Posts filed under “Think Tank”

Viacialevitra in Reverse

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania.


Viacialevitra in Reverse
July 14, 2009 David Kotok, Chairman & Chief Investment Officer

Too big to fail has become smaller. CIT was not on the original Geithner-Summers-Bernanke-designed list of 19 organizations deemed to be too large to fail. In the post-Lehman environment, this has become the norm. Failing is not permitted.

Now we see the making of this policy unfolding to a new level. CIT has received $2.3 billion in TARP money. The government has a stake. Therefore the government will now infuse additional money in order to “protect” the taxpayers. They will do this under the guise and umbrella of “helping small business.” That means a million small and independent businesses will not be incented to go to their local banking institutions but will instead be involved with a weakened CIT, operating under duress.

CIT has experienced a “run,” as those who are able withdrew their cash are doing so. We have an insolvency crisis at CIT becoming a liquidity crisis, because the cash is drained. Now, in steps the new industrial policy of the United States, as developed under the Obama administration and designed by the Secretary of the Treasury. Loan more, reconfigure the balance sheet, alter the form, assign the collateral that is workable, and otherwise find ways to pretend to be more secure while pouring more capital into a sinking ship.

I heard the former president of the St. Louis Fed summarize the dilemma well. Bill Poole said, “If you are in a hole and the hole is deep, stop digging!” With CIT they are going another layer deeper. Too big to fail is growing – Washington does not know how to stop digging.

Markets will like this in the short term, because markets like free lunches and bailout money. We as money managers will continue to position advantageously for the purpose of benefitting our clients in this continuing, post-crisis saga. But to policy wonks this is a disaster in the making, and it is getting bigger.

What to do as an investor? You see the result of government bailout money applied to Goldman Sachs. Who won? Goldman, the shareholders, the debt holders, and others who are less transparent like the former NY Fed director who traded Goldman stock for a profit. Who lost? You may argue no one, since GS paid everything back to the TARP and is now free to operate. Maybe. But they made it through the crunch on the back of a federal guarantee by the FDIC, one of the few remaining credible entities in Washington, thanks to Sheila Bair’s vigilance. Was there a price? Yes, but it is called “moral hazard” and it is difficult to measure until there is a failure like Lehman.

Who lost? Maybe no one. Maybe us? There are those of us citizens who understand that there is no free lunch and that a transfer of risk at a subsidy has a cost, even if you can’t see it at first glance.

Investors need to be vigilant. In my dinner conversation tonight with my colleagues Michael Comes and Peter Demirali, we talked about exit strategies, not for the Federal Reserve but for our clients. We have had a good run, going from Treasuries to spread products on the bond side and using our strategies on the ETF side. Now what do we do?

The conclusion tonight, and subject to change at any time is: stay the course with spread positions for now. They are narrowing and there is still value. Stay the course with an ETF strategy that favors emerging markets in the global view and is very selective and focuses on a broadening stock market in the domestic view. Avoid Treasuries and seek Build America Bonds and tax-free Munis.

And lastly, and most importantly, recognize that the US is heading for trouble and that we are in a benign period that will be followed by a troubled period. Right now it is good to be invested. We will keep a watchful eye on the exit. Too soon is not a good option. Too late is not a good outcome. In between is hard to discern. We need to work more and harder than normal. Stay tuned.

Watch the deal outcome for CIT. It is defining the new limit of too big to fail. Our title is a metaphor for getting smaller. Too big to fail is downsized. Now I am going to sleep.

Category: Bailouts, Think Tank

Jobless Claims

Initial Claims totaled 522k, 31k less than expected and down sharply from 569k last week. Again, the auto sector is depressing the number. In July automakers normally shut down plants but because Chrysler and GM shut plants over the past few months due to their bankruptcies and just restarted them, we aren’t going to see…Read More

Category: MacroNotes

Morning stuff/CIT and China

For just the 2nd time since the credit bubble imploded, the Fed and Treasury said no to another bailout. I fully acknowledge the potential bankruptcy of CIT will be highly disruptive and difficult for small business but score one for American Capitalism as I’m extremely confident that healthy financial institutions will step in and fill…Read More

Category: MacroNotes

Intel Throws Party; BAC Founder Appalled

Good Evening: The “Intel Inside” ad campaign received a boost today in the form of an Intel-Inspired equity market celebration. As the whole world watched, Intel exceeded earnings estimates last night, rose in aftermarket trading, and then paced an around the globe rally in stock prices. Setting the bar low and then leaping over it…Read More

Category: Markets, Think Tank

First Appointments to the to Financial Crisis Inquiry Commission

It is modeled on the Pecora Commission, a Senate panel that investigated causes of the Great Depression during the 1930s. The Pecora Commission led to major changes in federal law. Speaker and Majority Leader appointed Phil Angelides as chairman of the Commission. Angelides was elected California State Treasurer from 1999 to 2007 House Speaker •…Read More

Category: Markets, Think Tank

CIT is Not the FDIC’s Problem

The team of Treasury Secretary Tim Geithner and OCC chief John Dugan are trying to paint Sheila Bair and the FDIC as the villains in the CIT situation. CK this missive I just got from one of the members of the working press: “The lobbyists are ready to string Bair up and claim this could…Read More

Category: Credit, Markets, Think Tank

Pick your poison

On the same day Treasury Secretary Geithner said “It is the policy of the US and it will remain the policy of the US to remain committed to a strong dollar” and that it will “remain the principal reserve currency,” the $ index is back below 80 and a close here would be the lowest…Read More

Category: MacroNotes

King Report: Who Pays Taxes?



Last night Bill O’Reilly, in a segment about ‘connected firms’ profiting from cap & trade, stated
Goldman made $2B in 2008 but PAID NO FEDERAL INCOME TAXES!

Long-time readers know that we regularly inveigh against US policy that allows corporations to run two sets of books – one for investors and one for taxes. So when the usual suspects appear to whine that US corporations need tax relief, remember that many US corporations pay little or no income taxes while they report great earnings…How much federal income tax will Goldman pay this year? Where’s Congress?

A few weeks ago we warned that just like the previous two years, BLS seasonal adjustments prevented early spring commodity inflation (rallies) from appearing in PPI in CPI; but in June the seasonal adjustment process would inject the inflation that occurred early. This occurred yesterday with PPI.

Though PPI at 1.8% was double expectations, in reality inflation was not that strong in June. The BLS understated energy and food inflation in the spring and will overstate inflation in June & July.

Press releases noted that energy inflation (+6.6%, gasoline +18.5%) was the reason for the jump in PPI.

Once again we have better than expected retail sales (+0.65% m/m) due to inflation. ‘Core retail sales were 0.26%… Ex-food services, retail sales declined 10.3% y/y…Why won’t the government report ‘core retail sales’ (ex-food & energy) like it does for PPI and CPI?

Read More

Category: Markets, Think Tank

industrial Production

June Industrial Production fell .4% and is the 17th month of decline in the last 18. It was .2% better than expected but May was revised down .1% so overall it was about in line. Capacity Utilization fell to 68% from 68.2% in May but was a touch more than the consensus of 67.9%. It’s…Read More

Category: MacroNotes

Economic data

The July NY Fed survey was -.6, above expectations of -5 and up from -9.4 in June. New Orders jumped to +5.9 from -8.2, the first positive reading since Sept ’08 but Backlogs fell 2 points to -12.50. Employment was up a modest one point at -20.8 but it’s the least negative reading since it…Read More

Category: MacroNotes