In FDIC We Trust

I noted yesterday that the FDIC is better run than most financially oriented government agencies in this mess, logistically, but I dropped a parenthetical that they were not financially prepared for this mess. No fault of their own, but the mess is bigger than their piggy bank and they need avenues for financial support. There are some and they will be needed. The piece I am linking discusses the FDIC in more detail along with some of the challenges that face them (along with some dirt on what their PR guy is saying versus reality). Well worth the read.

http://www.nakedcapitalism.com/2009/03/links-and-quick-takes-32109.html

And to add to the FDIC problems, the former parent of Washington Mutual is suing the FDIC for $13 billion. Apparently the parent did not like the deal the FDIC worked out with JP Morgan.

http://www.reuters.com/article/businessNews/idUSTRE52K1K620090321?feedType=RSS&feedName=businessNews

The FDIC has indeed had some very tough questions over the past few months. There was a fair amount of debate on the deal they worked out for Wachovia. There was some speculation that the FDIC worked the initial deal with Citigroup as a stealth way to prop up Citigroup. This was undone when Wells Fargo came in with bid for a better deal - supposedly so Wells Fargo could take advantage of certain tax benefits of the Wachovia losses.

The Question of the Day - Is This a Dead Cat Bounce?

Yes. I was tempted to leave it at that - a one word answer of yes, but people need reasons. Let's start with Geithner. What he is proposing on the public/private partnership is simply not about to work. Yves at Naked Capitalism explains it well, and it is not pretty.

http://www.nakedcapitalism.com/2009/03/investor-on-private-public-partnership.html

I will give more reasons tomorrow. Time for bed.

Disclosures: None.

Another Day Another Dollar

Here is a good article on what is wrong with the current government plans. Basically boils down to what a lot of people are saying in terms of too few, misdirected funds and not enough of a concrete plan. This article provides more detail and provides a nice discussion on why the models the government relies upon are not accurate as they are built on assumptions that are simply not valid. In other words, you can not properly plan for a once in 50-100 year economic event based on models calibrated to a once in 25 year economic event. Time to throw out the old book and start over.

http://www.washingtonmonthly.com/features/2009/0903.galbraith.html#Byline

Another key point to the piece is that the models are assuming we return to where we were before the recession, a/k/a normal. Yet that "normal" was far from it. It was - as they said in Young Frankenstein - Abby Normal. We are not going back there or anywhere close.

Another key point to the article worth noting is the attitude of financial institutions being saved. They may very well be rolling the dice. If you leave current management in place, which we are doing, they may feel they have nothing to lose. They can make a big bet on commodities or equities and let the dice roll. If they are right, the government support is perhaps not needed and all is well in corporate America, and if they are wrong, then the government is already bailing them out so so what. This is the moral hazard our government has sponsored and, frankly, if I were these corporate CEOs I would likely think like them. Go for broke as you have insurance if you fail.

One negative aspect of this attitude is that there is little to no money to be made in usual bank functions. You can do a loan but there are few companies worth lending to and even fewer individuals, so why bother when we can use the government money to make a big bet on commodities or the like. No wonder that credit is gone. Yes there are plenty of other reasons - logical reasons - why credit is dried up, but government support is one reason for it.

Another Two Down

Hardly a surprise here - two more banks down. That makes 20 for the year. I went to the FDIC site around 4:00 and they had not posted yet, but I apparently just got there too soon. A bank failure or two every Friday is to be expected in these times. Indeed, the number of banks each Friday could well increase as this year continues.

http://www.calculatedriskblog.com/2009/03/bf-19-20-fdic-seizes-teambank-national.html

The FDIC is one organization that saw the severity of this mess early on and I think they are more-or-less prepared to handle it. That is, of course, assuming the government does not allow some of the big boys to fail. Some are likely already insolvent and legally the FDIC should be taking them down, but for political reasons this is not being done. Big boys aside, the FDIC is pretty well prepared for this mess (not economically, but logistically). They began hiring big time early last year, bringing back people from retirement and getting ready for the onslaught. They are now working on getting the funding they need to handle this mess. The FDIC is ready. I only wish we could use this well run agency to deal with some of the larger institutions that are in trouble.

Not Just the FDIC

The FDIC is busy, but now the National Credit Union Association ("NCUA") is getting busy as well. Two credit unions down today as well. To be expected.

http://www.calculatedriskblog.com/2009/03/regulators-seize-two-large-credit.html

Worth noting here that these were corporate credit unions, not retail establishments dealing with consumers, but the fact remains times are tough.

Tears for Credit Card Companies - NOT!!

Back in 2005 credit card companies lobbied hard for some rather significant changes in bankruptcy laws that made it harder for those going bankrupt to extinguish their credit card debt, and they got what they wanted. In an ironic twist of fate, this victory led these companies to extend credit to borrows they might otherwise have avoided. Remember those daily mailings offering a credit card or balance transfer. I have not gotten one in a while and am thankful for it. Any hoot, the credit card companies have made their bed. I might add that part of their problem was the fact that people were tapping in left-and-right to home equity loans for credit, instead of credit cards, so credit card companies were in a pinch for business. Be careful what you wish for.

Disclosures: None

Nothing to report

I apologize for being radio-silent lately, but I have read little to pass on. Still there today. I could talk about how the Fed is printing money to support us, but plenty of others are doing this. For now, I am sitting back and watching and will report again when I think there is something worth talking about. We will get there, and I fear soon.

Housing Data Lifts Markets

Well, we are well off the bottom for this year. About half of the fall during Obama's reign has been eclipsed by recent gains. We are 15% up from our lows this year. A nice lift today was attributed to some better than expected news on the real estate front. Adding to the bounce are some financial institutions saying they were profitable the first two months of 2009, as in Citigroup, JP Morgan and Bank of America. I find the latter news hard to swallow, but we will see at the end of first quarter 2009 where things stand. Hopefully they are not just blowing smoke or doing some cooking. Overall, the recent news and gains look promising.

http://www.bloomberg.com/apps/news?pid=20601087&sid=atjt1jiU8GCk&refer=home

Nonetheless, I need to add some caveats to the above. The most knowledgeable blog on real estate that I know of is Calculated Risk. The folks there are fixated on stats and they provide them out the whazoo (sp?). While they too are hoping for a real estate bottom this year, they do not see it here yet. Inventories still too high (the new home supply was at a 13.3 month record in January) and sales too low for this to happen. And they give the stats - and nice charts - to back this up. I must point out that certain geographic regions will rebound before others and certain "national" builders focus on certain geographic regions, so some big builders may rebound before others. Don't make the mistake that one rebounding means all will. One rebounding is good news and a start, but do not finish your research there.

http://www.calculatedriskblog.com/2009/03/housing-starts-is-this-bottom.html

That is all I have for now other than to say that I am not seeing the signs much differently than I did a month ago. So why the rally? You figure it out. Or you can look at the Four Bad Bears chart at Calculated Risk and realize even the worst of times has rallies. We just need to figure out if the present rally is real or a dead-cat-bounce. You know where I stand.

http://www.calculatedriskblog.com/2009/03/stock-market-update.html

Disclosures: None

Another Day - Another Dollar

Another busy day at work - for which I am very thankful - so little time to do much here. I noted yesterday that credit card debt was coming on as an increasing problem. It appears I was not off mark. Credit card defaults at a 20 year high - go figure. And one of the worst default rates is for Citigroup. Seriously people, did this company do any risk analysis? Did they check credit ratings of anyone? And, nonetheless, we are propping up such a "stellar" organization with many billions of dollars.

http://www.calculatedriskblog.com/2009/03/credit-card-defaults-at-20-year-high.html

Mark to Make Believe

The FASB is contemplating allowing more relaxed mark-to-market rules, which is something that Buffet has called for.

http://www.calculatedriskblog.com/2009/03/fasb-to-propose-changes-to-mark-to.html

Now I will not retread all the traffic on how mark-to-market was great on the way up so we need to live with it on the way down. I fundamentally see how it is ineffective in these times. I also see how most major financial institutions are not properly doing the existing mark-to-market. Does anyone really believe the toxic assets are valued properly on most corporate books? These things are not being properly valued, which is another reason why we are not getting to a bottom. Until the valuations get real, we will not get there.

http://www.nakedcapitalism.com/2009/03/now-its-official-public-private.html

Disclosures: None

What Will Tomorrow Bring?

I have written here about what I foresee as the new reality. We are beyond using our homes as piggy-banks, beyond living off credit cards, beyond spending more than we make and beyond being totally stupid. We are being forced to come back to reality. In many respects, this is a good thing.

At the risk of dating myself, let me discuss my childhood. As a kid, I had very few toys; just a banana seat bike, a pogo stick, a maple tree in the front yard and a forest up the street. These were my tools for fun. Yes, we had a black and white TV, but we only had 3 or 4 channels, so it was not a major source of entertainment. Entertainment in my day was making a fort in the woods, swinging from a vine, jumping a brook or catching a red-faced turtle (we lived over the hill from a wild strawberry patch and turtles love strawberries). I loved my childhood and it had none of the things our kids seem to require today.

Kids aside, we can do with less. I was looking at getting a new TV this weekend and decided my old one will do for now. I know prices are good, but I also know that I can enjoy my current TV even though it has certain problems. We will survive. TV aside, there are more important things.

Today, I played basketball and baseball with my daughter. She is a great player. And we took a hike with our dog and my daughter rode her bike. No TV, no Internet, no modern stuff - just a walk (bike ride) down the road. We had a great time.

I realize the irony of me doing this post to my computer on my simplistic childhood, but the point is that the world - due to the recession - is changing. In the U.S. we are reverting to a less expensive more frugal time. The reality is that we need to stay here and get used to it. I, for one, am looking forward to building a fort in the forest with my daughter. Recessions bring the good and the bad. I am fortunate to have a home, food and all the necessities. For those that do not, I wish you the best. I truly do.


Disclosure: None

I Repeat, Are We Off The Bottom?

If you are alive and investing you have to be asking yourself whether the worst is over, whether this is a bear rally - is the dead cat bouncing - or are we on the way to recovery? All good questions and the true answer is anyone's guess, but some are better guessers than others.
I posted Wednesday that I do not think we are at bottom just yet. I wish we were, but the data seems to say otherwise. Reading today, Nouriel Roubini seems to agree, and he has better reasons than what I gave.

http://www.rgemonitor.com/roubini-monitor/255995/reflections_on_the_latest_dead_cat_bounce_or_bear_market_suckers_rally

Let me summarize some of his key points for those out there without a lot of time to read his sage words. First, with respect to the belief that economies are contracting at a slower rate (so the worst is over), he believes economies are not contracting at a slower rate:

"the latest data don’t confirm this relative optimism. In Q4 of 2008 GDP fell by about 6% in the US, 6% in the Eurozone, by 8% in Germany, by 12% in Japan, by 16% in Singapore and by 20% in South Korea."

My take is that the U.S. still has a good bit of hurt ahead and while it may be further into the curve than most countries, it cannot separate itself from the world. Even being ahead of most countries, we are still in for some hurt. Suprime is no longer the area of greatest concern as we are near peak pain there. Alt-A and prime delinquencies and foreclosures are mounting. Credit card debt (which admittedly is small compared to mortgages) is a double-edge sword. On the one hand the card debt is becoming more problematic. And on the other, credit card companies are significantly reducing credit lines, which is putting the pinch on some needing the credit, though reducing the prospect for those in trouble to get more in trouble. Commercial loans are yet another source of problems facing the U.S. Yet, despite all this, I think the U.S. is in pretty good shape compared to most countries.

The problem increasingly is not the U.S. but other countries that we deal with on a regular basis. Let's face it, we are globalized. Even if the U.S. is possibly reaching its own bottom, many areas of the globe are feeling much more pain and we are not immune to where they are going. We are not immune from pain in Eastern Europe, Russia, China, England, Germany or elsewhere. They sneeze and we need a tissue. Again, Nouriel details this better than me:

"The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression) with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capex spending around the world. And now many emerging market economies – as argued here for a while- are on the verge of a fully fledged financial crisis starting with Emerging Europe."

Now Nouriel continues to his second point, that the fiscal stimulus is not, well, very stimulating - as in not working. He describes it as pushing on a string. He notes in passing that some countries and regions, like the EU and Japan, are not doing sufficient fiscal stimulus compared to us. To me this is a significant point worth some focus as we can do all the stimulus in the world but if certain other key countries fail to do so, we are doomed to failure.

Nouriel also he notes that even the U.S. stimulus has little hope to stimulate this year. Of the $800 billion to be spent in the U.S. on stimulus, only $200 billion will hit the ground this year with the rest through 2010. There is a limit on how fast you can spend this money. And of the $200 billion to be spent this year, most will be tax rebates to people who will save it or use it to pay off debt (thank God individuals know what to do). Seriously, I think individuals need to save and pay off debt now, i.e. deleverage, rather than spend like there is no tomorrow - like Summers would like us to do:

"Of the $800 billion of the US fiscal stimulus only $200 bn will be spent in 2009 with most of it being back-loaded to 2010 and later. And of this $200 half is tax cuts that will be mostly saved rather than spent as households are worried about jobs and about paying their credit card and mortgage bills (of last year’s $100 bn tax cut only 30% was spent and the rest saved). Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capex spending of the corporate sector, business inventories and exports) the stimulus from government spending will be puny this year."

Nouriel's third point is on how most assert that the U.S. markets are oversold. He seems to disagree in the extreme:

"If you take a macro approach earnings per share (EPS) of S&P 500 firms will be – quite realistically in 2009 - in the $ 50 to 60 range (I say realistically as some may even argue that in a severe recession they could fall to $40). Then, the question is what the multiple, i.e. the price earnings (P/E) ratio will be on such earnings. It is realistic to expect that the multiple may fall in the 10 to 12 range in a U-shaped recession. Then, even in the best scenario (earnings at 60 and P/E at 12) the S&P index would be at 720. If either earnings are closer to 50 or the P/E ratio is lower at 10 then the S&P could fall to 600 (12 x 50 or 10 x 60) or even to 500 (10 x 50). Equivalently the Dow (DJIA) would be at least as low as 7000 and possibly as low as 6000 or 5000. And using a similar logic we argued that global equities – following the US - had another 20% plus downside risk.

These predictions were made when the S&P 500 was close to 900 and the DIJA was close at 9000. This basic macro approach was the reason why we argued that the latest bear market sucker’s rally – the one going from late November 2008 to early January 2009 – would fizzle out and new lows would be reached. Indeed, like previous bear market rallies of the last year this one went bust – falling over 20% - and the DJIA and the S&P broke below the 7000 and 700 upper limit of our range for US equities. With the DJIA and the S&P now well below the “7” range the next test for the markets may be 6000 and 600 for the two indices.
I have also argued that another bear market rally may occur some time in Q2 or Q3 of this year and may end up like the previous six. Indeed in the last 12-18 every time something dramatic happens (that leads to a lower stock market low) and the government reacts to it with a more aggressive policy action optimists come out and say that this is the dramatic and cathartic event that suggests that a bottom has been reached: they said that after Bear Stearns, after the collapse and rescue of Fannie and Freddie, after Lehman, after AIG, after the TARP was announced, after the G7 communique’, after the $800 fiscal stimulus package was announced last November (the onset of the latest sucker’s rally).
And after a while markets are again “shocked shocked” (to paraphrase the French police inspector in Casablanca) to discover that the macro news are much worse than expected in the US and abroad, that earnings news are much worse than expected not just for financials, realtors, home builders and consumer discretionary firms but also for most other non-financial firms, and that financial markets/firms shocks/news are worse than expected.

As repeatedly argued here these financial markets/firms worse than expected news are many: news that more and more financial institutions are effectively insolvent and will have to be taken over by the government; news that highly leveraged institutions – such as hedge funds – will be forced to deleverage further and thus sell illiquid assets into illiquid markets; news that even non-levered investors (retail, mutual funds, etc.) that lost 50% plus into equities are burned out and want to reduce their exposure to equities; and news that a number of emerging market economies are on the verge o a contagious financial crisis."

Nouriel goes on at length, more so than usual for him, about how we are not yet at the bottom of things. I used far fewer words, but I agree with him for most of the same reasons. The facts say a bottom is not here yet. I only hope I am wrong.

Disclosures: None