Wednesday, December 21, 2011

Political Acrimony

The legislative debate on extending the payroll tax cut will garner much press today, as the Republicans are excoriated for getting in the way of helping out workers.

Today's WSJ has an interesting op-ed piece by John B. Taylor, arguing otherwise. Among the points he makes is that a temporary tax cut does little to help the economy. When was the last time any of us made an investment decision i.e., buying a new house, based on having an additional couple of months' payroll tax to help with the cash flow?

Uncertainty is the nemesis of investing, and consumers want to know what they will be paying in taxes long term before embarking on any major purchases. We are amazingly adaptable as consumers, so long as we know the rules.

A sluggish economy will be with us, unfortunately, until we have a clear idea of permanent tax and regulatory issues. Businesses are reluctant to hire, citing weak demand and unpredictability. Demand will stay weak until consumers feel more certain about the economy. It's a vicious cycle, and something has to break for things to get better.

Thursday, December 8, 2011

Is the Unthinkable Upon Us?

Today's WSJ's headline on planning for the demise of the Euro is sobering. Or is it? Touted as totally unthinkable just a few weeks ago, that leading institutions, including the august JP Morgan Chase & Co., already are suggesting that investors make contingency plans to protect portfolios says a lot.

Investors are being advised to hedge against "possible adverse moves" (READ: a possible collapse of the common currency), even though the probability of said collapse is only 20%, according to JPM. When "euro zone disintegration" and the "collapse of Lehman Brothers" appear in the same sentence, however, it gives us pause. Or it should.

Across the pond, the subject seems to be centered around how to print sovereign currency in the event of a Euro zone break up.

But on this side of the pond, there may be a silver lining. A serious fall in the value of the euro signals strength in the US dollar. Although, if the global markets are in free fall, that may be scant comfort.

Monday, November 28, 2011

Banks: Pass or Fail?

Today’s Wall Street Journal has an op-ed piece about the ongoing calamity befalling banks, on the heels of the Fed’s announcement that a new round of stress tests is in the works to measure banks’ exposure to the Euro Zone disaster. Included in the test is an estimate of revenues, losses and capital losses were there to be a market shock.

Designed to give investors more certainty about the risks they face, banks and other large institutions, numbering 19 in total, must submit capital plans by January 9, 2012. Banks are eager to pass the test so they can raise dividends, repurchase stock or be forced to raise more capital.

The last three months, however, already have signaled a market shock, as measured by a severe spike in volatility, suggesting that investors are extremely nervous, if not quite yet in panic mode. The chart accompanying the piece in today’s WSJ shows volatility of bank stock prices at a level dangerously close to the level in the Great Depression. Because banking depends on investor confidence, lack of said confidence causes investors to panic and pull out money, leaving the banks with little to lend. Investors may be saying that banks are barely passing.

Tuesday, November 22, 2011

A pyrhhic victory?

It seems the Super Committee isn't so super, after all - failing to reach compromise on the issue of what boils down to spending cuts versus tax increases, or some amalgam of both.

Both parties in Congress have their respective axes to grind. But as business leaders know, the battle for successfully effecting a company's bottom line depends on growing top-line revenue while keeping a lid on expenses. In the throes of a deep recession, with record unemployment, spurring economic growth for job creation must be the priority.

What will continued high deficit spending mean? While some bemoan a further shaving of our credit rating, S&P and Moody's say otherwise. Only Fitch holds out. On the other hand, the credit rating agencies may not be the most reliable source of comfort and assurance, given their snafus of the past few months.

While the current administration claims a sort of Pyrrhic victory in the debacle, bloviating that now defense spending can be cut while entitlement programs remain intact in time for the ensuing election, the other side of the aisle is thrilled that at least for the time being, there will be no new taxes. Meanwhile, the recession grinds on, and an important opportunity to break the stalemate was missed.

But the larger issue is lack of leadership. With our country's perceived economic prowess under seige internationally, leadership at home is vital to maintaining our ability to attract foreign capital and create jobs.

Tuesday, November 15, 2011

A Novel Unemployment Solution

With FHA broke and begging for a bailout, it is interesting to note the success of the other bailouts. While some may argue that they kept the global financial system from cratering, that's only half the story. The other half is record unemployment.

Many banks who received bailouts have kept the cash on their balance sheets, afraid to invest because of economic uncertainty. Although the companies look healthy, digging deeper suggests they could help solve the unemployment debacle by targeting 25% of the bailout funds for job creation. Of course, there's the ongoing argument that companies will hire when they see demand, but that begs the question. Hiring will create demand, as the ranks of the once unemployed find themselves earning a living again and finally having cash to spend on the kids' school clothes, buy better groceries, travel more or simply spend a bit more than their barely eking out an existence fostered.

If just half of the estimated 14 Million unemployed (or 7.5 Million) began working, at an average of $100,000, it amounts to $750 Billion. Isn't that about what the bailout cost? At least we'd be getting something for the money we taxpayers are on the hook for. If each newly employed person paid just 15% in taxes, ($112.5 Billion), we just may see some positive movement in bringing down the budget deficit, although not in time for the Super Committee's November 23 deadline. But maybe in time for Christmas.

Just cutting costs won't make a corporation grow long-term. But, a disciplined plan for long-term growth will. So, which of the top money-center banks will be first to recognize they can create long-term shareholder value? And extend a helping hand to those who gave them one?

Monday, November 14, 2011


So Italy now has a new government, and all is well, right? Not so fast. Europe continues to teeter, and some of our banks are beginning to worry, and investors would be wise to pay heed. Morgan Stanley announced its exposure to Euro zone debt, and its shares lost 9% last week.

With the demise of MF Global Holdings Ltd., investors want to know not only the extent of exposure to risky European debt, but also the nature of exposure through hedges. Before the market meltdown, investors assumed that hedges, implemented through credit default swaps, were a protection. As the old saying goes, "once burned, twice shy", and now they are savvier. Why? Because the companies on the other side of the hedge, known as counter parties, could be vulnerable, and the somewhat limited level of disclosure outside our country compounds the problem.

Even so, if Morgan Stanley is an example, investors are right to be wary. Morgan Stanley currently includes $1.9 billion of potential losses if the credit defaults fail in its $7.2 billion in gross exposure. Its share price reflects investor concern: down 26% since July 31, versus -11% for the S&P. It suggests that those hurt by the credit disaster 3 years ago have learned a valuable lesson.

Monday, November 7, 2011

Still Greece-y and a bit of Italian Opera

So now, despite surviving a confidence in Greece's parliament, Papandreou quits, the bailout package is back on deck, the Euro is saved, and all is fine. Or is it? It would seem not quite. Now Italy seems a bit shaky, at least if the 10-year bond rate of 7.5% is any indicator. Prime Minister Silvio Berlusconi is the leader in the headlines now.

Investors looking for yield may think Italy's bonds to be a viable option. Option, yes, but viable, not so fast. Italy very well could be the next boot to fall. The Euro zone is far from solid, and anyone who doubts its impact here need but count the headlines describing our own volatile stock market in which tumult in Europe is cited.

Stateside, our own markets are volatile, as we digest the MF Global debacle and the sudden appearance of $659 Million in an account at JP Morgan, amid news that Wall Street's profits are higher under the current administration than in the 8 years of George W. Bush's. Even so, Europe's woes continue to wreak havoc, as gold again climbs to 1800.

Thursday, November 3, 2011

It's Greece to Me

Yesterday's surprise from Greece (it seems there is at least one each day) is for a referendum. Not just on the bailout, thinly disguised as a rescue package. The terms for the package include some severe cuts, and few in Greece are in favor of the bitter medicine they must swallow.

Rather, Papandreou is risking his already-shaky career by asking his fellow Grecians, in effect, whether or not they still want to be part of the European Union. That could have some far-reaching ramifications. Words like "market panic" are being bandied about. The US market sell-off on Monday and Tuesday was part of it.

Several months ago, several investment folks debated whether or not the EU would survive. Smart minds on both sides of the pond were fairly certain that it would remain intact. Now, some of those same souls are scratching their collective heads.

The G 20 countries are in Cannes, amid much gnashing of teeth. All eyes are on Greece tomorrow, when the confidence-in-Papandreou vote will be held. His Pasok Socialist party controls a mere 152 seats in the 300-seat Parliament. But, he's savvy enough to recognize that unless he has the support of the Greek people, chaos is likely to ensue. Stay tuned.