September 2008

One. Just one stock in the S&P 500 was up today [9/29/08]. And guess which one it was? Campbell Soup (CPB). Talk about a bomb shelter stock!


I think we all know the story of Cassandra in Greek Mythology… where Cassandra could see the future, but no one would believe her.

While I read John Mauldin’s weekly email this morning, I couldn’t help but think back to the many dire warnings that Mauldin had back when “the music was playing” and everyone was convinced there was little wrong in the world of high finance.

A friend asked me a couple months ago, “didn’t anyone see the current situation coming?” My answer was, yes, more than a handful of people warned about everything that has been happening… and they were all laughed out of the room; they were dismissed as crazies…

Mauldin’s true bent is not that of perma-bear… but rather that of contrarian. When the music was playing, he pointed out the dangers. Now that the dangers are front-and-center, he cites where the markets have gotten too pessimistic. In the process, he makes a few comments that I feel compelled to write about. The comment that struck most loudly was this:

Again, the US government is the only entity with enough size and patience to act. We do not have to bail out Wall Street. They will still take large losses on their securities, just not as large a loss as they are now facing in a credit market that is frozen. As noted above, there are many securities that are being marked down and sold far below a rational price.

I certainly don’t want to be running a business, market, or industry in such a way that the US Federal Government is the only hope for long-term success. Maybe everyone else has more faith in government and congress than I do…

Where are we now? A $700 Billion Federal Government Stabilization Plan (pronounced: Bailout) is required to keep the entire country from falling into economic ruin. I would argue that if there was even a 1% chance that this situation would be reached — we have serious shortcomings in that industry, and we need regulation and rules to keep it from happening (in contrast, instead of 1%, the current situation was pretty much inevitable). And if that’s the point we’re at now, we’re better off starting a new set of banks with this money than bailing out the current ones who created such a clusterfuck (that one word truly describes the inter-connected nature of the current situation).

[Sidenote: Incidentally, more than a few of the rules actually were in place, such as a 12-to-1 maximum leverage ratio… and that rule was waived for 5 wall street firms on a special exemption so they could lever up to 30 and 40-to-1.]

Quite frankly, I find it shocking that Mauldin is standing up for so many who made mistakes that he forewarned of, yet their excuse is “everyone else was doing it,” and “I wouldn’t have made my quarterly numbers” (and that includes the ratings agencies). No wonder no one but the US Government has the patience to act — we’ve trained everyone to think short term, and the current government bailout would only re-enforce this bad conditioning.

As to the rationality of pricing these assets… if Mauldin thinks they are so irrationally priced, why doesn’t he act? Why doesn’t he put his money (and the many hedge funds who he works with) to work? If those buyers avoid leverage, then they have very little at risk, according to Mauldin’s logic. Ah, I made two critical assumptions in that rhetorical statement… that anyone in the investment world can avoid the siren song of leverage, and that Mauldin’s logic is correct that pricing is irrational.

Maybe Mauldin has forgotten one of his own points, in a secular bear market, ratios get compressed… he made the point when talking about stock P/E ratios falling in a decade-long trend, but why wouldn’t it apply to the returns on an investment like the tranched mortgage paper as well? Investors would expect to see higher returns in the future, rather than lower returns…

This other quote from Mauldin is also telling…

The average voter? They will see stock market investments off another 25% at the least. Home prices will go down even more.

I guess that a perpetually rising stock market and home price should be added to the entitlements that the US government (or more specifically, our politicians) want to guarantee to the US public. I recognize Mauldin is writing an open letter to a politician, and that is what resonates… but I for one, am disgusted that those in favor of the bailout to cite further declines in the stock market and house prices as rationale and motivation for the bailout. Stocks will stop falling on their own accord; house prices will stop falling when they are affordable again. No government bailout will allow us to skip the corrections in price that are required.

Let me try and have my own little Cassandra prediction… the bailout will be passed, maybe even tomorrow. And the markets bounce, maybe even for a month or two. Everything that Still-President Bush warned of in his speech the other night (failing banks, stock market falling, retirement accounts falling, home values continuing to fall, foreclosures continuing to rise, and more expensive credit for businesses and farmers) still happens. But, luckily, the elections will be over by then… And by then, all the politicians who spend other people’s money on bailouts will either have their job renewed, or it will be someone else’s problem.

But now, I don’t have all of Cassandra’s problems… after all, in mythology, Cassandra didn’t have her own brokerage account. I’m positioned for a bounce, but I also don’t think the bear market is over.

As someone with Georgist sympathies, that’s too bad.

I don’t normally get political here so I’ll just say that if you happen to be suspicious of this bailout stuff, you might want to check out this site which is both an analysis and a petition that you can sign if you want to tell the people in charge just where they can stick it. Not that I have an opinion, mind you. Surely not.

What does this have to do with the free market? As Kevin?Carson?likes to say, if this is the free market, then I’m against it. Of course, it is not the free market. The free market is a profit and loss system void of privilege. When businesses fail, they are supposed to actually fail, not turn to the taxpayers. What we really have is (state or political) capitalism, corporatism, or fascism. An essential characteristic of this system is that while profits are private, losses are socialized, i.e., ultimately covered by the mass of people without political clout.

It is worth making an aside here. When the banks actually run out of money they can?t lend. Asset prices depend critically on the ability to borrow against them (and that includes the price of current mortgages in the secondary market). When the banks can?t lend asset prices can fall to very low ? indeed insanely low levels. At the height of the crisis some 2 bedroom apartments walking distance from the centre of Oslo (one of the richest cities in the world) and with full 180 degree fjord views traded hands for USD15000. You would have easily made 30 times your money buying those properties. Property prices can fall to very low levels without any bank lending. Indeed the ability to borrow to buy assets is often crucial in maintaining their prices?

…from this article on the Norwegian financial crisis. Credit-based inflation…an idea at the same time obvious?(once you are made aware) and profound. The implications of this for the idea of wealth, poverty and the understand of value are bone-chilling. Or am I making too much of it?

As the Fed and Treasury announce yet another solution to all our problems, this graphic is making the rounds


My opinions are many and varied… banning short selling is a witch hunt, the likes of which remind me of the scene in Monty Python… only instead of being a comedy, it’s the politically charged sound bite of the day.

As a heads up, and as if we needed more reasons to be bearish… the Baltic Dry Index (BDI) is breaking down to new lows for the year

The BDI is a good indicator to follow as a barometer of economic health, so seeing it drop is generally not a good sign. If you like Mish’s blog, you can read more about it with his analysis of the situation.

This has been available for a while, but I hadn’t noticed it until now… but Google’s online spreadsheet program supports having live stock prices put directly into the spreadsheets for you… Great for a quick analysis or for some easy sharing…

Google’s Docs are not as powerful as Excel, but you could always export to Excel for heavier number crunching if you need to…

Two news articles worth mention broke so far over the weekend…

Paulson Plans to Bring Fannie, Freddie Under Government Control (Bloomberg):

Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control, seeking to halt the crisis of confidence in the companies that make up almost half the U.S. mortgage market.

Paulson met with Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac CEO Richard Syron yesterday to tell them of the decision to put the companies into a conservatorship, where they would be removed from their jobs, according to a person briefed on the discussions. A public announcement is expected this weekend, the person said.

My take on the news? They need to get rid of more than just the CEOs if our tax money is going to be used to restructure the companies.

And another medium-sized bank has been closed by the FDIC (Bloomberg):

Silver State Bank of Henderson, Nevada was closed by U.S. regulators, the 11th bank to collapse this year amid a surge in soured real-estate loans stemming from the worst housing slump since the Depression.

Silver State, with $2 billion in assets and $1.7 billion in deposits, was shut by the Nevada Financial Institutions Division and the Federal Deposit Insurance Corp., the FDIC said yesterday in a statement.

The FDIC has continued it’s game of closing banks on Friday after the banks are closed. With $2b in assets, Silver State is certainly not small.