E1 Asset Management

How to cope with what’s going on in today’s market.

2008-04-18T08:24:00.003-04:00

The market seems to have spiraled out of control these days. One day, recession fears cause the market to fall; the next day it’s inflation; banks and other financial institutions are posting massive losses; the Federal Reserve has had to find a way to bail out Bear Stearns, while at the same time home prices continue to fall, and foreclosures hit an all time high.

The Fed has been cutting interest rates to battle recession, at the same time oil continues to hit a new high causing gas prices to soar. On top of that, we are experiencing stagflation which has not happened since the 1970’s. So what are we supposed to do in times like this?

First of all, don’t panic! It’s natural to want to sell everything and walk away in times like this - some people have. This is causes a greater chance, of losing on your investments. If you take this route and you do decide to invest again, the market may go up to new highs and you miss out on all of the profits that could have been gained. Before you make any decisions, make sure you weigh out all of the pros and cons.

Next, don’t be afraid to open your account statement. There is a saying, “What you don’t know can’t hurt you”. This is the one time you do need to know at all times what is going on. This way you can make an informed decision on what to keep and what to change in your account. If you don’t pay attention with what’s going on with your investments, you could possibly suffer major losses.

Now that you know what is going on in your account, the next step is to ask yourself how much risk you are willing to take. Be sure to be honest with yourself, and to your advisor. Invest in a way that makes you feel comfortable. Just remember that a high risk does not necessarily mean a high reward or a better gain.

In the next coming months I believe the market will continue to have some wild swings. With the presidential elections around the corner, interest rates dropping, and home prices slipping, this may cause some uncertainty in the market. If you have any questions about your account, or what’s going on in the market, make sure you contact your advisor with any questions.

Farewell Chris Post !!!

2008-01-10T11:28:00.001-05:00

Farewell Chris Post !!!

The main contributor to the E1 Blog, Christian Post, is no longer with E1.

We wish Chris best of luck in his new career.

We want to thank Chris for his efforts in building the blog and in maintaining it over the years. We will continue his initial work, so look out for updates.

Thank You

2007-12-21T15:17:00.000-05:00

George Orwell once wrote that “Good people sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.”

Today, we have troops stationed around the globe doing their part in a conflict unlike any this world has ever seen. Our enemies don’t wear uniforms, don’t observe rules of engagement and have probably never heard of the Geneva Convention.

We debate whether “water-boarding” an illegal combatant for 5 to 30 seconds is torture. Our enemies have no compunction drilling kneecaps, skinning people alive or beheading them on camera.

Think about that for a second. Really let it sink in. Understand the physical, emotional and mental stress of providing that umbrella of security we all take for granted. It is an unimaginable risk to many why someone would choose such a path—but to those who serve, their mission and purpose could not be clearer.

The point is, do not our troops or their service for granted. It is easy when the battle is half a world away to forget that the many sacrifices that are made are to protect us here. Especially now that the surge has produced quantifiable results (mainly a huge drop in casualties across the board) it’s not as “newsworthy” to our media and coverage has dwindled.

What I propose is simple:

If you see someone in uniform, say “thank you.” If you run into them at a bar, buy them a drink. It doesn’t matter if you are for or against the war, its called gratitude. Without the service of our brave men and women—this country would certainly cease to exist and our constitution would be nothing more than the dream of an idealist wandering around the city of brotherly love.

I quote Zell Miller’s speech from the RNC one more time:

Never in the history of the world has any soldier sacrificed more for the freedom and liberty of total strangers than the American soldier. And, our soldiers don't just give freedom abroad; they preserve it for us here at home.

For it has been said so truthfully that it is the soldier, not the reporter, who has given us the freedom of the press. It is the soldier, not the poet, who has given us freedom of speech.

It is the soldier, not the agitator, who has given us the freedom to protest.

It is the soldier who salutes the flag, serves beneath the flag, whose coffin is draped by the flag, who gives that protester the freedom to abuse and burn that flag.

There are many organizations like “The Soldier’s Angels” and “Wounded Warrior Project” that are always looking for new volunteers, resources and whatever contributions can be made, no matter how small or insignificant it may seem.

Thank you and God Bless America.

Merry Christmas Murdoch

2007-12-19T08:48:00.001-05:00

The FCC voted today to relax the cross-media ownership rule, allowing organizations to house both newspaper and broadcast media entities.

After inheriting a small Australian (his native home) newspaper in 1952, Mr. Murdoch has amassed quite an empire, even referred to as a mogul by competitors and peers alike. After dipping his toe in the print trade, he has aggressively leveraged his business acumen to form one of the largest media conglomerates in the world—even becoming a US citizen in 1980 to gain entrance to television and arguably the single largest information marketplace in the world at the time.

Despite running into legislative difficulties from a rider enacted by a famous Senator from Massachusetts that ended an exemption allowing Murdoch to simultaneously own a newspaper and TV station in the same state, Murdoch persevered—and his News Corp. empire exploded.

To see the real extent of the FCC’s change in policy, here is a list of publications under the News Corp. umbrella:

Australia

Major newspapers:

The Australian (Based in Sydney, national circulation)

The Weekend Australian

The Daily Telegraph (Sydney)

The Sunday Telegraph (Sunday edition of The Daily Telegraph)

Cumberland Newspaper Group (20 titles in Sydney suburbs)

The Mercury (Hobart, Tasmania)

The Sunday Tasmanian (Sunday edition of The Mercury)

Derwent Valley Gazette (Tasmania)

Herald Sun (Melbourne, Victoria)

Sunday Herald Sun

The Courier Mail (Brisbane, Queensland)

The Sunday Mail (Brisbane)

Quest Community Newspapers (17 titles in Brisbane suburbs) [1]
The Gold Coast Bulletin (Queensland)
Townsville Bulletin (Townsville, Queensland)
North Queensland Newspaper Group [2]

The Advertiser (Adelaide, South Australia)

The Sunday Times (Perth and Western Australia region)

Centralian Advocate (Alice Springs, Northern Territory)
Northern Territory News (Darwin, Northern Territory)

Sunday Territorian

Leader Community Newspapers [3]
Cairns Post Group (42%)
Sportsman

United Kingdom:

The Sun (National)
The Times (National)
News of the World (National)
Thelondonpaper (Central London)

...

United States of America:

The New York Post

Link: http://www.answers.com/topic/list-of-newspapers-owned-by-rupert-murdoch

If print wasn’t enough for you, take a gander at News Corps’ broadcast, periodical and other content holdings:

Film

Twentieth Century Fox
Twentieth Century Fox Español
Twentieth Century Fox International
Twentieth Century Fox Television
Fox Searchlight Pictures
Fox Studios Australia
Fox Studios Baja
Fox Studios Los Angeles
Fox Television Studios

Television

BSkyB
The DirecTV Group
Fox Broadcasting Company
Fox Sports Australia
Fox Television Stations
Foxtel
Star Group Limited
Sky Latin America
Sky Television Italy
Latvijas Neatkarīgā Televīzija
TV5 Rīga

Cable

Fox Movie Channel
Fox News Channel
Fox Soccer Channel
Fox Sports Channel
Fox Sports Enterprises
Fox Sports en Español
Fox Sports Net
Fuel TV
FX Networks
National Geographic Channel
Speed Channel
Turner South
LAPTV (Latin America - co-owned with Paramount Pictures/Viacom, Metro-Goldwyn-Mayer/MGM Holdings and Universal Studios/NBC Universal)
Telecine (Brazil - co-owned with Globosat Canais, Paramount Pictures, Metro-Goldwyn-Mayer, Universal Studios and DreamWorks/Viacom);

Magazines and Inserts

InsideOut
donna hay
News America Marketing
SmartSource
The Weekly Standard
Gemstar

Link: http://www.answers.com/topic/list-of-assets-owned-by-news-corporation

I have no position on private ownership of media outlets, provided they are PRIVATE.

However, I would question the effectiveness of the FCC and invoke the words of a great President, whom once quipped that the scariest ten words in the English language are “Hi, I’m from the government and I’m here to help.”

More than Something Blew Up

2007-12-03T10:50:00.001-05:00

When it comes to interest rates, the old adage says that “the Fed raises rates until something blows up.” In fairness to Bernanke and co., the FOMC have reduced interest rates (arguably too late) but true to the old adage, something blew up. In this case it wasn’t a company, it was an entire asset class and those companies involved with it, even peripherally.

The “Sub-prime Crisis” is not easy to explain or decipher. The bottom line is that banks and others (mortgage lenders) extended credit to borrowers (homeowners), allowing them to buy their “dream homes.” The problem is that these houses should have remained dreams for these people and never, ever become a reality. Since the banks knew these loans were high risk, they attempted to offset it by pooling these high-risk loans together into pools, thereby selling pieces of these pools as securities, most commonly known as CDO’s or CMO’s.

Because of the buoyancy of the housing market and the high level of interest in participating from financial institutions, these securities were traded, leveraged off of and even repackaged with similar debt to generate trading revenue.

The way it looks now is that this asset class is like a road: many miles long, but only a few inches deep.

Take into account that many homeowners have foreclosed, those whom haven’t face mortgage resets to higher rates in the near future and that many market participants (mortgage brokers, banks and divisions) have gone out of business—liquidity has disappeared and the market for these securities has essentially frozen.

Since the financial markets are global today, it facilitated the spread of this sub-prime contagion into other sectors, mainly the Asset Backed Commercial Paper market. It has also had the obvious consequence of banks adopting stricter lending policies in general, sending borrowing costs sky high, which in turn hurts capital investment and R&D.

Returning to the Federal Reserve, Chairman Bernanke has maintained a position of returning liquidity to the market though firmly renouncing any idea that the FOMC will bail out speculators. Mr. Bernanke has also distanced himself from the response of his predecessor to any liquidity crisis which entailed cutting rates until the problem is solved. Instead, this FOMC (while reducing rates) has indicated it will be more active in the machinations of the bond markets, specifically in REPO’s—allowing institutions that are strapped for liquidity to either visit the Fed’s discount window or pledge their troubled debt as collateral for loans to ease the credit squeeze.
So far, the market has not been thrilled since the last FOMC meeting when it was made public —while the Fed recognized the risks—that the last cut was not supported by all members and further cuts looks unlikely.

Anytime market participants take on the mindset of shooting first and asking questions later, the result usually wind up bringing a scenario that produces the “capitulation” selling that pundits preach will become the basis of a market bottom. Most times the shooting is patently absurd and unnecessary, but took place because policy makers opted to be reactive instead of proactive. One of the many criticisms leveled toward the new Fed head is that he is an academic, with little practical experience.

Since the emergency cut and the many REPO interventions, things have gone from bad to worse in the market. Many of the largest banks and brokers have been forced to take write-downs in the $billions and everyone still feels as though they are looking into an abyss. Until investors are able to get their arms around what the damage is—or unless they are confident that the risks are not overwhelming, money will simply remain on the sidelines.

Nobody wants to own the next Citigroup ($47 down to $31 in 19 days) or the next Countrywide Financial ($17 down to $9 in 17 days) and they are clearly worried these companies will be forced to undertake major layoffs, purchasing cuts and the like that will spread throughout the economy as others follow suit.

More things will “blow up” unless the fed expands the scope of their campaign beyond the REPO market and discount window. Companies like Northern Rock, Bond Insurers like Ambac, the Credit Rating Agencies like Fitch and others will have their financial health put into question unless borrowing costs ease and liquidity returns to the fixed income market.

I understand the Fed is preoccupied with the inflation stemming from high commodities prices but if the entire bond market seizes up and sends the economy tumbling—$95 oil will be an afterthought—regardless of how much China is buying.

Bernanke’s Monetary Flex-cuffs

2007-11-09T10:43:00.000-05:00

Bernanke’s Monetary Flex-cuffs

Are they too tight?

Will the housing market have a knight in shining armor ride to its rescue?

If we use history as a guide, it would be more like 535 bureaucratic clowns, most in bad suits (a few with bow ties- though no economists) riding in environmentally unfriendly SUV’s to the rescue (not to mention those who are frequent no-shows, so more like 300 or so members of the House and Senate).

Treasury Secretary Hank Paulson has been active both behind the scenes (working as a liaison between the White House, Congress, the Fed, and Wall Street. He has also taken initiative working with Brokers to set up a “Super SIV” or Super Structured Investment Vehicle to help restore liquidity to the credit markets, specifically amongst Mortgage-Backed Securities and related entities like CMO’s and CDO’s. Funnily enough, even though this is a “private venture funded with private money, Paulson’s fingerprints are all over it.

Conversely, the FOMC’s (and Federal Reserve’s) hands are tied. Despite several strokes of innovation like boosting liquidity in the credit market via REPO’s, applying a little WD-40 to open the discount window for banks after hiring a cleaning crew to get rid of the cobwebs and also cutting the Fed Funds Rate by 75 basis points (which was preceded by an emergency cut of the discount rate (mirroring their ECB counterpart Jean-Claude Trichet’s move to lend to banks at 4%) to alleviate the crisis.

Sadly to say, Bernanke and the FOMC can do little more. The ramifications of easy money (characterized by lower rates in an economy growing at 4%+) have become visibly apparent and borderline dangerous.

The most obvious result has been the dollar slide, which has boosted commodities prices into an area sure to push inflation higher. $90/ barrel oil, $800 oz Gold and record prices at the pump have returned. The secondary and tertiary effects are not much better. Industrial goods requiring energy and commodities are seeing severe price augmentation along with the cost of transporting and storing these goods that is approaching a spike.

On the positive side, trade imbalances are shrinking as the weakening dollar has benefited exports, which represents a huge slice of GDP.

Two and Done?

2007-11-01T18:08:00.001-04:00

It has been a real whirlwind of economic and financial activity here on Wall Street over the course of the last few months.

As the housing market continued its slide, the paper, bonds and other instruments (CDO’s, CMO’s, PIPE’s, etc.) backing these assets not only followed suit, but plunged and in many cases became totally illiquid. Nobody knew quite how to value them (disturbing especially since many carried ratings of AA or AAA) and bids all but dried up. Combine this with the 125 plus mortgage lenders/brokers that have gone bankrupt since the beginning of the year and you have all the makings of the beginning of a crisis.

Then the problem popped up in Europe, as lenders responded immediately by pulling back from lending and calling in loans. As a result, banks tightened practices globally and the ABCP (Asset Backed Commercial Paper) market seized up in response.

Enter Chairman “Helicopter Ben” Bernanke whom made the (under-utilized and antiquated) discount window available to banks and cut the discount rate 50 bps in between meetings. The FOMC also began conducting operations in the REPO market, essentially allowing banks to use bad paper as collateral for money (in the thought that soon the market would begin functioning).

The Fed then followed up on that with a rate cut during their regularly scheduled meeting and made clear that the risks of the credit market to the economic health of the economy outweighed those of price stability.

From August 16^th (viewed as the end of the world by some) to October 11^th, the S&P 500 and Dow Jones all hit new all-time highs.

Just yesterday, The FOMC followed suit with a second regular meeting cut of the Fed Funds rate, but shifting their language to straddle neutral.

Why?

Since the Fed flooded the market with money, Oil has broken $90/ barrel. Grain, Wheat, Flour and other food commodities logged all time highs. The US Dollar basket managed to set a record low, since they began tracking it in 1974.

Essentially, if inflation was under control before (which most believe it was), the FOMC’s actions have risked exacerbating further price inflation.

I don’t know that the Fed’s approach is right; then again I am not an economist. It seems that oil is the price stability bugaboo, and the Fed’s actions while certainly have contributed, are not the driver. New U.S. proposed sanctions on Iran, Turkey invading Northern Iraq and the insatiable quest for resources in Asia are far more culpable in pushing energy higher.

In fact if you look at the last two EIA Oil Inventory reports, analysts were expecting builds in oil stocks. That is stupid. If you were Exxon, Chevron, BP or some other oil Giant—would you build supply at $93/barrel or would you sell it on the spot market for cash, mitigating the risk of future price action lower? It is a no-brainer.

Interest Rate Hawks will say that how can the Fed cut the FF Rate 75 bps when the labor markets are tight, job creation is firm and GDP remains buoyant (3%+ last two quarters)?

The answer is simple. The data they cite already happened. The FOMC and Federal Reserve need to be focused on the future, because as it stands today this trend is unlikely to continue. There is no evidence to suggest the housing market has stabilized and that banks like CITI, UBS and Bear (just to name a few) are through taking these monster write-downs on bad loans—ones not confined to the sub-prime sector.

Look to the future

Federal Reserve Open Market Committee

2007-10-11T10:28:00.001-04:00

Federal Reserve Open Market Committee

(FOMC) Releases "Minutes" from most recent meeting

Before you actually go through the headlines, this is my take on the data (if you are interested):

I read this as a positive development for both equities and the housing market (as the FOMC moves away from fighting inflation and toward maintaining liquid, orderly markets to ensure solid economic growth).

While Friday's strong employment report was not available at the time of their meeting-- the downward trend in job creation and the quality of the jobs being created leave a lot to be desired. Seasonal factors (Teachers returning from summer break to School and more conducive Weather toward construction) also likely contributed to the upward revisions from months prior.

The Fed has the complicated task of further shoring up the credit markets from additional volatility and prepare for the potential for additional debt-related crises (both the ABCP- Asset Backed Commercial Paper and Mortgage-Backed Securities markets are still on shaky footing), all the while labor markets remain extremely tight (4.7% unemployment) and food/ energy prices (mainly wheat and crude oil) continue to hover near record levels.

(In my opinion) The brightest spot of all is the Fed's confidence that inflation will remain in check, giving them the wiggle room they so desperately need to head off any potential shocks to the economy, allowing the free market's invisible hand to emerge and remind investors that there has been little damage to the strong economic underpinnings that has paved the way the for the 5 year Bull Market underway.

-C. Post

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Here are the headlines as they appeared on the Newswire (The Full Story follows):

( DJ ) 10/09 02:00PM *DJ FOMC: 'All' Fed Members Agreed To 50BP Sep Rate Cut

( DJ ) 10/09 02:00PM *DJ FOMC: Rate Cut Won't Affect 'Realistic' Pricing Of Risk

( DJ ) 10/09 02:00PM *DJ FOMC: Future Fed Actions Depend On Economic Outlook

( DJ ) 10/09 02:00PM *DJ FOMC: Econ Outlook Uncertain, Risks To Downside

( DJ ) 10/09 02:00PM *DJ FOMC: Fed Staff Cut '08 GDP, Core PCE Forecasts

( DJ ) 10/09 02:00PM *DJ FOMC: Staff Sees Above-Trend GDP Growth In '09

( DJ ) 10/09 02:00PM *DJ FOMC: 'A Little More Confident' On Sustained Inflation Drop

( DJ ) 10/09 02:00PM *DJ FOMC: Housing Remained 'Exceptionally Weak'

( DJ ) 10/09 02:00PM *DJ FOMC: Further Employment Slowdown 'Likely'

( DJ ) 10/09 02:00PM *DJ FOMC: Officials Skeptical About Original Aug Payroll Drop

( DJ ) 10/09 02:00PM *DJ FOMC: Inflation Risk If Dollar Keeps Falling 'Significantly'

DJ ) 10/09 02:00PM *DJ FOMC Minutes: Confident Of Sustained Core Inflation Drop

STOCK OF THE WEEK: CISCO SYSTEMS INC

2007-08-27T14:23:00.001-04:00

STOCK OF THE WEEK: CISCO SYSTEMS INC

NASDAQ SYMBOL: CSCO

One of the original “Four Horseman” of the NASDAQ back in the late 1990’s, Cisco rode the information superhighway to a stock price in the stratosphere. Led by the old technology hand John Chambers, whom made his bones at IBM but left a promising career at Wang Computers to join the online revolution and provide the telecom equipment and infrastructure it operates on; he once predicted that Cisco would be (paraphrasing) “the single greatest company in the history of the world.”

Despite presiding over one of the single largest losses in market capitalization in history, John Chambers remains at the helm. His tenure has actually seen CSCO’s revenues soar from just a little over a billion dollars in 1995 to nearly 30 billion today. Sure there was a bubble for which he cannot be blamed however he can take credit for the company emerging out a stronger, leaner operation.

To this day, Cisco remains a bellwether for the technology space and specifically the telecom equipment space. Its rival Juniper has also done well but enjoys a value of 1/10 of Cisco’s market cap. Cisco also continues to make savvy acquisitions which have boosted its presence in both the enterprise markets and inside of governmental red tape.

As more municipalities, cities and states create public WI-FI hotspots, Cisco will reap the rewards. It is only a matter of time until the entire country is wireless and by then the stock should have recovered much of what it lost. Also consider that many of the large technology companies caught up in the NASDAQ bubble bursting in 2000 are reporting their best and most profitable numbers today—with sounder balance sheets and better educated global workforces.

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Crisis of Confidence

2007-08-20T10:59:00.000-04:00

Despite the Fed’s best efforts to shore up the credit market, a “crisis of confidence” remains firmly in place. The mortgage space is still horribly illiquid, as lenders are unable to issue new debt via “Asset Backed Commercial Paper (ABCP).”

I firmly believe that until this sector begins to price closer to its actual value, the stock market will be on hold. Presently AAA and AA rated debt is still trading at junk levels—even causing fear amongst money market managers which a handful have expressed fear that they will be unable to meet redemptions, that would likely spread should a run on the bank occur.

Now is the time for lenders and other financial institutions with heavy exposure in the credit markets to become more active. Countrywide Financial was able to secure a line of credit that will essentially fund all operations, meet debt covenants and help maintain liquidity for several months to come. Their predicament came somewhat as a surprise to participants as only a short while earlier the company’s spokesperson made clear their exposure to “sub prime” loans was less than 5% of their overall portfolio. Let this be a lesson to the rest of the sector that they will be unable to meet reserves with some of the same tricks they used for decades, like swaps and such.

Now is the time to liquidate portfolios, lock in credit lines and focus on staving off any dramatic interruptions to their normal business. Thornberg, much like CFC became proactive last week as well, as they were able to sell a loan portfolio over the course of last week for about $20 billion, helping to reduce leverage and free up cash for operations

Purging stupid, aggressive, speculative behavior in the financial sector is simply a function of capitalism. Only companies like those mentioned above with solid balance sheets are going to be able to get the funding they need to continue without declaring chapter 11. The Fed can intervene and cut rates until they are blue in the face but that will not prevent sub par institutions from going belly up.

If the government or central bank were to go ahead with an airline style bail out, that would prevent speculators and the like from learning a much needed lesson, basically guaranteeing we would see the same sort of wanton behavior occur again in another asset class, though unfortunately on a much greater scale likely to take the economy down with it.

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Capitalism, the Federal Reserve and Purging Stupid People

2007-08-17T11:04:00.000-04:00

Capitalism without risk is like religion without sin. Capitalism only works when people respect the risk-reward relationship and have a firm understanding of its ability to purge stupid behavior. A good example of this would be the 2000 market top and subsequent bear market. People that bought internet stocks that were hemorrhaging cash but had a lot of “page views” were annihilated, just the same as certain classes of investors should be subject to today.

First we have the mortgage brokers and lenders, in this case the original sinners. In order to drum up business and capitalize on a booming real estate market they made a lot of really bad decisions. People with $40,000 in income were able to buy million dollar homes (that were not only overvalued), something that is (and should have been) way out of their league. 10, 20 or 50 years ago this was impossible as mortgage companies actually turned people down for loans.

Today the FOMC cut the Discount Rate by 50 bps, left the Fed Funds/ Prime rates alone and basically altered their bias toward the dovish side in reaction to the deterioration in credit and the weakness it will generate. The Fed has also stayed active in the Repo market with an additional $5bil intervention this morning, further attempting to buoy the credit market by adding more liquidity.

It is difficult to be sure whether or not this will work to the satisfaction of the market, or even the bankers themselves. While interest rate adjustments typically take 6-9 months to work their way through the system, the repo activity should be felt first, if and only if lenders pass that on through and ignore the urge to squirrel it away in their reserves above and beyond their minimum maintenance.

I don’t know if the Fed took rates too low in the wake of the 2000 recession and I don’t know if they took rates too high after the economy recovered. What I do know is that the actions of central bankers globally are impacting the risk profiles of market players by mitigating the risks inherent in investing, spurring perhaps an even bigger flood of cheap money into the next asset class looking for funding.

Much like the breakthrough visit to China by the US in the 1970’s, President Nixon and Henry Kissinger met with their counterparts on the mainland. During an icebreaker conversation Kissinger asked Premier Chou Enlai what he thought about the French Revolution. Enlai responded, “too soon to tell.”

Gentle Ben and the “Greenspan Put”

2007-08-13T15:15:00.000-04:00

Since Black Monday in 1987 when the market went down 22% in a single day, Wall Street has become accustomed to a proactive, sometimes aggressive Central Bank. Greenspan was responsible for defusing many disasters-in-the-making (and downright carnage during 9-11), namely the Asian Crisis, Long Term Capital, and Russian crisis; with some deft words and proclivity toward intervention.

While Greenspan did provide lots of liquidity via the Repo market in the days following September 11^th, his vehicle of choice for calming down the street was interest rates—often lowering them dramatically—even sometimes unscheduled. Many people confused this as a sign that the Federal Reserve would bail out the markets which may have led to the speculative excesses that brought on the March 2000 market top and subsequent burst of the bubble.

As a result, the extra liquidity swishing around the system seemed to fuel other asset classes, this time in real estate and the bond market (which financed the real estate boom). It almost seems like it’s a big game of “Whack-a-Mole” trying to seek out the next area of froth in the economy.

Chairman Ben Bernanke is not a likely candidate to adhere to the actions of his predecessor. For one, he appears to be far more preoccupied with inflation, which is more in line with the intended (sic) mandate of the Federal Reserve of maintaining price stability. Low inflation is an idyllic setting for a strong economy, but as we have seen— can be difficult to achieve during a war-time economy that is fueling a commodities boom.

Whilst Greenspan presided over an economy underpinned by the service sector, bolstered by huge gains in productivity and supply chain improvement; the Bernanke economy has its roots in manufacturing. The Energy sector represents the largest share of the S&P 500 that is has in nearly 50 years while minerals, transportation and engineering companies have provided the infrastructure for this economy.

Greenspan’s tenure was by in large a peaceful one; although it did extend to 9-11, Afghanistan and the beginning of the Iraq War. The 1990-2000 Bull Market was built upon the “Peace Dividend,” following the end of the Cold War and a relatively quiet decade geopolitically. The United States today is engaged in a two-front war militarily and faces a whole new layer of threats from rogue states like Iran, North Korea, and even possibly Pakistan (as President Musharraf faces a growing internal threat fueled by radical fundamentalists).

Different times call for different measures. The credit market crunch does pose a very real threat to the economy, though cutting rates isn’t necessarily the answer. The government or its central bank shouldn’t be bailing out anybody in a capitalist society, let alone speculators. What the Fed needs to do is send a message to the market that risky behavior will be met with consequences, not a safety net. In many ways, the Fed is responsible for today’s situation as taking rates down to 2.5% after 9-11 created a ton of cheap money, much of which became principal in the sub prime market.

In addition, labor markets are extremely tight and commodities prices are still sky high. Cutting rates now will only help push the dollar even lower, thereby increasing the prices of things like unleaded gasoline, milk and corn for consumers. This will unfairly punish people for the actions of mortgage lenders, hedge funds, commercial banks and others involved in the sub prime home giveaway at the center of the controversy. As it stands, many cattle farmers cannot afford to fatten their animals up with feed and have instead looked to other sources to make up the difference. And where does that cost get made up? Of course the farmers aren’t going to eat it all themselves so they pass it on to the wholesale level.

Consumers are also spending the most money on staples (as a % of their budget) that they have in 30 years. Dairy, vegetable, energy and travel prices are aptly shrinking discretionary dollars from Joe Six-pack, forcing him to conserve. Conservation destroys demand and eventually will lead to an inventory build, decline in output, or both. Either way what you will have is a contraction in the economy. Two consecutive quarters of contraction and you have yourself a recession.

So if the Fed knows what is best for our economy and prosperity, it will not bail out another speculative excess. We cannot allow traders to push markets to the brink of extinction by looking the other way while they are running it up and then providing a cushion for the fall. President Bush understands that we need to let markets correct. Natural market forces will not be deterred; intervening will only put off the inevitable for another day.

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The Human Condition

2007-07-31T14:47:00.000-04:00

Of all the verbiage and meaningless words, terms and expressions that have come to define the English language, I cannot think of a more annoyingly useless one than “human condition.”

If there was an example of anti-Euclidean expressionist propaganda permeating our culture, this is it. The PC (politically correct) crowd loves it, therefore it must be wrong.

The Chairman of the Board, aka Whitey Ford, said in a recent interview in one of the New York papers that his idol growing up was Joe DiMaggio. The first game he attended at the polo fields he witnessed the Yankee Clipper go 1-6 with a home run and 5 long fly outs, which Whitey estimated to be in the neighborhood of 380 feet based on the 400ft wall in the outfield.

Fast forward a few years after Whitey had transitioned from a batter to a pitcher and had the luxury of watching Joltin’ Joe up close, at you guessed it, a remodeled Polo Fields. As Whitey made his way onto the diamond from the outfield he realized had his first glimpse of DiMaggio been at the present, he would have gone 6 for 6 with 6 home runs, as the newly designed field had considerable shortened the distance to the outfield stands.

This story could have a lot to do with the “human condition,” or nothing at all—depending on whether you see the world as it is or what you want to see. You can go into any situation looking for something and inevitably find it, if you look hard enough. The author of The Black Swan, Nassim Taleb challenges us to look for issues, items, ideas, etc. that refute our opinions and color our bias. Because the stock market exists in “Extremistan” and not “Mediocristan,” anything can happen, literally (you have to read his book(s) because you owe it to yourself to understand the link between randomness and the market, or markets).

The point is that the benchmarks are always changing and in reality Joe DiMaggio did go 1-6 that day.

If you apply this to the market you must understand that what is going on now is not Long Term Capital, the Russian Crisis, Asian Crisis or a bubble. Sure history does repeat itself but it is clever enough not to let us know until it is too late. This particular sub prime problem is not going to chart its course according the preceding disasters—if it is “disaster” at all. Odds are that the transparency of the US financial infrastructure—namely banks and lenders, not to mention the actual borrowers have given us more than a window into what is to come. In addition, the fail-safe mechanisms put in place by congress, FDIC, SIPC and the Federal Reserve (as well as all of the guidance the Fed has provided to the governing bodies in order to prevent a meltdown) are not in vain. While Taleb would argue that anything is possible (I don’t argue with his premise), look for data (thanks Euclid) that contradicts a financial blow up. There is plenty out there, starting with the economy, the global acceleration of free trade, the consumption of China and India, etc.

If starting now: the carry trade does come to an end, banks literally shut off the credit spigot and a major financial player does go under then I will write the MLB a letter imploring them to go back through the history books and tack 5 more home runs on DiMaggio’s career total. But as of right now, as much as I love and revere Joe for everything he was—a gentleman, athlete and role model, he went he flew out 5 times.

Needless to say, the human condition is salaciously juicy, sparse and funny.

CLICK TO ENLARGE

Why, Why, Why?

2007-07-26T14:14:00.000-04:00

Why, Why, Why?

And

The CNBC Indicator

One of the flavors in the Tropical Fruits roll of Lifesavers has a fishy aftertaste. While I am curious as to what flavor and why, this is not the point of today’s column. As I write, the Dow Industrials have rebounded from a session low down 315 points up to being down only 238. Lots of people have been asking me why, so I thought I would share my thoughts with the 7 people that read this column.

The debt market is a crazy place, especially when tens (maybe hundreds) of thousands of people are getting ready to pay the piper for the extravagant dwellings usually known as homes. Remember no money down mortgages? Trust me, these people will never forget. Right now they are being presented with their first stab at principal and you guessed it, they cannot afford it. So they will do what anyone does that is in way over their head without any chance of paying their debt off—file for Chapter 11 Bankruptcy protection.

Not so fast.

One of the legacies of the republican majority in congress is their successful attempt to pre-empt people from simply filing for Chapter 11, a process akin to the speed, service and overall experience of going to the DMV. Sure it’s annoying but in the end; after clutching onto your numbered ticket until you are called by a bureaucrat focused more on their game of solitaire on their PC as opposed to helping you change your address.

To file now is not easy as you must not only go through paperwork and sit before a judge; you need good faith on your side. A person making $45,000 a year with no other form of income or a substantial asset base has no business buying a 2 million dollar house. While this logic may differ from the expertise of the mortgage brokers at New Century, Nova star and Countrywide Financial—it’s just plain stupid.

In other words, there are no guarantees Chapter 11 is in your future and you may well face other consequences of the lack of prudence by all parties involved.

So now these mortgage lenders are sitting on a lot of bad loans, many of which they financed through lines of credit (some secured, some not) from banks and other lending institutions. Banks then took said loans and pooled them together and then proceeded to issue separate securities like CMO’s (Collateralized Mortgage Obligations) and other instruments designed to offset their risk.

Enter Hedge Funds, traders and other institutions eager to play the housing market. They bought these securities, in many cases packaging them together—a few AA rated, some BBB’s a few junk; even using a “PIPE” (Private Investment in Public Equity) or Structured Pipe in passing these on to other funds and whomever was looking for exposure. In many circumstances buyers knew they were buying a package of trouble debt with the hopes that if one lender made good on their bonds that it would be a windfall. Sounds like a good strategy to me….

Let’s take a case study of the two Bear Stearn’s funds that went under. To my knowledge, they began as a $3 billion investment, opened to accredited investors. While the market was booming, it supposedly went up to $6 billion. One of the fund’s strategy, might I add, was supposedly investing in high grade debt or investment grade. When New Century went bust and BSC investors saw the wave of panic heading toward them they opted to withdraw their money from the funds.

Not so fast.

In order to sell something, you need a buyer. In the case of these structured debt investments liquidity was not their strong suit, to say they are illiquid is an understatement. Then take into account that word had leaked (via the WSJ I believe) of the dire straits these funds were entering. Just as in the ocean, when there is blood in the water on Wall Street the sharks tend to show up and in numbers. The BSC fund managers could not unload their portfolios for anything resembling a fair price while the counterparties knew they had no choice but to sell. As I am sure you figured out, these funds have both closed and once again (to my knowledge) they are worth nothing.

If the story ended here it would be bad, but not necessary capable of sounding a death knell for lenders and large banks. Guess what? It doesn’t end here.

Long Term Capital may seem like a long time ago, but the lessons should last a lifetime—especially the part about leverage and how a few eggheads almost took down the global economy using said leverage, along with derivatives.

Derivatives are dangerous, especially because for all intents and purposes, they have no value. Banks may think they have value, or a value; but they don’t. Derivatives can be designed to hedge an investment (think like selling a covered call) or to leverage a “long” or “short” position in order to profit more from small moves in a market. The big problem is that nobody really knows how to value them. Fischer Black and Myron Scholes were pretty sure they knew how to find fair value. Turns out they didn’t and it didn’t turn out too well.

Anyway, this is the markets fear. People default on mortgage lenders, mortgage lenders unable to pay back banks, banks sell securities (and buy) to other funds etc. and large swaths of the economy either tighten lending requirements so much it doesn’t allow capital to flow where it is needed (even legitimately sound investments) or lenders go under.

My take is simple—stay away from anything involving real estate, financial services or anything the average person reaches into his pocket to pay for, especially if he uses a credit card. Why? Because soon the other shoe will invariably drop. I know bears have been predicting this since the market crashed in 2000, but the real estate sector has far more reaching consequences for the average Joe than the stock market.

Finally, let me address the CNBC indicator. Whenever CNBC takes it upon themselves to explain an investment and/or how to do it to their audience is used by some as a contrarian indicator. For instance, when CNBC starts trotting out guests that are bearish and then follow up the segment detailing how to go about shorting a stock, contrarians take this to be a signal to go long.

The reason I bring this up is because this is exactly what happened during lunchtime. Bob Pisani, their reporter from the floor of the NYSE explained the mechanics of a short sale to his audience. He also mentioned several ETF’s (Exchange Traded Funds) that make bearish bets against the market, so you can basically purchase an instrument that is betting against indexes or sectors going higher. In short, you make money when stocks go down.

Bull Market End?

2007-07-23T13:06:00.000-04:00

Much of the reason behind the U.S. Bull market over the past 5 years has been the strength of the global economy and a very weak U.S. dollar. In fact, earnings from blue chip Dow member Caterpillar (CAT) late last week were a very nice summation of what cyclical stocks will be facing in the coming quarters: flat domestic orders, increase in foreign orders. Free trade has been a boon for our economy.

Democrats feel that this is wrong and that America should take a more “protectionist” approach toward international economic affairs. They fear the outflow of manufacturing labor to China and India (as well as smaller, lesser-known havens like Cambodia) has hurt the country (Edwards and his “two Americas” talk) and more importantly, they have lost a strong voter base in the process: organized labor.

The Wall Street Journal reported a few weeks back that many of the software jobs (engineers and designers) that moved to Bangalore are now commanding salaries of approximately $75,000 (US) which is on par with earnings here, leading to a repatriation of sorts by returning those jobs to Silicon Valley. This should come as no surprise to free traders, as efficient markets operate efficiently only when a lack of intervention applies. There is no doubt that a similar effect will occur as China continues to move toward the free-flotation of the Yuan, dulling the impetus of American companies to seek lower wages abroad to manufacture their products.

The point I am making is that regulation and over-regulation are bad. Look at how the U.S. has ceded its investment banking and financial services advantage through the introduction of Sarbanes-Oxley. It is no coincidence that smaller and middle size corporations simply cannot afford to take their companies public at home because they are unable to maintain compliance with the act, leading to a loss of share to London which is benefiting from a buoyant banking sector.

Recently Treasury Secretary Hank Paulson commissioned several different studies to scale back some of Sarbox’s most tedious rules and regulations and reopen our capital markets to the private sector, some of which have already been implemented. This should not serve to obfuscate politicians and central bankers from their mandate to keep our economy strong, however bent they are on twisting facts.

Wal-Mart, Microsoft and Exxon did not originate as global behemoths; nor did Blackstone, SAC Capital and many other funds. There are no two Americas, no matter how catchy it sounds. There is only one and we are all affected.

If protectionism returns, coupled with the expiration of the “Bush Tax Cuts” and the addition of the “Blackstone Bill,” our economy will be on the rocks. I can only speculate at this point since the President has a remaining 18 months in office and he has promised to veto any tax increases that reach his desk. As his term in office draws to a close and if it looks likely that any of the three front-running democrats (Clinton, Obama and Edwards) will beat their opponent in the general election, it may be an infection point for the market and a damn good time to rebalance your portfolio.

CLICK TO ENLARGE

Murdoch Industrial Average Hits 14000

2007-07-18T10:15:00.000-04:00

Not only did the Dow Industrials break 14000 yesterday and set another record high, but the Dow Theorists out there will be eager to point out that the Transportation Average confirmed the move. As Matthew McConaughey would say, “alright, alright, alright—patience darling, there is a fiesta in the making.” Not exactly Aerosmith tickets for the summer, but there you go.

CLICK TO ENLARGE

Iraq Update

2007-06-25T10:51:00.000-04:00

As most major news outlets are reporting, there has been an increase in coalition casualties over the weekend. We honor those whom have fallen, been injured and served; righteously for their sacrifice. What is missing here from the press is context. The Multinational Force in Iraq has just began its largest offensive since the initial invasion, aptly titled “Operation Arrowhead Ripper,” for the large element of the 2^nd I.D. or “Arrowhead” division.

John Lennon once wrote/sang “what if there was a war and no one showed up?” Well, allow me to retort: “what if there was a war and no one covered it from up close?”

I know of Michael Yon, an independent journalist who was embedded with the 1-4 Cav. and Stryker Brigades previously, is up close and personal at the TOC now. For the kickoff of Ripper (19^th June), only a reporter from the NY Times was there, with others just getting in on the 22^nd from the LA Times and Time Magazine.

I guess the media really has written General Petreaus’ strategy off as a failure. Yesterday, I came across a quote that struck me as rather fitting:

It appears we have appointed our worst generals to command forces, and our most gifted and brilliant to edit newspapers! In fact, I discovered by reading newspapers that these editor/geniuses plainly saw all my strategic defects from the start, yet failed to inform me until it was too late. Accordingly, I'm readily willing to yield my command to these obviously superior intellects, and I'll, in turn, do my best for the cause by writing editorials - after the fact.

Robert E. Lee, 1863

I am unsure if the summer doldrums will run their course or if:

Iraq returns to dominate headlines, taking focus away from economic/ financial news.

More fallout from Bear Stearn’s sub prime funds continues (and escalates).

Players remain attuned to economic weakness last quarter… is it here to stay?

For now, market remains range-bound with a short term bearish outlook and an intermediate and long term bullish outlook.

CLICK TO ENLARGE

Friedman (Posthumously) on Immigration

2007-06-19T10:46:00.001-04:00

Neither myself, nor anyone really is qualified to put words in the mouth of the greatest economist of all time, however, his words on the effect of businessman as natural opponents of free enterprise provide a useful basis for debunking the myth that undocumented workers are doing “the jobs that Americans just won’t do…”

Not only do I find that platitude incredibly disgusting and blissfully ignorant, it simply doesn’t hold up to a simple analysis.

One of the largest (or perhaps the single largest) driving forces on our side of the border behind the surge of undocumented workers coming to the United States is business and the lure of employment without citizenship and or a work visa. The other obvious reason pushing them on their side (whilst business is pulling) is simply to better their lot in life—the “Horatio Alger Myth,” if you will.

Many economists label humans as capital—simply as a metric that can be quantified. Many economists also agree that along with goods, resources, money, etc.—labor (or humans) should also participate in the free flow of capital. Common sense (in the law of supply and demand) tells us where there is a shortage of supply or an overwhelming amount of demand, resources will be effectively and efficiently allocated to where they are needed most.

Labor intensive businesses require labor, more specifically cheap labor. Once upon a time, they attempted to separate our country for free labor. Since slavery has been abolished, business wants the next best thing—cheap labor; the cheaper the better—which is legitimate, so long as it is legal. If the wages for these positions were dictated by the market, rather than the exploiter of those without the legal documentation to be here—Americans would be doing these jobs also; this is a cold, hard fact.

Not only are the labor conditions many undocumented workers face a clear violation of human rights (in many cases) that harkens back to the days of sweatshops and child labor, but it distinctively does not fit under the penumbra of free enterprise or the American way.

Milton Friedman distinctly wrote the chief opponents of free enterprise are intellectuals and businessmen; for opposite reasons. Rather than paraphrasing, it is best you hear it from the man himself (from Capitalism and Freedom):

“Every intellectual believes in freedom for himself, but he’s
opposed to freedom for others.…He thinks…there ought to be a central planning board that will establish social priorities.…The businessmen are just the opposite—every businessman is in favor of freedom for everybody else, but when it comes to himself that’s a different question. He’s always the special case. He ought to get special privileges from the government, a tariff, this, that, and the other thing…"

This is the true essence of where business; both large and small have gone very wrong on this issue.

Third Gear was Major

2007-06-14T08:57:00.001-04:00

Part I, Background:

I drive a car. In order to do so legally, I have a nice laminated document that fits neatly in my wallet. It has a picture of me (a good one too), my date of birth, an ID number, my name (first, last and middle initial), my current residence, my sex, eye color, height, class of license (I can only operate automobiles, not buses/trucks or heavy machinery), my signature and finally, the dates of issuance/ expiration.

For security reasons it has a hologram in the background, a swipe area in the back and barcode. This particular features are extremely difficult to reproduce and I cannot name any occurrence when this has happened, lest on a large scale.

10 years ago, driver’s licenses from all states lacked many, if not most of these pictures. I recall not too long ago that New Jersey licenses didn’t even have pictures of the operator.

In essence, technology has made a profound impact in our lives and in terms of aiding law enforcement, it has been nothing short of a miracle. If you unsure of the extent of the impact of technology in law enforcement, tune into to an episode of “CSI” or “Law and Order”—while they are TV shows, they have numerous consultants and former law enforcement members on their payrolls as consultants and the like.

I do dare say, despite the waits at the Department of Motor Vehicles, the individual states have done a great job maintaining databases of those enrolled, from the permit holders up to the livery driver, trucker and average commuter.

The logical question would be, “what about non-drivers?”

In every state (while ages vary from 13-18) individuals are required by law to carry picture ID’s on them, (one of which must be Government issued-or recognized as a valid form) AT ALL TIMES, which failure to comply could result in a fine, detention or imprisonment.

In many cases, people simply opt for State ID cards, available through DMV’s in all 50 states and are identical to licenses but clearly state they are merely for identification. These are also issued to those failing to meet the criteria for maintaining a driver’s license, i.e. license suspension or termination.

Another option is a U.S. Passport through the Department of State, which also requires a picture ID, one of which is government issued as well.

For those whom are both citizens and non-citizens and are enlisted in our Armed Services, they are also required to carry identification on them

If you are here as a guest in this country but may be seeking permanent residency, you will also require government approved ID, though it may be a green card or foreign work permit.

Depending on the individual state, hunting licenses, gun permits and other localized forms of ID may also be accountable.

Part II, relationship between Federal and State:

Without a Government issued form of Identification, chaos would ensue on many levels. Obviously the police activity and investigations would grind to a halt. But I have news for you, this will never happen.

Even when illegal/undocumented/etc aliens (whatever you want to call them) cross over and get caught, they identification is ascertained and they are fingerprinted before releasing and deporting them. This is the most far fetched case of literally an unidentified person in our country and we are still able to discover the individual’s name, D.O.B., etc. often through the cooperation of foreign governments and by standard police work.

It seems to me that the states, which act independently in many regards (age of driver’s license, etc.) are still bound to operate within the framework of the guidelines provided by the federal government.

Even as federal crimes take place, mainly those that constitute a particular offense that crosses over state borders—it is the current ID combined with other resources (state license plates, etc.) that lead to the capture and/or prosecution.

Part III, simplicity and necessity:

What could the average individual accomplish for any period of time without a Driver’s License, Passport or State ID card?

The answer is not much.

You could not apply for a job, bank account, mortgage or any of life’s normal activities without proof of your identity. You cannot board a plane. You cannot withdraw money from a bank (and you need ID to get an ATM card). Credit card/ Personal Checks require a photo ID. Basically, think about how many times you show your Identification over the course of a week, it adds up.

Part IV, the “need” for a national ID card:

It simply does not exist. There is far more than enough bureaucratic overlap in the government as it is, not to mention the inefficient and ineffective nature of the federal government as a whole.

Since these cards would invariably fall under the jurisdiction of the Department of Homeland Security, a cursory look at how they have handled “identification matters” gives keen insight for what one could look forward to should they manage this program.

A few key items:

16 of the 9-11 hijackers still are on the Government’s “No Fly List” after being dead for more than 5 years
Zacarias Moussaoui (the 19^th Hijacker in Government custody for 5 years is also on the no fly list.
Saddam Hussein, deposed, tried, convicted and executed in Iraq is also on the list
Many people whose names match or are similar to names found on the list (but are not a threat to commercial aviation) can be detained for hours or even days. Currently, there is no established bona fide process for these people to have their names removed.
In many cases those whom have established they are not the person in question on the list are still not allowed to board their flights
There are currently 75,000 people on the list—a number which we are sadly unprepared to screen and supervise effectively due to a lack of resources.

If Federal Investigators, Border Security agents, Customs Agents at Airports and all those in charge of protecting the populace possess all the same information on a form of Identification that simply says “Alabama,” “California,” “New York,” or “Tennessee” in lieu of “The United States of America” atop the card—how can we expect a superior level of protection as a result?

Many countries already employ National ID Cards (with Biometric features) and have not enjoyed any quantifiable benefit as a result. One poignant example is Spain, which had implemented a countrywide standard was effectively targeted by terrorists in Madrid on March 11^th, 2004. Backpack laden explosives dispersed throughout depots and stops managed to kill 191 people and wound over 2000.

Part V, the impact on civil liberties:

While anyone who knows me would be surprised that I find myself on the same side as any supporter of civil liberties or the ACLU; a National ID Card presents some serious problems.

Among them:

It further centralizes power in the hands of the government, namely the supervising agency and its employees. It also will definitely require the help of the private sector and allow a large amount of information on individuals to be located in one area.
It will also allow for the tracking of individuals, including those not necessarily considered a threat. This coincides with constitutional protection, specifically the “right to privacy:
The claim that it will deter criminal behavior is without merit, as all forms of ID currently employed have failed to do so.
To date, the only countries prior to Spain to employ such a measure have been totalitarian regimes, i.e. the former USSR, Nazi Germany and East Germany

Part VI, Conclusion:

A National ID Card system is a flawed in theory and in practice. Not only does the cost of implementing, operating and maintaining such a system provide a huge hurdle (think trillions of dollars), the practicality and integrity of this program would constantly be under scrutiny from Congress and Advocacy groups.

There is also no study that has effectively demonstrated any benefit above and beyond the current system, which is decentralized and largely run by the individual states.

Finally, the “slippery slope” argument must be made here. What information will be made available upon “swiping” or “scanning” the ID CARD.?

Some questions that inevitably will arise are:

1. Will it include financial information?

2. Will it include Family information—such as marital status, children, etc.?

3. What about detailed medical Information such as current ailments or family history?

I firmly believe the introduction of a National ID Card is a waste of resources that will overlap a system in place that works. While National Security is paramount, putting such a system under a branch of government that is worried about confirmed dead terrorists boarding a plane is not only ineffective, but presents an opportunity for abuse and error. Centralizing the intimate details of an entire country in one virtual location will not only create a new target for terrorists but also a “holy grail for hackers.”

The federal government and taxpayers would be better served to see their current system improved (or even overhauled), as well as a defined process to establish who belongs on the “no fly list” and to give those listed inadvertently a means out.

In closing, President Reagan once opined in his first inaugural address, “Government is not the solution to our problem. Government is the problem.”

SUPREME HEADQUARTERS ALLIED EXPEDITIONARY FORCE

2007-06-06T10:26:00.001-04:00

June 6^th, 2007

From June 6^th, 1944:

SUPREME HEADQUARTERS ALLIED EXPEDITIONARY FORCE

Soldiers, Sailors and Airmen of the Allied Expeditionary Force!

You are about to embark upon the Great Crusade, toward which we have striven these many months. The eyes of the world are upon you. The hopes and prayers of liberty-loving people everywhere march with you. In company with our brave Allies and brothers-in-arms on other Fronts, you will bring about the destruction of the German war machine, the elimination of Nazi tyranny over the oppressed peoples of Europe, and security for ourselves in a free world.

Your task will not be an easy one. Your enemy is well trained, well equipped and battle-hardened. He will fight savagely.

But this is the year 1944! Much has happened since the Nazi triumphs of 1940-41. The United Nations have inflicted upon the Germans great defeats, in open battle, man-to-man. Our air offensive has seriously reduced their strength in the air and their capacity to wage war on the ground. Our Home Fronts have given us an overwhelming superiority in weapons and munitions of war, and placed at our disposal great reserves of trained fighting men. The tide has turned! The free men of the world are marching together to Victory!

I have full confidence in your courage, devotion to duty and skill in battle. We will accept nothing less than full Victory!

Good Luck! And let us all beseech the blessing of Almighty God upon this great and noble undertaking.

Dwight D. Eisenhower

Cool Hand Luke

2007-06-06T08:45:00.001-04:00

Bernanke is sitting on his hands yet again. While the economy oscillates between the upper range of the Fed’s imaginary inflation target and no growth, the ubiquitous central banker to the world opted to continue along the “wait and see path.”

As predicted, in the wake of his broadcast remarks to Cape Town, South Africa; the European Central bank raised rates from 3.75% to 4% this morning.

Morgan Stanley issued a “Triple Sell” warning on European equities for the first time since 2000 and the fifth such signal since the 1980’s. This rating is based largely on the Price-to-Earnings Ratio (PE Ratio) for the continentals reaching a level that is consummate with “frothy.”

Another round in political primaries concluded last night with the GOP debate, following Sunday’s snipe-a-thon between Edwards and Obama amongst the democratic faithful; with Clinton at times being targeted but maintaining her front-runner stature by staying above the fray.

On the other side of the aisle, there was an apparent armistice between the Romney and McCain camps, which managed to make it through the entire event without any serious barbs. Come to think of it, there wasn’t really any political pot-shots exchanged among the right, it really was more political posturing for the title of “Heir Apparent” to the Reagan mantle.

I will also be supporting Senator John McCain (R-AZ) for the Republican Nomination for President of the United States.

Stub Equity

2007-06-04T08:44:00.000-04:00

Wall Street is a self-marketing, self-sustaining institution that is aptly comparable to an ecosystem than anything you will ever read in an economics or business textbook. Wall Street as defined as a whole is a survivor. Despite the best attempts by regulators, politicians and anybody else keen on boxing “the street” in, it has confounded and will continue to confound antagonists.

In the days of Jesse Livermore it was so called “pools” of two varieties: Bull Pools and Bear Pools. These pools basically allowed large investors to collude on a grand scale, which often resulted in market corners (literally controlling the entire market) and/or plunging companies, commodities or whatever into oblivion. The passage of the SEC Act of 1933 and the appointment of Ambassador Joseph Kennedy; patriarch of the Kennedy clan, inside trader, bootlegger and politician, banned pools from the marketplace.

30 years later, the advent of the mutual fund allowed investors to work together in a similar fashion. It didn’t take long for the fund industry to come under the thumb of regulators which imposed a litany of rules governing practices.

In the 1980’s it was the leveraged buyout (LBO), specifically a buyout fueled and financed by junk bonds that pioneered a period of huge returns and illicit behavior. The rise (and subsequent fall) of Ivan Boesky and Michael Milliken—probably best represented in Oliver Stone’s “Wall Street” in Michael Douglas’ amalgamation of a character in Gordon Gekko.

In the 1990’s, it was the hedge fund—a vehicle for “accredited investors” that gave the hedge fund a management fee and a share of profits derived from trading. Taking advantage of the very nature of the investment (accredited investors are defined as those with exceptional financial means and experience); regulators did not need to protect the investing public from malfeasance.

In the case of the hedge fund, it was competition that led to the arrival of its successor (though hedge funds are still quite popular). Only so many people and their respective funds can rely on quantative/ black box trading to drive returns that beat the market. Today we have returned to buyouts, though the primary driver is “private equity.” Firms like the Blackstone Group, KKR and Texas Pacific have taken tens of billions worth of market capitalization from the public’s hands and on to their balance sheets.

Chrysler Automotive, Dow Chemical, and HCA are some of the largest targets of private equity—though the market may be maturing, it appears to be far from over as Blackstone has solicited funds from the Chinese government in the pre-IPO stage, as they plan to go public to raise more money later this year.

Private equity looks to layer debt onto their takeovers, often engineering large layoffs and reductions in overhead to drive profitability. How successful this will be over the longer term is debatable, as surely some will buckle under the amount of leverage applied to their balance sheets by suitors.

The other emergence from this M&A surge is “stub equity.” This is a highly illiquid investment that represents an equity share in a private company. Presently, many mutual funds are figuring out whether or not they can hold stub equity in their portfolio’s as they may own millions or billions of dollars in companies that go private. As always, this should lead to a new class of derivatives attached to this new vehicle, adding a new layer of risk to an already leveraged marketplace.

While one cannot be sure what is next, it is uniquely helpful to judge according to investor’s appetite for risky investments, which is extremely high today. This should send warning signals to central bankers and regulators that we are becoming more susceptible to a credit meltdown.

The US Immigration Conundrum

2007-05-29T10:58:00.001-04:00

The US Senate is currently debating the 2007 "comprehensive" immigration reform bill.

We could easily substitute the word "comprehensive" for either "controversial", "confusing", "confounding" and/or "compromise" and it would have fit to a T, also.

It’s a bill that almost everyone can find a piece to hate which probably means it’s just about right.

The passions flare high whenever buzz words like "amnesty" and "reform" are used in the same sentence.

Is it fair to reward illegal behavior to an individual who broke the law by overstaying his “Visitors” visa and is now working "illegally"?

Well, what if the individual does work an American would not do?

What if I told you, the only reason that an American would not do that job, is because another "American" Business owner did not want to pay the higher prices it would take to hire an American over the "illegal" individual?

The higher wages could also add to wage inflation, making business less competitive because American consumers would not tolerate the (higher) price as a result of higher wages.

And what if the "illegal" individual has three children who were born in America (at no fault of their own) and the kids are hence American citizens attending high school and one could eventually become a scientist at say NASA or a US Senator or even a President one day?

Where does the American dream begin and where does it end and is having the “correct” papers a pre-requisite to pursue it?

These questions are just the tip of the immigration iceberg. It’s an iceberg that needs to be gently addressed or it may one day (or night) bring the Titanic (great American economic tanker) down.

It’s easy for people that are "legal" to pass judgment on this hot issue since they are in already (and also to be closed (maybe even xenophobic) on this issue).

It’s also easy for the "illegal" people to claim discrimination and use their American kids as pawns while continuing to send billions of dollars outside America while refusing to be fully assimilated (speak fluent English or fly “Old Glory”).

May I politely remind all that that we live in an ever small planet (especially with the internet) and this issue will need to be addressed every 21 years (1986, 2007 ) or so.

At the end of the day, I would rather live, work and raise a family in a country where people are dying to come in rather than one from which they may be dying to leave...

Political Third Rails

2007-05-22T13:24:00.001-04:00

There used to be a time in the beltway when there was only one “third rail” in politics. Sadly, after 50 years plus, that title stands no longer. It has been at the behest of the Bush Political machine that the useless lexicon of monikers favored by all those covering the DC beat has been reduced to the trash heap. I really didn’t things could be politically worse so many times—just think—“heckuva job Brownie,” Dubai controlling our port security is a good idea, Harriet Miers paralegal turned brilliant legal mind, the insurgency is in its last throes… you get my drift. Its not that policy wasn’t sound necessarily, its simply the way it was served to the public gave the opposition and the media a friendly-fire, sound-bite heavy diatribe making these guys look like a bunch of amateurs.

I realize the “real deal” is that Bush doesn’t care about polls and he’s too caught up in the business of “governing” to worry about these petty nuances and nuisances. Here is the thing—looking back, this government was handed a mandate on a silver platter and in return torpedo an entire agenda. The public wanted it. Pollsters wanted. Republicans back in the oval office wanted. I almost feel violated

Now I feel violated. This mishmash of legal-ESE disguised as law passing as comprehensive immigration reform is not worth the paper it was printed on, even if it wasn’t recycled and Al Gore cut down the tree while Leo DiCaprio operated the wood chipper. The funny thing is, every initiative that the Bush Administration lost in the public realm was lost to the conservatives, but the democrats were the winners by default. I don’t know what back room back slaps and winks were given out during the pre-negotiating period (read: a very long time and guaranteed at least a vote, i.e. testing the waters).

The Bush administration threw its weight behind the bill before the public even had a chance to weigh in. For anyone who knows anything about cards, it’s like going all in before being dealt whilst confined to a sensory depravation chamber. Here is the skinny on this one: this ONE time you didn’t screw up, you didn’t write it! Why take credit for this train wreck unfolding frame by frame on every 24 hour cable news channel?

For the record, the old third rail was Social Security. That looks more doable now than organizing a press conference in the Rose Garden. I’ll talk about content when something with a content level approaching “garbage” makes it out of committee. Unbelievable.

You say Goodbye (and I Say Hello)

2007-05-16T10:44:00.000-04:00

We already greeted our new pal “Sarko the American” a few blogs ago, now its about time we witness another changing of the guard, one with far more at stake for

America

’s National Security (a synonym for Global Security if I dare say). Today, we begin to say goodbye to perhaps America’s greatest friend since Margaret Thatcher (and before that Winston Churchill), a magnificent politician, a man of tremendous conviction and an invaluable leader not only in the Anglophile relationship, but to the world.

Prime Minister Tony Blair has announced he will leave Downing Street after dedicating 10 years of his life to public service at the highest level. He will officially resign on June 27^th, likely (sorry I had to write that) passing on the parliamentary PM reins to his long-time colleague and ally, current Chairman of the Exchequer, Gordon Brown. Give ‘em Hell Gordo.

Throughout his tenure, PM Blair has surrounded himself with the brightest and best minds in Britain. His selection of Mr. Brown was perhaps the single best candidate to steward the economy, via monetary and fiscal policy. While tax rates soared (something I disagreed with whole-heartedly), the housing market stayed strong, trade soared and London found itself the new financial capital of the world (I didn’t like that part either). Very in touch with the tenets of the Labour movement, it was the Keynesian policy toward tax policy which allowed the Blair government’s ambitious social agenda.

In addition, Mr. Blair took a page from President Clinton’s political playbook and wrested the expertise on crime and punishment from the Tory opposition.

In terms of foreign policy, the United States could not have a stronger ally or friend. Whether in the immediate aftermath of 9-11, the Afghanistan campaign or the War in Iraq; no other country stood shoulder-to-shoulder with us, both diplomatically and militarily.

Mr. Blair, it is my pleasure to compare you to the great Prime Minster Churchill, in recognizing many great dangers—whilst the storms were still gathering. We can only hope that your successor, our next successor and our respective populaces receive the gift that is your clarity. God bless the United Kingdom and the United States of America, may his grace see to the longevity and strength of the trans-Atlantic alliance.