Thursday, April 30, 2009

Geithner, Member and Overseer of Finance Club

Just who is Timothy Geithner (Treasury Secretary), The New York Times just did a huge expose on his career and who he hangs out with. The jury is in, he's a friend of Wall Street. The previous head of the Federal Reserve New York he was the regulator for companies like Citibank, Bear, Lehman and the list goes on. So why does the guy who is at the center of the Wall Street failure have one of the most important jobs in the country? Good question and one many are scratching their heads trying to answer, including the New York Times (who endorsed President Obama when he was running).

I have not been a fan of Geithner. I think he is too cozy with Wall Street and has done a terrible job trying to lead during this crisis. I think his ideas are bound for failure. However, I don't think he is an idiot (yet), I just disagree with how he is conducting the nations business (I didn't much care for the Goldman guy either - Hank Paulson - he was Wall Street).

I don't expect many of you will take the time to read this whole article, but you should. Geithner and Bernanke (also Rubin and Summers) are the ones remaking our financial system and they are important people to follow.

The Chrysler "managed" bankruptcy is my first glimmer of hope with Geithner, perhaps he's starting to realize that bondholders are going to have to share in the losses (and should have before taxpayers) of big financial firms that made stupid mistakes. This may be a test run for a "managed" bankruptcy of a large or mid-size financial firm, we shall see.

What I do know is that I don't see how PPIP is going to be a successful program, yet we need to deal with the underlying collateral (mortgages) soon or we will see another crisis. The good news is that with Mark-to-Market accounting being relaxed we shouldn't see the runs we saw last year, however because of this relaxation we may not see the banks deal with the losses for years - we've pushed off the inevitable and made it much more expensive.

Scott Dauenhauer CFP, MSFP, AIF

Wednesday, April 29, 2009

Humor Break: How the Swine Flu Started

No, this is not my daughter, but it wouldn't surprise me to see her do this!

Scott Dauenhauer CFP, MSFP, AIF

Commentary: The "Green Shoots" of Potential

The NY Times ran two interesting stories this morning, the first one linked to above, the second you can find here.

Both reference a potential change in the way the administration could handle the financial crisis (no it hasn't passed) in the future.

The first article speaks to forcing creditors to take losses before taxpayers. It only makes sense that those who took on credit risk be the ones who pay the price for being wrong, not the taxpayers. Wall Street keeps pointing to the Lehman failure as a reason not to first hit the bondholders of these financial companies, however this arguement is self serving as the financial crisis was not caused by Lehman's failure - it was caused by too much leverage in risky assets. It was made worse by the governments erratic response (saving Bear, a much smaller version of Lehman), letting Lehman fail, then saving AIG. Wall Street and banks say the market won't function if bondholders are forced to take losses, this is ridiculous. Markets work when bad decisions are punished and good decisions are rewarded, by bailing out bondholders you distort the market and create further problems down the road that taxpayers WILL have to solve.

My point: perhaps the administration is warming to the idea that the people who lent the institutions money should first pay BEFORE TAXPAYERS.

The second article focuses on the mortgage program that I think is already dead in the water. It acknowledges for the first time that there are second-lien holders that are causing problems in modifying loans - they need to be worked with. The Administration is coming out with what I think is another dead in the water plan to address the second lien holders. So, why am I least a little bit? Perhaps the administration is realizing that this crisis is not over and will accelerate (in terms of foreclosures). The sooner they realize this and facilitate an orderly resolution to the foreclosure crisis, the sooner we can recover.

To recover bondholders will have to take losses and banks will have to take losses - both can be compensated for a portion of those losses with equity (bondholders with actual stock, banks with property appreciation rights (read Hussman)).

While we are not even close to being out of the foreclosure/housing crisis, there are "Green Shoots" (the buzzword of the day - yes I'm kind of mocking it!) of potential out there - the question remains whether they shoots will be watered and cared for so that they will blossom, or whether they will wither and die.

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, April 28, 2009

Hussman: Money Doesn't Grow on Trees

John Hussman has a strong opinion about the current economy (and he is one of the few managers to do well during the past two downturns), the pertinent part of his latest commentary:

"What we cannot do is create all of this out of thin air. Understand that the money that the government is throwing around represents a transfer of wealth from an unwitting public to the bondholders of mismanaged financial corporations, even while foreclosures continue. Even if the Fed buys up the Treasuries being issued, and thereby “monetizes” the debt, that increase in government liabilities will mean a long-term erosion in the purchasing power of people on relatively fixed incomes.

To a large extent, the funds to defend these bondholders will come by allowing U.S. businesses and our future production to be controlled by foreigners. You'll watch the analysts on the financial news channels celebrate the acquisition of U.S. businesses by foreign buyers as if it represents something good. It's frustrating, but we are wasting trillions of dollars that could bring enormous relief of suffering, knowledge, productivity, and innovation in order to defend bondholders of mismanaged financials, and nobody cares because hey, at least the stock market is rallying. If one thing is clear from the last decade, it is that investors have no concern about the ultimate cost of the wreckage as long as they can get a rally going over the short run.

For my part, I remain convinced that without serious efforts at foreclosure abatement (ideally via property appreciation rights), mortgage losses will begin to creep higher later this year, surging in mid-2010, remaining high through 2011, and peaking in early 2012. To believe that we are through with this crisis or the associated losses is to completely ignore the overhang of mortgage resets that still remain from the final years of the housing bubble."

I agree with John, we have to address the issues affecting our financial system head on, we aren't doing it.

Scott Dauenhauer CFP, MSFP, AIF

Swine Flu Information

So now everybody is scared about the Swine Flu, probably with good reason. A global pandemic could shut down global trade and exacerbate a global recession turning it into a global depression. I don't think this is going to happen, however it doesn't mean the potential doesn't exist and I don't have a crystal ball.

The article posted is by a doctor who seems to think we shouldn't worry, but should take precautions.

I don't know enough about this yet to make a determination, however, as the article points out - we lose around 36,000 people per year to the far we've lost zero in America to the Swine Flu. Some are speculating this is because we have better access to health care than Mexico.

This is certainly something to watch and be aware of, maybe vacationing in Mexico is a bad idea for now, but going on with your daily life is the right answer.

Scott Dauenhauer CFP, MSFP, AIF

Monday, April 27, 2009

Monetarism Defiant

I confess, I'm a Monetarist. This article is a rare interview with one of the founders of the Monetarist movement in economics, Anna Schwartz. Anna along with Milton Friedman believe that the quantity of money in the system determines growth and inflation. This story is really a short interview with Anna, now in her 90's about the current crisis. A few quite interesting tidbits:

On Bubbles

“A too-easy monetary policy induces people to acquire whatever is the object of desire in a mania period,”

On Bernanke

...the Fed and the Treasury “try to break news on a daily basis and they look for immediate gratification,” she says. “Bernanke is looking for sensations, with new developments every day.”....“but he (Bernanke) is fighting the wrong war today; the present crisis has nothing to do with a lack of liquidity.”

On Bank Bailouts

“Doing so is shifting from trying to save the banking system to trying to save bankers, which is not the same thing,” Schwartz says. “Ultimately, though, firms that made wrong decisions should fail. The market works better when wrong decisions are punished and good decisions make you rich.”

On Deflation

“The risk of deflation is very much exaggerated,” she answers. Inflation seems to her “unavoidable”: the Federal Reserve is creating money with little restraint, while Treasury expenditures remain far in excess of revenue. The inflation spigot is thus wide open. To beat the coming inflation, a “new Paul Volcker will be needed at the head of the Federal Reserve.”

Its a short, but very good article that I wish the people at the Federal Reserve and the administration would listen too (as the last administration should have).

Is it possible that knowing the past doesn't necessarily mean we aren't doomed to repeat?

Scott Dauenhauer CFP, MSFP, AIF

Toxic Assets: They CAN be traded

As I've said for months, these assets are trading, just not at the price Banks are willing to accept.....this is why PPIP is doomed.

Scott Dauenhauer CFP, MSFP, AIF

Hulbert: 25 Years to Bounce Back? Try 4½

Mark Hulbert once again busts a myth that has been making the rounds. The myth is that it took investors 25 years to get back what they lost in the crash of 1929 - in fact I've attached a chart showing what some are using to demonstrate that investing in stocks right now is hopeless.

In reality it took only 4.5 years (despite an 83% drop). How is this possible - doesn't the chart tell the whole story? It certainly does not. The chart excludes dividends and the fact that we had a severe deflation (the opposite of inflation). I encourage you to read the story, its short, easy to understand and worth your time.

Having said that.....I'm not confident of a four and a half year recovery. As I've always stated, I don't know where the market will go, but I still see a lot of risk in the financial sector as the massive losses are hidden but will have to be dealt with at some point.

Still, this is a great article.

Scott Dauenhauer CFP, MSFP, AIF

Lawyers say lenders set stage to collect on 'short sales'

This article is unbelievable. Some lenders are inserting language into Short Sale documents that change a non-recourse loan into a recourse loan. This means that the borrower who simply couldn't pay and tried to sell the house in a short-sale would be on the hook for the difference between the loan amount and the amount recovered from the sale, despite the fact that they would not be responsible in any other circumstance. This is coming from institutions that have received bailout money - your tax dollars hard at work.

If you are doing a short sale, make sure you read all the fine print, your nightmare may not be over with the sale. The good news is that most of the banks are taking the language out.....If you catch them.

Scott Dauenhauer CFP, MSFP, AIF

Real Estate Crash Example: Murrieta - 71%

Saw this posted in our local paper, this isn't a joke and it isn't a one off, this is happening throughout Murrieta (and Riverside/San Bernardino Counties). The story reads as follows:


"When we started Deal of the Week in February, we focused on outliers that posted huge declines. No more. This isn't an outlier; this is pretty much the neighborhood average. Homes similar to this 1,442-square-foot, single-family house have been selling left and right in the $100,000 to $120,000 range in this area of Murrieta. Dipping into five figures isn't uncommon. As you can see, the yard is, uh, limited and the home was built 36 years ago. But do you really care at $67 per square foot?

July 1997: $60,000

August 2006: $330,545

January 2009: $96,000

Deal: 71 percent"
Unbelievable - the bank probably is still carrying at full laon value.

Scott Dauenhauer CFP, MSFP, AIF

Savers are still paying for Fed’s gift to banks

An excellent article about how Savers are subsidizing the bailout. Think a 60% drop in the stock market is bad (update: its now "only" down about 40%), imagine getting 6% on a Certificate of Deposit five years ago and renewing it at 1.5%. That is a 75% drop in income. On $1 million you would go from an income of $60,000 to an income of $15,000....this is the hidden tax of the bailout.

Scott Dauenhauer CFP, MSFP, AIF

Fannie Mae Creates Housing Mirage With Bum Loans: David Reilly

This story is absolutely unbelievable, but you better believe it. This shows how some of our biggest lenders are not working to solve the problem, simply to kick the can down the road a few years.

Fannie mae started loaning money on an unsecured basis, the program is "Known as the “HomeSaver Advance” plan, Fannie used the program to provide “foreclosure prevention assistance to distressed borrowers,” according to its 2008 securities filing."

"Fannie funded $462 million in such loans during 2008. The company tells investors in notes to its financial statements, though, what it thinks the loans are actually worth.

Based on market prices, Fannie said the loans had a value of just $8 million. That’s right, the loans, which are in many cases just months old, were worth 1.7 cents on the dollar."

Remember, you, the taxpayer own this company - this is your money being thrown away. Things are not well in the mortgage market and nobody is doing anything to make them better - including the banks. We are being set up for a much worse bailout either by ignorance or on purpose.

Scott Dauenhauer CFP, MSFP, AIF

Thursday, April 23, 2009

Bloomberg: PPIP - Like 1929 Pool Scams

The administration's program to solve our financial crisis is a slight of hand fraud that will make TARP look like a good investment. While we waste our time with the PPIP program the collateral that supports the Toxic Assets is worsening and it is affecting assets that are not troubled. Without a program to re-write loans on a massive basis, we face an ever growing whole in bank balance sheets and bailout that will make us think AIG was a bargain.

The article is good, here is part of its conclusion:

"The main premise of Geithner’s plan is that the banks’ toxic assets are now priced at artificially low levels. As the federal bailout program’s Congressional Oversight Panel wrote in an April 7 report, “Treasury has not explained its assumption that the proper values for these assets are their book values,” rather than the prices unsubsidized investors would pay for them.

If Treasury’s premise proves false, we may end up looking back on the Public-Private Investment Program as an elaborate pump-and-dump game. Only this time, unlike with the pools that sucked in gullible investors during the 1920s, the big losers would be taxpayers -- who never had the choice of not playing."

Scott Dauenhauer CFP, MSFP, AIF

Wednesday, April 22, 2009

For Housing Crisis, the End Probably Isn’t Near

It ain't over till its over and for housing, it ain't over. This is the evidence from New York Times writer David Leonhardt after attending a few home auctions that surprised him.

I've been warning that the foreclosure crisis is not over, it was just delayed and its starting again. This wave will be the continuation of the previous wave, the next wave will be people who thought they were going to get help, but didn't and the wave after that will be Option ARMs in 2010 and 2011 (or earlier as they see no relief). The final wave will be those people who can fully afford their mortgage but can't find a good reason to pay it given the massive losses they've experienced.

All of this is of course preventable and as much as I despise the government intervention thus far, without government coordination I fear that the government will end up bailing out banks in a much more profound way. We have an opportunity, perhaps a window to bring this crisis to an end once and for all - nobody is paying attention though. The government appears ready to not act until another crisis appears as opposed to preventing the next crisis.

There are good answers, I've written about them and linked to others. Is anybody paying attention?

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, April 21, 2009

Putting the Toothpaste Back into the Tube

Andy Kessler does a great job of laying out the current problem the Federal Reserve has with the printing of so much money - how do you unprint it or "Once the toothpaste is out of the tube, how do you put it back in". If you don't put it back in you get Inflation, potentially the hyper sort, but putting it back in the wrong way could ruin the economy. Its a tightrope and Kessler explains this tightrope, his conclusion is that Bernanke (Fed chairman) should be transparent and tell the world in advance his plans.

Scott Dauenhauer CFP, MSFP, AIF

Foreclosures Up 24% in 1st quarter

Banks have been busy foreclosing and it won't be over for a long time. They waited for the administration to come out with its program, which turned out to be a nice hand-out to the "servicers" but nothing that could actually stem the wave of foreclosures that must happen in order for markets to get back to normal. 2010 will bring with it the foreclosures that should have happened in 2008 and 2009 along with the foreclosures related to Option ARMs that will have to be dealt with in 2010 and 2011.

The governments PPIP plan will have little affect on this.

Believe it or not as bad as this is, its also a good sign - the market needs to be purged of homes that can't be paid for by borrowers, however the process that is set up now is not good. There are homes that should not go into foreclosure for purely economic reasons that will go into foreclosure and make a bad market worse.

As for the stock market, there is no way to know the effect, it could be bad or the market may react to other news - with the amount of money being pumped into the economy we'll have to see some recovery, even if its not built on something that can last.

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, April 07, 2009

Barrons: How Not To Price Toxic Bonds

Excellent piece in Barrons about why the current Obama/Geithner/Summers PPIP plan won't work.

Scott Dauenhauer CFP, MSFP, AIF

Monday, April 06, 2009

Hussman: 35 - 40% Decline Possible

"Still, given sufficient evidence of broad improvement in market action (which we take as a measure of risk tolerance and economic expectations), we wouldn't fight the combination of roughly fair values and a willingness of investors to bear risk. We've been carrying small “contingent” call option positions for a good portion of the recent advance. This helped to compensate for our low weightings in financials, homebuilders and other low-quality sectors that have enjoyed frantic short-covering. Still, with only about 1% of assets currently in those calls, our stance is still characterized as defensive here, as we are otherwise fully hedged. Again, we won't fight a broad improvement if it continues sufficiently, but if I were to make a guess, it would be that the potential downside in the S&P 500 from these levels could approach 30-40%. That is not a typo, and it is not a possibility that should be ruled out."

Read the full weekly commentary by clicking the link above, basically a continuation and recap of his commentary last week.

Hussman, as do I, believes the Geithner PPIP plan is irresponsible and doesn't solve any of the underlying issues. Hussman has gotten a lot of media attention as the media has finally noticed that taxpayers have been bailing out financial bondholders and counterparties despite the fact that the bondholder knew the risks they faced. The FDIC will foot the bill, without congressional approval.

I'm not sure I think stocks will go down 40%, but nothing can be ruled out these days (including a further rally).

Scott Dauenhauer CFP, MSFP, AIF

Meridian Wealth Management

Saturday, April 04, 2009

The Crisis of Credit....Visualized

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Hat tip to Gregg.

Not a bad visual representation of what happened, not perfect, but easy to understand and worth your time.

Scott Dauenhauer CFP, MSFP, AIF