March 5, 2009
Our President, the Stock Tout
The President on Tuesday told citizens of the world that stocks in the United States were a bargain. He said and I quote "the P/E ratio, the profit to earnings ratios are low." He was, I think, referring to P/E ratios used by everyone that stand for "prices to earnings." It was a breathtaking error born of ignorance. He is, by his own admission, not well-informed about market mechanics and has consistently, for over two years, disparaged capital markets and capital market traders and financiers. Moreover, since his tepid endorsement the market has dropped significantly. His statement is reminiscent of the famous claims by President Hoover in 1930 and President Roosevelt in 1935 that the market declines were over. Presidents ought to stay out of the market prediction business, especially when they know little and do not care to figure it out correctly in light of their other aims and goals.
March 4, 2009
Lessons on Markets from the Chinese
China announced a $560B stimulus plan and our market went up 200 points on the Dow. When President Obama passed a $780 B plan our market dropped like a rock. We need, apparently, to take some lessons on capitalism from the Chinese.
The Fed's TALF Program: Another Surprise in the Details
The Fed announced the details of its new $1T TALF lending program yesterday. It was another unpleasant surprise. The Fed is acting as a prime broker (investment banker) for private investment funds (hedge funds), in essence, for free. Here is how it works. The Fed loans money to hedge funds who use the money to leverage purchases of the AAA tranche of asset backed securities from SPV pools of assets. The backing will encourage other investors to buy other tranches, will give SPVs money to buy income producing assets (loans) from originators who will then be encouraged to place loans with consumers who will then buy on credit from American manufacturers. Several problems: 1) Who will buy the "junk" tranches? 2) Consumers are credit wary. 3) The Fed is, very quietly, backing securitization, leverage, and hedge funds, three of the primary targets of Congress and the media. Moreover, hedge funds will make a killing in profits and not share them with the Fed. 4) Obama, in his budge bill, is attempting to impose higher taxes on hedge fund manager's share of the profits ("carried interest"), however. Good golly Miss Molly.
March 2, 2009
New AIG Bailout: A Complex Mess
AIG has lost $61B in the 4th Quarter and the government has responded with another bailout plan. The new plan does two things: First, it corrects a horrible first plan and, second, it dumps in more cash. The new problem is that the new plan is a complex mess. The plan lowers the interest rate AIG must pay on the government's line of credit, offers lines of credit to a variety of AIG subs, and gives up cumulative dividends on the preferred stock the government holds. In exchange the government takes a substantial ownership interest in two of AIGs more profitable subs (and continues to hold a potential 77.9% ownership interest in AIG itself with outstanding warrants). The ownership interest is held in a "trust" with trustees appointed by the Treasury. The government exchanges its Series D Preferred for two new issues of preferred, Series E and Series F and new out of the money warrants ($2.50 strike price). Why the complexity?? To hide the true extent of the bailout (for how much cash are we in??) and to hide the true extent of AIG's problems (will this hold??). In many ways, the AIG bailout is the government's worst of its worst efforts. And it will get worse yet.