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

Chris Dodd introduces financial reform legislation, and Jon pretends he has the same rights as a corporation.

(10:39)

I posted the 11 page overview of the Senate package, the Financial Reform Summary, in the Think Tank.

Its worth a few minutes of your time to read . . .

Here is an overview of the Senate package:

Financial Reform Summary Final

Perennial quarterly statement fabricator Overstock.com filed a FORM 12b-25: NOTIFICATION OF LATE FILING for its 2009 10K.  (Delisting soon to follow?)

Why is Overstock.com filing this this delay of its 401k at this late date? “Operational errors“are the starter, but the real issue is “material weaknesses in its internal control over financial reporting.” At least, that’s what Stephen J. Chesnut, their Senior Vice President, Finance and Risk Management.

Someone less eloquent than Mr.Chestnut would have called their accounting a steaming pile of fresh bullshit.

Me? I call the whole organization “reality challenged.” I deduce this due to their difficulties finding, retaining and then keeping auditors. Oh, and the massive campaign of misdirection, misinformation, pretexting and otherwise contemptible actions by a public firm.

My expectation is that we will eventually discover numerous other unsavory secrets at this little shop of creative accounting horrors.

I harbor no animus — I only wish that everyone involved in this firm gets what they deserve. No more, no less . . .

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See also:
Overstock.com Fails to Celebrate Latest Fiasco
http://garyweiss.blogspot.com/2010/03/overstockcom-fails-to-celebrate-latest.html

Overstock Delays Filing 10-K; Finds Multiple Accounting Errors
http://blogs.barrons.com/techtraderdaily/2010/03/17/overstock-finds-multiple-accounting-errors-delays-filing-10-k/

Overstock.com Delays Filing 10-K, Reports Even More GAAP Violations, While Patrick Byrne Hides
http://whitecollarfraud.blogspot.com/2010/03/overstockcom-delays-filing-10-k-reports.html

Overstock.com, Inc. Draws Skeptical Speculation, Despite Short-Term Rally  (Shaeffers Research)

These are the items that I found worth reading today:

• Regulation two-fer:
- – --Wall Street Loses as Small Banks Win (WSJ)
- - -Reform Bill Adds Layers of Oversight (NYT)

• 4 bln yanked from U.S. stock funds in February (Reuters)

• Lehman Two-fer:
- – -At Lehman, Watchdogs Saw It All (NYT)
- - -Lehman Whistle-Blower’s Fate: Fired (WSJ)

• Oil companies look at permanent refinery cutbacks (LATimes)

• Eliot Spitzer and William Black call for an immediate Congressional investigation of Lehman’s accounting deception and the release of relevant emails and internal documents (New Deal 2.0)

• Andrew Lo, MIT: Physics Envy May Be Hazardous To Your Wealth!  (Quantitative Finance > Risk Management)

• Pink Floyd, Queen May Ditch EMI (Bloomberg)

• Chat Roulette + Improv Piano = Hilarious (Video)

What are you reading?

With the key FOMC meeting over, key b/c it was their last official comment before QE ends at month end, what do we now have to look forward to in terms of their exit? IF the economy continues to show signs of improvement, the next move won’t be an actual policy change, it will be wording, the telegraph by Fed members in speeches topped off by the April FOMC statement that will tell us that rates won’t be “exceptionally low” anymore for an “extended period.” That’s step 1. While the FOMC won’t be raising the fed funds rate anytime soon, paying a higher rate of interest on reserves will come first (also not anytime soon) and this will lift all rates, step 2. Step 3 much later will be a fed funds hike. IF on the other hand the economy doesn’t gain further traction, rates will stay at current levels. Under both scenarios (less friendly Fed or lack of economic growth), I believe the stock market rally is approaching its end.

The ingenuity of people on the intertubes never ceases to amaze me . . .

Hat tip boingboing

Despite my association with the Bear camp, and my belief that we are most likely in a long term secular bear market, I actually am an optimistic guy.

The future is never as dire looking as the survivalists make it out to be. Even though I know the cyclical bull rally within the longer bear will eventually end with a significant correction of ~25%, I have been playing this on the long side. That’s optimism!

I lived through the 1970s — an era of sky high interest rates, ugly cars, polyester and disco — so I now how bad life can get in the USA.

My motto: Hope for the best, but be prepared for the worst.

With that thought in mind, let’s have a look at a long term chart that is actually encouraging. It comes from the book “The Next Hundred Million: America in 2050.” Many people are surprised to learn that America “boasts the highest fertility rate: 50 percent higher than Russia, Germany or Japan, and well above that of China, Italy, Singapore, Korea and virtually all of eastern Europe.”

In terms of economic development, this demographic factor provides a long term advantage — think of the financial bulge of the Baby Boomers (while ignoring everything else they screwed up).

That leaves us with this chart, which has potenetially long term, positive connotations:

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Labor Force Growth (growth in age 15-64)

Chart courtesy of Joel Kotkin

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Hat tip Kevin!

Most importantly within the FOMC statement, they reiterated that the MBS/agency debt portion of QE will end by March and that the fed funds rate will remain “exceptionally low” for an “extended period” just as should have been expected. The Fed likely wants to see how the market responds by month end to the finish of QE before they alter the wording. If all goes smooth, I believe this wording will change. Hoenig again dissented and said the wording should go as the policy “could lead to the buildup of financial imbalances and increase risks to longer run macroeconomic and financial stability.” In other words, lets not repeat the mistake of too low for too long that helped create the credit bubble. The inflation wording was dovish and the same as has been seen and the economic comments were a touch more positive with the same caveats as the Jan comments. Bottom line, today is a non event but expect a change in Apr.

Good Morning: Our capital markets have lately been, in the words of one of veteran participant, “just scintillating”. Stocks, bonds, the dollar, and even commodities have been stuck in fairly narrow ranges during the past week or so, as can easily be seen in measures of implied volatility that are loitering near multi-month lows. The VIX now sports a 17 handle, down more than a touch from last month’s highs near 30. Investors seem to be waiting for some sort of decisive news flow, the latest candidate being today’s FOMC meeting. And yet, while politicians seem bent on creating headlines that should goad Mr. Market out of his recent slumber, policy makers from EU finance ministers to our own Federal Reserve Governors seem intent on fostering the type of “stability” they so crave. Whether it’s the EU’s continuously evolving policy toward Greece or the Fed’s efforts to stimulate while appearing to remove stimulus, both entities are hoping words alone will help forestall real action.

Yesterday there were stories in the press that indicated EU finance ministers were in disagreement about what to do with Greece (see below). The ideas ranged from doing nothing (“they don’t need our help”), to providing loan guarantees, to the type of bond purchases that will look to their constituents like nothing short of a bailout. Today, however, comes a different story, one of seeming unity on the subject (see below). The ministers have cobbled together some sort of financial “lifeline” for Greece , though sticky details like how, when, and how much have been left for investors to imagine for themselves. “The clear hope is that the mere promise of support will reassure investors enough to bring Greek bond yields down further,” said Ben May, an economist at Capital Economics Ltd. in London (source: Bloomberg article below). Mr. May has it exactly right; the ministers are hoping cheap talk will supplant the need for politically expensive financial support.

Our Fed has a different challenge in front of it, but the FOMC will also likely call upon a press release to do its work instead of substantive policy changes. The governors will debate ways they can thread the policy needle of a monetary stance easy enough to encourage economic growth (thus providing aid and comfort to equity investors) while still appearing tough enough to restrain long term inflation expectations (and thus term premiums in the bond market). Whether the FOMC decides to hike the mostly symbolic discount rate again or shift around a few words like “extended period”, I honestly have no idea. What’s important to remember is what they do, not what they say. No matter how the Fed phrases its press release, the fed funds rate is unlikely to head north any time soon.

Why do I think the funds rate will stay at snake-belly levels? It may just be my read of the situation, but I think the Fed feels its biggest risks are of the economic and political variety. Inflation risks — to them — are distant and manageable. Reading Chairman Bernanke’s old speeches about Japan ‘s need to target “positive inflation” in the midst of their long stagnation might even mean that Bernanke and company would welcome some inflation here in the U.S. But I can’t prove it. What I do know is that the dovish Janet Yellen has been tipped to occupy the vice chair seat next to Mr. Bernanke.

What also seems clear is that the Fed would like an expanded supervisory role in any financial regulatory changes now under consideration. Since this legislative effort falls to Congress to engineer, the Fed may wish to focus on the “full employment” aspect of its dual mandate over “price stability” while its supervisory role is up for debate. On this score, the Obama administration weighed in this morning with its own cute reminder of what it sees as the highest priority for the Fed. Does the following choice of words ring a bell? “The percent of Americans who can’t find work is likely to ‘remain elevated for an extended period,’ Treasury Secretary Timothy F. Geithner, White House budget director Peter Orszag and Christina Romer, chairman of the Council of Economic Advisers, said in a joint statement.” (source: Bloomberg article below).

Other risks to the economic outlook the FOMC may not choose to discuss in today’s press release include the aforementioned financial stresses in Europe, a brewing currency/trade spat with China , and another attempt at passing healthcare reform. What’s more, small and midsize banks have real estate losses that are curtailing new lending; the housing industry is still flat on its back; and the auto industry has potential customers keeping one foot on the brake over new purchases because they can’t be sure if the other foot will cause a new accelerator to stick. There are other risks, too, so the Fed’s plate is a full one today. Like everyone else, I don’t know what words will pour forth from the Eccles building this afternoon. I do know, however, that just like their ministerial colleagues in Europe , the Fed hopes that today’s words alone will be enough to keep various market constituencies calm.

Whether this trust investors still have in our central bank can last is another question. Volatile markets may or may not reappear before the FOMC’s next meeting in late April, but Mr. Bernanke and his merry band of governors won’t be able to rely on words forever. Like fiat currencies, press releases are only worth the paper they’re printed on.

– Jack McHugh

EU Spars Over Aid for Greece, Bets on No Need for Bailout
EU Lays Groundwork for Greek Lifeline to Bolster Euro
Obama Aides See Jobless Rate Elevated for ‘Extended Period’ Fed May Seek to Avoid Lower Inflation as Officials Debate Exit