Market Talk

Bernanke launching "unconventional measures."

Sounds as if former Fed vice chairman and Princeton professor Alan Blinder has changed his tune a bit. Hat tip to Gluskin Sheff’s David Rosenberg for pointing out this Blinder quote in a NY Times story late last week:

The Fed has run out of the strong tools, and is turning to the weak ones…When you’re fighting in a foxhole and you’ve used up the machine guns and hand grenades, then you pull out the swords and start throwing rocks.

The Times went on to quote Blinder as saying the economy seemed “substantially worse” than it did three months ago.

Interesting, Alan. Three months ago, eh? That’s around the time the good professor penned an op-ed for the WSJ (so rich we had to clip it out and save it in the bottom file drawer), titled “Government to the Economic Rescue.”

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How 'bout another $100 on Cisco, pal?

Interesting post by Jeff Cooper at Minyanville today, which gets to some notions we’ve held as close observers of US stock markets, particularly during the past 18 months. Needless to say, the rationale behind many a rally has been suspect, at best, and whipsaw moves have become part of the daily grind.

From Cooper: 

Getting whipped, and getting whipped around when you’re a highly competitive individual, gives rise to “unusual uncertainty.” This seems true whether you’re an individual or a company. Both end up playing more not to lose than to win. And this is a road to perdition marked by death by a thousand cuts.

While the markets are an emotional beast, if anything, when any wisp of logic is shredded by seemingly random acts of pernicious trendlessness, the exit sign looms large in neon.

Trading ranges are the hallmark of throwing in the towel. Whipsaws without any apparent underlying raison d’être define times of unusual uncertainly where the machines dominate with strategies of trying to squeeze dimes out of nickels.

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How many of your problems have you kicked down the road that have eventually gotten better?

Hedge-fund manager Kyle Bass’ testimony before the Financial Crisis Inquiry Commission back in January was a hit with us. He’s another gent who we’d be proud to initiate into the Committee for the Continuation of Keeping It Real. Kudos to CNBC for giving him the floor this afternoon. 

He’s looking a lot more tanned and trim than in January, when he resembled more of small Gandolfini. Good stuff follows: 

Part II

- The multi-year deal pay-cable movie channel Epix and Netflix (NFLX) agreed to is “a major move for Netflix, and undoubtedly a nice cash infusion for Epix, which has struggled to get carriage deals from traditional cable operators,” MediaMemo blogger Peter Kafka says. “This deal may make Netflix more competitive with cable, but it’s not designed to threaten Hollywood’s DVD business.”

- Demand Media filing a $125M IPO at a reported $1.5B valuation shows making it in the online content business is a “long march to the big time,” Kara Swisher writes. “Hence, the IPO, which will give it both cash and stock to use to grow itself, either organically or via acquisition, all while keeping the costs of content creation lower and lower via innovative technology.”

- Small business optimism sharply declines for second straight month. “Businesses and households are losing confidence and are adjusting their spending and investing plans accordingly,” Ryan Avent says. “A chill has settled on expectations around the country. It will take credible policy steps to change the tune.”

- Former Hewlett-Packard (HPQ) CEO Mark Hurd’s severance package, which could be worth as much as $30M, is “appalling,” writes Nell Minow, shareholder activist and editor of The Corporate Library blog. “While most CEO contracts exempt poor performance as a reason for ‘termination for cause,’ there is no reason to permit a departure following an ethics violation to be characterized as a resignation — when the result is a $50 million payout that would otherwise stay in the corporate bank account.”

- Now that Mark Hurd is no longer H-Ps’ CEO, a “dirty little secret” has been revealed about H-P’s business model. “H-P is a sprawling, ungainly conglomerate of tech companies that have only tangential connections to each other and that generate the most tepid of synergies,” writes Kevin Kelleher at AOL’s Daily Finance blog.

- This won’t get the attention of the Hurd departure, but TechCrunch reports the man who designed the Palm Pre has left H-P for greener pastures. Peter Skillman’s exit is the latest in a string of departures from the recently acquired smartphone maker.

- Productivity unexpectedly posted its first quarterly drop in 18 months as output growth slowed and labor costs rose. “If you were looking for one more reason to wonder about the already shaky prospects for a recovery in the labor market, today’s report on second-quarter worker productivity is just the ticket,” James Picerno writes at The Capital Spectator.

- Don’t get too anxious about Google (GOOG) and Verizon’s (VZ) joint proposal: the net neutrality situation still hasn’t changed much, Stacey Higginbotham says at GigaOm. “The good news is nothing about this compromise has any teeth without the FCC deciding to make it part of its official rules on network neutrality.”

- Rail traffic rose 4.1% last month compared to July 2009, but was still 15% lower than in July 2008, Calculated Risk reports, citing data from the Association of American Railroads. “Rail traffic collapsed in November 2008, and now, a year into the recovery, traffic has only recovered part way,” Calculated Risk adds.

- Former Sen. Ted Stevens, along with eight others, die in a plane crash in Alaska.

I’d have had more respect for this editorial if it had been called “Welcome to the Recovery, Don’t Mind the Smell,” but perhaps that’s a bit too lowbrow for somebody as elevated as the Treasury Secretary. Or maybe the stench just doesn’t waft that high.

From the NY Times:

The recession that began in late 2007 was extraordinarily severe, but the actions we took at its height to stimulate the economy helped arrest the freefall, preventing an even deeper collapse and putting the economy on the road to recovery.

While the economy has a long way to go before reaching its full potential, last week’s data on economic growth show that large parts of the private sector continue to strengthen. Business investment and consumption — the two keys to private demand — are getting stronger, better than last year and better than last quarter. Uncertainty is still inhibiting investment, but business capital spending increased at a solid annual rate of about 17 percent.

Most of the column is a hodgepodge of data points that purportedly spell recovery. I don’t have the time to rip through them point by point, but I will say this: it’s amazing to me that the only people convinced by the “strength” of this recovery seem to live in the vicinity of Pennsylvania Avenue and Wall Street, and even on those two thoroughfare’s you can find doubters (if not outright agitators.)

I’ll also note that nowhere does he tout wage gains. Because he can’t. I’ve been trying to put together a post on this topic, but haven’t had a chance what with our daily Upshot columns (which end Friday, by the by.) But to my thinking this is the one most important, critical measure among the universe of data points that get spewed out on a regular basis. Take a look at today’s report on income and spending. Hey, look at that; wages went nowhere. How quaint.

Until we see some long-term, inflation-adjusted sustainable wage gains, this economy will not grow in a sustatinable fashion, and we will be vulnerable to booms and busts and related shocks.

Just when I thought I could not possibly get more outraged by anything I hear about government bailouts, I read this from the Times:

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Societe Generale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

Um, excuse me? Am I to understand that the U.S. government, which was about to hand over nearly $200 billion to AIG, forced it to agree not to sue any of the banks it owed money to, even if it should it later find out that any of them committed, oh, you know, fraud? Is that what my government brokered?

This is the kind of agreement that, say, a corporation might make one sign when they’re letting you go, but giving you a little severance package, know what I mean? Why in the world would the U.S. government, which was about to fork over an almost unheard of amount of taxpayer money, want to force to AIG to give up any legal chance to recoup any of that money? It would make sense if it was the banks forcing that issue, but for the government to…

A-ha! A-ha!

“Another way to read this requirement is that the Fed and Treasury were opposed to having fraud at the banks exposed, period,” Yves Smith writes at naked capitalism. “That is a very troubling stance for bank regulators to take.”

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Reports on the housing market haven’t been too sunny lately. Last week we learned May housing starts cratered, a June home builder sentiment gauge tumbled and Fitch said “a sizeable amount” of loan modifications (65%-75% of subprime and Alt-A) will re-default again within a year.

Little surprise then that the Obama administration is trying its best to put lipstick on the pig that is Treasury’s HAMP mortgage modification program. Treasury and HUD today announced a new “housing scorecard” to accompany the monthly HAMP servicer performance report, to “highlight the Administration’s unprecedented housing recovery efforts,” the agencies said.

HUD Secretary Shaun Donovan said the scorecard “will allow the American people to monitor the Administration’s efforts to strengthen the housing market on a monthly basis and hold the government and industry accountable.” He said  this month’s report “provides a broad set of indicators showing encouraging signs of recovery.”

Sounds like a lot of bluster to distract attention from a couple key things: there’s still a relatively small 340,000 permanent modifications, amid almost 3.2 million eligible delinquent loans; and there’s more canceled trial mods — roughly 430,000, than active permanent mods.

Canceled trials jumped more than 277,000 in May, but officials apparently shrugged that one off, citing a policy shift requiring proof of income to obtain a modification.

If nothing else, the oil-spill catastrophe in the Gulf of Mexico highlights at least one urgent necessity: the need for a new cabinet-level post in the Obama administration. We humbly suggest the creation of a “Fubar czar.” The creation of this much-needed position is born partly from a deep tradition in Washington to add another layer of largely unaccountable government bureaucracy as a remedy to any easily foreseeable, fully avoidable catastrophe.

Yes, citizens, the writing has been on the wall for many years now, as we lurch from one botched reaction to a disaster to another. Hurricane Katrina, the implosion in the housing market and near-collapse of the US financial system, not to mention the motion picture “Gigli,” little Elian Gonzalez (couch potatoes remember him well as cause of pre-emption of many of your favorite shows), Toyota’s “sticky” gas pedals and the ABC sit-com “Cougar Town.” All calamities in their own right, and all would’ve been less costly to the taxpayer, or at least the public’s collective psyche, if we had a strong Fubar czar.

But in this case, the creation of a Fubar czar should, thankfully, mitigate the need for additional wasteful agencies as the post would carry the power to supersede any other government agency, upon the simple declaration from the president of the United States that a given situation is indeed “fubar.” Voila, Fubar czar then takes control, with the full faith and resources of the USA at his command.

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That's right, pal, I'm pointing at you.

President Obama in a speech today apparently took some shots at Republicans, accusing the party of gutting regulation and putting “industry insiders in charge of industry oversight.”

“If you’re a Wall Street banker or insurance company or oil company, you pretty much get to play by your own rules, regardless of the consequences to everyone else,” the president said.

Typical demagoguery to which politicians like to resort, and sounds as if the president may be referring to Gramm-Leach-Bliley Act in 1999 that in part repealed Glass-Steagall. Better check the records on that one, Mr. President, because that legislative action was the type of bipartisan affair that seems almost like a fairy tale amid today’s political bickering.  

The act passed the Senate 90-8, with 38 Democrats voting in favor; the House passed it with 362 yes votes, 155 coming from Democrats.

Courtesy NY Times:

“Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century…This historic legislation will better enable American companies to compete in the new economy.” Guess who? None other than the director of Obama’s National Economic Council and then-Treasury Secretary Larry Summers.

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- Attorney General Eric Holder says US is launching civil and criminal investigations into the Gulf oil spill.

- The unchecked flow from BP’s busted well is bringing more than just thick crude to the surface — desperate emotions are bubbling up, too. Former labor secretary Robert Reich wants the federal government to temporarily put BP into receivership and take over its North American operations. As justification, he argues BP hasn’t been truthful about the size of the gusher, and “continues to be responsible primarily to its shareholders, not to the American public.”

- Pinning recent ups and downs in asset and commodity prices solely on Europe “misses an important part of the story,” UC San Diego economics professor James Hamilton says. Venture a glance at China.

- The Economist effectively declares bank balance sheets have been repaired and banks don’t need to raise much new capital. But naked capitalism blogger Yves Smith begs to differ. “It should be no surprise that US bank regulators are continuing to prop up banks, but it’s disappointing when the media gives them and the bank earnings phony-baloney they enable a free pass.”

- S&P 500 drops 19, or 1.7%, to 1071, marking the third worst post-Memorial Day performance ever for the index.

- Attitudes toward big banks are changing around the world, except the US. “Our top policymakers are simply convinced that what is good for the biggest and most dangerous element on Wall Street is good for the American economy,” former IMF chief economist Simon Johnson writes. “This is cultural capture in its purest and most extreme form.”

- “Policymakers are betting that the recovery is strong enough to self-sustain, and so they are turning their attention to other threats,” Ryan Avent says. “Perhaps they’re right. But if they aren’t, the policy decisions being made right now will look awfully peculiar and unfortunate several years down the road.”

- There may be signs that “the rich” are back, from luxury home sales in New York and San Francisco to rising sales at Tiffany (TIF) and Whole Foods (WFMI), Daniel Gross says. But the actual story may be about the “not-quite-rich,” and “while they may have emerged from their stunned, locked-down stupor, these consumers are not at full strength…it may take another year or two of solid growth, market gains, and healthy bonuses before they start to party like it’s 2007.”

- Internet ad spending has jumped from zero to 5% of all US ad spending over the past decade. “That is the most bullish signal about investing in the Internet that I have seen this year,” Fred Wilson writes.

- “If stocks keep pace with valuations, then the S&P 500 could easily be over 1400 within 18 months,” Eddy Elfenbein says. Bold prediction, which would mark a 30% increase off current levels. But keep an eye on those earnings forecasts: if companies increasingly start cutting guidance, “then the whole bullish scenario falls apart.”