banks also might try to make up for the loss of profits from proprietary trading by lending more to risky borrowers such as real estate developers, threatening the federal safety net, said Martin Baily, a former White House economist now with the Brookings Institution in Washington. “Beware of unintended consequences,” said Robert Litan, vice president of research and policy at the Kansas City-based Kauffman Foundation, a group that promotes entrepreneurship, and a former Clinton administration budget official. “This could have perverse effects on risk-taking.” The proposals highlight the difficulties the administration has faced in dealing with institutions that have grown so big and risky that their failure could rock the financial system. Until that’s resolved, the U.S. will be forced to use taxpayer money to rescue failed firms or risk the same sort of global financial panic that occurred in the wake of Lehman Brothers Holdings Inc.’s collapse in September 2008.

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January 22, 2010

Dear Colleagues:

Several people have asked me about an article published by the Huffington Post Investigative Fund (HPIF) alleging wrong doing by FDIC Chairman Sheila Bair with respect to a mortgage she obtained from Bank of America. I have reviewed the article by Keith Epstein and David Heath of the HPIF and frankly I am appalled. This article is, in my view, a hideous piece of garbage that lacks any thread of truth. There is no story, no smoking gun, just a lot of innuendo and malicious speculation about one of the finest people I know in American public life.

I call upon the authors and the HPIF, and Ariana Huffington, to retract this story immediately and to apologize to Chairman Bair for this outrageous hatchet job. More, I believe that the directors of the HPIF, which is a 501(c) non-profit corporation, need to immediately initiate an investigation into this article and the authors to discover just how such a weak and clearly malicious story could be published. This article suggests to me that there is a complete breakdown in the internal systems and controls at HPIF. Were it not for the fact that Chairman Bair was a public official, in my view the HPIF would surely be facing a liable litigation for this malicious and unwarranted attack.

I am including the statement by Andrew Gray of the FDIC below. If you have any questions about the HPIF article, please contact Andrew at AnGray@FDIC.gov

Yours truly,

Christopher Whalen
www.rcwhalen.com

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Whether the Volcker Rule becomes law one day or banks get broken up or bankers are forced to accept 5 figure paydays or long/short hedge funds are deemed legally riskier, by some systemic risk regulating czar, than long only mutual funds who get mauled in bear markets, we can all be confident that we’ve learned nothing about what was the genesis of the credit bubble and what can be a foundation for responsible behavior in the future. The genesis being artificially cheap money whose sole intention is to encourage borrowing, artificial demand in housing spurred on by the financing of FNM and FRE and the inability to allow failure as a result of bad decisions that can be controlled by bankruptcy law. But I digress. Global stocks continue their China led correction, earnings season relative to expectations is mediocre and Greece remains a problem as their 10 yr bond yield is rising to the highest since 2000.

The politicalization of the WSJ has moved to a new and more risky phase. The paper is now in danger of being a money loser — not for its investors (tho that has already happened), but for those traders who read its content.

It used to be that articles on the Market or specific companies or various finance stories were objective and reliable and free from bias. Sure, you could always count on money losing, bat-shit crazy nonsense in the editorial pages, but that was a special area of sequestered partisans, who due to their insanity cared not a whit about how much capital their lunatic ravings lost their readers. (The list is long and varied, but the Boskin “Obama Crash” on March 6th is a good place to start; then read anything Don Luskin writes — he is a reliable contrary indicator).

I assumed the drunks on the OpEd page did not care about what they did to your portfolio if you drank their Kool-Aid. But they were easy to steer clear of  — you simply avoided that page, or read it and laughed. Smart investors could easily say “Go sell crazy somewhere else –we ain’t buying.” That was possible because you knew that the business pages were sacrosanct, always run with a steel-eyed objectivity that professionals could rely upon.

That is no longer the case. The lunatics now run the asylum, and henceforth, I am moving the WSJ into the column of “Stuff to read, but not take very seriously.”

I am bereft over this. This is a major change for me, for I have loved this paper for years, even decades. I read the Times (along with many other papers), but as someone who works in finance, I marveled at the quality and breadth of the business reportage at the Journal. Accuracy was paramount, political bias limited to the cartoon (Opinion) pages. For a long time, it was the best paper in America.

Those days are now ending.

I keep seeing headlines that are blatantly political, articles that looked to be edited by a ham-fisted politburo apparatchiks, other signs that the usual outstanding journalism at the WSJ is under assault. When I read David Carr’s NYT article, I hoped he was referring only to the DC coverage, and not Wall Street, Markets, or anything that investors rely on.

Sigh. If only that was the case.

Regular readers know that I despise political parties, believe partisans suffer brain damage — literally — they have the same cognitive deficits that ardent sports fans suffer from. I have trashed both Bush and Obama, but moved to a bullish posture when despite either’s incompetence, they accidentally did something that caused a bullish set of factors to predominate. Independence matters; Politics and investing are a fatal combination to performance.

My bottom line for content is performance — if I can rely on something to provide me insight and information, it becomes a steady part of the media diet. Once I suspect they are no longer capable of that simple investor service, they go on a short leash. Eventually, they reveal themselves as money makers or money losers, and today, the WSJ crossed that line. They are now money losers to those who read them.

Quite a difference a few years make.

A specific article that led to this sad conclusion? The most egregious example (of many) I noticed was this front page headline: New Bank Rules Sink Stocks.  This is the sort of silly headline I expect from lesser media outlets, not the Journal. Without getting too philosophical, we know that day-to-day action is mostly nonsense. Selecting a causal factor from the cacophony of news releases, earnings, price data is all but impossible.  There is a whole lot of noise, and very little signal. Assigning a definitive causative factor is at best a guessing game, at worst an exercise in futility.

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WSJ.com January 22, 2010

For example, I cannot tell you why we were down 100 on Friday, up 115 on Tuesday (supposedly on the Brown victory) down more than 100 on Wednesday (on the Brown victory as well?), then down more than 200 yesterday. Perhaps a 68% gain in 10 months had something to do with it. Or perhaps the fact that despite a major rally, the finance sector has made no upwards progress for 6 months. Or the dollar was rallying.

But it doesn’t take much looking to see other, more plausible, less politically motivated explanations than the floated Volcker/Obama proposal. The market’s biggest losers were not finance related issues, but rather were commodity-related stocks.

While the financial sector suffered a 3% decline after some disappointing earnings from various banks, it was the commodities sector that got whacked 4.3%. China, the driver of much of recent economic improvements,  made a major announcement they were restricting bank lending to cool inflation and slow the economy.

I noticed this and pointed to a China article in Reads; Tom Petruno at the LA Times pointed out the relationship between the change in China policy to the Commodity sector, and how substantial those losses were.

The WSJ article? Never so much as mentioned China or commodities.

Hence, I must now move the Journal out of my column of “Essential investor reads,” and into the column marked “Infotainment.” Under Murdoch, the paper has become politicized to the point of losing a significant portion of its value.

Investors beware.

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S&P Financial Sector

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Previously:
Murdoch’s WSJ Changes Creates Opening for NYT, FT (April 24th, 2008)
http://www.ritholtz.com/blog/2008/04/murdochs-wsj-changes-creates-opening-for-nyt-ft/

Sources:
New Bank Rules Sink Stocks
JONATHAN WEISMAN, DAMIAN PALETTA And ROBIN SIDEL
WSJ, JANUARY 21, 2010
http://online.wsj.com/article/SB10001424052748703699204575016983630045768.html

Dow goes negative for 2010 as sellers swarm
Tom Petruno
January 21, 2010 | 2:23 pm
http://bit.ly/7PecP5

Under Murdoch, Tilting Rightward at The Journal
DAVID CARR
NYT,  December 13, 2009
http://www.nytimes.com/2009/12/14/business/media/14carr.html

Good Evening: U.S. investors spent a second consecutive day reacquainting themselves with the term “risk”. Since the past few months have mostly been tranquil, this renewed volatility might require an adjustment period, with most of the adjusting taking the form of lower securities prices. And while yesterday’s big concern was a potential cooling of the Chinese economy, today’s culprit was political heat on our nation’s largest financial institutions. President Obama proposed sweeping new regulations for the banking sector, including caps on deposit size, and bans on activities like proprietary trading and owning alternative asset managers. Financial shares slumped in response to this latest salvo directed at Wall Street, the timing and ferocity of which may not entirely be coincidental to Tuesday’s election results in Massachusetts. Predictably, there was considerable gnashing of teeth in the executive suites up and down Wall Street, but I believe top management brought these latest proposals upon themselves.

Obama Calls for Limiting Size, Risk-Taking of Banks

The gist of the story you see above was leaked last night, but global investors didn’t seem to react much to it. That they’ve seen similar promises in the past from the Obama administration come to naught may have been part of the reason, or perhaps investors just wanted to see the details before taking action. U.S. stocks actually opened only a little lower before it became clear that the President’s latest reforms are much more broad and sweeping than were previous attempts. Until Mr. Obama took to the podium, the indexes were somewhat mixed, with the NASDAQ actually rising due to some positive earnings results in the tech sector. I will save my thoughts about the wisdom of the President’s approach for another day, but market participants expressed their opinions on this day with sell orders.

An uneven set of economic releases (jobless claims and the Philly Fed survey were disappointing; leading indicators were strong) was quickly forgotten as the downside pressure mounted. The major averages dropped between 1.5% and 2% following Mr. Obama’s press conference. Though commodity-related stocks finished the day in worse shape, the vicious early selling in the largest financial names almost made it seem as if all the prop desks had in fact been shut down, that many bank-owned hedge funds and private equity shops were busy tacking “For Sale” signs to their doors, and that Glass-Steagall had once again become the law of the land.

Not quite. Most of the President’s reforms will require legislation, and those that do will require the blessing of retiring Senate Banking Committee Chairman, Christopher Dodd. Mr. Dodd’s promise to give these proposals “serious consideration” sounded like anything but a ringing endorsement. Investors paused to collect their wits after the initial selling was over, and stocks then essentially went sideways for the rest of the session before settling near the lows. The major averages declined between 1.1% (NASDAQ) and 2% (Dow). Treasurys were sought in this environment of risk aversion, and yields fell by 4 to 7 bps. Credit spreads — even swap spreads – widened. The dollar traded both higher and lower within a 1% range before curiously closing unchanged, while many commodities were once again drubbed. Weak oil and metals prices left the CRB index down 0.7% on Thursday.

Wall Street Hubris Soars as Crisis Goes to Waste: William Cohan

President Obama could not have been happy to see articles like the one above circulating in recent weeks. His healthcare initiatives were struggling, his financial reform proposals had gone nowhere, and his poll numbers were slipping. His entire first year agenda of change had little to show for it. And then Tuesday’s election results hit, threatening to altogether scuttle his plans for healthcare. Though it’s been on his mind to do so for a while, I’m guessing he decided some time yesterday to vent his frustration on the easiest target he could find — Wall Street. The wrenching financial changes Wall Street had been thus far successful in avoiding suddenly became an urgent priority for the administration. Inaction no more; this crisis would not go to waste without populist change.

Morgan Stanley Allots 62% of Revenue to Pay Employees in 2009
Goldman Sachs Sets Aside $16.2 Billion to Pay Staff

Executives at our nation’s largest financial firms reacted with shock and dismay this afternoon, but they brought these policy proposals on themselves. They’ve successfully gamed the legislative and regulatory systems so well and for so long that they literally cannot understand why so many people are angry enough to side with the President on this issue. Maybe their memories are a little foggy, so let me try to list just some of the change Wall Street firms themselves were able to effect during the past 15 years. It’s a Top 10 checklist of memorable achievements only a bank executive could love:

(1) Preventing OTC derivatives from being listed on exchanges and keeping them in a “regulation-free zone” during the mid 1990′s so they could become today’s multi-hundred trillion dollar business of intertwining counterparty risks — check.
(2) Tearing down the Glass-Steagall act during the late ’90′s so financial firms could take more risk and enter almost whatever business they pleased — check.
(3) Prevailing upon SEC Chairman Chris Cox during the early 2000′s to let firms lever up by exempting large financial institutions from regulations that had effectively capped their balance sheet leverage at levels just above 10 to 1– check.
(4) Finding (or creating) loopholes that would enable large financial firms to take on even more leverage through off balance sheet vehicles like SIVs — check.
(5) Boosting ROEs during the last decade by acquiring illiquid, higher yielding investments with this newfound leverage — check.
(6) Letting lending standards slip so badly during the middle of the last decade that almost anyone who could fog a mirror could now receive whatever financing they needed to buy a home — check.
(7) Allocating huge amounts of the resulting ersatz profits to themselves as compensation — check.
(8) Negotiating and then accepting relatively cheap, taxpayer-backed funding from the TARP — with few strings attached — when their levered business models threatened to bring down the entire financial system in late 2008 — check.
(9) Negotiating their way back out from under the TARP with relatively little pain during 2009 — check.
(10) Lobbying Congress to thwart the type of financial reforms that might prevent taxpayers from having to bail them out again some day — check.

By helping to bring about the changes listed above, executives in the upper echelons of our largest financial firms have, in the eyes of most of the public, pulled off the perfect caper: Private profits and socialized risks. Until now. Now these firms will reap the political whirlwind of antipathy blowing in the wake of the changes these firms foisted upon our financial system since the mid 1990′s. Yes, there many others — like the Maestro, who gave his official nod to numbers 1-7 above — who deserve blame. But if Wall Street and its army of lobbyists hadn’t been so successful in preventing even sensible reform in recent months, then they might have escaped the type of populist proposals put forth by the President this morning. In so many ways, they brought this mess upon themselves.

– Jack McHugh

Stocks, Commodities Slide, Treasuries Gain on Obama Bank Reform

Swap Spreads Widen as Obama’s Bank Plan Boosts Treasury Demand

Off to an appointment, but before I head out, I had to share these eye catchers:

• Volcker whacks Goldman Sachs (CNN)

• Banks’ Size, Trading Would Be Limited in Obama Plan to Reduce Risk-Taking (Bloomberg)

• China growth quickens, points to tighter policy (Reuters)

• Bad loan twofer:

-Banks See a Leveling Off in Bad Consumer Loans (NYT)
-Loan Troubles Bedevil Banks (WSJ)

• Homebuilders Turn to Private Equity for Financing (Bloomberg)

• Better Off Deadbeat: Craig Cunningham Has a Simple Solution for Getting Bill Collectors Off His Back. He Sues Them. (Dallas Observer)

• Direct Bids Creep In To 4-Week Treasury Auction (MarketBeat)

• Apple iSlate two-fer

-Apple Sees New Money in Old Media (WSJ)
-Apple Courts Publishers, While Kindle Adds Apps (NYT)

What are you reading?

I spoke at a conference recently at a major bulge bracket firm. A friend introduced me to a bond manager who runs an enormous amount of money.

He is not the typical manager. He said one of the most amusing things I’ve ever heard:

“Isn’t it funny when you walk into a investment firm, and you see all of the financial advisors watching CNBC — that gives me the same feeling of confidence I would have if I walked into the Mayo-clinic or Sloan Kettering and all the medical doctors were watching General Hospital…”

-Senior portfolio manager, UBS

Classic! I love learning that I am not the only one with an irreverent view of my industry . . .

Thanks, Mark!