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

If there was ever a billboard that financial markets and American business would love to place in front of our elected officials it would read “Do No Harm.” Last nights election results in Mass was exactly that message as political traffic jams are preferred to free reign when it comes to making policy that impacts each one of our lives and livelihood. But, we had the Scott Brown rally yesterday. Today it’s back to economic reality and an earnings season that is mediocre so far relative to expectations as IBM and CSX are the newest co’s to trade off after earnings following other high profile names like JPM, INTC and AA. Also, the Shanghai composite traded down by 3% to a 4 week low on the belief that Chinese officials will continue to take steps to cool both asset and consumer price inflation pressures. Greek bonds are getting slammed again and the euro is at a 5 month low as investors show little faith in Greek politicians.

For over a year now, I have been advocating a Swedish rather than Japanese approach to crisis. The Swedes decided to protect their banking system at all costs; the Japanese protected their banks at all costs.

That subtle distinction is the difference between a rapid recovery and a slow, agonizing one.

Some people think this is an academic debate — a distinction without a difference. However, when you see who bears where the actual costs of this fall, it is apparent that the it is an enormous difference.

Unfortunately, the US  (mostly) went the Japanese route. Exceptions are the automakers and a handful of FDIC closed banks. Instead of waxing philosophical, let’s look at who pays the costs of this – and who does not.

Shareholders:  In the Swedish approach, the Shareholders get wiped out. In the US/Japanese model, they take a big hit — a loss of 90%+ of their value — but they got to keep there stock shares. Hope springs eternal for an eventual recovery.

On Wall Street, other than Lehman Brothers (LEH), all other shareholders were saved. Bear Stearns (BSC), Citigroup (C), Fannie Mae (FNM), AIG, BofA, (BAC) Goldie (GS), Morgan Stanley (MS) — all were kept afloat.

Ironically, the insolvent firms that were forced into a reorganization – GM & Chrysler, Washingon Mutual, etc. –  actually are the ones following (at least partially) the Swedish style model: Restructure, Wipe Out Debt, Recapitalize, Relaunch as a new, clean firm.

Bondholders:  There are 3 parties that undeservedly were bailed out, and the head of the class are the bondholders.

Except for Lehman and FDIC closures, most bondholders were rescued: Bear Stearns Bondholders received 100 cents on the dollar — that was their reward for exercising terrible judgment when lending money to a reckless irresponsible insolvent investment house (so much for Moral Hazard). Same for Citi, Fannie Mae,  Bank of America. We still don’t know what the final impact will be for AIG Bondholders, but expectations are for the full monty.

When future historians discuss the bailouts of 2008-09, and discuss who were the greatest financial recipients of taxpayer largesse, they will be referring to the bondholders.

Counter-parties:  For reasons not yet explained, Paulson, Bernake and Geithner essentially gifted to speculators and hedge fund traders a guarantee that all their back alley bets would be made good. This is truly perplexing, as they are probably the least deserving group receiving taxpayer money.

Management:  Several senior execs have lost their jobs, but they have been the exception. A recent study found that 92% of TARP firm senior execs, boards of directors, and C-level management were still running the firms they had been. It is perplexing to those of us are trying to figure out the penalties for driving your firm over a cliff . . .

Taxpayers: So far, the US taxpayer has laid out all of the costs of the bailouts. TARP appears to be mostly repaid, and the new TBTF tax should recover the rest. But the question the FCIC should be asking is why are taxpayers a backstop fro traders and speculators?

Borrowers:  Banks are lending dramatically less, as they slowly recapitalize their balance sheets, borrowing from the Fed at 0% and lending back to the Treasury at 3%. Best guesses are that this year and last will see a $1 trillion less dollars than normally would be loaned to credit worthy borrowers. This is directly due to the Japanese approach that allows bad balance sheets and enormous bank under-capitalization to continue.

Workers:  Are going to suffer for a long period of slow job recovery due to the above. If banks were forced into the normal FDIC insolvency  process, the economy and employment would likely recover must faster.

Savers:  Zero % interest rate. Estimates are this costs depositors $250Billion per year.  ’nuff said

Bank Customers:  All banks customers are now buying services from frims in a sector with much less competition.

First Time Home Buyers: Although they get a minor tax credit, various government policies are maintaining home prices at levels far in excess of where the market would take them. Outside of the big foreclosure zones, they are feeling the impact of the subsidies and bad policies.

The bottom line: Bailouts have specific winners and losers . . .

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Previously:
Attack of the Zombies ! February 26th, 2009
http://www.ritholtz.com/blog/2009/02/attack-of-the-zombies/

92% of TARP Firm Sr Management is Unchanged (January 4th, 2010)
http://www.ritholtz.com/blog/2010/01/banking-sector-remains-literally-unchanged/

See also:
What we can learn from Japan’s decades of trouble
Martin Wolf
FT, January 12 2010
http://www.ft.com/cms/s/0/3c5b388e-ffb2-11de-921f-00144feabdc0.html

Our story so far:

Back on December 9th, my young niece informed me (via Facebook) that she had discovered her name publicly posted on a DeepCapture website.

That was the first discovery of the “Facebook Friends scraping” operation.

My assumption was that the asshats at DeepCapture had exploited a Facebook security lapse, and grabbed all of the friends and family of any one who had the temerity to so much as discuss this 3rd rate retailer, Overstock.com. (See DeepCapture.com Scraping Facebook Friends).

The reality turned out to be far more insidious than that: A career douche bag (and possible pedarast) named Judd Bagley decided to engage in some fraudulent pretexting. He assumed a false persona on Facebook, using someone else’s name and photo (perhaps committing a Felony in NYS). He then began cyber-stalking the children, friends and family of numerous journalists, bloggers and fund mangers. After friending all the kiddies, Bagley posted their names, friends, etc. at the Deep Capture site.

At that point, I had seen enough. I spoke to my lawyer (more on this later), then I put up a post titled Boycott Overstock.com. (Note that legal counsel is only allowing me to reference items already published publicly. There are other things I am not at liberty to discuss — yet)

One would think that the CEO of an online retailer might have enough common sense not to piss off the blogosphere before the Christmas shopping season. That assumes all retail CEOs are not functional idiots; As it turns out, what appears to be the case for only most retail CEOs.

Our story continues: Soon thereafter, a modest article appeared in the NY Observer about the pretexter/possible pederast. It was to my eyes, way too generous considering the sleazoid subject of the article, who, in addition to stalking children online, is a probable sociopath (look it up — the shoe fits).

The fun never stops: Today in The Big Money, former Fortune writer Roddy Boyd delivers a brutal smackdown on the clueless CEO who has ran Overstock.com into the ground: Titled America’s Nastiest CEO, it is about a Overstock.com executive Patrick Byrne.

Rather than excerpt it, I can briefly sumarize: Overstock has engaged in a variety of actions and inactions that are likely to subject it to various future civil, regulatory and tax proceedings in various courts. The heart of the article reflects a tax scam run by the firm to avoid paying New York State retail sales taxes. I would expect the New York and/or the SEC to use Boyd’s article as a road map for any prosecution. It is clear upon first reading this article that not only is this a disastrous retail operation, but it is run by a deeply disturbed individual who seems to have never tripped across “The Truth” even by accident.

But you have yet to hear the most amusing part: Gary Weiss points out that the trading in Overstock today reflects some frantic sellers in advance of this brutal article. Someone appears to have known that bad news was coming, and they dumped plenty of shares.Its something else for the SEC to investigate — whether or not insiders at Ovestock dumped shares, or warned others to do the same.

Source: Suspicious Trading Ahead of Devastating Article on Overstock.com’s Sales Tax Dodge

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Here is a bit of irony: On paper, you might be led to think that Byrne is a bright guy — undergrad at Dartmouth, a Ph.D. in philosophy from Stanford, a Marshall scholar. It just goes to show you that having book smarts, being people savvy and possessing common sense can all be mutually exclusive.

The whole sordid tale of Overstock.com has one rule of thumb here that investors should learn for their own benefit: Anytime a CEO complains about short sellers, run dont walk to the nearest exit.

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Source:
America’s Nastiest CEO
Think business journalists are too timid? Look what happens when you go after a struggling firm.
By Roddy Boyd
The Big Money, January 19, 2010 – 4:31pm
http://www.thebigmoney.com/articles/judgments/2010/01/19/americas-nastiest-ceo?page=full

The Word – Honor Bound:

Hat tip Bill

Hat tip Prof Farber

Some interesting, unusual reads:

• How the big banks rigged the market (FT)

• Are stock markets still undervalued? (Telegraph)  I don’t know…

• New emails show AIG mulled bank payment disclosures (Reuters)

• Bad Bet: How Wall Street Lost Managed to Generate Another $100 billion in losses (Marketwatch)

• Souring Mortgages, Weak Market Force FHA to Walk a Tightrope (WSJ)

• Why Big is Bad; Alex Pollock on Sarbanes-Oxley and the Financial Crisis (IRA)

• Google Sends Right Message to China’s Police State (Bloomberg)

• One of the biggest challenges for American intelligence is the way the brain works (Boston Globe)

• Top 5 Reasons Porn-for-Profit Is Dying (The Daily Beast)

• 25 Most Influential Journalists in History

What are you reading?

I am not in the “dissolve the Fed” camp,  but I do think they were a major cause of the crisis and collapse due to their ultra-low rates, and nonfeasance when it came to enforcing bank lending standards.

Regardless, i found this infoporn via Column Five Media to be rather interesting:

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click for ginormous graphic

chart via Column Five Media

Jay Leno interviews Jimmy Kimmel via satellite for the Jay Leno Show’s Ten at Ten

The Jan Nat’l Assoc of Home Builders sentiment index fell to 15 from 16, was 2 pts below expectations and is back to the lowest level since June. Present conditions fell 1 pt to 15 but the Future outlook was flat at 26. Prospective Buyers Traffic fell 1 pt to 12 and was down in all four regions of the country. The NAHB Chairman summed up the two major issues dampening the outlook by saying, “consumer concerns about job security and competition from foreclosed homes on the market are still impeding demand for new homes at this time.” “Home buying conditions have rarely been as good as they are right now, but consumers are still waiting to see significant positive signs of improvement in employment and confidence, and this is slowing buyers’ return to the market” said the NAHB chief economist.” Come spring will be the next real test for the industry as the Fed’s MBS purchases end as does the home buying tax credit.

Bob Lefsetz is a music industry observer, and publisher of the Lefsetz letter:

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“According to a source familiar with his thinking, Jobs has recognized that ‘mobile ads suck’ and that improving that situation will make Apple even harder to beat.”

-BusinessWeek-”Apple vs. Google“

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Aren’t ads supposed to suck?

Google survives, quite nicely, on providing targeted ads. You may not click on them, but enough people do that Microsoft decided to invest zillions in a futile effort to compete (Bing’s market share of search just declined.)

But on a smart phone, where it’s frustratingly difficult to use the search function, what are the odds someone is going to click on the ads strung alongside the desired results, especially when the typeface is almost too small for anybody to read.

No, to survive, somehow you’ve got to put the ads inside the apps. And make those ads desirable to the surfer.

The Google Nexus One may have gotten a lot of media play, but sales suck. Still, prognosticators believe the Android platform will ultimately triumph, because Google is indomitable and the WinTel strategy is always best…license to others, swarm and defeat.

But the Android phone allows only a tiny number of apps to be installed. And there’s no vetting process, that’s one of the reasons that apps are kept separate in their tiny space, so as not to taint the rest of the phone’s memory, supposedly loaded with media that Google makes it almost impossible to transfer from your desktop to your phone.

Usability… On the Nexus One, it sucks. Syncing with Outlook is bad enough, but you install music via drag and drop? Didn’t that die with the Rio?

But that’s all secondary to delivering ads on smart phones. Developers have to be able to make money, if not, they won’t create the apps that Apple touts, three billion of which have already been downloaded.

And what has this got to do with music?

Nothing.

And what has this got to do with iPods?

Very little.

The smart phone is killing the iPod. But Apple had to do this, to prepare for the future. And the company has to create viable advertising on the iPhone in order to continue to grow.

Contrast this with the record labels. Continuing to bank on the CD, so busy protecting what they’ve got that they can’t create what will help them survive in the future.

The future… It’s a vast unknown. But you’ve got to enter it if you want to survive. Or plan on cashing out soon, because the future arrives ever faster these days.

For all the innovation touted by the major labels, 360 deals, Vevo, where is the quantum leap, that makes people pay attention, that rains revenue? Seemingly every iPhone app is cooler than Vevo. And Vevo’s supposed to be the future?

Meanwhile, the labels are fighting with Apple when the Cupertino company could give a shit. Music doesn’t drive iPhones, it’s an afterthought, apps drive iPhone revenue…the labels just lost all their leverage. This is like content companies fighting ISPs and electronic manufacturers in Washington, D.C. Who does the most billing? Who can afford the best lobbyists? You’ve got to see when you can’t win and develop a new strategy.

The future of the music business is the development of new ways to get the public closer and more involved with music and the people who make it. Apple’s fans will seemingly buy anything and everything the company makes. This is the paradigm the music business invented, but has forgone. Not only does nobody want yesterday’s Top Forty artist’s music, nobody wants U2′s new album. Sure, the band can tour in extremely large venues, but what’s the long term play, other than squeezing more money out of Live Nation? The YouTube simulcast was a step forward, but in order to make us truly care, we’ve got to feel closer to the band, Bono has to stop pontificating in the “New York Times” and be available for feedback on the Internet.

Yes, we want to be able to reach our artists.

And seemingly every artist with traction wants to throw off the major label constraints and try new things. Nine Inch Nails is selling a DVD of footage created by fans. Shit, the majors don’t even want the fans to shoot video!

Apple is moving forward. Read this “BusinessWeek” story. It’s positively scary. Jobs & company are playing on a plane that most can’t even see. But we’re gonna get there. And if you want our revenue in the future, you’ve got to set up for years down the line right now.

Insanely great products.

We know what insanely great music is. We know what insanely great promotions are. Leverage these. Build loyalty. Bond users to you and super-serve them, field all complaints, sell people what they don’t even know they want and never ever tell them they’re wrong, be such a bright, shining star that they have no choice but to follow you.

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