The Bush Administration is going to roll out yet another new plan to save the financial markets this week. The plan will expand the powers of the Fed, making it a "financial supercop" able "to send SWAT teams into any corner of the (financial) industry," according to a New York Times article.
Oh boy. We're safe now.
Is it appropriate for a central bank - whose role is to effect monetary policy to achieve a dual mandate of price stability and full employment - to be made a "supercop?" Also, is the Fed even up to the task? The article notes that the plan involves major reforms to the "hodgepodge" of financial regulators we have now, "which many experts say failed to recognize the rampant excesses in mortgage lending that set off the current economic turmoil." Well ...
SO DID THE FED!
At least one of those banking regulators warned then-Fed Chairman Alan "Bubble-Man" Greenspan about the brewing crisis, and he pooh-poohed the risk. True, we have a different Fed chief at the helm now, one who doesn't appear to be as laissez-faire about regulation as his hands-off, Ayn-Rand-devotee predecessor. But thus far, he hasn't exactly proven masterful at understanding, averting or resolving the current mess.
In short, my fear is that he's inept.
And we will have other Fed chairs in the future, so we may again get an extreme free-markets guy like Greenspan, and then what? Does the oversight role change? Central bankers should make monetary policy. Regulators should regulate. And never the twain should meet.
The plan would provide for oversight of investment banks, brokerage firms, hedge funds, private equity firms, presumably all the alphabet soup entities out there like SIVs and CPDOs, and insurance companies, which heretofore have been regulated by the states. The oversight would come from the Fed, the SEC - which would merge with the CFTC - and a new federal insurance regulator. No mention is made of regulating the ratings agencies, which contributed mightily to this mess by missing the boat in assessing risk (which is their only job), nor of the monoline bond insurers, though they'd ostensibly fall under the jurisdiction of the new insurance regulator.
This proposal will resonate with the Barney Franks of the world, but don't think that means it's a slam-dunk. The states will fight it tooth and nail, as they don't want to hand insurance oversight to the Feds. So will the OTS, which would be eliminated as part of the plan, which also calls for elimination of the distinction between banks and thrifts. A single bank regulator would be melded from the five we now have, so there'd be resistance on other fronts as well.
Indeed, administration officials concede that the plan likely won't become law this year. And that makes it a safe bet that it won't become law. It stops short of calling for new regulations on lenders and other financial players; it basically just says that when a problem arises, the Fed can swoop in to fix it (presumably with a taxpayer bail-out - see Bear Stearns). It reminds me of the time, back when I was an S&L examiner, that I was asked by a thrift I was examining what they should invest in. I asked my boss if I should be dispensing investment advice. His answer?
"Nope. Our job is to shoot the wounded."
Well, if a Democrat wins the White House, they'll undoubtedly take the position that a pound of prevention is worth an ounce of cure, calling for more regulation. And they'll be pressured to maintain the current size of the banking regulatory force, which they'll likely do. So we shouldn't expect to see this plan take effect even after this year.
But it makes for good politics. It makes ol' Hank Paulson, who was the plan's architect, look like he's doing something productive. And it rewards Helicopter Ben Bernanke for being a puppet of Wall Street.
Speaking of Hank, he hinted at the plan in a speech last week to the US Chamber of Commerce. In that speech, he said two things that struck me (one funny, one angry).
First, he claimed that his hapless HOPE NOW plan is working, claiming that "since July, more than 1 million struggling homeowners received a work out ... that helped them avoid foreclosure." For now. He didn't say how many of them have since foreclosed anyway, or will.
He also said that "work out efforts are accelerating more quickly than the foreclosure rate," noting that "January foreclosure starts were up 5% while the number of mortgage workouts grew 19%." Remember Disraeli's line, "There are lies, damned lies, and then there are statistics?" This is one of those times that it's good to understand what that means.
I don't know the exact numbers, but it's a safe bet that there are a heck of a lot more foreclosures out there than workouts. So 5% of a huge number is still going to be more than 19% of a minuscule one. Of course, Hank would rather work with percentages - at least in this case, where it suits his point.
The quote that raised my blood pressure was this one, which he uttered after noting that the government isn't interested in bailing out speculators: "The people we seek to help are those who want to keep their homes but can't afford the monthly payment because of an ARM reset. If they also have negative equity in their homes, refinancing becomes almost impossible."
My question is, why does the government seek to help irresponsible people who wanted to live beyond their means, over-leveraged themselves into more house than they could afford, fueled a bubble that is now affecting the rest of us, thought what they were doing made perfect sense because their home prices would appreciate by 15% a year forever, and now that they've been proven reckless and stupid, want a handout?
In Merrie Olde England, they used to put those people in debtor's prisons, or make them work off their debts in servitude. Now, we bail them out. Times have changed.
Saturday, March 29, 2008
Wednesday, March 26, 2008
I Feel A Rant Coming On ...
So I'm reading this rather humorous (to me, since I don't live in Florida or have a subprime mortgage) Bloomberg story, about a Miami suburb where the homeowners are finding themselves having to tighten their belts. One guy's cut his weekly grocery bill by $70. Okay, that eats into the necessities, depending on what he bought in the way of groceries before. A neighbor canceled his cable TV subscription. Not quite a necessity, but something most of us take for granted.
Then we move to the theatre of the absurd. Another woman cut her 14-inch-long tresses down to three inches so she wouldn't have to shell out for "Japanese-style thermal straightening" treatments at the salon, and she's kicked her $400-a-month shopping mall habit. The poor thing: she "hasn't bought any new clothes or shoes since October." October! And another poor soul cut out his $50-60 a week Guinness habit. Brilliant!
The local homeowners' association finds itself in a pickle due to the area's housing woes (Miami tied for Las Vegas for the ignominous title of biggest loser in US home values among the 20 metro areas covered by the S&P/Case Shiller survey, down 19.3% year-over-year as of January). Eight of the neighborhood's 153 homes are in foreclosure and 15% of those that aren't are delinquent on their homeowners' dues. So the homes association is cutting back on landscaping and other improvements to cover an anticipated shortfall of at least $20,000.
Brief aside: in the Tampa area, one school district is facing similar shortages due to lower property tax receipts, and the fact that it has some of its cash management funds tied up in the state short-term fund that invested in long-term subprime debt, tried to cover it up until it was too late, then reported major losses. Those losses are so severed that they've blocked withdrawals from the fund until at least September, meaning those that used the fund for monthly cash management have to find money elsewhere. So the school district is switching from hot dogs to turkey franks for the remainder of the year, which will save $25,000.
Back to the Miami suburbs. Now, normally I might be able to feel somewhat sorry for these people. (I certainly feel sorry for the Tampa kids who have to eat turkey dogs, though they'll probably live longer for it.) I wouldn't want to have to pare the grocery bill by $70 a week, though I'm sure I could. I doubt I'd miss cable, but my wife and daughter would. And while I don't feel sorry for the lady who had to cut her hair, I applaud the move. My hair's about a half-inch long, and I use coupons from Great Clips to get it cut.
I have no sympathy, however, for her foregone monthly shopping sprees, or for the guy who was dropping $50 every Friday night on Guinness. But there's something even more disturbing about these stories. Something about which I must rant.
From the haircut lady: "I looked at my house as a bank account that was going to accrue interest on a daily, monthly, annual basis. I'm looking at not gaining money on this stock that I call a house, and may actually lose money."
Uh, lady, there are a couple of important lessons here. First, you should always look at a stock as something that, if you invest in it, could result in your not gaining any money, or actually losing money.
Second, and more important, you call this "stock" a "house" because ... well, because it's a house. Not a stock. Not a bank account. It doesn't accrue interest. And it doesn't have to go up in value. As Pumbaa said in "The Lion King," "Home is where your rump rests." It ain't a portfolio, unless you're a speculator, and you live someplace else.
That's a big part of the problem. People look at their houses as things that will always go up in value, that they can cash out on at a profit, that they can continually suck equity out of like an ATM with an attached garage.
It's none of those. It's a place to live.
Need more proof that these people aren't the hapless "victims" of predatory lenders that Hillary et al would have you believe?
The haircut lady, a single mom, moved into the neighborhood from L.A. in 2004, "lured by the lower costs and slower way of life." She bought the house - "her first, for about $350,000 and she intended to sell for a higher price after five years ... Her house hasn't appreciated since January 2007, when it was worth about $425,000."
What's wrong with this picture? For starters - your first house costs over a third of a million bucks? What's wrong with a nice starter home, something in the $150,000 range? Second, why was she planning to sell in five years? Most likely, because she leveraged herself into more house that she could afford with a subprime ARM that would reset in five years, and she was counting on her "bank" paying enough interest to sell at a profit and actually be able to afford the next house she bought.
And third, she realized price appreciation on non-interest-earning residential real estate of $75,000 over three years or less. That's a return of better than 7% in an environment when inflation averaged about 2.5% or less. What goes up too much, must come down a lot. But a year later, she's still sitting on a 5%+ return, which is still pretty good, unless you're being piggishly greedy. And as the old Wall Street saying goes, bulls make money, bears make money, but pigs get slaughtered.
One resident is "a 34-year-old executive assistant." Her husband's sister moved next door, buying a $330,000 house "with no down payment in 2006." Last August, her mortgage payment went from $1,900 to $3,000, and the house went into foreclosure. The sister-in-law's profession? Manicurist. I don't get manicures, but I can't imagine many manicurists who make the coin to drop a third of a million bucks on a house.
The Guinness guy? He's an energy analyst for the Coast Guard. He makes $69,000 a year. These houses apparently went for anywhere from $330,000 to $400,000 a few years back. That's roughly 5.3 times his salary. Whatever happened to the old rule of thumb that you shouldn't buy more house than a price of 2.5-3.0 times your salary will get you?
The grocery guy was smarter - at least at first blush. He was a trading assistant at Dean Witter (trading assistants don't make squat, by the way, unless the traders they assist cut them in on their spoils). He paid $201,000 for his home in 2001, and nearly scored a three-bagger within six years, as its value appreciated to $595,000. Even today, it's worth $450,000, well over twice what he paid. So why's he cutting back on the grocery bills?
"He took out a home equity line of credit in 2006 to refinance a second mortgage with a variable rate."
In the immortal words of Charlie Brown, "AAAAAUUUUGGGHHH!"
Then we move to the theatre of the absurd. Another woman cut her 14-inch-long tresses down to three inches so she wouldn't have to shell out for "Japanese-style thermal straightening" treatments at the salon, and she's kicked her $400-a-month shopping mall habit. The poor thing: she "hasn't bought any new clothes or shoes since October." October! And another poor soul cut out his $50-60 a week Guinness habit. Brilliant!
The local homeowners' association finds itself in a pickle due to the area's housing woes (Miami tied for Las Vegas for the ignominous title of biggest loser in US home values among the 20 metro areas covered by the S&P/Case Shiller survey, down 19.3% year-over-year as of January). Eight of the neighborhood's 153 homes are in foreclosure and 15% of those that aren't are delinquent on their homeowners' dues. So the homes association is cutting back on landscaping and other improvements to cover an anticipated shortfall of at least $20,000.
Brief aside: in the Tampa area, one school district is facing similar shortages due to lower property tax receipts, and the fact that it has some of its cash management funds tied up in the state short-term fund that invested in long-term subprime debt, tried to cover it up until it was too late, then reported major losses. Those losses are so severed that they've blocked withdrawals from the fund until at least September, meaning those that used the fund for monthly cash management have to find money elsewhere. So the school district is switching from hot dogs to turkey franks for the remainder of the year, which will save $25,000.
Back to the Miami suburbs. Now, normally I might be able to feel somewhat sorry for these people. (I certainly feel sorry for the Tampa kids who have to eat turkey dogs, though they'll probably live longer for it.) I wouldn't want to have to pare the grocery bill by $70 a week, though I'm sure I could. I doubt I'd miss cable, but my wife and daughter would. And while I don't feel sorry for the lady who had to cut her hair, I applaud the move. My hair's about a half-inch long, and I use coupons from Great Clips to get it cut.
I have no sympathy, however, for her foregone monthly shopping sprees, or for the guy who was dropping $50 every Friday night on Guinness. But there's something even more disturbing about these stories. Something about which I must rant.
From the haircut lady: "I looked at my house as a bank account that was going to accrue interest on a daily, monthly, annual basis. I'm looking at not gaining money on this stock that I call a house, and may actually lose money."
Uh, lady, there are a couple of important lessons here. First, you should always look at a stock as something that, if you invest in it, could result in your not gaining any money, or actually losing money.
Second, and more important, you call this "stock" a "house" because ... well, because it's a house. Not a stock. Not a bank account. It doesn't accrue interest. And it doesn't have to go up in value. As Pumbaa said in "The Lion King," "Home is where your rump rests." It ain't a portfolio, unless you're a speculator, and you live someplace else.
That's a big part of the problem. People look at their houses as things that will always go up in value, that they can cash out on at a profit, that they can continually suck equity out of like an ATM with an attached garage.
It's none of those. It's a place to live.
Need more proof that these people aren't the hapless "victims" of predatory lenders that Hillary et al would have you believe?
The haircut lady, a single mom, moved into the neighborhood from L.A. in 2004, "lured by the lower costs and slower way of life." She bought the house - "her first, for about $350,000 and she intended to sell for a higher price after five years ... Her house hasn't appreciated since January 2007, when it was worth about $425,000."
What's wrong with this picture? For starters - your first house costs over a third of a million bucks? What's wrong with a nice starter home, something in the $150,000 range? Second, why was she planning to sell in five years? Most likely, because she leveraged herself into more house that she could afford with a subprime ARM that would reset in five years, and she was counting on her "bank" paying enough interest to sell at a profit and actually be able to afford the next house she bought.
And third, she realized price appreciation on non-interest-earning residential real estate of $75,000 over three years or less. That's a return of better than 7% in an environment when inflation averaged about 2.5% or less. What goes up too much, must come down a lot. But a year later, she's still sitting on a 5%+ return, which is still pretty good, unless you're being piggishly greedy. And as the old Wall Street saying goes, bulls make money, bears make money, but pigs get slaughtered.
One resident is "a 34-year-old executive assistant." Her husband's sister moved next door, buying a $330,000 house "with no down payment in 2006." Last August, her mortgage payment went from $1,900 to $3,000, and the house went into foreclosure. The sister-in-law's profession? Manicurist. I don't get manicures, but I can't imagine many manicurists who make the coin to drop a third of a million bucks on a house.
The Guinness guy? He's an energy analyst for the Coast Guard. He makes $69,000 a year. These houses apparently went for anywhere from $330,000 to $400,000 a few years back. That's roughly 5.3 times his salary. Whatever happened to the old rule of thumb that you shouldn't buy more house than a price of 2.5-3.0 times your salary will get you?
The grocery guy was smarter - at least at first blush. He was a trading assistant at Dean Witter (trading assistants don't make squat, by the way, unless the traders they assist cut them in on their spoils). He paid $201,000 for his home in 2001, and nearly scored a three-bagger within six years, as its value appreciated to $595,000. Even today, it's worth $450,000, well over twice what he paid. So why's he cutting back on the grocery bills?
"He took out a home equity line of credit in 2006 to refinance a second mortgage with a variable rate."
In the immortal words of Charlie Brown, "AAAAAUUUUGGGHHH!"
Monday, March 24, 2008
A Bear of a Deal
I've got to weigh in on the Bear deal. As you may recall, Bear Stearns' fall from grace has been one of epic proportions. Once the darling of the fixed-income market - especially the mortgage-backed securities (MBS) and collateralized mortgage obligations (CMO) markets - Bear has become the laughingstock of Wall Street, having impaled itself on its own area of expertise.
Bear's demise began when two of its hedge funds sank last summer, kicking off the whole credit contagion in which global markets are now mired. It ended in recent weeks, as rumors surfaced that Bear was an unacceptable counterparty risk to other Street firms due to a liquidity shortfall. Bear's new CEO, Alan Schwartz, vehemently denied the rumors, then two days later, accepted a plan, brokered by the Fed, to be bought out by JPMorgan Chase. Why? Because of a lack of liquidity - one that we were to believe had just surfaced in the 24 hours prior to the merger deal. Riiiight.
Let's put this in the perspective of a market I know all too well: wine. (I have a bottle of Penfold's Grange Shiraz, vintage 1998, that I bought in 2003 for $110. It was the most I ever paid for a bottle of wine, but it was rated a 99 by Robert Parker. I'd never seen a 99-rated wine before, and I just had to have it, so into my cellar it went. Today, it's worth $450-500, making it easily the best investment I ever made, and I'll be darned if I'm going to drink it. I'm selling the sucker.)
Bear's stock traded at more than $170 a share just over a year ago. That placed a share of Bear stock at about the value of a bottle of '99 Grange a year after its release, or a bottle of Silver Oak Napa Cabernet in a restaurant. When JPMorgan made its original offer for Bear, it was worth the same amount as a bottle of Two-Buck Chuck.
Today, Morgan upped the ante, responding to angry Bear shareholders (Bearholders?) who threatened to vote against the deal. So now Morgan will pay $10 a share for Bear. That places its value in the range of a Woodbridge Merlot - marginally better than Two-Buck Chuck, but still better suited for a salad dressing than for imbibing, let alone cellaring.
But here's the catch: Morgan's only buying a little less than 40% of Bear at that price. So to Morgan, Bear's worth a half-bottle of Woodbridge Merlot. And they're doing it with a new stock offering from Bear. Why? To circumvent a vote from existing shareholders, who are going to find themselves diluted as a result of the deal, a la Ambac. It's enough to drive a Bearholder to drink.
The ominous part of the deal is that Morgan's purchase is being funded by a very favorable loan from the Fed: ten years at the discount rate, currently 2.50%. And they don't actually start repaying until two years from the effective date of the deal. And, the Fed is setting up a company to hold $30 billion of Bear's worst crap paper, to be managed by BlackRock. Think the S&L crisis and Refcorp, only this is the Fed taking the action, not a bank regulator, which is virtually unprecedented.
The reason the deal is ominous is not only because of the cheap rate on the loan, or the fact that the Fed - which gets its money from the taxpayers - is in effect bailing out Bear Stearns, which nobody seems to get. The most ominous part is the ten-year term.
Some observers figure that the reason for the ten-year term of the deal coincides with the benchmark for the mortgage debt - the ten-year Treasury - that the Fed is letting Morgan ante up as collateral for the loan. (Very crappy mortgage debt, mind you.) However, I see it differently.
I think the Fed is saying that, best case, this whole credit market imbroglio is at least two years - the time frame for the commencement of repayment - from being resolved. And its full effects may be felt for a decade. That should tell us all something.
But, naturally, the message didn't reach stocks, which rallied to the tune of a near 200-point gain in the Dow. That makes sense, right? Let's see, Bear - which was deemed to be worth two bucks last week - is now worth ten, so let's rally. Only the ten is for less than half the company. In a new, dilutive offering. Funded by what is in effect a taxpayer bailout, accompanied by an acknowledgement from the Fed that this mess is anywhere from two to ten years from being over. Said bailout provided to another Street firm, that, if it were healthy, wouldn't need the Fed's help, calling into question just how far down the chain of dominoes Morgan stands. And let's not forget that, whether the price is $2 or $10, Bear's stock has fallen almost 100% in a year, and absent a bailout, it would have failed outright.
Thank God I'm short stocks. And long wine (good wine).
Bear's demise began when two of its hedge funds sank last summer, kicking off the whole credit contagion in which global markets are now mired. It ended in recent weeks, as rumors surfaced that Bear was an unacceptable counterparty risk to other Street firms due to a liquidity shortfall. Bear's new CEO, Alan Schwartz, vehemently denied the rumors, then two days later, accepted a plan, brokered by the Fed, to be bought out by JPMorgan Chase. Why? Because of a lack of liquidity - one that we were to believe had just surfaced in the 24 hours prior to the merger deal. Riiiight.
Let's put this in the perspective of a market I know all too well: wine. (I have a bottle of Penfold's Grange Shiraz, vintage 1998, that I bought in 2003 for $110. It was the most I ever paid for a bottle of wine, but it was rated a 99 by Robert Parker. I'd never seen a 99-rated wine before, and I just had to have it, so into my cellar it went. Today, it's worth $450-500, making it easily the best investment I ever made, and I'll be darned if I'm going to drink it. I'm selling the sucker.)
Bear's stock traded at more than $170 a share just over a year ago. That placed a share of Bear stock at about the value of a bottle of '99 Grange a year after its release, or a bottle of Silver Oak Napa Cabernet in a restaurant. When JPMorgan made its original offer for Bear, it was worth the same amount as a bottle of Two-Buck Chuck.
Today, Morgan upped the ante, responding to angry Bear shareholders (Bearholders?) who threatened to vote against the deal. So now Morgan will pay $10 a share for Bear. That places its value in the range of a Woodbridge Merlot - marginally better than Two-Buck Chuck, but still better suited for a salad dressing than for imbibing, let alone cellaring.
But here's the catch: Morgan's only buying a little less than 40% of Bear at that price. So to Morgan, Bear's worth a half-bottle of Woodbridge Merlot. And they're doing it with a new stock offering from Bear. Why? To circumvent a vote from existing shareholders, who are going to find themselves diluted as a result of the deal, a la Ambac. It's enough to drive a Bearholder to drink.
The ominous part of the deal is that Morgan's purchase is being funded by a very favorable loan from the Fed: ten years at the discount rate, currently 2.50%. And they don't actually start repaying until two years from the effective date of the deal. And, the Fed is setting up a company to hold $30 billion of Bear's worst crap paper, to be managed by BlackRock. Think the S&L crisis and Refcorp, only this is the Fed taking the action, not a bank regulator, which is virtually unprecedented.
The reason the deal is ominous is not only because of the cheap rate on the loan, or the fact that the Fed - which gets its money from the taxpayers - is in effect bailing out Bear Stearns, which nobody seems to get. The most ominous part is the ten-year term.
Some observers figure that the reason for the ten-year term of the deal coincides with the benchmark for the mortgage debt - the ten-year Treasury - that the Fed is letting Morgan ante up as collateral for the loan. (Very crappy mortgage debt, mind you.) However, I see it differently.
I think the Fed is saying that, best case, this whole credit market imbroglio is at least two years - the time frame for the commencement of repayment - from being resolved. And its full effects may be felt for a decade. That should tell us all something.
But, naturally, the message didn't reach stocks, which rallied to the tune of a near 200-point gain in the Dow. That makes sense, right? Let's see, Bear - which was deemed to be worth two bucks last week - is now worth ten, so let's rally. Only the ten is for less than half the company. In a new, dilutive offering. Funded by what is in effect a taxpayer bailout, accompanied by an acknowledgement from the Fed that this mess is anywhere from two to ten years from being over. Said bailout provided to another Street firm, that, if it were healthy, wouldn't need the Fed's help, calling into question just how far down the chain of dominoes Morgan stands. And let's not forget that, whether the price is $2 or $10, Bear's stock has fallen almost 100% in a year, and absent a bailout, it would have failed outright.
Thank God I'm short stocks. And long wine (good wine).
Friday, March 21, 2008
The Wisdom of the Islands
One of the best things about visiting the Caribbean is meeting and talking to the people. We never do the cruise ship beach excursions. If beach bumming is our agenda du jour, we simply find a cab driver, ask him to recommend a beach that is 1) uncrowded, 2) has chairs we can rent, and 3) has a restaurant. We've never been led astray, and they always come back to pick us up at whatever pre-arranged time we agree upon.
We always use these opportunities to talk to the cabbies about their lives and the local customs, economy, etc. And it's always eye-opening. We've met a bus driver who was the national road cycling champion of Barbados. As he drove us over the steep, mountainous roads, he told us that he'd won the national title in the morning, racing 110 miles over these same tough climbs, then surfed in the afternoon with his son.
On this trip, we met a cabbie in Antigua who has toured the world with a famous steel-drum band. He's been to the US, Korea, the Middle East, Europe - all over. But the best part about these conversations is what it teaches us about life, economics and faith.
One cabbie, in St. Martin, offered this insightful gem on living within one's means: "If you hang your hat where you cannot reach it, you will have great difficulty. But if you hang your hat where you can reach it - no problem."
Our Antigua cabbie told us that things were better now that they had a new government and were paying taxes, something I've always groused about. But he noted that before, while there were no taxes, the government had to borrow for everything, and basic things like road repairs and improvements were too often deferred. Plus, as he noted, "Someone always holds you in the palm of their hand." Sort of like Japan and China hold the US today.
He offered another eye-opener too: Cuba - our enemy, the repressive Communist regime - offers full-ride scholarships to its colleges for all Caribbean residents. No strings attached. They complete high school on their home island, go to Cuba for six years of college, then are free to return home, bringing their education with them to benefit their home country. I'm not ready to sing Fidel's praises, but I see Cuba in a different light than before.
A final insight from this man came when my wife asked about health care. He noted that they have subsidized care, with doctors often educated in those same Cuban colleges - some of them Cuban nationals who've moved to Antigua. He told of visiting his children in New York City, which he does for six months out of every year, and having to go to the dentist there to have a tooth pulled . The bill was $1,600. "Here," he said, "the same tooth would cost me $150."
I'm not convinced national health care is the only solution for the US. But I do know this: somewhere, between $1,600 and $150, there's a workable solution.
We always use these opportunities to talk to the cabbies about their lives and the local customs, economy, etc. And it's always eye-opening. We've met a bus driver who was the national road cycling champion of Barbados. As he drove us over the steep, mountainous roads, he told us that he'd won the national title in the morning, racing 110 miles over these same tough climbs, then surfed in the afternoon with his son.
On this trip, we met a cabbie in Antigua who has toured the world with a famous steel-drum band. He's been to the US, Korea, the Middle East, Europe - all over. But the best part about these conversations is what it teaches us about life, economics and faith.
One cabbie, in St. Martin, offered this insightful gem on living within one's means: "If you hang your hat where you cannot reach it, you will have great difficulty. But if you hang your hat where you can reach it - no problem."
Our Antigua cabbie told us that things were better now that they had a new government and were paying taxes, something I've always groused about. But he noted that before, while there were no taxes, the government had to borrow for everything, and basic things like road repairs and improvements were too often deferred. Plus, as he noted, "Someone always holds you in the palm of their hand." Sort of like Japan and China hold the US today.
He offered another eye-opener too: Cuba - our enemy, the repressive Communist regime - offers full-ride scholarships to its colleges for all Caribbean residents. No strings attached. They complete high school on their home island, go to Cuba for six years of college, then are free to return home, bringing their education with them to benefit their home country. I'm not ready to sing Fidel's praises, but I see Cuba in a different light than before.
A final insight from this man came when my wife asked about health care. He noted that they have subsidized care, with doctors often educated in those same Cuban colleges - some of them Cuban nationals who've moved to Antigua. He told of visiting his children in New York City, which he does for six months out of every year, and having to go to the dentist there to have a tooth pulled . The bill was $1,600. "Here," he said, "the same tooth would cost me $150."
I'm not convinced national health care is the only solution for the US. But I do know this: somewhere, between $1,600 and $150, there's a workable solution.
We Are All Samaritans
I'm writing this from a cruise ship in the Caribbean. Why, you ask? I'm waiting for my wife and daughter to get ready for dinner, and I have some time to kill. Plus, this is a story worth telling.
The weather on this cruise has been pretty good, but the swells have been unlike any I've experienced, in 11 cruises. Fifteen to twenty feet, with the boat rocking like a bucking bronc, every joint in our cabin creaking like a Halloween soundtrack.
A couple days ago, we were on Antigua, a beautiful island that boasts 365 beaches - one for every day of the year. We've visited a couple before, and this time, after we arrived in the port and capital of St. John's, we took a cab to a new beach, called Darkwood, on the south side of the island, looking across the water to the volcanic isle of Monserrat.
It was idyllic, a beautiful expanse of sand, uncrowded, with a little beach bar and restaurant behind it, and lounge chairs we could rent ($5 for the day, a bargain) with a cabana to pull them under when we'd had too much sun. Incredible.
The surf was much higher than usual, and the waves came up to our lounge chairs a number of times. Needless to say, we wisely avoided going in too deep, given the strong surge. Others weren't so wise.
We saw one young man, lying on the beach with his wife or girlfriend, jump up and run headlong toward the waves. Instead of running through the first one or two waves, then diving, he dove into the first wave, and he took it high. Bad move.
I could tell when he took off, it would not end well. Sure enough, he came up nursing his arm, his shoulder lowered, in obvious pain. He was able to make it back to his lounge chair, and his significant other ran for help. A woman who I took to be a nurse helped him fashion a sling out of his beach towel.
Shortly thereafter, they made their way to a waiting cab. As he walked by, I could see the broken collarbone pushing up the skin next to his shoulder. A beautiful vacation, ruined - or at least impeded - by a bad choice.
A bit later, there was another group next to us, and three of the men ran toward the waves, and again, dove in - this time, at least, into the second or third wave. But again, I could tell that one of them landed badly, the one in the middle. My concerns were confirmed when I saw him on his back, with blood apparently running from his ear. That brought me to my feet (my wife and daughter were shopping for handmade sarongs in a small area next to the beach restaurant).
When the guy's two friends started pulling him out of the water, I ran to help. Never mind that I swim about well enough to get across the neighborhood pool and back. As we pulled him clear of the coming wave, I got smacked in the face by it, but we kept pulling - or at least I did.
The two friends stopped once we were clear of the wave. But I knew that the waves had been coming in threes, with the first stopping shortest of the beach, the second advancing further, and the third often reaching to the beach chairs and beyond. So I urged my companions to keep pulling. The trouble was, they were German, and spoke not a bit of English.
I kept pulling the guy, and urging them to help. They caught on, and more of their party came to help. Two people grabbed his leg, but that still left me with his torso, and he was a big guy - and pretty well out of it; not unconscious, but unable to get to his feet or help himself.
Finally, I got someone to help me lift his upper body, and we got him clear of the water and onto a lounge chair. It turns out his bloody ear was just a superficial scrape, to match the cut on his lip and the one above his eye, all of which were bleeding. His eyes were also filled with sand and salt water, so someone rinsed them with fresh bottled water.
Now, I can't tell you how many times I've been on my way to work and seen a car broken down, and thought, "Everybody has cell phones these days - help's probably already on its way. Besides, I'm running late - let somebody else stop, who's not in a hurry." It's the Good Samaritan story all over again.
But this was different. I sensed that this man could have been in grave danger (as Jack Nicholson would say, is there any other kind?). So I just ... helped him.
Now, here's where God is in the details of these things.
First, when we arrived in port, we had planned to go to a different beach, one my wife and I had been to on our first visit to Antigua. But when we told the cabbie we wanted to go there because we remembered it being uncrowded, he said, "Oh, no, it's crowded now - the cruise is having its beach barbecue there."
So we asked him to recommend a beach that would be nice, uncrowded, and have a restaurant and chairs we could rent. He mentioned Darkwood, but said it would be too expensive a ride ($32 each way for the three of us) and take too long (25-30 minutes). We were fine with the cost and the travel time, so we chose Darkwood - where this German tourist would have a mishap in the strong surf.
Second, my wife and daughter had gone to shop for local goods, as I mentioned. I could have gone with them. But I opted to stay on the beach, and I wasn't just lying there getting fried, I was watching the other people.
The third "God element" in the story has to do with an accident of my own, that I had the night before, at dinner. We were eating in the ship's buffet, and one of the entrees was fish. It looked good, but there was one piece in particular, right in the middle of the pan, that looked particularly nice - cooked exactly to my liking.
So, greedy soul that I am, instead of just taking the tongs and picking up the nearest piece of fish, I was determined to pick the choicest piece out of the middle of the pan (forbidden fish, perhaps?). I carefully maneuvered the tongs to grab my target, when I brushed the knuckle of my pinkie against the heating element above the pan.
Those things are hot, in case you ever wondered. Hot enough to immediately blister the skin, then melt the blistered skin to the element, breaking the blister in the process. It's nice and neat - no blister-popping, and it pretty effectively self-cauterizes the wound so that it doesn't hurt at all. Other than the initial burn, and a throbbing that comes an hour or so later.
I put Neosporin ointment on the blister and put a Band-Aid on my finger for the night. The next day, as I packed my daypack for the beach, I threw in the Neosporin. Otherwise, I'd never have Neosporin with me on the beach.
When the German tourist was on the beach chair and his friends were attending to him, I saw his bloody wounds, thought of the Neosporin - which I didn't really need at that point - and grabbed it, walking over to them. I remembered what little German I knew, courtesy of my Dad's stint in WWII. "Sprechen sie English?" I asked the group. One guy replied, "Ja, a little."
So I showed him the tube of ointment, explained that it was antibiotic, and told him to have someone put some on their finger, and rub it on his bloody wounds. We were able to communicate enough for them to be able to get the job done.
Did God put me on that beach that day? Yes, I believe He did. Did he compel me to not go shop with my wife and daughter? Probably, though that one I routinely handle on my own.
Did he make me burn my finger the night before? No, I don't believe so. That resulted from my own greed, wanting to take the very best piece of fish for myself, instead of just taking the nearest one.
But God used my greedy mistake, helping me to think to put the Neosporin in my backpack. That tube of antibiotic ointment is now on its way back to Germany, in the possession of a passenger on another cruise ship, who will never know who the guy was who pulled him out of the water on a beautiful beach on a small island in the Caribbean. And though I don't know him either, I've been praying for him anyway.
After it was over, I told my wife and daughter what had happened. My daughter had seen me pulling the guy out of the water. She looked at me curiously, and said, "Dad, you're a hero." I told her I wasn't; that I just did an ordinary thing.
But one thing does make it extraordinary - besides God's obvious intervention. If I'm a hero in my daughter's eyes - I can't imagine anything more that I could aspire to be.
The weather on this cruise has been pretty good, but the swells have been unlike any I've experienced, in 11 cruises. Fifteen to twenty feet, with the boat rocking like a bucking bronc, every joint in our cabin creaking like a Halloween soundtrack.
A couple days ago, we were on Antigua, a beautiful island that boasts 365 beaches - one for every day of the year. We've visited a couple before, and this time, after we arrived in the port and capital of St. John's, we took a cab to a new beach, called Darkwood, on the south side of the island, looking across the water to the volcanic isle of Monserrat.
It was idyllic, a beautiful expanse of sand, uncrowded, with a little beach bar and restaurant behind it, and lounge chairs we could rent ($5 for the day, a bargain) with a cabana to pull them under when we'd had too much sun. Incredible.
The surf was much higher than usual, and the waves came up to our lounge chairs a number of times. Needless to say, we wisely avoided going in too deep, given the strong surge. Others weren't so wise.
We saw one young man, lying on the beach with his wife or girlfriend, jump up and run headlong toward the waves. Instead of running through the first one or two waves, then diving, he dove into the first wave, and he took it high. Bad move.
I could tell when he took off, it would not end well. Sure enough, he came up nursing his arm, his shoulder lowered, in obvious pain. He was able to make it back to his lounge chair, and his significant other ran for help. A woman who I took to be a nurse helped him fashion a sling out of his beach towel.
Shortly thereafter, they made their way to a waiting cab. As he walked by, I could see the broken collarbone pushing up the skin next to his shoulder. A beautiful vacation, ruined - or at least impeded - by a bad choice.
A bit later, there was another group next to us, and three of the men ran toward the waves, and again, dove in - this time, at least, into the second or third wave. But again, I could tell that one of them landed badly, the one in the middle. My concerns were confirmed when I saw him on his back, with blood apparently running from his ear. That brought me to my feet (my wife and daughter were shopping for handmade sarongs in a small area next to the beach restaurant).
When the guy's two friends started pulling him out of the water, I ran to help. Never mind that I swim about well enough to get across the neighborhood pool and back. As we pulled him clear of the coming wave, I got smacked in the face by it, but we kept pulling - or at least I did.
The two friends stopped once we were clear of the wave. But I knew that the waves had been coming in threes, with the first stopping shortest of the beach, the second advancing further, and the third often reaching to the beach chairs and beyond. So I urged my companions to keep pulling. The trouble was, they were German, and spoke not a bit of English.
I kept pulling the guy, and urging them to help. They caught on, and more of their party came to help. Two people grabbed his leg, but that still left me with his torso, and he was a big guy - and pretty well out of it; not unconscious, but unable to get to his feet or help himself.
Finally, I got someone to help me lift his upper body, and we got him clear of the water and onto a lounge chair. It turns out his bloody ear was just a superficial scrape, to match the cut on his lip and the one above his eye, all of which were bleeding. His eyes were also filled with sand and salt water, so someone rinsed them with fresh bottled water.
Now, I can't tell you how many times I've been on my way to work and seen a car broken down, and thought, "Everybody has cell phones these days - help's probably already on its way. Besides, I'm running late - let somebody else stop, who's not in a hurry." It's the Good Samaritan story all over again.
But this was different. I sensed that this man could have been in grave danger (as Jack Nicholson would say, is there any other kind?). So I just ... helped him.
Now, here's where God is in the details of these things.
First, when we arrived in port, we had planned to go to a different beach, one my wife and I had been to on our first visit to Antigua. But when we told the cabbie we wanted to go there because we remembered it being uncrowded, he said, "Oh, no, it's crowded now - the cruise is having its beach barbecue there."
So we asked him to recommend a beach that would be nice, uncrowded, and have a restaurant and chairs we could rent. He mentioned Darkwood, but said it would be too expensive a ride ($32 each way for the three of us) and take too long (25-30 minutes). We were fine with the cost and the travel time, so we chose Darkwood - where this German tourist would have a mishap in the strong surf.
Second, my wife and daughter had gone to shop for local goods, as I mentioned. I could have gone with them. But I opted to stay on the beach, and I wasn't just lying there getting fried, I was watching the other people.
The third "God element" in the story has to do with an accident of my own, that I had the night before, at dinner. We were eating in the ship's buffet, and one of the entrees was fish. It looked good, but there was one piece in particular, right in the middle of the pan, that looked particularly nice - cooked exactly to my liking.
So, greedy soul that I am, instead of just taking the tongs and picking up the nearest piece of fish, I was determined to pick the choicest piece out of the middle of the pan (forbidden fish, perhaps?). I carefully maneuvered the tongs to grab my target, when I brushed the knuckle of my pinkie against the heating element above the pan.
Those things are hot, in case you ever wondered. Hot enough to immediately blister the skin, then melt the blistered skin to the element, breaking the blister in the process. It's nice and neat - no blister-popping, and it pretty effectively self-cauterizes the wound so that it doesn't hurt at all. Other than the initial burn, and a throbbing that comes an hour or so later.
I put Neosporin ointment on the blister and put a Band-Aid on my finger for the night. The next day, as I packed my daypack for the beach, I threw in the Neosporin. Otherwise, I'd never have Neosporin with me on the beach.
When the German tourist was on the beach chair and his friends were attending to him, I saw his bloody wounds, thought of the Neosporin - which I didn't really need at that point - and grabbed it, walking over to them. I remembered what little German I knew, courtesy of my Dad's stint in WWII. "Sprechen sie English?" I asked the group. One guy replied, "Ja, a little."
So I showed him the tube of ointment, explained that it was antibiotic, and told him to have someone put some on their finger, and rub it on his bloody wounds. We were able to communicate enough for them to be able to get the job done.
Did God put me on that beach that day? Yes, I believe He did. Did he compel me to not go shop with my wife and daughter? Probably, though that one I routinely handle on my own.
Did he make me burn my finger the night before? No, I don't believe so. That resulted from my own greed, wanting to take the very best piece of fish for myself, instead of just taking the nearest one.
But God used my greedy mistake, helping me to think to put the Neosporin in my backpack. That tube of antibiotic ointment is now on its way back to Germany, in the possession of a passenger on another cruise ship, who will never know who the guy was who pulled him out of the water on a beautiful beach on a small island in the Caribbean. And though I don't know him either, I've been praying for him anyway.
After it was over, I told my wife and daughter what had happened. My daughter had seen me pulling the guy out of the water. She looked at me curiously, and said, "Dad, you're a hero." I told her I wasn't; that I just did an ordinary thing.
But one thing does make it extraordinary - besides God's obvious intervention. If I'm a hero in my daughter's eyes - I can't imagine anything more that I could aspire to be.
Saturday, March 15, 2008
Lies, and the Lying Liars Who Tell Them
I feel like I need a shower, after borrowing the title of Al Franken's bitter leftist diatribe. But this is the Wall Street version, and it's a fitting title (moreso than of Franken's tome).
Remember when we called into question Bear Stearns CEO Alan Schwartz's assertion, in an interview with CNBC's David Faber, that the rumors swirling about Bear's lack of liquidity were just rumors? That led to a Tuesday morning rally, as investors were quick to drink Schwartz's Kool-Aid.
Well, Friday morning JPMorgan, the New York Fed, and Bear announced a plan whereby Morgan would provide a funding conduit to Bear that would allow Bear to borrow from the Fed's discount window. Bear can't directly access the window because it's not a bank, but a stand-alone broker/dealer, whereas Morgan also has a banking unit. So it's like you loaned your friend, who doesn't have a bank account, your ATM card. Bear's using Morgan's PIN to access the discount window at the New York Fed.
Why? Apparently, Bear lacks liquidity and can't access the capital markets.
Oops - didn't Schwartz say there's not a liquidity crisis at Bear? That they're able to get deals done? That the $17 billion cash they had parked at the holding company level in December is still there?
Schwartz's Kool-Aid flavor of the day on Friday was that conditions worsened dramatically over a 24-hour period, and while there wasn't a problem on Tuesday when he talked to Faber, there was a critical one now.
Riiiiight. And I've got some houses in Florida, California and Vegas I'll sell you.
Schwartz didn't know on Tuesday? Well gee, traders at Goldman Sachs seemed to, since they wouldn't accept Bear's counterparty risk. If they knew the problem was there, and Bear's CEO didn't until Friday, he should be canned. Without a healthy exit package.
Bear traded as low as $27 a share on Friday, less than half its price the previous day, so those buyers of $30 March puts made out like bandits (maybe they should be running Bear's trading desk - or maybe they already are). And its debt - which S&P downgraded to A - is trading at spreads similar to the junk-graded bonds of the Indonesian government.
Bear's earnings announcement is next week, and it'll be well below forecasts, in spite of Schwartz's assertions Tuesday that they would be "within the range of estimates." And that'll tank Bear. Bear's toast. Bear will be bought in the second quarter.
Speaking of liars, let's turn to S&P. In downgrading Bear, they said the JPMorgan/NY Fed rescue is a short-term solution to a long-term problem for Bear.
Really? Is this the same S&P that told us Thursday that subprime losses would slow, and things would get better soon? Well, if things are going to get better "soon," how is Bear's problem "long-term?"
S&P is blowing sunshine to cover for the fact that if it followed its own rules, it would double its downgrades from AAA status. Which would make S&P look even more criminally stupid. Which would lead Congress to step up the pressure on the ratings agencies to explain how they screwed this one up so bad.
Just remember: you read the truth here on Thursday (or at least had the opportunity to). The rest of the world didn't reveal the truth until Friday. If you want the truth, you know where to turn. If you want to keep listening to the guys who look like Kevin Bacon in the chaotic closing scene of "Animal House," running through the streets yelling "All is well!" while the parade implodes around him - keep drinking the Kool-Aid.
Remember when we called into question Bear Stearns CEO Alan Schwartz's assertion, in an interview with CNBC's David Faber, that the rumors swirling about Bear's lack of liquidity were just rumors? That led to a Tuesday morning rally, as investors were quick to drink Schwartz's Kool-Aid.
Well, Friday morning JPMorgan, the New York Fed, and Bear announced a plan whereby Morgan would provide a funding conduit to Bear that would allow Bear to borrow from the Fed's discount window. Bear can't directly access the window because it's not a bank, but a stand-alone broker/dealer, whereas Morgan also has a banking unit. So it's like you loaned your friend, who doesn't have a bank account, your ATM card. Bear's using Morgan's PIN to access the discount window at the New York Fed.
Why? Apparently, Bear lacks liquidity and can't access the capital markets.
Oops - didn't Schwartz say there's not a liquidity crisis at Bear? That they're able to get deals done? That the $17 billion cash they had parked at the holding company level in December is still there?
Schwartz's Kool-Aid flavor of the day on Friday was that conditions worsened dramatically over a 24-hour period, and while there wasn't a problem on Tuesday when he talked to Faber, there was a critical one now.
Riiiiight. And I've got some houses in Florida, California and Vegas I'll sell you.
Schwartz didn't know on Tuesday? Well gee, traders at Goldman Sachs seemed to, since they wouldn't accept Bear's counterparty risk. If they knew the problem was there, and Bear's CEO didn't until Friday, he should be canned. Without a healthy exit package.
Bear traded as low as $27 a share on Friday, less than half its price the previous day, so those buyers of $30 March puts made out like bandits (maybe they should be running Bear's trading desk - or maybe they already are). And its debt - which S&P downgraded to A - is trading at spreads similar to the junk-graded bonds of the Indonesian government.
Bear's earnings announcement is next week, and it'll be well below forecasts, in spite of Schwartz's assertions Tuesday that they would be "within the range of estimates." And that'll tank Bear. Bear's toast. Bear will be bought in the second quarter.
Speaking of liars, let's turn to S&P. In downgrading Bear, they said the JPMorgan/NY Fed rescue is a short-term solution to a long-term problem for Bear.
Really? Is this the same S&P that told us Thursday that subprime losses would slow, and things would get better soon? Well, if things are going to get better "soon," how is Bear's problem "long-term?"
S&P is blowing sunshine to cover for the fact that if it followed its own rules, it would double its downgrades from AAA status. Which would make S&P look even more criminally stupid. Which would lead Congress to step up the pressure on the ratings agencies to explain how they screwed this one up so bad.
Just remember: you read the truth here on Thursday (or at least had the opportunity to). The rest of the world didn't reveal the truth until Friday. If you want the truth, you know where to turn. If you want to keep listening to the guys who look like Kevin Bacon in the chaotic closing scene of "Animal House," running through the streets yelling "All is well!" while the parade implodes around him - keep drinking the Kool-Aid.
Thursday, March 13, 2008
Irrational Exuberance Revisited
Stocks continue to ignore what bonds and commodities are screaming at them.
Equities sold off sharply this morning after creditors seized the assets of a big private equity fund managed by the Carlyle Group. The fund had defaulted on nearly $17 billion of debt after failing to meet multiple margin calls on its borrowings. Its collapse led to increased speculation that other LBO companies and hedge funds may collapse, which will prove the Fed's $200 billion credit program to be the drop in the bucket that it is, given the $1.9 trillion hedge fund industry.
The sell-off - which at one point saw the Dow down more than 200 points - had strong fundamental underpinnings, and was made worse when Hank Paulson announced his ideas for salvaging the credit markets, which were universally panned as either unworkable or of little to no consequence.
Then, exuberance set in. The market rebounded. And the Dow closed up 35 points. Why?
I saw two different Bloomberg headlines attempting to answer that question. One attributed it to a rally among commodity producers, as oil and gold hit new record highs, because the dollar hit new record lows. I love it when the markets rally on record oil prices because it's good for Exxon. Never mind that it's bad for the rest of the economy, and for every non-oil stock trading. Remember the good old '70s?
The second reason was this: "U.S. Stocks Gain as S&P Forecasts Subprime Losses Will Slow." Oh, really? Is this the same S&P that totally missed the mark in rating billions of dollars of subprime toxic waste AAA? The same S&P that still won't follow its own ratings guidelines, for if it did, another $120 billion or more of AAA bonds would be downgraded, which would probably get the ratings agencies collective backsides sued off? Sorry, I'm not drinking any flavor of Kool-Aid S&P chooses to pour. (More on ratings in a future post.)
This silliness comes after a rally Tuesday morning - later corrected - that was reportedly driven by two stocks, Bear Stearns and Caterpillar. The stock price of Bear - once Wall Street's most respected bond house, now its village idiot - had fallen from more than $170 to $60ish. With rumors swirling that the company had a liquidity shortage, buying of put options on Bear's stock, which are bets that it will fall to a given level (called the strike price) became frenzied, with speculators buying puts with strike prices as low as $30 - in other words, betting the stock would fall by half again.
So why the Bear-led rally Tuesday? Bear's new CEO Alan Schwartz (they fired the old one) told CNBC interviewer David Faber that the liquidity rumors were just that - rumors. That's what Bloomberg says, anyway. Well, I watched the interview, and Schwartz looked incredibly uncomfortable. My wife commented afterward, "I'll bet he never wants to go on CNBC again."
Faber challenged Schwartz's assertion, saying, "So if I told you that a hedge fund manager, whom I know well, told me they were trying to sell a position, and Bear Stearns was the low bidder, and Goldman Sachs, who was the swap counterparty, refused to let the fund accept Bear's bid because Goldman considered Bear an unacceptable counterparty risk, you're telling me that's a rumor?"
Ouch. Schwartz replied with some Hank Paulson-esque stammering, eventually saying in effect that that was just one transaction, and that they've been able to get other transactions done. Kudos to Faber for his original thrust, but I'd have parried back with, "Really? Can you give me one example?"
During today's morning sell-off, Bear's stock dipped as low as $50.48. Those $30 put buyers might be onto something. I wonder if they're Bear employees.
As for Caterpillar, it rallied because it "boosted its sales forecast ... by 20 percent," according to Bloomberg. Yeah, that's cause for a rally, at least in that one stock. Except the part I replaced with the "..." read, "for 2010." Caterpillar can't realistically forecast its sales for the fourth quarter of this year, much less 2010. Show me some orders, and I might buy it.
The last time we saw a big fundamental morning sell-off reverse in the afternoon to close within 50 points of the Dow's previous level was March 4, and the afternoon rally that day was for equally silly reasons. As is always the case in a bear market (maybe we should say Bear market?), the false-hope-driven rebound was soon reversed, as trading was pretty much sideways March 5, then the bottom fell out.
The ensuing three days saw the Dow shed 515 points. Even Tuesday's irrationally exuberant 417-point rally wasn't enough to recoup those losses.
So if history repeats itself - and mark my words, it will - the next few days should bring a return to reality, meaning another big selling spree. Also, the Fed meets Tuesday, and they're widely expected to cut rates by 75 basis points, but inflation pressures could force them to hold at 50. If that happens, look for a blood-bath the rest of the week.
Note: tomorrow I'm headed off to the sunny Caribee for a family spring break trip, so posting will be light, unless I find myself unable to sleep nights. Which is unlikely, as I'm sleeping much better these days, having taken advantage of Tuesday's silly rally to cut my losses (or, more accurately in the long-term sense, lock in my gains). Now, I'm out of equities altogether, save for a couple of leveraged inverse bets that should pay off handsomely.
Equities sold off sharply this morning after creditors seized the assets of a big private equity fund managed by the Carlyle Group. The fund had defaulted on nearly $17 billion of debt after failing to meet multiple margin calls on its borrowings. Its collapse led to increased speculation that other LBO companies and hedge funds may collapse, which will prove the Fed's $200 billion credit program to be the drop in the bucket that it is, given the $1.9 trillion hedge fund industry.
The sell-off - which at one point saw the Dow down more than 200 points - had strong fundamental underpinnings, and was made worse when Hank Paulson announced his ideas for salvaging the credit markets, which were universally panned as either unworkable or of little to no consequence.
Then, exuberance set in. The market rebounded. And the Dow closed up 35 points. Why?
I saw two different Bloomberg headlines attempting to answer that question. One attributed it to a rally among commodity producers, as oil and gold hit new record highs, because the dollar hit new record lows. I love it when the markets rally on record oil prices because it's good for Exxon. Never mind that it's bad for the rest of the economy, and for every non-oil stock trading. Remember the good old '70s?
The second reason was this: "U.S. Stocks Gain as S&P Forecasts Subprime Losses Will Slow." Oh, really? Is this the same S&P that totally missed the mark in rating billions of dollars of subprime toxic waste AAA? The same S&P that still won't follow its own ratings guidelines, for if it did, another $120 billion or more of AAA bonds would be downgraded, which would probably get the ratings agencies collective backsides sued off? Sorry, I'm not drinking any flavor of Kool-Aid S&P chooses to pour. (More on ratings in a future post.)
This silliness comes after a rally Tuesday morning - later corrected - that was reportedly driven by two stocks, Bear Stearns and Caterpillar. The stock price of Bear - once Wall Street's most respected bond house, now its village idiot - had fallen from more than $170 to $60ish. With rumors swirling that the company had a liquidity shortage, buying of put options on Bear's stock, which are bets that it will fall to a given level (called the strike price) became frenzied, with speculators buying puts with strike prices as low as $30 - in other words, betting the stock would fall by half again.
So why the Bear-led rally Tuesday? Bear's new CEO Alan Schwartz (they fired the old one) told CNBC interviewer David Faber that the liquidity rumors were just that - rumors. That's what Bloomberg says, anyway. Well, I watched the interview, and Schwartz looked incredibly uncomfortable. My wife commented afterward, "I'll bet he never wants to go on CNBC again."
Faber challenged Schwartz's assertion, saying, "So if I told you that a hedge fund manager, whom I know well, told me they were trying to sell a position, and Bear Stearns was the low bidder, and Goldman Sachs, who was the swap counterparty, refused to let the fund accept Bear's bid because Goldman considered Bear an unacceptable counterparty risk, you're telling me that's a rumor?"
Ouch. Schwartz replied with some Hank Paulson-esque stammering, eventually saying in effect that that was just one transaction, and that they've been able to get other transactions done. Kudos to Faber for his original thrust, but I'd have parried back with, "Really? Can you give me one example?"
During today's morning sell-off, Bear's stock dipped as low as $50.48. Those $30 put buyers might be onto something. I wonder if they're Bear employees.
As for Caterpillar, it rallied because it "boosted its sales forecast ... by 20 percent," according to Bloomberg. Yeah, that's cause for a rally, at least in that one stock. Except the part I replaced with the "..." read, "for 2010." Caterpillar can't realistically forecast its sales for the fourth quarter of this year, much less 2010. Show me some orders, and I might buy it.
The last time we saw a big fundamental morning sell-off reverse in the afternoon to close within 50 points of the Dow's previous level was March 4, and the afternoon rally that day was for equally silly reasons. As is always the case in a bear market (maybe we should say Bear market?), the false-hope-driven rebound was soon reversed, as trading was pretty much sideways March 5, then the bottom fell out.
The ensuing three days saw the Dow shed 515 points. Even Tuesday's irrationally exuberant 417-point rally wasn't enough to recoup those losses.
So if history repeats itself - and mark my words, it will - the next few days should bring a return to reality, meaning another big selling spree. Also, the Fed meets Tuesday, and they're widely expected to cut rates by 75 basis points, but inflation pressures could force them to hold at 50. If that happens, look for a blood-bath the rest of the week.
Note: tomorrow I'm headed off to the sunny Caribee for a family spring break trip, so posting will be light, unless I find myself unable to sleep nights. Which is unlikely, as I'm sleeping much better these days, having taken advantage of Tuesday's silly rally to cut my losses (or, more accurately in the long-term sense, lock in my gains). Now, I'm out of equities altogether, save for a couple of leveraged inverse bets that should pay off handsomely.
A Curmudgeon Before His Time
I was just recalling when I first interviewed with the company in whose employ I remain, some 16 years later. The interviewers were the President and the VP in charge of the fledgling advisory service of which I would become a part, and eventually manage before being promoted to being the simple figurehead I am today.
The VP had a banking background. I was coming from a large S&L that had probably the most complex investment portfolio off Wall Street. (We had an arbitrage group on Wall Street, in fact, made up of a bunch of Ivy League engineering PhDs, and the mortgage prepayment model we built in-house was later bought by Salomon Brothers.)
So, my boss-to-be came from the corporate and muni bond world, whereas I was a mortgage guy. So he thought he'd try to trip me up. He asked a very simple question in Street lingo, and what it meant was can you buy bonds just based on the credit rating alone. Specifically, the question was, "Can you buy ratings?"
My answer: "No. I don't trust ratings."
Prescient.
The VP had a banking background. I was coming from a large S&L that had probably the most complex investment portfolio off Wall Street. (We had an arbitrage group on Wall Street, in fact, made up of a bunch of Ivy League engineering PhDs, and the mortgage prepayment model we built in-house was later bought by Salomon Brothers.)
So, my boss-to-be came from the corporate and muni bond world, whereas I was a mortgage guy. So he thought he'd try to trip me up. He asked a very simple question in Street lingo, and what it meant was can you buy bonds just based on the credit rating alone. Specifically, the question was, "Can you buy ratings?"
My answer: "No. I don't trust ratings."
Prescient.
Tuesday, March 11, 2008
Paradise Lost
The whole Elliott Spitzer episode is sad. Sad for his family. Sad for the promise that his considerable God-given talents held for the people of New York. Sad for the example he set. Sad for humanity.
Why sad for humanity? Because Elliott Spitzer's story is your story, and mine. No, we don't frequent hookers. But Spitzer's act has a deeper point of origin.
Remember the story of Adam and Eve? They knew the fruit was forbidden. But oh, how good it looked. How ripe, and fresh. And they could just imagine how it would taste. The more they thought about it, the more they lusted for it. They reached a point where they couldn't even see the consequences anymore, or if they did, they had diminished in importance relative to their lust. So they partook. And were banished from Eden.
Paradise lost.
Elliott Spitzer had it all. Wealth. A beautiful wife. Wonderful kids. Respect. A great job. A promising political future. The opportunity to use his considerable wealth, skills, power and intellect for so, so much good.
But there was that forbidden fruit. And all he could think about was how good it looked. What the experience would be like. So he partook.
Paradise lost.
I don't sit in judgment of the man. Jesus taught us to hate the sin, and love the sinner. So he'll be in my prayers.
By the same token, I hope that he is prosecuted for human trafficking, as has been hinted at. Let me explain this apparent contradiction in my views on this matter.
Spitzer spent his career as a relentless prosecutor, and he was good at his job. He shut down several prostitution rings during his stint as New York's Attorney General, and in a speech about busting one of them, he "spoke with revulsion and anger."
His visits to the women employed by this particular prostitution ring were apparently frequent, as the woman he was with most recently - the incident that was his ultimate undoing - reported to her employer that she did not find him "difficult." The response was that he had asked other prostitutes in the ring to do things that were "unsafe."
The repetitiveness of his behavior is also reflected in the reports that when he was told which girl he would be meeting with, he commented that he thought he remembered what she looked like, implying that he had been with her previously.
In this particular tryst, which took place the night before Valentine's Day - which has to make Mrs. Spitzer feel special, and loved - Spitzer called the service to arrange for this particular girl to travel from New York to his hotel room in Washington, DC. And therein may lie his undoing.
Soliciting a prostitute to cross state lines to perform sex acts for hire violates the Mann Act, and is a federal offense. Now, it may seem that this is a bastardization of the law, and that this instance should be discounted. But here's why it shouldn't be - and why I believe Mr. Spitzer should suffer the full consequences of the law.
The enforcement of the Mann Act against human trafficking reflects the fact that existing laws against prostitution, soliciting the same, child pornography, and other such crimes are not enforced strongly enough. The penalties just aren't sufficient to stop the lucrative trade. In other words, the reward outweighs the risk, which in economic terms leads to a surge in market activity.
So great is the demand for human flesh that a new trade route has developed, from former Soviet Republics and other Eastern bloc nations, where organized crime is rampant, as well as from the far East, into Western Europe, Japan, and the US. Much of the activity occurs in Eastern Europe, and the hub of that trade is in Prague, in the Czech Republic.
As long as there is demand, this trade will continue. And it's not down-on-their-luck women hooked on crack who need to pay for their habit, or college students looking for an easy way to pay for school, or bored housewives, or "enterprising" women who decide they can make more money with their bodies than doing anything else - it's not these stereotypical types who voluntarily enter the prostitution trade.
It's girls who are taken from - or sold by - their families by organized crime rings in Russia or elsewhere, literally sold into slavery, abused, transported around the globe, and pressed into service as prostitutes. Eventually, most will resign themselves to the lives they've been forced into, either deciding they're better off than in the homeland, or succumbing to the Stockholm syndrome, or some combination thereof.
And again, as long as there is demand - demand from wealthy, misogynistic serial cheaters like Elliott Spitzer - this trade will continue, and flourish. Because such a man will pay $4,300 for a night with one of these sad creatures. And that's lucrative to all parties involved, except the victim.
Unless the risk premium is increased. And that's where the stronger human trafficking laws come in.
Those laws recognized the weakness in the penalties imposed by the existing laws. So - at the urging of Attorneys General across the nation, like Mr. Spitzer - the Mann Act was applied to these cases aggressively, recognizing that such activity is tantamount to slave-trading.
As Attorney General of New York, Mr. Spitzer would have wanted those laws enforced in this case if the perp had been a captain of industry or a Wall Street mogul, for the very reasons I've articulated above. So I think he should get his wish.
A friend of mine, who is a brother in Christ and himself a former prosecutor, provides an excellent counterpoint to Mr. Spitzer's story.
Charlie Lamento was a local prosecutor and criminal investigator. His work sometimes involved investigating and prosecuting local prostitution rings, which often had ties back to the Eastern European sex-slave trade. And what Charlie saw sickened him.
He resolved to fight it. But he knew it was too hard to fight from Midwestern America.
So he joined the International Institute for Christian Studies (IICS, at www.iics.com). IICS places Christian educators in universities around the world, in the belief that the more educators of higher learning are adding a faith-based component to the influence they have on the world's future leaders, the better.
Similar to missionaries, IICS professors have to raise the money for their appointments themselves. Charlie raised over $50,000. He then left the comfort and familiarity of his job and his home, and set out for Prague, to teach law. And more.
Charlie is also working with local Czech prosecutors to teach them how to better investigate these cases, and how to better prosecute under the laws already on the books, which he says are a very good start. He's also working to try to help them influence lawmakers to strengthen the laws. Charlie is a one-man crusader against these terrible crimes. And he's a man I'd bet on to win.
I know what Attorney General Elliott Spitzer would have said about whether he deserved to be prosecuted under the Human Trafficking laws. More importantly, I know what Charlie Lamento, another prosecutor and a forgiving Christian, would say. And that's good enough for me.
(You can donate to IICS by going to the website - again, www.iics.com. Be sure to include Charlie's name for donations made on his behalf.)
Why sad for humanity? Because Elliott Spitzer's story is your story, and mine. No, we don't frequent hookers. But Spitzer's act has a deeper point of origin.
Remember the story of Adam and Eve? They knew the fruit was forbidden. But oh, how good it looked. How ripe, and fresh. And they could just imagine how it would taste. The more they thought about it, the more they lusted for it. They reached a point where they couldn't even see the consequences anymore, or if they did, they had diminished in importance relative to their lust. So they partook. And were banished from Eden.
Paradise lost.
Elliott Spitzer had it all. Wealth. A beautiful wife. Wonderful kids. Respect. A great job. A promising political future. The opportunity to use his considerable wealth, skills, power and intellect for so, so much good.
But there was that forbidden fruit. And all he could think about was how good it looked. What the experience would be like. So he partook.
Paradise lost.
I don't sit in judgment of the man. Jesus taught us to hate the sin, and love the sinner. So he'll be in my prayers.
By the same token, I hope that he is prosecuted for human trafficking, as has been hinted at. Let me explain this apparent contradiction in my views on this matter.
Spitzer spent his career as a relentless prosecutor, and he was good at his job. He shut down several prostitution rings during his stint as New York's Attorney General, and in a speech about busting one of them, he "spoke with revulsion and anger."
His visits to the women employed by this particular prostitution ring were apparently frequent, as the woman he was with most recently - the incident that was his ultimate undoing - reported to her employer that she did not find him "difficult." The response was that he had asked other prostitutes in the ring to do things that were "unsafe."
The repetitiveness of his behavior is also reflected in the reports that when he was told which girl he would be meeting with, he commented that he thought he remembered what she looked like, implying that he had been with her previously.
In this particular tryst, which took place the night before Valentine's Day - which has to make Mrs. Spitzer feel special, and loved - Spitzer called the service to arrange for this particular girl to travel from New York to his hotel room in Washington, DC. And therein may lie his undoing.
Soliciting a prostitute to cross state lines to perform sex acts for hire violates the Mann Act, and is a federal offense. Now, it may seem that this is a bastardization of the law, and that this instance should be discounted. But here's why it shouldn't be - and why I believe Mr. Spitzer should suffer the full consequences of the law.
The enforcement of the Mann Act against human trafficking reflects the fact that existing laws against prostitution, soliciting the same, child pornography, and other such crimes are not enforced strongly enough. The penalties just aren't sufficient to stop the lucrative trade. In other words, the reward outweighs the risk, which in economic terms leads to a surge in market activity.
So great is the demand for human flesh that a new trade route has developed, from former Soviet Republics and other Eastern bloc nations, where organized crime is rampant, as well as from the far East, into Western Europe, Japan, and the US. Much of the activity occurs in Eastern Europe, and the hub of that trade is in Prague, in the Czech Republic.
As long as there is demand, this trade will continue. And it's not down-on-their-luck women hooked on crack who need to pay for their habit, or college students looking for an easy way to pay for school, or bored housewives, or "enterprising" women who decide they can make more money with their bodies than doing anything else - it's not these stereotypical types who voluntarily enter the prostitution trade.
It's girls who are taken from - or sold by - their families by organized crime rings in Russia or elsewhere, literally sold into slavery, abused, transported around the globe, and pressed into service as prostitutes. Eventually, most will resign themselves to the lives they've been forced into, either deciding they're better off than in the homeland, or succumbing to the Stockholm syndrome, or some combination thereof.
And again, as long as there is demand - demand from wealthy, misogynistic serial cheaters like Elliott Spitzer - this trade will continue, and flourish. Because such a man will pay $4,300 for a night with one of these sad creatures. And that's lucrative to all parties involved, except the victim.
Unless the risk premium is increased. And that's where the stronger human trafficking laws come in.
Those laws recognized the weakness in the penalties imposed by the existing laws. So - at the urging of Attorneys General across the nation, like Mr. Spitzer - the Mann Act was applied to these cases aggressively, recognizing that such activity is tantamount to slave-trading.
As Attorney General of New York, Mr. Spitzer would have wanted those laws enforced in this case if the perp had been a captain of industry or a Wall Street mogul, for the very reasons I've articulated above. So I think he should get his wish.
A friend of mine, who is a brother in Christ and himself a former prosecutor, provides an excellent counterpoint to Mr. Spitzer's story.
Charlie Lamento was a local prosecutor and criminal investigator. His work sometimes involved investigating and prosecuting local prostitution rings, which often had ties back to the Eastern European sex-slave trade. And what Charlie saw sickened him.
He resolved to fight it. But he knew it was too hard to fight from Midwestern America.
So he joined the International Institute for Christian Studies (IICS, at www.iics.com). IICS places Christian educators in universities around the world, in the belief that the more educators of higher learning are adding a faith-based component to the influence they have on the world's future leaders, the better.
Similar to missionaries, IICS professors have to raise the money for their appointments themselves. Charlie raised over $50,000. He then left the comfort and familiarity of his job and his home, and set out for Prague, to teach law. And more.
Charlie is also working with local Czech prosecutors to teach them how to better investigate these cases, and how to better prosecute under the laws already on the books, which he says are a very good start. He's also working to try to help them influence lawmakers to strengthen the laws. Charlie is a one-man crusader against these terrible crimes. And he's a man I'd bet on to win.
I know what Attorney General Elliott Spitzer would have said about whether he deserved to be prosecuted under the Human Trafficking laws. More importantly, I know what Charlie Lamento, another prosecutor and a forgiving Christian, would say. And that's good enough for me.
(You can donate to IICS by going to the website - again, www.iics.com. Be sure to include Charlie's name for donations made on his behalf.)
Monday, March 10, 2008
Still Can't Find the Bottom
This post is a lesson in why you shouldn't watch CNBC, other than for pure entertainment value.
I've already commented on the Friday rally the network fueled on February 22, when it leaked a supposed bailout of Ambac that never materialized. Today, they demonstrated that while the market has advanced down the sentiment curve to Fear, CNBC remains firmly entrenched in Denial.
On this morning's "Squawk Box" segment (which features anchor Becky Quick, who last week had to ask someone to explain a flight to quality), the headline banner read something like, "Are We Near the Bottom?" (meaning for stocks). My first thought was, "Are you kidding me?? We just pierced the bear threshold. Traders are saying sentiment is bleak. Economists are talking ten-year recession, and at least the worst and longest downturn since 1990. The worst for housing is still to come, and liquidity's drying up again. Again, are you kidding me?"
Then, they brought in an "expert" to "enlighten" us. I don't recall the firm the guy was with, but he cited last Friday's jobs report as a sign we're near the bottom.
Oh. Okay. That clears it right up, then.
Are you KIDDING ME?? Friday's payroll report showed a loss of 63,000 jobs in February, after we lost 22,000 in January (and December's originally reported gain of 82,000 was halved). So the trend is down for jobs, as it has been for nearly two years.
And this is a sign stocks have hit bottom?
Here was this "expert's" rationale: "Jobs are the ultimate lagging indicator."
Oh. Okay.
Wait - sorry, but I'm a skeptic when it comes to this stuff. So I decided to look at the numbers myself.
In March 2000, job growth peaked at about a 450,000 monthly gain. Over the next three months, the monthly pace declined to a loss of 50,000 jobs for June. Payrolls bounced around for the rest of the year and into early 2001, rising as high as 200,000+, but hitting zero or below three times, and averaging just south of 100,000 a month.
Then the bottom fell out, and we shed about 300,000 jobs in April 2001. Job growth was negative from March 2001 through May 2002, bottoming out at a loss of a little more than 300,000 in October 2001, just after 9/11.
An important point needs to be made here: even in the last, relatively mild and brief recession, job growth didn't just go negative for two months. It lasted more than a year, and even if you discount the impact of 9/11, negative job growth lasted six months. So if jobs are a lagging indicator, the fact that we haven't hit bottom yet on job losses means we have no idea whether we're near a bottom in stocks.
Now, we need to turn our attention to this "lagging indicator" concept. If jobs are indeed a lagging indicator relative to stock market performance, then, given the data above, stocks should have peaked prior to the peak in job creation in March 2000, and bottomed out prior to the trough in job creation in October 2001. Did they?
Nope, and nope. The S&P 500 peaked in July 2000, a few months after the peak in job growth, and hit bottom about a year after the trough. After that, the S&P rebounded a bit, but dropped back to within 25 points of the low about six months later. So jobs were a leading indicator of stocks, by about four months for the peak, and a year to a year and a half for the bottom.
What about this cycle? Job creation peaked in June 2005 at more than 350,000, then nearly hit that level again three months later. The trend slowed deliberately after that, until the bottom fell out, beginning four months ago. Meanwhile, stocks peaked ... four months ago. Not in 2005. So this time, jobs led stocks on the upside by about two years.
And on the downside? Well, it's too soon to tell. If this cycle's like the last one - and clearly it's not, for a variety of reasons including the fact that the upside lag between jobs and stocks is so much longer this time - then the bottom in stocks should come about 12-18 months after the bottom in jobs. And, again if this is like last cycle, the bottom in jobs should be about about a year out, and I'm being generous by discounting for the 9/11 effect.
Let's see, that puts the bottom in stocks about two years out. Haven't I read that prediction somewhere before? Oh yeah - here!
*****
Quote of the day: "We lost $8.6 billion last year ... But in parallel we raised $12.8 billion in under two months, or more than the losses we suffered. That is why today I can say that we will not need additional funds. These problems are behind us. We will not return to the market." - Merrill Lynch CEO John Thain
(Why is this the quote of the day? I just wanted to quote it for posterity, so I can reference it next time Merrill seeks a capital infusion.)
I've already commented on the Friday rally the network fueled on February 22, when it leaked a supposed bailout of Ambac that never materialized. Today, they demonstrated that while the market has advanced down the sentiment curve to Fear, CNBC remains firmly entrenched in Denial.
On this morning's "Squawk Box" segment (which features anchor Becky Quick, who last week had to ask someone to explain a flight to quality), the headline banner read something like, "Are We Near the Bottom?" (meaning for stocks). My first thought was, "Are you kidding me?? We just pierced the bear threshold. Traders are saying sentiment is bleak. Economists are talking ten-year recession, and at least the worst and longest downturn since 1990. The worst for housing is still to come, and liquidity's drying up again. Again, are you kidding me?"
Then, they brought in an "expert" to "enlighten" us. I don't recall the firm the guy was with, but he cited last Friday's jobs report as a sign we're near the bottom.
Oh. Okay. That clears it right up, then.
Are you KIDDING ME?? Friday's payroll report showed a loss of 63,000 jobs in February, after we lost 22,000 in January (and December's originally reported gain of 82,000 was halved). So the trend is down for jobs, as it has been for nearly two years.
And this is a sign stocks have hit bottom?
Here was this "expert's" rationale: "Jobs are the ultimate lagging indicator."
Oh. Okay.
Wait - sorry, but I'm a skeptic when it comes to this stuff. So I decided to look at the numbers myself.
In March 2000, job growth peaked at about a 450,000 monthly gain. Over the next three months, the monthly pace declined to a loss of 50,000 jobs for June. Payrolls bounced around for the rest of the year and into early 2001, rising as high as 200,000+, but hitting zero or below three times, and averaging just south of 100,000 a month.
Then the bottom fell out, and we shed about 300,000 jobs in April 2001. Job growth was negative from March 2001 through May 2002, bottoming out at a loss of a little more than 300,000 in October 2001, just after 9/11.
An important point needs to be made here: even in the last, relatively mild and brief recession, job growth didn't just go negative for two months. It lasted more than a year, and even if you discount the impact of 9/11, negative job growth lasted six months. So if jobs are a lagging indicator, the fact that we haven't hit bottom yet on job losses means we have no idea whether we're near a bottom in stocks.
Now, we need to turn our attention to this "lagging indicator" concept. If jobs are indeed a lagging indicator relative to stock market performance, then, given the data above, stocks should have peaked prior to the peak in job creation in March 2000, and bottomed out prior to the trough in job creation in October 2001. Did they?
Nope, and nope. The S&P 500 peaked in July 2000, a few months after the peak in job growth, and hit bottom about a year after the trough. After that, the S&P rebounded a bit, but dropped back to within 25 points of the low about six months later. So jobs were a leading indicator of stocks, by about four months for the peak, and a year to a year and a half for the bottom.
What about this cycle? Job creation peaked in June 2005 at more than 350,000, then nearly hit that level again three months later. The trend slowed deliberately after that, until the bottom fell out, beginning four months ago. Meanwhile, stocks peaked ... four months ago. Not in 2005. So this time, jobs led stocks on the upside by about two years.
And on the downside? Well, it's too soon to tell. If this cycle's like the last one - and clearly it's not, for a variety of reasons including the fact that the upside lag between jobs and stocks is so much longer this time - then the bottom in stocks should come about 12-18 months after the bottom in jobs. And, again if this is like last cycle, the bottom in jobs should be about about a year out, and I'm being generous by discounting for the 9/11 effect.
Let's see, that puts the bottom in stocks about two years out. Haven't I read that prediction somewhere before? Oh yeah - here!
*****
Quote of the day: "We lost $8.6 billion last year ... But in parallel we raised $12.8 billion in under two months, or more than the losses we suffered. That is why today I can say that we will not need additional funds. These problems are behind us. We will not return to the market." - Merrill Lynch CEO John Thain
(Why is this the quote of the day? I just wanted to quote it for posterity, so I can reference it next time Merrill seeks a capital infusion.)
Saturday, March 8, 2008
"That's Obscene!"
I didn't watch the grilling of several banking and Wall Street CEOs by the House Committee on Oversight and Government reform, in part out of protest: the committee's name includes government reform, not private-sector reform. These guys should spend their time trying to fix the government; Lord knows it needs fixing.
Anyway, I didn't watch it, but my wife did (there's my muse again). And she told me about how some of the committee members were basically asking, "Why are we here?", while others were ripping the execs over their pay.
Look, I won't argue that some of these guys are overpaid. It's not my place to; I don't own Citi or Merrill or Countrywide stock. But if their shareholders think they're worth it, pay them. Yes, I'm aware that the boards - who determine CEO pay - are packed with hand-picked cronies who are often CEOs themselves, making it sort of like a Ponzi scheme. But stockholders can make enough noise to attract the attention of a big fish who might see an opportunity to buy in, gain a board seat, gain control, cut executive pay, and improve the return on his investment - like a Carl Icahn.
It reminds me of when I served on an employee compensation committee for a company I worked for. Those of us on the committee came from different departments. I was in Treasury and Capital Markets, where I was responsible for trading futures and valuing the portfolio. We had a high-yield division, a group of very talented guys who managed junk bonds, which were pretty new back then. The committee was grading their jobs; the grades determined pay scales. So the leader of the group was making his case to us.
He gave the example of Michael Milkin, who was the father of the junk bond market, and worked for Drexel Burnham Lambert. He told us how much Milkin made, and a woman on the committee gasped, "That's obscene!"
No; child molestation is obscene.
The head of our junk-bond group patiently explained how much value Milkin created, how the companies that were able to raise funds through the junk debt market - companies that otherwise would have no source of funding - made products that saved lives, improved our quality of life, etc. And how those companies also provided valuable jobs for people.
All that's true, but my thought was, Milkin's not the head of Drexel, he's got a boss. If the boss thinks he's worth what they're paying him, where's the beef?
I also think Congress spends entirely too much time worrying about steroids in baseball, CEO pay, and other stuff that's not really the purview of our lawmakers. Most Congressmen themselves are overpaid in my opinion, and they take their fair share of junkets and other perks. And most aren't half as smart as a Wall Street CEO. And when they do finally leave office - if it's not in a pine box - they'll become lobbyists or consultants and make as much as those CEOs made. You think guys like Newt Gingrich and Al Gore aren't doing okay financially these days? Ever hear a Congressman question their pay?
My wife noted that part of the uproar was over how the Street could pay these guys so much for "taking advantage of the poor subprime borrowers." In a previous post I exploded that myth. The very greed that drives these guys to get up in the morning, to want more pay, bigger bonuses, a bigger jet, a bigger office, more vacation homes, etc., drove an awful lot of people to leverage themselves into more house than they could afford.
That greed is everywhere. I just pulled up Yahoo! Finance, and the top story wasn't last week's market rout, or our economy, which is increasingly looking like a fast-moving train going off a cliff. It was: "The Cars of the World's Billionaires." The teaser reads, "see what the world's richest drivers have in their garages."
We crave that crap. We want to know what brand of purse Paris Hilton is carrying these days, what sunglasses Tom Cruise wears, what car some rich guy drives. Then we lust after this stuff ourselves, and buy it even though we can't afford it, and as long as we're willing to do that, somebody will loan us money, on some terms, then sell off the loans to somebody else who'll package the crap into something some other poor schmuck will buy. And now it's all blowing up. Yet we still get these headlines, which may as well read, "Click here to see this woman naked."
Any of us "can" afford a Rolex or a Ferrari or a mansion, if we work hard and prudently manage our resources. But too many people want the bling without working for it. That's not what America is about. It's the land of equal opportunity, but no one ever said it was going to be the land of equal achievement or attainment. You've got to work at it.
The Bible doesn't say that money is the root of all evil. It says the LOVE of money is the root of all kinds of evil. High CEO pay isn't the problem. It's this insatiable lust for stuff, this rampant consumerism, that leads households to max out their debt to the point they lose everything.
And THAT's obscene.
Anyway, I didn't watch it, but my wife did (there's my muse again). And she told me about how some of the committee members were basically asking, "Why are we here?", while others were ripping the execs over their pay.
Look, I won't argue that some of these guys are overpaid. It's not my place to; I don't own Citi or Merrill or Countrywide stock. But if their shareholders think they're worth it, pay them. Yes, I'm aware that the boards - who determine CEO pay - are packed with hand-picked cronies who are often CEOs themselves, making it sort of like a Ponzi scheme. But stockholders can make enough noise to attract the attention of a big fish who might see an opportunity to buy in, gain a board seat, gain control, cut executive pay, and improve the return on his investment - like a Carl Icahn.
It reminds me of when I served on an employee compensation committee for a company I worked for. Those of us on the committee came from different departments. I was in Treasury and Capital Markets, where I was responsible for trading futures and valuing the portfolio. We had a high-yield division, a group of very talented guys who managed junk bonds, which were pretty new back then. The committee was grading their jobs; the grades determined pay scales. So the leader of the group was making his case to us.
He gave the example of Michael Milkin, who was the father of the junk bond market, and worked for Drexel Burnham Lambert. He told us how much Milkin made, and a woman on the committee gasped, "That's obscene!"
No; child molestation is obscene.
The head of our junk-bond group patiently explained how much value Milkin created, how the companies that were able to raise funds through the junk debt market - companies that otherwise would have no source of funding - made products that saved lives, improved our quality of life, etc. And how those companies also provided valuable jobs for people.
All that's true, but my thought was, Milkin's not the head of Drexel, he's got a boss. If the boss thinks he's worth what they're paying him, where's the beef?
I also think Congress spends entirely too much time worrying about steroids in baseball, CEO pay, and other stuff that's not really the purview of our lawmakers. Most Congressmen themselves are overpaid in my opinion, and they take their fair share of junkets and other perks. And most aren't half as smart as a Wall Street CEO. And when they do finally leave office - if it's not in a pine box - they'll become lobbyists or consultants and make as much as those CEOs made. You think guys like Newt Gingrich and Al Gore aren't doing okay financially these days? Ever hear a Congressman question their pay?
My wife noted that part of the uproar was over how the Street could pay these guys so much for "taking advantage of the poor subprime borrowers." In a previous post I exploded that myth. The very greed that drives these guys to get up in the morning, to want more pay, bigger bonuses, a bigger jet, a bigger office, more vacation homes, etc., drove an awful lot of people to leverage themselves into more house than they could afford.
That greed is everywhere. I just pulled up Yahoo! Finance, and the top story wasn't last week's market rout, or our economy, which is increasingly looking like a fast-moving train going off a cliff. It was: "The Cars of the World's Billionaires." The teaser reads, "see what the world's richest drivers have in their garages."
We crave that crap. We want to know what brand of purse Paris Hilton is carrying these days, what sunglasses Tom Cruise wears, what car some rich guy drives. Then we lust after this stuff ourselves, and buy it even though we can't afford it, and as long as we're willing to do that, somebody will loan us money, on some terms, then sell off the loans to somebody else who'll package the crap into something some other poor schmuck will buy. And now it's all blowing up. Yet we still get these headlines, which may as well read, "Click here to see this woman naked."
Any of us "can" afford a Rolex or a Ferrari or a mansion, if we work hard and prudently manage our resources. But too many people want the bling without working for it. That's not what America is about. It's the land of equal opportunity, but no one ever said it was going to be the land of equal achievement or attainment. You've got to work at it.
The Bible doesn't say that money is the root of all evil. It says the LOVE of money is the root of all kinds of evil. High CEO pay isn't the problem. It's this insatiable lust for stuff, this rampant consumerism, that leads households to max out their debt to the point they lose everything.
And THAT's obscene.
Friday, March 7, 2008
Random Musings
Just some various random thoughts, none of which is really long enough to make a full post on its own.
My wife and I were watching the E*Trade baby ad the other night - the one that first aired during the Super Bowl, where the baby, captured on webcam, is talking about E*Trade. (You may or may not be aware that E*Trade was the poorest-performing stock in the S&P 500 last year.) He clicks his mouse, buys a stock, says, "Whoa - I just bought stock," then spits up. (That always cracks me up.) And my clever wife looks at me and says, "Maybe he just bought E*Trade." Just keep 'em coming, babe. You're my muse.
*****
This week we learned that mortgage foreclosures and delinquencies are at record levels. Who'da thunk it? The conventional wisdom has always been that the home loan was the last debt a borrower would default on. But that was before we started making loans to people who should have remained renters. With plummeting real estate values, once people see they own less than they owe, they're just dropping the keys in the mailbox and walking away, thinking, "Why make payments on a house that's worth less than the balance?"
Exacerbating this problem is the fact that these people thought real estate would go up forever (like the fools who thought tech would go up forever back in '99). Now that they see it ain't so, they don't want to be homeowners anymore.
And lest anyone's been drinking Hillary's (and, to be fair, many others') "this-problem-was-caused-by-predatory-lenders-taking-advantage-of-honest-hardworking-Americans-who-just-wanted-a-piece-of-the-American-dream-so-the-best-option-is-to-freeze-their-rates" kool-aid, consider this. Accompanying the forecosure data was a comment by an economist for the organization that published the numbers:
"We're seeing people give up even before they get to the (rate) reset because they couldn't afford the home in the first place." (Emphasis added.)
Sorry. I do not feel sorry for those people, not one iota. The American dream, insofar as it pertains to home ownership, is a roof over one's head. It doesn't have to be an Italian slate roof, topping an expanse of 4,000 square feet.
*****
Related note: now, increasing numbers of Americans are saying the mortgage is the first thing they'll default on. Why? The answers are frightening: "I need my car to get to work to make money to make my other debt payments, and I need my credit card to buy groceries, but I can live anywhere." Wow. I guess nobody cares about equity anymore. I just hope my daughter's not stuck supporting these people in their retirement, when they find they have nothing. It's a brave new world.
*****
Five-year TIPS (Treasury Inflation-Protected Securities) have a negative yield these days. What does that mean? First, I'll define TIPS. Then, I'll explain.
TIPS were introduced a few years back to help investors hedge against (or bet on; always remember that one man's hedge is another man's bet) inflation. Traditionally, investors would just buy or sell straight Treasury notes and bonds, and the difference between their yield and the inflation rate was deemed their "real," or inflation-adjusted, rate of return.
The rate of interest TIPS pay is lower than regular Treasuries. But, unlike the vanilla version, TIPS don't pay a fixed principal amount. Instead, their principal can go up or down based on changes in the Consumer Price Index, or CPI. When inflation is higher, the principal goes up more. In the event of deflation, the principal can go down. TIPS still pay principal at maturity, but the Treasury pays you the CPI-adjusted principal amount, not what you bought. And, each semi-annual interest payment is based on the prevailing principal balance and the interest rate.
So what does a negative yield on five-year TIPS mean? Does the investor pay the Treasury interest? Not quite. Yield is a function of the interest rate a bond pays, and its current price relative to "par," or 100% of the amount originally bought. So you still receive interest, but the traders have basically bid the price of the TIPS you own up to a level where the premium you pay over par wipes out the interest you're going to get over the bond's life.
Why would the traders do that? It's simple, as Ross Perot used to say. TIPS traders - the inflation-bettors of the bond world - are betting that inflation's going to take off to the point where they're not getting paid for the inflation risk. Hence the negative yield on TIPS.
The moral of the story: there is significant inflation risk in our economy right now, especially with Fed Chairman Ben Bernanke (who's a pansy, by the way) throwing money on the problem, like so much gas on a fire.
*****
Speaking of gas - fill 'er up - quick! Oil's trading over $106 a barrel today.
*****
And speaking of the Fed, and inflation, and mortgages ... well, mortgage rates keep going up even as the Fed pushes short-term rates down. Why? Two reasons.
First, traders and buyers of long-term assets, like mortgages and the ten-year Treasuries they're priced off of, are concerned about the future purchasing power of their investments. When the Fed's throwing money at the economy, their concern is that future inflation will be higher. This is due in part to the fear that all that easy money will overheat the economy and people will go on a borrowing and buying rampage that will increase demand for everything, thus bidding prices up.
And if that sounds familiar, it's because that's what happened in real estate after Bernanke's predecessor, Alan Greenspan, practically gave money away for a year, keeping the Fed funds target at a ridiculously low 1.00% much longer than he needed to.
So, long-term Treasury traders and originators of mortgages, concerned over the future purchasing power of the dollars in their investments, are keeping rates high to ensure they're compensated for future inflation.
The second reason for higher mortgage rates is that, with rising foreclosures, and given the brave new world of attitudes about responsibility for debt, lenders are realizing that risk is still underpriced in the mortgage market. That's why spreads on mortgage-backed bonds (the yield they offer relative to the yield on Treasuries, which are supposedly risk-free) widened about 50 basis points, or half a percent, in three days this week.
The bottom line: the Fed can ease all they want, but mortgage rates are staying put. That means the subprime crisis continues unabated, and the Fed just tanks the dollar and fuels inflation with their careless easing.
*****
In a story related to the widening of mortgage spreads, a couple of comments by traders and money managers indicate just how ugly this is getting: the markets are "utterly unhinged," and "Everything is telling you the financial system is broken," and "The Fed can't really save the mortgage market." I've been playing in the world of mortgage-backed bonds since their early days, in the 1980s, and I've never seen anything remotely like this.
*****
Two signs of the times: first, I got a postcard in the mail from a local realtor, offering a $500 discount off the commish if I listed my house for sale. Things must be getting pretty bad. (By the way, the Kansas City market isn't nearly as volatile as places like Vegas, Florida and SoCal, so if things are getting bad here, they're really ugly in those spots. I also know of two area real estate partnerships that folded recently, and that's just anecdotally.)
Second, even CNBC is now lambasting the Fed for its easy money policy, with a story headlined, "Fed's Rate Cuts May Do Long-Term Dollar Damage." Yeah, no kidding. But this is the same network that loves a rally and will start any rumor to spark one, the network whose poster boy, Jim Cramer, likes to scream at Ben Bernanke on-air, "Mr. Chairman! Cut the rate! Cut the rate!" What does Jim care if we inflate another bubble? To him, it's just a buying opportunity. He won't starve when it bursts.
*****
I leave you with this final story. My daughter, who plays the viola, was selected to the Kansas State Orchestra, and last weekend they played their concert in Wichita, which is a three-hour drive. I drove to hear her, and her boyfriend rode with me, so I had ample time to bond with the lad.
Now, some fathers might face this prospect with dread (and some lads as well). But we had a very nice time. He struck me as a thoughtful, caring, mature young man.
One comment he made stood out in particular. He was telling me about a youth mission trip to Mexico that he went on, and how he was struck by the poverty there. And he said ...
"Those people are just so thankful for things that we'd complain about not being good enough."
Wow. Would that I had had that insight at 18. Would that all those who bought more house than they could afford had had that insight, however old they are.
My wife and I were watching the E*Trade baby ad the other night - the one that first aired during the Super Bowl, where the baby, captured on webcam, is talking about E*Trade. (You may or may not be aware that E*Trade was the poorest-performing stock in the S&P 500 last year.) He clicks his mouse, buys a stock, says, "Whoa - I just bought stock," then spits up. (That always cracks me up.) And my clever wife looks at me and says, "Maybe he just bought E*Trade." Just keep 'em coming, babe. You're my muse.
*****
This week we learned that mortgage foreclosures and delinquencies are at record levels. Who'da thunk it? The conventional wisdom has always been that the home loan was the last debt a borrower would default on. But that was before we started making loans to people who should have remained renters. With plummeting real estate values, once people see they own less than they owe, they're just dropping the keys in the mailbox and walking away, thinking, "Why make payments on a house that's worth less than the balance?"
Exacerbating this problem is the fact that these people thought real estate would go up forever (like the fools who thought tech would go up forever back in '99). Now that they see it ain't so, they don't want to be homeowners anymore.
And lest anyone's been drinking Hillary's (and, to be fair, many others') "this-problem-was-caused-by-predatory-lenders-taking-advantage-of-honest-hardworking-Americans-who-just-wanted-a-piece-of-the-American-dream-so-the-best-option-is-to-freeze-their-rates" kool-aid, consider this. Accompanying the forecosure data was a comment by an economist for the organization that published the numbers:
"We're seeing people give up even before they get to the (rate) reset because they couldn't afford the home in the first place." (Emphasis added.)
Sorry. I do not feel sorry for those people, not one iota. The American dream, insofar as it pertains to home ownership, is a roof over one's head. It doesn't have to be an Italian slate roof, topping an expanse of 4,000 square feet.
*****
Related note: now, increasing numbers of Americans are saying the mortgage is the first thing they'll default on. Why? The answers are frightening: "I need my car to get to work to make money to make my other debt payments, and I need my credit card to buy groceries, but I can live anywhere." Wow. I guess nobody cares about equity anymore. I just hope my daughter's not stuck supporting these people in their retirement, when they find they have nothing. It's a brave new world.
*****
Five-year TIPS (Treasury Inflation-Protected Securities) have a negative yield these days. What does that mean? First, I'll define TIPS. Then, I'll explain.
TIPS were introduced a few years back to help investors hedge against (or bet on; always remember that one man's hedge is another man's bet) inflation. Traditionally, investors would just buy or sell straight Treasury notes and bonds, and the difference between their yield and the inflation rate was deemed their "real," or inflation-adjusted, rate of return.
The rate of interest TIPS pay is lower than regular Treasuries. But, unlike the vanilla version, TIPS don't pay a fixed principal amount. Instead, their principal can go up or down based on changes in the Consumer Price Index, or CPI. When inflation is higher, the principal goes up more. In the event of deflation, the principal can go down. TIPS still pay principal at maturity, but the Treasury pays you the CPI-adjusted principal amount, not what you bought. And, each semi-annual interest payment is based on the prevailing principal balance and the interest rate.
So what does a negative yield on five-year TIPS mean? Does the investor pay the Treasury interest? Not quite. Yield is a function of the interest rate a bond pays, and its current price relative to "par," or 100% of the amount originally bought. So you still receive interest, but the traders have basically bid the price of the TIPS you own up to a level where the premium you pay over par wipes out the interest you're going to get over the bond's life.
Why would the traders do that? It's simple, as Ross Perot used to say. TIPS traders - the inflation-bettors of the bond world - are betting that inflation's going to take off to the point where they're not getting paid for the inflation risk. Hence the negative yield on TIPS.
The moral of the story: there is significant inflation risk in our economy right now, especially with Fed Chairman Ben Bernanke (who's a pansy, by the way) throwing money on the problem, like so much gas on a fire.
*****
Speaking of gas - fill 'er up - quick! Oil's trading over $106 a barrel today.
*****
And speaking of the Fed, and inflation, and mortgages ... well, mortgage rates keep going up even as the Fed pushes short-term rates down. Why? Two reasons.
First, traders and buyers of long-term assets, like mortgages and the ten-year Treasuries they're priced off of, are concerned about the future purchasing power of their investments. When the Fed's throwing money at the economy, their concern is that future inflation will be higher. This is due in part to the fear that all that easy money will overheat the economy and people will go on a borrowing and buying rampage that will increase demand for everything, thus bidding prices up.
And if that sounds familiar, it's because that's what happened in real estate after Bernanke's predecessor, Alan Greenspan, practically gave money away for a year, keeping the Fed funds target at a ridiculously low 1.00% much longer than he needed to.
So, long-term Treasury traders and originators of mortgages, concerned over the future purchasing power of the dollars in their investments, are keeping rates high to ensure they're compensated for future inflation.
The second reason for higher mortgage rates is that, with rising foreclosures, and given the brave new world of attitudes about responsibility for debt, lenders are realizing that risk is still underpriced in the mortgage market. That's why spreads on mortgage-backed bonds (the yield they offer relative to the yield on Treasuries, which are supposedly risk-free) widened about 50 basis points, or half a percent, in three days this week.
The bottom line: the Fed can ease all they want, but mortgage rates are staying put. That means the subprime crisis continues unabated, and the Fed just tanks the dollar and fuels inflation with their careless easing.
*****
In a story related to the widening of mortgage spreads, a couple of comments by traders and money managers indicate just how ugly this is getting: the markets are "utterly unhinged," and "Everything is telling you the financial system is broken," and "The Fed can't really save the mortgage market." I've been playing in the world of mortgage-backed bonds since their early days, in the 1980s, and I've never seen anything remotely like this.
*****
Two signs of the times: first, I got a postcard in the mail from a local realtor, offering a $500 discount off the commish if I listed my house for sale. Things must be getting pretty bad. (By the way, the Kansas City market isn't nearly as volatile as places like Vegas, Florida and SoCal, so if things are getting bad here, they're really ugly in those spots. I also know of two area real estate partnerships that folded recently, and that's just anecdotally.)
Second, even CNBC is now lambasting the Fed for its easy money policy, with a story headlined, "Fed's Rate Cuts May Do Long-Term Dollar Damage." Yeah, no kidding. But this is the same network that loves a rally and will start any rumor to spark one, the network whose poster boy, Jim Cramer, likes to scream at Ben Bernanke on-air, "Mr. Chairman! Cut the rate! Cut the rate!" What does Jim care if we inflate another bubble? To him, it's just a buying opportunity. He won't starve when it bursts.
*****
I leave you with this final story. My daughter, who plays the viola, was selected to the Kansas State Orchestra, and last weekend they played their concert in Wichita, which is a three-hour drive. I drove to hear her, and her boyfriend rode with me, so I had ample time to bond with the lad.
Now, some fathers might face this prospect with dread (and some lads as well). But we had a very nice time. He struck me as a thoughtful, caring, mature young man.
One comment he made stood out in particular. He was telling me about a youth mission trip to Mexico that he went on, and how he was struck by the poverty there. And he said ...
"Those people are just so thankful for things that we'd complain about not being good enough."
Wow. Would that I had had that insight at 18. Would that all those who bought more house than they could afford had had that insight, however old they are.
Charlie Crist for President
I watched the Florida governor, Charlie Crist, last night on Chris Matthews' show, and I was impressed. I'd never really been exposed to him before, other than during the Florida primaries when he stumped for McCain. But his performance last night was masterful.
The discussion centered on Hillary's bid to make the Florida and Michigan primaries count. Now that she has "momentum," she apparently wants to avoid the good voters in those two states becoming disenfranchised (read: "In spite of my 'momentum,' I only picked up a net three delegates on Obama. Crying isn't working any more, being nasty isn't working so hot either, and Bill - don't get me started on Bill. So I've gotta do something, and quick!).
Never mind the fact that nobody campaigned in those states, and Obama wasn't even on the ballot in Michigan. Hillary won both (like I win when I play myself in checkers), so now she wants them to count.
There are several options. One, tell them tough cookies - you didn't play by the rules, the DNC made its decision, so the votes don't count. But that seems so ... undemocratic (at least to Hillary it does). Two, split the delegates according to how the voters voted. But Hillary doesn't like that either; she only beat Obama 50% to 33% in Florida, and she only beat "undecided" in Michigan (where supporters of Obama and Edwards, who was also left off the ballot there, were encouraged to vote "undecided") by a 55-40 margin. Bottom line: Hillary would pick up less than 40 delegates on Obama.
Another option is to just seat all the delegates at the convention and let them vote their will. Nobody likes that one, because then any state could violate its party's primary or caucus rules, then demand to be seated.
The last option is a good old schoolyard do-over. The biggest problem is that it would cost about $25 million or so to do it. And that raises questions as to who's going to pay. (As an aside, Obama doesn't like this one either, as he's apparently been drinking the "Hillary's got the momentum" kool-aid. Note to Barack: you're 13-3 in the last sixteen contests, and you've been the front-runner all along. Just keep doing what you've been doing, and you're golden.)
Back to who would pay for a re-vote. Michigan and Florida can't afford it. Florida's taking a bath from the housing melt-down, and so - to a slightly lesser extent - is Michigan. The latter state is also suffering from the growing slump in the US factory sector. Both face lower tax revenues this year, both from property taxes and individual and corporate income taxes. And Florida may have to bail out a state investment fund that made some bad subprime bets.
The DNC could pay for it, but good old Howard Dean ("Yeeeaaaahhhh!!!!") is thus far resisting. The candidates could pay - Lord knows they can raise the dough - but all the money they've raised, they've already spent.
Now, Charlie Crist first got dragged into this thing when some Dems accused him of orchestrating the violation of the DNC's rules, when Florida moved up its primaries to an earlier date. Give me a break. If a Republican governor had done something to sabotage the Democratic primary in his state, don't you think somebody would have cried foul back then? Don't you think the Florida Dems would have gone howling to Howard Dean (no pun intended) then, instead of coming up with this vast right-wing conspiracy theory now?
So, Charlie finds himself being interviewed by Chris Matthews (whose fawning manner, and that annoying little drool thing he's got going, are pretty annoying sometimes). And he reminded me of Babe Ruth. He pointed to his spot over the wall, and then knocked the ball flat out of the park.
He said the voters of Florida shouldn't be disenfranchised, Democrat or Republican, and cited his constitutional duty to lobby on their behalf for their votes to count. He also pointed out that his state couldn't be expected to pay for a re-vote, especially given the current economic environment (plus, imagine the Florida Republican taxpayers' reaction to having to foot the bill for a Democratic blunder).
So why do I view this as knocking the ball out of the park? What makes it a brilliant performance, a political coup de grace?
Let's use an investment analogy. Sometimes, instead of buying into a market, you just want to be long or short volatility in that market. Charlie, a Republican, doesn't want to put his money on Obama or Clinton necessarily. But his party benefits from volatility among the Democrats. The nastier this mess gets, the better for the GOP. And Charlie can contribute to the volatility, while looking like a bi-partisan champion of his constituents' constitutional rights.
Matthews was clever enough to spot this, and basically asked Charlie what he had to say to anyone who would accuse him of having that ulterior motive. And Charlie - with a disarming sincerity - deftly deflected the parry, placing the whole thing in the lap of the Democrats by noting that Florida Senator Bill Nelson, whom he called "my friend," a Democrat and Hillary supporter, felt the same way, as did Democrat and Michigan Governor Jennifer Granholm. And, he reminded Chris that he has a constitutional obligation to represent his constituents' constitutional rights, as the governor of all the people of Florida, regardless of party affiliation. As my daughter's boyfriend often says, "Sweet."
As for the volatility argument, Karl Rove noted that all this attention on the Democrats could work to McCain's disadvantage, in that he'd fade out of the limelight while the Dems duke it out. In making that point, Rove said that sometimes even bad press is good, as long as it's press. Tell that to Gary Hart. Nobody remembers who beat him after the Donna Rice debacle. But we all remember Gary, Donna, the name of the boat, the island they sailed to, the jeans company Donna went on to model for ... you get the idea. Yet the other guy won. And a "W" trumps media attention, every time.
The latest rumor is that Charlie is on McCain's VP short list (which McCain denies having at this point, to which I raise the BS flag). After watching him set up not just one of his opposition-party candidates, not just both, but the entire party, I can only say that he'd be a very good pick.
Now, pass the popcorn.
The discussion centered on Hillary's bid to make the Florida and Michigan primaries count. Now that she has "momentum," she apparently wants to avoid the good voters in those two states becoming disenfranchised (read: "In spite of my 'momentum,' I only picked up a net three delegates on Obama. Crying isn't working any more, being nasty isn't working so hot either, and Bill - don't get me started on Bill. So I've gotta do something, and quick!).
Never mind the fact that nobody campaigned in those states, and Obama wasn't even on the ballot in Michigan. Hillary won both (like I win when I play myself in checkers), so now she wants them to count.
There are several options. One, tell them tough cookies - you didn't play by the rules, the DNC made its decision, so the votes don't count. But that seems so ... undemocratic (at least to Hillary it does). Two, split the delegates according to how the voters voted. But Hillary doesn't like that either; she only beat Obama 50% to 33% in Florida, and she only beat "undecided" in Michigan (where supporters of Obama and Edwards, who was also left off the ballot there, were encouraged to vote "undecided") by a 55-40 margin. Bottom line: Hillary would pick up less than 40 delegates on Obama.
Another option is to just seat all the delegates at the convention and let them vote their will. Nobody likes that one, because then any state could violate its party's primary or caucus rules, then demand to be seated.
The last option is a good old schoolyard do-over. The biggest problem is that it would cost about $25 million or so to do it. And that raises questions as to who's going to pay. (As an aside, Obama doesn't like this one either, as he's apparently been drinking the "Hillary's got the momentum" kool-aid. Note to Barack: you're 13-3 in the last sixteen contests, and you've been the front-runner all along. Just keep doing what you've been doing, and you're golden.)
Back to who would pay for a re-vote. Michigan and Florida can't afford it. Florida's taking a bath from the housing melt-down, and so - to a slightly lesser extent - is Michigan. The latter state is also suffering from the growing slump in the US factory sector. Both face lower tax revenues this year, both from property taxes and individual and corporate income taxes. And Florida may have to bail out a state investment fund that made some bad subprime bets.
The DNC could pay for it, but good old Howard Dean ("Yeeeaaaahhhh!!!!") is thus far resisting. The candidates could pay - Lord knows they can raise the dough - but all the money they've raised, they've already spent.
Now, Charlie Crist first got dragged into this thing when some Dems accused him of orchestrating the violation of the DNC's rules, when Florida moved up its primaries to an earlier date. Give me a break. If a Republican governor had done something to sabotage the Democratic primary in his state, don't you think somebody would have cried foul back then? Don't you think the Florida Dems would have gone howling to Howard Dean (no pun intended) then, instead of coming up with this vast right-wing conspiracy theory now?
So, Charlie finds himself being interviewed by Chris Matthews (whose fawning manner, and that annoying little drool thing he's got going, are pretty annoying sometimes). And he reminded me of Babe Ruth. He pointed to his spot over the wall, and then knocked the ball flat out of the park.
He said the voters of Florida shouldn't be disenfranchised, Democrat or Republican, and cited his constitutional duty to lobby on their behalf for their votes to count. He also pointed out that his state couldn't be expected to pay for a re-vote, especially given the current economic environment (plus, imagine the Florida Republican taxpayers' reaction to having to foot the bill for a Democratic blunder).
So why do I view this as knocking the ball out of the park? What makes it a brilliant performance, a political coup de grace?
Let's use an investment analogy. Sometimes, instead of buying into a market, you just want to be long or short volatility in that market. Charlie, a Republican, doesn't want to put his money on Obama or Clinton necessarily. But his party benefits from volatility among the Democrats. The nastier this mess gets, the better for the GOP. And Charlie can contribute to the volatility, while looking like a bi-partisan champion of his constituents' constitutional rights.
Matthews was clever enough to spot this, and basically asked Charlie what he had to say to anyone who would accuse him of having that ulterior motive. And Charlie - with a disarming sincerity - deftly deflected the parry, placing the whole thing in the lap of the Democrats by noting that Florida Senator Bill Nelson, whom he called "my friend," a Democrat and Hillary supporter, felt the same way, as did Democrat and Michigan Governor Jennifer Granholm. And, he reminded Chris that he has a constitutional obligation to represent his constituents' constitutional rights, as the governor of all the people of Florida, regardless of party affiliation. As my daughter's boyfriend often says, "Sweet."
As for the volatility argument, Karl Rove noted that all this attention on the Democrats could work to McCain's disadvantage, in that he'd fade out of the limelight while the Dems duke it out. In making that point, Rove said that sometimes even bad press is good, as long as it's press. Tell that to Gary Hart. Nobody remembers who beat him after the Donna Rice debacle. But we all remember Gary, Donna, the name of the boat, the island they sailed to, the jeans company Donna went on to model for ... you get the idea. Yet the other guy won. And a "W" trumps media attention, every time.
The latest rumor is that Charlie is on McCain's VP short list (which McCain denies having at this point, to which I raise the BS flag). After watching him set up not just one of his opposition-party candidates, not just both, but the entire party, I can only say that he'd be a very good pick.
Now, pass the popcorn.
Wednesday, March 5, 2008
Trading on Emotion
I'm beginning to think one has to be bi-polar to be a stock trader these days. Oil hits a new record high, and the entire market rallies, led by Exxon. Never mind that record-high oil is bad for the economy overall. These days, the market is clearly trading on emotion, and looking for reasons to rally.
Tuesday of this week was proof of that, as stocks fell early in the day, with the Dow tanking as much as 200 points, until a late-day rally brought things back near Monday's close. The initial drop came as Fed Chairman Ben Bernanke (who is a pansy, by the way) told a group of community bankers that they should forgive a portion of their subprime borrowers' loan balances (I'll rant on that stupid idea later). Apparently, the market was concerned that doing so would hurt banks' profits, as they'd have to write down the loans.
Silly traders. Unless someone holds a gun to their collective head, bankers will do no such thing. So of course the market came back late in the day. Another thing that's been moving the market of late is the on-again, off-again mysterious Ambac rescue plan. CNBC first broke the rumor that a group of banks was working to bail out Ambac on Friday, February 22. The rumor sent stocks soaring in a late-day rally that saw the Dow climb nearly 100 points.
(Detour for the uninitiated: Ambac is the second-largest of the so-called monoline insurers. These companies traditionally provide insurance to issuers of municipal bonds, like your local school district or water district. That enables the issuer to get a triple-A credit rating, which in turn means they can issue debt at a lower cost. Their bonds keep that rating as long as the insurer is rated triple-A.
Trouble is, Ambac and its fellow monolines got greedy as the housing bubble inflated, and they started insuring subprime mortgage-backed bonds, at much higher premiums. When the bonds started to default, the insurers' losses were much more than they had anticipated, because - like everybody else - they mispriced the risk in subprime paper. Those losses are threatening the monolines' credit ratings, and if they all get downgraded - one already has been by one rating agency - so will the bonds they insure, which could trigger financial armageddon. In fact, one segment of the municipal bond market has already imploded, resulting in higher issuance costs for state and local governments. Bottom line: the markets would really like to see the monolines avoid a downgrade.)
Now, back to the Ambac rumor. Last week, CNBC said the plan had faltered, and we all saw where stocks ended the week. Then, this morning, after seeing the threat of a 200-point drop yesterday, CNBC leaks a rumor that the talks have resumed. But this afternoon, lo and behold, Ambac announces that it's going to attempt to issue $1.5 billion in stock. The market doesn't like the idea. Why? Because, while it would infuse much-needed capital into Ambac, who wants to buy Ambac stock? And is $1.5 billion enough to contain the additional subprime write-downs that are guaranteed to come?
So, the rally that had begun early in the day (on higher oil prices, again; in spite of morning economic reports that showed a possible second straight monthly decline in jobs, higher labor costs, and weaker factory orders) fizzled. At one point, the Dow was down about 75 points, after having been up as much as 115. But late in the day, it rebounded to close up 41 points.
Why? "After four down days, we had to take a rest from all that selling," one investment manager said. Oh. Okay.
Another thing that had fueled the early rally was the fact that a measure of the health of the service sector of the economy was higher than expected. Last month, when that measure dropped sharply, the market sold off dramatically, as it suggested widespread weakness in the economy (we already knew the factory and construction sectors were in the tank, but the service sector was our last glimmer of hope). So today, when it beat the forecast, that helped stocks - never mind that it was still below its neutral level, which indicates the service sector is contracting.
Herein, dear children, lies an important lesson about economic data, especially about market reactions to it when the actual numbers vary from the consensus forecast of economists. Too often, when a number comes out higher or lower than forecast, the market reaction is based more on the forecast than the absolute level of the number, like this morning, when the number was better than expected, but still indicative of weak economic conditions.
The theory is that the expectations are already priced into the market, but too often they're not. I don't recall the market selling off more when the forecast for the service sector gauge came out, for example. Yet we rally when the forecast is beat. But - and here's the lesson - what does it really mean when a number comes in higher or lower than the forecast?
All it means is that the forecast was wrong. In other words, a bunch of economists couldn't accurately predict what was going to happen. And this comes as a surprise? Look, the numbers are what they are. It's the forecast that's fungible. A weak number is a bad thing, and a strong one is a good thing, generally speaking. Bad forecasts are a given.
Back to stock trading and emotion. I recently came across a graphic that depicts relative levels of investor optimism, on a curve that looks like the letter S turned on its side, and backwards. The starting point is "Optimism," then the curve progresses upward through "Excitement," "Thrill," and "Euphoria," where it peaks. The decline passes steadily through "Anxiety," "Denial," "Fear," "Desperation," "Panic," "Capitulation," and "Despondency," where it bottoms out before rebounding through "Depression," "Hope," and "Relief," finally returning to "Optimism," at the same level where the curve began.
The interesting thing about this is not the progression itself, which is somewhat intuitive: sort of like Elisabeth Kubler-Ross' Five Stages of Grief. What's interesting is that the money managers who came up with the curve identified the point of maximum financial risk as the peak at "Euphoria," and the point of maximum financial opportunity as the trough between "Despondency" and "Depression."
In other words, when the market's riskiest, we're most euphoric about it, hopping on the rapidly-inflating bubble (or fast-moving train might be a better analogy) just before it bursts. Conversely, at the absolute best time to get into the market, we're so morose that we've finally cashed out and put what's left of our fortune in a shoe box in the closet.
The way stocks are trading right now, I'd say the market's firmly entrenched in Denial. Things are bad. They're going to get worse. But we'll find any excuse to manufacture a rally.
Tuesday of this week was proof of that, as stocks fell early in the day, with the Dow tanking as much as 200 points, until a late-day rally brought things back near Monday's close. The initial drop came as Fed Chairman Ben Bernanke (who is a pansy, by the way) told a group of community bankers that they should forgive a portion of their subprime borrowers' loan balances (I'll rant on that stupid idea later). Apparently, the market was concerned that doing so would hurt banks' profits, as they'd have to write down the loans.
Silly traders. Unless someone holds a gun to their collective head, bankers will do no such thing. So of course the market came back late in the day. Another thing that's been moving the market of late is the on-again, off-again mysterious Ambac rescue plan. CNBC first broke the rumor that a group of banks was working to bail out Ambac on Friday, February 22. The rumor sent stocks soaring in a late-day rally that saw the Dow climb nearly 100 points.
(Detour for the uninitiated: Ambac is the second-largest of the so-called monoline insurers. These companies traditionally provide insurance to issuers of municipal bonds, like your local school district or water district. That enables the issuer to get a triple-A credit rating, which in turn means they can issue debt at a lower cost. Their bonds keep that rating as long as the insurer is rated triple-A.
Trouble is, Ambac and its fellow monolines got greedy as the housing bubble inflated, and they started insuring subprime mortgage-backed bonds, at much higher premiums. When the bonds started to default, the insurers' losses were much more than they had anticipated, because - like everybody else - they mispriced the risk in subprime paper. Those losses are threatening the monolines' credit ratings, and if they all get downgraded - one already has been by one rating agency - so will the bonds they insure, which could trigger financial armageddon. In fact, one segment of the municipal bond market has already imploded, resulting in higher issuance costs for state and local governments. Bottom line: the markets would really like to see the monolines avoid a downgrade.)
Now, back to the Ambac rumor. Last week, CNBC said the plan had faltered, and we all saw where stocks ended the week. Then, this morning, after seeing the threat of a 200-point drop yesterday, CNBC leaks a rumor that the talks have resumed. But this afternoon, lo and behold, Ambac announces that it's going to attempt to issue $1.5 billion in stock. The market doesn't like the idea. Why? Because, while it would infuse much-needed capital into Ambac, who wants to buy Ambac stock? And is $1.5 billion enough to contain the additional subprime write-downs that are guaranteed to come?
So, the rally that had begun early in the day (on higher oil prices, again; in spite of morning economic reports that showed a possible second straight monthly decline in jobs, higher labor costs, and weaker factory orders) fizzled. At one point, the Dow was down about 75 points, after having been up as much as 115. But late in the day, it rebounded to close up 41 points.
Why? "After four down days, we had to take a rest from all that selling," one investment manager said. Oh. Okay.
Another thing that had fueled the early rally was the fact that a measure of the health of the service sector of the economy was higher than expected. Last month, when that measure dropped sharply, the market sold off dramatically, as it suggested widespread weakness in the economy (we already knew the factory and construction sectors were in the tank, but the service sector was our last glimmer of hope). So today, when it beat the forecast, that helped stocks - never mind that it was still below its neutral level, which indicates the service sector is contracting.
Herein, dear children, lies an important lesson about economic data, especially about market reactions to it when the actual numbers vary from the consensus forecast of economists. Too often, when a number comes out higher or lower than forecast, the market reaction is based more on the forecast than the absolute level of the number, like this morning, when the number was better than expected, but still indicative of weak economic conditions.
The theory is that the expectations are already priced into the market, but too often they're not. I don't recall the market selling off more when the forecast for the service sector gauge came out, for example. Yet we rally when the forecast is beat. But - and here's the lesson - what does it really mean when a number comes in higher or lower than the forecast?
All it means is that the forecast was wrong. In other words, a bunch of economists couldn't accurately predict what was going to happen. And this comes as a surprise? Look, the numbers are what they are. It's the forecast that's fungible. A weak number is a bad thing, and a strong one is a good thing, generally speaking. Bad forecasts are a given.
Back to stock trading and emotion. I recently came across a graphic that depicts relative levels of investor optimism, on a curve that looks like the letter S turned on its side, and backwards. The starting point is "Optimism," then the curve progresses upward through "Excitement," "Thrill," and "Euphoria," where it peaks. The decline passes steadily through "Anxiety," "Denial," "Fear," "Desperation," "Panic," "Capitulation," and "Despondency," where it bottoms out before rebounding through "Depression," "Hope," and "Relief," finally returning to "Optimism," at the same level where the curve began.
The interesting thing about this is not the progression itself, which is somewhat intuitive: sort of like Elisabeth Kubler-Ross' Five Stages of Grief. What's interesting is that the money managers who came up with the curve identified the point of maximum financial risk as the peak at "Euphoria," and the point of maximum financial opportunity as the trough between "Despondency" and "Depression."
In other words, when the market's riskiest, we're most euphoric about it, hopping on the rapidly-inflating bubble (or fast-moving train might be a better analogy) just before it bursts. Conversely, at the absolute best time to get into the market, we're so morose that we've finally cashed out and put what's left of our fortune in a shoe box in the closet.
The way stocks are trading right now, I'd say the market's firmly entrenched in Denial. Things are bad. They're going to get worse. But we'll find any excuse to manufacture a rally.
Hillary: Between Barack and a Hard Place
First, please pardon my long hiatus from posting - it's been a crazy couple of weeks, but there's been plenty to talk about, so I hope to catch up.
Second, credit my clever wife with the title of this post, which she came up with a couple of weeks ago. But even with Hillary's Ohio and Texas* wins, it still holds. (There's an asterisk next to "Texas" because it now appears that Obama's votes in the caucuses in that state, which came in late, have pretty much negated Hillary's win in the primaries there.)
To wit: Hillary has resumed her argument that Michigan and Florida should count, once again lobbying to change the rules in the second half of the game (Obama should just yell, "Scoreboard! Scoreboard!"). And she's jawboning the superdelegates as well, saying they should vote to reflect how the voters in their states would have voted if they had known then what they know now: "New questions are being raised, new challenges are being put to my opponent. Superdelegates are supposed to take all that information on board and they are supposed to be exercising the judgment that people would have exercised if this information and challenges had been available several months ago." Huh?? (This, of course, assumes that the average voter is exercising judgment when he or she votes anyway.)
In fact, Hillary's such a good lobbyist, I'm beginning to think that's her true calling anyway. She should think about that - she'd get to stay in Washington, and she'd make a lot more money. Of course, she'd miss out on those taxpayer-funded perks and junkets, and on the opportunity to swipe more of the White House china. Plus, she wouldn't get to sit in that big chair in the Oval Office (the one her husband sat in when ... ahhh, never mind).
She has other skills a lobbyist needs, like the ability to connect with her prey - er, audience. When she was stumping in Ft. Worth, Texas, I noticed she dropped her "g's": "... givin' a speech ... missin' in action ... runnin' for the Senate ..." It was reminiscent of when she suddenly developed a Southern accent while speaking at an Alabama church. Or conjured up tears in a coffee shop full of women.
Then, in an Ohio speech (the "g's" were back for this one), the meter and rhythm of her phrasing sounded exactly like Obama's, as though her handlers sat her down and said, "Okay, Hill, people are responding favorably to Obama's speeches, so let's break them down, and see if you can't copy the style ... maybe you'll lull the voters into thinking they're hearing his message."
As for her content, one of her Ohio speeches just before the primary attempted to deflect the idea that she's almost out of the race: "I'm just getting warmed up!" My thought was, "Yeah, just like a Thanksgiving turkey - and before long you'll be 'done'". Even her supporters are copying Obama's campaign. At her victory speech in Ohio, the Hill-raisers were chanting "Yes she will!", echoing the Obama camp's ubiquitous "Yes we can!" cheer. I agree; yes, she will ... do anything, say anything, to get elected.
Now, on to Obama. I recently re-connected with an old friend, one with whom I used to have many a political conversation. He made an excellent point. Noting that Obama boasts of having grown up poor, raised by a single mother and his grandparents, put himself through school, worked hard, pulled himself up by his bootstraps, as it were, became successful, and then shared his success by using his time and talents to help others less fortunate than himself.
My friend's point was that Obama's living proof that the American Way works, and that his story is more reminiscent of the traditional conservative view of providing opportunity and leaving it up to the individual to make the most of it, versus the less conservative view that holds that the government should provide for our needs. If the current system is working for guys like Obama, why all the calls for change?
As for McCain ... I just can't get over the whole Keating Five thing. For those of you that don't recall, Charles Keating, primary owner of a big S&L in Arizona called Lincoln Savings, was doing more shady things than you could shake a stick at back in the S&L crisis days. The regulators began investigating Charlie, who was a big campaign contributor to McCain and four other Congressmen. Said Congressmen called the regulators on the carpet and told them to lay off the investigation. They didn't, Lincoln went belly-up, and Charlie did some time. It's just hard for me to imagine that McCain wouldn't still practice the time-(dis)honored Washington tradition of doing favors for any special interest that greases his palm.
So, what's a voter to do? Close your eyes and push a button. Then go home and cringe.
Second, credit my clever wife with the title of this post, which she came up with a couple of weeks ago. But even with Hillary's Ohio and Texas* wins, it still holds. (There's an asterisk next to "Texas" because it now appears that Obama's votes in the caucuses in that state, which came in late, have pretty much negated Hillary's win in the primaries there.)
To wit: Hillary has resumed her argument that Michigan and Florida should count, once again lobbying to change the rules in the second half of the game (Obama should just yell, "Scoreboard! Scoreboard!"). And she's jawboning the superdelegates as well, saying they should vote to reflect how the voters in their states would have voted if they had known then what they know now: "New questions are being raised, new challenges are being put to my opponent. Superdelegates are supposed to take all that information on board and they are supposed to be exercising the judgment that people would have exercised if this information and challenges had been available several months ago." Huh?? (This, of course, assumes that the average voter is exercising judgment when he or she votes anyway.)
In fact, Hillary's such a good lobbyist, I'm beginning to think that's her true calling anyway. She should think about that - she'd get to stay in Washington, and she'd make a lot more money. Of course, she'd miss out on those taxpayer-funded perks and junkets, and on the opportunity to swipe more of the White House china. Plus, she wouldn't get to sit in that big chair in the Oval Office (the one her husband sat in when ... ahhh, never mind).
She has other skills a lobbyist needs, like the ability to connect with her prey - er, audience. When she was stumping in Ft. Worth, Texas, I noticed she dropped her "g's": "... givin' a speech ... missin' in action ... runnin' for the Senate ..." It was reminiscent of when she suddenly developed a Southern accent while speaking at an Alabama church. Or conjured up tears in a coffee shop full of women.
Then, in an Ohio speech (the "g's" were back for this one), the meter and rhythm of her phrasing sounded exactly like Obama's, as though her handlers sat her down and said, "Okay, Hill, people are responding favorably to Obama's speeches, so let's break them down, and see if you can't copy the style ... maybe you'll lull the voters into thinking they're hearing his message."
As for her content, one of her Ohio speeches just before the primary attempted to deflect the idea that she's almost out of the race: "I'm just getting warmed up!" My thought was, "Yeah, just like a Thanksgiving turkey - and before long you'll be 'done'". Even her supporters are copying Obama's campaign. At her victory speech in Ohio, the Hill-raisers were chanting "Yes she will!", echoing the Obama camp's ubiquitous "Yes we can!" cheer. I agree; yes, she will ... do anything, say anything, to get elected.
Now, on to Obama. I recently re-connected with an old friend, one with whom I used to have many a political conversation. He made an excellent point. Noting that Obama boasts of having grown up poor, raised by a single mother and his grandparents, put himself through school, worked hard, pulled himself up by his bootstraps, as it were, became successful, and then shared his success by using his time and talents to help others less fortunate than himself.
My friend's point was that Obama's living proof that the American Way works, and that his story is more reminiscent of the traditional conservative view of providing opportunity and leaving it up to the individual to make the most of it, versus the less conservative view that holds that the government should provide for our needs. If the current system is working for guys like Obama, why all the calls for change?
As for McCain ... I just can't get over the whole Keating Five thing. For those of you that don't recall, Charles Keating, primary owner of a big S&L in Arizona called Lincoln Savings, was doing more shady things than you could shake a stick at back in the S&L crisis days. The regulators began investigating Charlie, who was a big campaign contributor to McCain and four other Congressmen. Said Congressmen called the regulators on the carpet and told them to lay off the investigation. They didn't, Lincoln went belly-up, and Charlie did some time. It's just hard for me to imagine that McCain wouldn't still practice the time-(dis)honored Washington tradition of doing favors for any special interest that greases his palm.
So, what's a voter to do? Close your eyes and push a button. Then go home and cringe.
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