May 27th, 2009 by johnnyvenom

Investors are already concerned about the level of government spending. Today’s deluge of longer term securities has confirmed that more of the same, adding to that concern. Bloomberg is reporting the price of treasuries dropped significantly.

Normally you have sales of around $15-20 billion. But today, participants saw an introduction of about $35 billion. This will come on top of an already announced record auction of $27 billion on 7-year securities. Bond traders are wondering if next week the numbers set today will be exceeded.

The yield on 10-years jumped 17 basis points to 3.71%. As most will tel you, what we have here is a classic case of supply and demand. I mean what did one expect? The main products have ways been the 90-day, 2s, 5s, and 10 years. Now we have the 7s being pushed. What’s next, the reintroduction of the long bond?

Investors are already weary. There is only so much demand for US government securities. The price drops one is seein is testimony of several thing:

1. That credit is still tight, despite an upward yield curve.
2. Investors are wondering where the government will be able to fund thee obligations, especially since the ratings warning.
3. Foreign investors, particularly China, are looking to pair back on their US Dollar investment.
4. No one is truly sure just how much supply is going to come on the market.

This is all one massive overhang. One need only take a gander at the futures products that reflect these instruments. All back month contracts are showing ever decreasing prices.

May 26th, 2009 by johnnyvenom

I’m a sucker for barbeques, especially good ones.  Normally I’m not a “family” person, but I am a people person.  When it comes to barbeques, though I tend to even go to the ones my family puts out.  This year I hosted, unfortunately the weather was not on my side and being someone into risk management I decided to hold an “indoor bbq.”  The food, as always, was good, but my other type of appetite was also satisfied, my hunger for news and tid bits. 

Many years ago,  I read a few books by Peter Lynch, one called “Learn to Earn” and the other “One Up on Wall Street.”  Now Lynch was one of those guys that could pick a stock and make money, but in my opinion he was one of those money managers in an era where really everyone was making money.  He’s one of those proponents of “buy and hold” which today has been proven to be bunk for the most part.  Anyways besides learning how to read a company’s financials, his other main pony trick was to utilize “outside forces” for research, that is taking notice of things.  For example, if you’re kids or their friends all seem to be wearing the same Chinese-made sneaker, maybe you should look into that company to invest.  Well one derivative of that which I adopted was to listen to people and pay attention. 

Yes, I watch the news, but sometimes you can pick up something just on hearing a friend who is an expert on something or he or she is one of those “tells” on the economy.  This gets me to my first thing I learned this weekend, the consumer is more worse off than even the news is saying.  My cousin Will is a shopper, I mean he’s like the last of the big spenders regardless if he’s got the money or not, we’re talking the types that predatory credit cards love.  His credit is shot, yet he still could get a card.  I say could instead of can because as of now, all he gets are rejection letters. His biggest binge is on clothing, he is (as he says) the “Shopping Queen.”  Now I’m a plain man, not a great dresser, working jeans and good shoes I’m happy.  Not him, name brand this or that, I even seen him spend $300 on a pair of jeans.

Well ok, so what the hell does this have to do with anything?  Ok, we get it, he wastes money, why are you wasting this on EP?  Because today he told me he’s gotten into mending his old clothes!  And by mending, I mean he actually went into a pawn shop and purchased a sowing machine and whatever else you need.  He went on to say how since he literally cannot afford even pants from Target (Where he works), that he’s gone to finding whatever he hasn’t thrown out (which he used to do almost every few months to refill his closet) and making them last.  I have to say, he seems pretty good at it.  He showed me all the spots he fixed and that.  I asked him where he learned to sow and then he dropped another bomb.  His friend, another shopaholic took it up when he fell into financial disrepair.  It seems his whole circle just stopped shopping and going on to making their clothes last.

This mending business isn’t just clothing, folks.  Two friends, one an accountant who was laid off, said he returned his year old Toyota and is keeping his Chevy he let his wife use.  It’s now the “family car,” meaning sharing and such.  Now this thing has got to be 7 years old.  But he said no matter what, he isn’t going to into hock to buy another new car.  That they will keep this going for at least another 7 years.  This was echoed by another family member, who was looking to buy a car but was afraid to.  They all hear from people saying the same thing.

Homes, not really a surprise here.  I would say that a third who attended my indoor bbq shindig are going to lose their home.  They didn’t come up and say it, but you know how when someone talks and wants to say something but doesn’t come out and say it but you get the idea?  Like that.  Damn shame too, because we’re talking small families and in one case pets too. I had 4 who were trying to sell who just gave up and took their homes off the market.  Half are in industries where there is a shakeout going.  Instead of selling, most who believe are going to stay in their homes are now doing for their homes what they are for their cars.  Trying to keep it up, fixing a pipe here, adding something affordable like a new sink.  One friend of ours who live in Lake in the Hills was telling us how a lot of the fancy homes out there are quietly becoming empty.  I’m curious and going to have to get out there, they got some BIG homes over there.

Another thing I learned is that the job market is a lot worse than the media is saying it is.  Of course, we here at EP have known this for a while.  9% my ass!  A lot of my friends who worked in the service or retail sector had their hours cut.  My cousin, Will, the shopaholic, had his hours paired down from 30/week to less than 10.  Several others were given a choice of less hours or being laid off.  You know, the level of underemployment in this country I think has to be the highest since the Great Depression.  I bet if you added it to what we all think unemployment should be, the overall figure would be at least 20%. And this has an impact on the economy, folks aren’t going to spend if they think they won’t be working as much or at all.

The last thing I learned, despite the graphs and studies, most aren’t saving like they should  We keep hearing how Americans are once again approaching 10% savings rate.  If my informal unscientific poll/inquiry is any sign, I would say we’ve gone from a minus figure to perhaps 4-5%.  Most are now plowing what they can to pay off their credit cards.  What they can save, gets quickly eaten up by rising gas and food prices. Not to mention taxes, here in Cook County, we have 10.25% sales tax.  The City of Chicago has a score of fees and taxes as well, all of this eats up folk’s salaries and savings.  My aunt actually said she plans on trying to find cereal online to avoid buying it in Chicago.  It isn’t easy for her to get out to the burbs, she’s all the way on Sheridan by the lake, got in there when it was cheap back in the day.  She says how seniors are having it tough, “you just can’t save, you try but you can’t! Having a bitch of a time doing it!” she goes on.  I think those words could actually go for a lot of things I learned.  Folks are trying to survive, but can’t or having a bitch of a time doing it.

May 24th, 2009 by johnnyvenom

Caroline Baum has a good piece on Bloomberg highlighting one of the reasons why it is we’re in the mess we’re in.  She talks about how several prominent economics are bringing up a little chestnut that the current Fed chairman, Ben Bernanke, wrote about meshed in with their crazy scheme.  Essentially, you have the convergence of two really horrible ideas, an inflation targeter and negative interest rates.

Basically, for the first one, the Federal Reserve wants to aim for 6% inflation rate.  Now this goes totally against the supposed 0mission of the Federal Reserve, which is to fight inflation (and deflation). Frankly, I’ve had my doubts about this government-granted monopoly on rates for a while now.  In this case, with the official rate at about 2-3% (depending on what variables you look at), the Fed believes it can handle triple that amount.  The problem is this, that the only real way to increase inflation in face of falling demand for spending is to simply print more money. Remember gang, increasing the money supply often leads to inflation!  But let me ask you this, has government ever been able to see their plans go according to spec?  Never!  There’s always a hiccup.

Now we get to this other insane idea, and this is to get the Federal Reserve to go below zero on the interest rate front.  Below zero?  Is that possible?  For the Federal Reserve, anything possible!  This idea comes actually from a respected economist, Greg Mankiw.  Like Ms. Baum, I’m flabbergasted that it is Mankiw coming up with this. 

Interest rates can be either a “good thing” or a “bad thing”.  Positive interest rates means you’re earning a little something in your savings accounts.  It also means you’re paying something out if you borrow money.  Negative interest rates have more than an opposite reaction.  Now don’t get excited into thinking you can use your credit card and earn interest while spending.  You see this is really a double whammy.

Under Mankiw’s theory, you could borrow $100 and pay back say $97 if we had an interest rate of negative 3%.  But let me ask you this, do you really believe the bank behind that credit card is really going to offer you a negative interest rate?  I didn’t think so.  Outside of President Obama being Obama, there is nothing to compel banks (especially those not under TARP) to offer a negative rate.  It would be suicide for the banks to go this route. 

Prof. Mankiw knows this and addresses this, and that is where it really gets well…evil! 

The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less.

Unless, that is, we figure out a way to make holding money less attractive.

At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. (I will let the student remain anonymous. In case he ever wants to pursue a career as a central banker, having his name associated with this idea probably won’t help.)

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

 

- excerpt from “It May Be Time for the Fed to Go Negative”, New York Times, 2009.

Here’s the evil part.  Say you were a pensioner.  Now you become the victim of these two insane ideas coming together.  One one hand, because inflation would be AT LEAST at 6%, the value of your savings and buying power would decrease each year.  To give you an idea, at 6%, the total value of what you have saved will be cut in half in just over a decade.  Add in the prospect that a good chunk of your money would become non-legal tender because you had the wrong serial number, well that just spells disaster.

That last part, in my opinion is worse than the inflation scheme.  What they have here is an old idea, I want to say Keynesian but its older than that, to make holding money costly.  In foreign currency exchanges this is what is tantamount to a carry, that is the cost of a currency.  That serial number scam essentially clips 10% of your savings in one blow in an economic game of Russian Roulette.  You are forced to spend money whether you want to or can afford to.

But do you think it would end there?  C’mon folks, you know the government better than that.  So for example, because of White House meddling, you end up with two lending systems; one that does not offer you interest when you borrow money, and those that will charge you regardless.  My bet the former would still be TARP victims.  Anyways, say folks go for that type of lending.  It would seem almost stupid not to borrow money AND only have to pay back say 97%!  Now, here comes the last move.  The government, being the calculating money hungry gnomes that they are, will come back to you and say that that 3% you didn’t have to pay back is really a capital gain!

Oh yes, you didn’t think they wouldn’t do that would you?  To them it would be like a taxable zero-coupon bond!  So here you have a daily existence where you run the risk of having 1/10th of your money not being usable.  Inflation is eating away at the value of what you can use.  So with prices rising you have no choice but to use the ol’ plastic.  Only now, after you’ve gone through all that, you now have a new tax!

Oh how I long for a sound monetary policy.

May 10th, 2009 by johnnyvenom

Starting this fall, journalism students at the University of Missouri, Columbia will need to add an iPhone or an iPod touch to their shopping carts.

Before you protest that it may seem ridiculous, lavish, or favoring Apple to force students to pick up one of these expensive pieces of hardware, Brian Brooks, associate dean of the journalism school, told the Columbia Missourian that the requirement "will not be enforced, however, and there will not be a penalty for students who chose not to buy an iPod touch or iPhone."

So why require it? Brooks said that it’ll helps students review recorded lectures, but the real reason for "requiring" the purchase is for the benefit of students on financial aid. He told the paper

Missouri journalism students required to buy iPhone or iPod touch? by Macworld.com: Yahoo! Tech

Now if that don’t beat all.  In this day an age of budget deficits and such, do we really need to be subsidizing Apple like we are GM and AIG?  This reminds me of that other big scam going on with those digital converter boxes.  To this day, I cannot see where it says in the US Constitution that Congress has the right to subsidize someone’s television viewing!  As for the University promoting this, there is a word out there for you…whore.

You sold yourself out, University of Missouri, Columbia, as far as I’m concerned.  Students today are already having a hard time getting financial aid.  By whoring out to Apple, you cheapen…yes cheapen the idea behind financial aid.  When I went to college, you were lucky if you got a grant to help pay for books.  Money that would go for these iPods could be deployed elsewhere.  Indeed, this is not only whoring but also theft being done to the taxpayer!

The average iPhone runs between $199-$299, but that is already a discounted price because it assumes you will purchase a 2-year mobile phone contract with AT&T.  Will the taxpayer be footing the bill for that as well?  Out of curiosity, I pulled up a plan, the cheapest I could find for an iPhone, including a data package.  Oh yes, what you thought that all you need was a calling plan?  I’ve got news for you, without the data package, that iPhone becomes nothing more than a normal mobile with a fancy screen.  You can’t access the App Store to get all those things that make the damn thing “cool” without it, unless you can find a Wifi hotspot; chances are you won’t find those all the time.  So calling plan and data package comes to about $70 a month before taxes, keep in mind I tried to make it as no-frills as I could here.  Now at $70  month multiplied by 24 months (remember, it’s a 2-year promise) without any “extras” like roadside assistance or an extended warranty or texting, the total bill comes to $1879 ($199 for the low end iPhone plus $1680 for the 24 months of service).

The lesser evil here would simply to get these students the iPod Touch.  At the low end, the thing runs at $229, while the top of the line model costs $399.  So the rape on the taxpayer wouldn’t be as much and it would be quick if they went for this.  Outrageous that someone would suggest that these folks should get an iPod product as part of an educational funding package.  At least this end of this Faustian deal for the taxpayer wouldn’t require us in a sense having the government cough up money to AT&T, as if they deserved our money.

I have to tell you, this also says a lot of how the University thinks of its students, that is they must have a certain amount of disdain for them.  Journalism students, by the nature of what they are studying, should be able to jot down what they need in a lecture without the use of these gadgets!  Tell me, when you release them into the real world, are you saying that they will need an iPhone to do their job?  If that is the future of the Fourth Estate, heaven help this republic!  Government should not be in the business of distributing iPods or iPhones or anything of the such.  If a student wants to record a lecture, well they got two choices, either buy a tape recorder or their own damn iPod or iPhone! Frankly, the dean who put this out there should be fired, plain and simple.

But you know what, those kids are smart.  They know what it really means to have government pay for these things.  As the article noted, there is already a protest amongst the students about this stupid idea.  Regarding loans, they know this wouldn’t be a “free” anything.  You put that on your loan as a “requirement” then down the road you’re going to have to pay it back.  Students graduating already have a boat load of debt on their shoulders, they don’t need an additional cost of a gadget on that roster of liabilities. And folks wonder why the average citizen complains about education and wasteful spending by government. 

May 5th, 2009 by johnnyvenom

WASHINGTON (Reuters) - Bank of America has been deemed to need an additional $34 billion in capital, according to the results of a government stress test, a source familiar with the results said on Tuesday.

A Bank of America spokesman declined comment.

The amount is far higher than published reports had speculated the largest bank might need. It is certain to increase the pressure on Chief Executive Kenneth Lewis, whom shareholders ousted as chairman last week.

BofA to need $34 billion in capital: source | Reuters

The title of the Reuters article really says it all.  $34  billion?  This is how the AIG situation started, first they needed a $40 billion dollar bridge loan back in September.  Back then we were first entering this financial maelstrom, people (including myself) were saying that they needed propping up or else it was financial Armageddon.  Just this one loan, that’s it and we could begin to set things straight.  Well I and most others were wrong.  We’re now at almost 200 billion for AIG and we have nothing to show for it.  And now, now it seems Bank of America is heading down that same path!

The latest were a leakage regarding those stupid stress tests.  Come on, given the parameters that were used (10.3% unemployment, etc), no one on the Street took the stress tests seriously.  If anything, when you do implement such an examination of the strength and capabilities of a financial institution, make sure that they can really survive.  They essentially used the worst we saw in the early 1980s and went with that.  Let me tell you, it isn’t enough, not when you have some places witnessing 15%+ unemployment and a collapse in housing prices north of 20%!  Before the test, we figured it was Citigroup that was the problem child of the two.  Who even knows how much Citi will need now?!?

No, ladies and gentlemen, as the old Kenny Rogers song used to go…you have to know when to hold them and you have to know when to fold them.  From AIG to Citigroup, it’s time to close up shop.  If that means nationalizing these sorry excuses, who over leveraged themselves, so be it.  The American taxpayer simply cannot afford to keep dolling out this kind of money.  Do you really believe it will stop at $34 billion? 

A lot of folks who took the other side of those derivatives trades are going to get hurt. They are going to have to realize that their payday isn’t coming.  At the rate we are going, the Federal Reserve will continue expanding its balance sheet, the Treasury will continue to print more money.  While we may argue about deflation or inflation, the long-term cost of borrowing will become more dearer.  Indeed, one need only look at futures contracts of the Eurodollar or Treasuries to see an implied increase in interest rates. 

Now some of the banks that underwent those “tests” are in reasonable shape, like Goldman Sachs.  Now Goldman has been on the other side of many of those trades, so maybe they may not get those payouts.  But they still are capable of surviving on their own and have been asking to pay back the TARP loan.  I say let them, and the others who aren’t zombie banks.  As for the rest, let the culling begin.

Like I said, some banks will simply have to cease to be, others hopefully nationalization may do the trick.  I know what you’re thinking, but what if after nationalization, these banks are still too sick?  It would have to depend on an individual case by case basis.  Some probably can be broken up and sold to healthier banks.  Others, well probably have to be folded and we will have to absorb one final cost…think of it as the cost for burial. 

We have been very generous, in my opinion.  Had we applied a more stringent market philosophy on them, they would have died months ago, but probably take us along for that one final ride.  But here we are, still on the precipice.  In the zombie horror film genre, what normally happens is that if you don’t kill off the first wave of the undead they begin to infect the general populace, thus growing the problem.  In September 2008, it was $40 billion, as of now we have already seen hundreds of billions go.  My friends, its time for a financial quarantine before the rest of the economic general populace joins the economic undead. 

April 25th, 2009 by johnnyvenom

Deflation, inflation, it really doesn’t matter. The price for money, that is interest rates, is going up. You can see it in the back month contracts in the futures market. You can see it in the failed auctions for foreign debentures like the Gilt in the UK. Investors/lenders are demanding a higher rate for loaning out money. The banks may be lending, but it’s still a capital desert out there. We were at historical lows, not seen in decades.  Folks, it was not always going to stay that way. The benchmark 10-year, Bloomberg is reporting, the yield is now going up.  The Federal Reserve may be attempting to buy up some debt, but the fact remains that more of it is still going to come online.  So long as we’re on this runaway train of borrowing, the cost for money will have to go up.

excerpts from the Bloomberg article:

April 25 (Bloomberg) — Treasury 10-year notes fell, pushing yields above 3 percent for the first time since the Federal Reserve announced a plan to buy U.S. debt, as investors focused on $101 billion in note auctions next week.

The benchmark 10-year security dropped for the fifth straight week as record U.S. debt sales overshadowed the buyback program the Fed unveiled on March 18 to drive down consumer borrowing rates. The 30-year bond yield rose to the highest since Nov. 20, while the gap between yields on two- and 10-year Treasuries approached the widest since November as investors demanded greater compensation to lend to the government for longer periods.

“Supply definitely continues to be a factor,” said Adam Brown, director of Treasury trading at Barclays Capital Inc. in New York, one of 16 primary dealers that trade with the central bank.

The yield on the 10-year note increased five basis points, or 0.05 percentage point, this week to 3 percent, according to BGCantor Market Data. The 2.75 percent security due in February 2019 fell 3/8, or $3.75 per $1,000 face amount, to 97 29/32.

The benchmark note’s yield had held between 2.46 percent and 2.99 percent since March 19, the day after the Fed said it would buy up to $300 billion in U.S. securities over six months.

The Treasury will auction $40 billion in two-year notes on April 27, a record $35 billion in five-year securities on April 28 and a record $26 billion in seven-year debt on April 29. It is scheduled to announce April 29 how much it plans to raise in sales of three-, 10- and 30-year debt in the first week of May.

——————————-

The U.S. needs to raise $3.25 trillion this fiscal year, according to primary dealer Goldman Sachs Group Inc. President Barack Obama has already increased the U.S. marketable debt to a record $6.27 trillion as he borrows to try to snap the recession.

Fed Chairman Ben S. Bernanke more than doubled the central bank’s balance sheet in the past year to $2.2 trillion by purchasing financial assets including Treasuries as he tries to revive credit markets after a rout in 2007 and 2008.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 97 basis points yesterday, from 1.35 percentage points at the end of 2008. It averaged 36 basis points in 2006.

April 14th, 2009 by johnnyvenom

I will say this, at the question period, those students asked better questions than I heard from our so-called “Fourth Estate”.

April 13th, 2009 by johnnyvenom

Is anyone surprised to hear Goldman making money?  Let’s not kid ourselves, though, it helped that the government used AIG as a way to cover Goldman’s CDS bets.  Still, I’m happy to hear that they will be paying back their TARP-related obligation.  Now lets hope we can get the other banks to square away their government-induced liabilities.

While activity in the debt markets picked up in the first quarter, equity underwriting remained at depressed levels. Toxic assets, including mortgage-related securities and leveraged loans, continue to pose a risk of write-downs for investment banks.

Goldman said its fixed income, currency and commodities segment generated record quarterly net revenues of $6.56 billion, 34% higher than its previous record, reflecting strength in most businesses, including record results in interest-rate products and commodities.

"Given the difficult market conditions, we are pleased with this quarter’s performance," said Chief Executive Lloyd C. Blankfein. "Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people."

For the period ended March 27, Goldman posted net income of $1.81 billion, or $3.39 a share, up from $1.51 billion, or $3.23 a share, a year earlier. Net revenue increased 13% to $9.43 billion.

Goldman Sachs Goldman Sachs Profit Rises 20% in First Quarter - WSJ.com

April 13th, 2009 by johnnyvenom

It’s an interesting read.  While I can understand the anger towards deficits and the ballooning debt, something in the back of my brain has told me that there was something fishy about these so-called “tea parties.”  Perhaps I’m wrong, hey it would be nice if this was the real deal.  And to you folks out there who are part of this movement, please chime in if I’m wrong (which I’m hoping I am).

Op-Ed Columnist - Tea Parties Forever - NYTimes.com

Going back to those tea parties, Mr. DeLay, a fierce opponent of the theory of evolution — he famously suggested that the teaching of evolution led to the Columbine school massacre — also foreshadowed the denunciations of evolution that have emerged at some of the parties.

Last but not least: it turns out that the tea parties don’t represent a spontaneous outpouring of public sentiment. They’re AstroTurf (fake grass roots) events, manufactured by the usual suspects. In particular, a key role is being played by FreedomWorks, an organization run by Richard Armey, the former House majority leader, and supported by the usual group of right-wing billionaires. And the parties are, of course, being promoted heavily by Fox News.

But that’s nothing new, and AstroTurf has worked well for Republicans in the past. The most notable example was the “spontaneous” riot back in 2000 — actually orchestrated by G.O.P. strategists — that shut down the presidential vote recount in Florida’s Miami-Dade County.

 

- excerpt from Krugman’s latest article

April 12th, 2009 by johnnyvenom