True To Form

So the financial companies that are getting billions of taxpayer dollars are getting too much heat over bonuses. The answer to this problem, according to Bank of America, is to increase the base salaries and not the bonuses. I will give you ample time to try to digest this as it is hard to digest . . .. Time is up and the answer is . . . increasing salaries versus bonuses does not cure the problem. These are the people that caused the mess. They deserve neither the salary, the bonus nor the revised salary. Frankly, from a lawyer's perspective they should be sued for all this and more, but what do I know. Either way, no raises or bonuses seems logical for companies sucking wind.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSxLH6u4FVJw&refer=home

Disclosures: None

OK Den - We Hada Nice Run Dare

I am not going to say the bounce is over. We had an incredibly sharp drop in January and February and by early March we were due for a bounce. Question remains, dead cat bounce or we reached bottom?

Some day I will say the latter, i.e. we reached a bottom, but I simply do not believe we are there yet. The 2 + 2 math does not add up. I think most of the action this month is in response to the U.S. government throwing another trillion in the fire. I say fire as it will be burned with minimal benefit, in my opinion. I have detailed here why and will not repeat my thoughts. Nonetheless the bounce is extremely impressive. March - not over yet - has been the best month for the market in three decades. And you are questioning why I have been buying put options this week, including some today. Go figure.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aHOOUq_1HIfI&refer=home

But let's focus a bit on the 2 + 2 for a moment. Why does the bounce not add up - aside from my view that the Geithner plan will have a relatively modest benefit in the short to mid term and perhaps a negative effect in the long term? Well, simply put, we are not close to out of the woods yet.
Let me count the ways:

• The first "2" in the equation is employment or, more precisely, unemployment. People without jobs cannot spend, they cannot pay their mortgages, they cannot buy homes and they cannot deleverage. These are all in my mind key problems in the current recession and they are getting worse, not better. As Market Watch puts it:

http://www.marketwatch.com/news/story/Unemployment-still-rising/story.aspx?guid=%7BE9A43AF7%2DCFF8%2D4226%2DA96C%2D1F695F9DACC0%7D

"Nearly 15% of the workforce is unemployed, underemployed, or just plain discouraged."

We are in serious downturn in employment and everything I am seeing says this will continue to get worse into 2010. Mind you, unemployment typically continues to get worse well after a recession has bottomed as employers get burned with a recession and are slow to respond in a positive fashion when it has bottomed. In any event, employment issues continue to complicate things and unemployment is still climbing with a vengence.

As Calculated Risk aptly reports (have I mentioned Calculated Risk is a great site):

"Rex Nutting writes at MarketWatch: Unemployment still rising
The raw numbers, not seasonally adjusted, [show] 6.4 million collecting state unemployment benefits, and an additional 1.4 million who were collecting the federal benefits that go to people who've been fruitlessly looking for a job for more than six months. The claims numbers don't show the whole story. About 4 million more people are officially unemployed but not eligible for jobless benefits. In addition, 8.6 million can find only part-time work and another 2 million have given up looking for work. Nearly 15% of the workforce is unemployed, underemployed, or just plain discouraged.The employment situation is grim, and even if GDP turns slightly positive later this year, the unemployment rate will probably rise all this year and into 2010."

• New home sales, though better than expected, were the -seasonally adjusted - second worst on record. Second to January this year. The chart at Calculated Risk is one of the most impressive cliff dives I have seen.

http://www.calculatedriskblog.com/2009/03/new-home-sales-is-this-bottom.html

• And commercial real estate is in for a world of hurt too. You think vacancy rates are high now with all the bankruptcies, wait until 78 million more feet of space comes onto the market:

http://www.calculatedriskblog.com/2009/03/more-retail-space-coming.html

There are more "2"s to add to this equation, and I will add them as time allows, but y0u get the picture - I hope. We have simply not reached a bottom based on the stats. I could (and hope I am) wrong on this, but those who have followed me for a while will hopefully pipe in on my general track record.

Disclosures: I have put options on GE, MSFT, AA and AXP. They total less than $5000.

Wild Day!!

We were up, we were down and then up again. Mr.Toad's
Wild Ride seems to be where we will be for a while. Expect the market to move a lot in both directions in the short term.

I commented yesterday on my dislike for the Geithner plan. I got some significant negative feedback on my negativity. Seriously folks, I am just a messenger here. Sure I give my take, but my take is based on data. Any hoot, we will see whether killing the messenger is justified. It works or it fails - we will see.

Disclosures: None

Will the Geithner Plan Work - Let's Hope Not!!

I noticed several weeks ago an analyst report noting that banks were bad investments, which I noted here. The author concluded that some would not last and there would need to be a lot of consolidation. Hardly novel observations except for the fact that it came from Richard Bernstein, chief investment strategist at Bank of America. Now at the time I naturally assumed he was not talking about his own bank but rather was looking to create support for his own institution to make further stupid moves buying up competitors, further adding to BofA's not insignificant problems. Nonetheless, I suggested he had a short career at his company.

Well yesterday Richard was back at it. He recommended selling bank shares and noted that the new Geithner plan would only provide short term relief to the banks and make things worse in the long run, as in delaying the solution. Again, I was thinking, not likely to be pleasing his employer.

Well, he is "moving on" as they say - undoubtedly to greener pastures. I love the PR statements from the folks at BofA. “The wisdom and counsel that David and Rich provided clients, analysts and our businesses have enriched our franchise.” Bernstein’s next job may include “potential opportunities on the buy-side, teaching and perhaps authoring another book." Well this guy who gave good counsel is counseling against buying BofA stock and against the Geithner plan. Finally, someone on the inside looking out and saying this is a bunch of BS. Then, of course, he promptly ends up on the outside looking in.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_ujysijdX.E

http://www.ritholtz.com/blog/2009/03/merrillbank-america-departures/

And here is a really bad thought for you to chew on - what if the Geithner plan works? I know the plan working sounds like a good thing, but let's think this through just a tad bit more. I think it is a given that debt levels, especially on the consumer side, in the U.S. are already too high in relation to GDP. Basically still near record levels. Levels that make the last major spike, before the Great Depression, look small in comparison. So what do we do in response to having too much debt - we spend a trillion dollars letting banks clean off their debt loads so they can . . . you got it, lend more and create more toxic debt. Now I for one do not think the banks will be foolish enough to do this, i.e. create more toxic debt. Credit standards are tightening not because of a lack of liquidity but because the borrowers cannot afford to repay. Nonetheless, let's play out the plan and assume it works.

So we have a society already heavily overburdened with debt that the government is trying to get banks to lend to more. If they do and if consumers are foolish enough to borrow more, then the debt load increases, we buy more and we form what? Think about it a minute. Take your time. Bingo . . . a new unsupportable bubble. We support more spending, build more debt and then we only get into a situation that is worse, much worse. In large part most agree we are in the present mess due to an overreaction to the bursting of the tech bubble.

Now maybe the additional lending is just for good corporations that need it, which I admit is needed (our economy is lubricated by credit and I will not pretend we do not need a certain level of credit for normal operation). Even with bad debt off the books the banks will only lend to corporate borrowers who are worthy. Alternatively, they might lend to the not so worthy at extremely high rates (something most are still already doing), so what do we achieve. Some good perhaps, but I think the government would be better off directly lending to those good corporations that need it and let the financial institutions that largely got us into this go under (in an orderly wind down fashion).

As for consumer lending. Consumer spending is two thirds of our economy. It needs to come down as a percentage but it is what it is. If we do not support consumers with more debt, our economy is not going to rebound quickly. If we do, we simply build a new bubble. Boy, this really sucks. And this gets me back to the Geithner plan, which also sucks.

So why do I not like the Geithner plan?

1. We are using massive taxpayer dollars to support/insure private investors (with little of their skin in the game) to remove toxic assets from the jerks that brought us here. Taxpayers socialize the loss and get little of the gain (if there ever is one). And given the diversity in the "assets" being sold, I see little price discovery in the mark-to-market values (especially with the major rating agencies weekly downgrading hundreds of billions of these assets.)
2. We are creating massive moral hazard. The banks we are supporting will take foolish bets to return to their profiting ways now knowing that the government will repeatedly bail them out.
3. There are in fact some good banks out there. Those that did not do all these securitizations, bad lending and the like. We are supporting insolvent zombie banks that are now competing (with massive taxpayer support) against the good banks that did not dive into toxic debt. We are supporting the jerks and punishing those that did what they should have done.
4. The problem is not a liquidity problem but a solvency problem. The banks will not lend to those on the edge.
5. U.S. consumers and many corporations are in a position where they need drastic further deleveraging - especially after trillions in net worth was wiped out over the past year. We do not need the government artificially supporting more lending.
6. This "plan," even if it works, at best delays the pain. It takes us into the Japan lost decade and more (which we already in if you look at the markets).
7. I don't think the Geithner plan will work and then we will be tempted to spend much more to make it work. We cannot afford to flush these dollars, these taxpayer dollars.
8. We need a better way, a structured way, to recoup the taxpayer dollars if these misfits recover. It will likely take decades but to avoid moral hazard we need to recover every last dime.
9. I don't like the way Geithner looks.

I am eagerly looking forward to the responses on my nine points above and why they are wrong, especially number nine. The better question to me is what happens next after the Geithner plan fails. We will see.

Disclosures: I still have the put options I noted yesterday (GE,AA and AMX) but otherwise None.

My Quest

The U.S. markets were up 6-7% today. Truly incredible. Days like today do not happen without a reason, so this evening I set out on a mission to discover the cause of this massive bounce. Join me in my quest for a logical explanation of the movement.

• An early contender for the prize is the unexpected bounce in existing home sales, up 4.4%. Oops, I am sorry, that was just a month-over-month increase and existing home sales usually go up from January to February. It is a seasonal thingy. YoY they are down 4.6% and that is with prices down 15.5%. Did I mention that distressed sales were 40-45% of sales. Guess my search continues.

http://www.ritholtz.com/blog/2009/03/existing-home-sales-fall-46/

http://www.calculatedriskblog.com/2009/03/existing-home-sales-turnover-rate.html

• But wait, here it is. GE leading the charge with a 9% gain. When such a big triple A player gains that much, the market moves big time too. Oops, my bad again. Though it was up over 9% today it also lost its Moody's triple A rating. Oh well, easy come easy go. Then again perhaps a triple A rating not that easy come by given the very few companies that have it. GE has had its Moody's triple A rating for around four decades. It will be hard to get back.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=angxVEiQaibk

• Perhaps it is Barton Biggs predicting a big market recovery. Then again I did not see this article until after the market close and the same article notes today's market rise, so perhaps he is partially a Monday morning quarterback.

http://www.bloomberg.com/apps/news?pid=20601087&sid=areCXRA8DzQQ&refer=home

• Try as I may and might, I cannot find a reason for the big gain today. Wait a second, I think I see something here. Yes, this could be it. Geithner came out with a new plan today. Who knew that was coming. Apparently he is planning on buying toxic assets from the banks. Where have I heard that before? I'm sorry, he is not buying them outright like TARP, he is funding the purchases about 93% with no recourse loans and letting private investors have most of any gains and very little of any losses. Now that works in my book. Glad I am not the guy getting the short end of that stick . . .

There is no doubt the Geithner plan was the basis for today's bounce. I have read today that most economists support it - but then again most economists did not see this mess coming. I prefer to follow people that I have followed for well over a year. They saw this mess coming and have generally been correct on how it has played out. So let's see what they are saying:

• Let's start with Naked Capitalism. Yves there is a major fan of the Geithner plan - not! In one of her longer posts that I have ever read, she seems to not like it much at all.

http://www.nakedcapitalism.com/2009/03/fed-rescue-programs-no-exit.html

• Paul Krugman, the Nobel laureate in economics, is not a big fan either. He provides some examples on the math of why it makes little sense.

http://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/

http://krugman.blogs.nytimes.com/2009/03/22/brad-delongs-defense-of-geithner/

• Mish - a man against any government action - obviously views the "plan" as foolish. While you may not agree with his total anti-government case, he does make a good case for the Geithner plan not working in this linked article. Well worth the read as he spends some time making his case.

http://globaleconomicanalysis.blogspot.com/2009/03/geithners-galling-and-dangerous-plan.html

As he points out, the plan ignores reality. The problem is not a lack of credit, it is a lack of credit-worthy borrows who are looking to borrow. We are too debt-laden already. Moves to free up credit are doomed to failure.

And for a perhaps more balanced view of it all, here is a piece from Calculated Risk suggesting that Geithner is not totally full of it. I beg to differ, but I offer it for those looking for hope.

http://globaleconomicanalysis.blogspot.com/2009/03/geithners-galling-and-dangerous-plan.html

Overall, I must say I saw no reason for the bounce today other than desperate souls looking for a bottom and us bouncing off a quadruple witching last Friday. I did, however, that advantage of it to do a few put options in the last 15 minutes of the trading today.

Disclosures: I bought put options in GE, Alcoa and American Express in the closing minutes of today's market. I could not resist. I have not done put options in the last six months or so, but you have to invest it as you see it. By the way, I did less that$600 in each option. More of a bet than an investment.

And The Answer Is?

At least one prominent economist thinks the worst is yet to come. I agree but I am not a prominent economist.

http://www.businessinsider.com/henry-blodget-rogoff-the-worst-is-over-are-you-kidding-2009-3

Disclosures: None

Pretty Much Sums It Up

I link a very well written piece at Rolling Stone that does a more than apt job of describing where we are and how we got there, focusing on the AIG bailout. As the piece notes well, these _____ (supply your own four, five or six letter word) gambled their own fortunes away and now have convinced the U.S. to spend our taxpayer dollars to bail them out. Mind you, we are bailing out AIG because it gave CDS protection to a ton of EU banks and they are able to use the AIG obligations to support their capital positions and stay solvent. This is a house of cards - a despicable house of cards.

The attached is a bit long, but trust me, worth the read. Lest you need more temptation to go to the link, here is a small bit of what you will find:

"The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses)."

That does give a smidge of perspective. Let me add a bit of perspective myself. I am in the insurance industry and few here are sorry to see AIG having problems. Let us just say that it could not happen to a nicer guy. They were not well liked by their brethern. I cannot resist giving a few more tidbits from the article, though I recommend reading it whole. Here are a nice couple of lines:

"The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror."

This is good stuff. As the article notes, AIG spent the better part of a century building itself to the largest property and casualty insurer in the world, only to allow a small shop of people in the financial products division take the house down. In fairness, I have read that other investments drove the first nail in the coffin before the financial products division took them down, but do you get bonus points for having two independent divisions in you company able to deal you the death knell?

Disclosures: None.