The Broker's Advocate

FDIC report, Lehman under Dodd-Frank

2011-04-18T09:23:00.001-07:00

What might have been ... What might be too-large to fail resolution under DF.

http://media.ft.com/cms/0a72e3a2-6948-11e0-9040-00144feab49a.pdf

And the FT has more:

"Billed as the solution to the costly AIG bail-out and the damage caused by Lehman’s bankruptcy, the new tools [under Dodd-Frank] would allow the government to seize a company and run it before selling the assets to the highest bidder."

Slicin' thru 50d's

2010-11-16T10:21:00.000-08:00

Lotta formerly strong sectors slicing thru their 50-day averages, eg., VGK, EEM, EPP. Given the kinda funky mkt to begin with, ie, little volume, spotty leadership, this is worth watching.

Bernanke to markets: Deflation is here (?)

2010-07-21T15:20:00.000-07:00

Ben Bernanke's comments to Congress today seemed to elicit a flight to quality (Treasuries up, stocks down, i.e., position as if we're Japan).

Bernanke:
"... underlying inflation has trended down over the past two years.... expect continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years. ... progress in reducing unemployment is now expected to be somewhat slower than we previously projected, and near-term inflation now looks likely to be a little lower ...One factor underlying the Committee's somewhat weaker outlook is that financial conditions—though much improved since the depth of the financial crisis—have become less supportive of economic growth in recent months."

Another sign of market weakness

2010-07-15T09:47:00.000-07:00

JPM posts strong results, and financial stocks fall. Yet another sign of a weak rebound.

Euro crisis not another Lehman: Bob Doll

2010-05-18T07:31:00.000-07:00

Bob Doll says the current worries over the euro and sovereign credit risks don't amount to another Lehman-sparked implosion.

"Credit risks involving governments are significantly more transparent than those surrounding subprime loans and collateralized debt obligations," he says, and unlike 2008, "the broader global economy is firmly in recovery mode [and] the banking system as a whole is in better shape."

Is the foreign bull over? Part II

2010-05-05T14:17:00.000-07:00

Last week, I said yes.

Today's down market tends to confirm the thesis that we may be entering a period with strong dollar/weak foreign markets:

Berkowitz likes financials

2010-05-05T10:53:00.000-07:00

BusinessWeek reports that Bruce Berkowitz, manager of the Fairholme Fund, thinks financial stocks are in the second inning of a nine-inning bull market.

BW says:

As the economy continues to recover, financials can sustain a rally reminiscent of their run in the 1990s when they rose sevenfold, said Berkowitz, who was named U.S. stock manager of the decade in January by fund-rater Morningstar Inc.

I'd tend to agree. Been buying IAT, KRE, KIE, KBE, VNQ.

Is the 10-year foreign stock bull over?

2010-04-26T13:11:00.000-07:00

Bespoke Investment Group notes today that after nearly a decade of underperformance versus the rest of the world, U.S. stocks could be the winning bet. The underperformance of U.S. stocks formed a higher low and is now back on the upswing forming a new uptrend, Bespoke says.

Editor's note:
Clearly the strength of the dollar supports this case.

Yikes. SEC enforcement officials refused to pursue Stanford

2010-04-19T15:38:00.000-07:00

Last Friday, the SEC inspector general laid out in a report how SEC enforcement officials in the agency's Ft. Worth, Texas office refused repeated efforts by SEC examination staff to get them to pursue Allen Stanford's suspected ponzi scheme.

The roadblocks in the case appear to be Jeffrey Cohen, an assistant director of enforcement program;

Spencer Barasch, a former enforcement assistant director and now a partner with Andrews Kurth LLP; and
Harold Degenhardt, former district administrator of the Ft. Worth office.

Singapore rallies ... right after I sold

2010-04-14T10:55:00.001-07:00

Singapore market up huge today, on news that it just tightened monetary policy after reporting its swiftest expansion on record, according to the WSJ.

So why did I sell EWS yesterday??!! ... Because Asian markets (and other foreign markets) have been lagging during the rebound since the Feb. 5 correction low point, while other sectors like financials and consumer discretionary have taken off.

SEC, firms, work to unwind research-scandal settlement

2010-03-18T10:02:00.000-07:00

Why is this not shocking?

The WSJ reports that the SEC is working with securities firms to unwind key provisions in the 2003 research-scandal settlement.

2010-03-17T09:31:00.000-07:00

The WSJ says that Comptroller of the Currency John Dugan acknowledged

tough times for U.S. banks, with 702 banks—nearly 9% of the industry—defined as troubled. He told bankers that regulators "simply cannot turn a blind eye" to problems and have learned the lesson that looking the other way will only compound losses.

Nearly 200 U.S. banks have failed in the past two years, at a cost of nearly $58 billion, "and we may not be even halfway through," said Mr. Dugan.

So, why are financial stocks, including banks doing so well?

The Valukas report on what happened at Lehman

2010-03-15T13:03:00.000-07:00

The Report of the Examiner in the Chapter 11 proceedings of Lehman Brothers Holdings Inc.:

Why health insurers need MORE market power

2010-02-26T14:46:00.000-08:00

The Economist lays out the challenges of expecting private health insurers to boost access and quality. It raises the oft-forgotten issue of the lack of market power by health insurers, vs. hospitals and medical groups in the regions insurers cover. Which of course raises questions about removing insurers' anti-trust exemptions.The mag quotes George Halvorson, the chief executive of Kaiser Permanente, who points ...

to a chart showing how difficult it is for private insurers to tackle costs in the country’s “fee for service” health system, which rewards transactions rather than health outcomes. As insurers have squeezed hospitals, the average duration of hospital stays has indeed fallen—but that has been more than offset by a rise in prices (see chart 2). You might ask why competition among hospitals has not held prices down. The explanation is that there is not much of it. Hospitals have local oligopolies or even monopolies, especially after a recent wave of consolidation, so price competition is rare. The opacity of pricing makes it hard for insurers (and harder still for patients) to shop around. ...

According to Alain Enthoven of Stanford University, an economist whose theory of managed competition inspired Dutch reformers: “If they are to deliver innovation, insurers need more market power...or they must integrate like Kaiser Permanente.”

Krugman: Japan, here we come ...

2010-02-26T13:14:00.000-08:00

Paul Krugman says alternative core inflation measures, like "trimmed-mean and median inflation," are getting increasing attention. Core measures like these measure inflation "inertia," and provide a view into inflation expectations over the longer term, he says.

"What these measures show is an ongoing process of disinflation that could, in not too long, turn into outright deflation," Krugman writes.

See the chart ...

Bill would kill tax-free munis

2010-02-24T07:53:00.000-08:00

The Bond Buyer reports that legislation unveiled Tuesday would eliminate tax-exempt bonds beginning in 2011, and change the tax exemption for state and local bonds to a tax credit.

The story says economists "have long argued that tax-exempt bonds are an inefficient way to subsidize state and local projects."

New market leadership?

2010-02-17T15:07:00.000-08:00

Is recovery from the recent market correction showing that healthcare and consumer discretionary stocks might lead the way from here?

Is the FSA doomed?

2010-02-09T12:41:00.000-08:00

Is the U.K.'s Financial Services Authority, the uber principles-based regulator held up (pre crisis) by the industry as the model for other nations follow ... now doomed?

The useless U-5

2010-02-09T08:42:00.000-08:00

Peter Chepucavage, a former SEC staffer who speaks up on issues re investors and brokers, tells me the form U-5 termination report has outlived its usefulness.

He links to attorney Bill Singer's analysis of a recent arbitration I reported on, in which a broker won $4 million.

"We encourage the reading of this excellent analysis of the U-5 which in our view is a relic of the past," Peter says, adding:

We have always believed the following;
1. It should never be used for performance related issues.
2. It should never be public until a regulator has made a finding of violation.
3. It should never reduce complicated employment issues to a word or phrase.
4. The employer should provide the facts to the regulator without making any judgments and the employee should respond to those facts. The regulator should make the judgment.

Google and China--not really so different

2010-02-05T12:36:00.000-08:00

Thomas J. Powell, on how Google and China, for all their differences, run similar operations.

Is the SEC becoming more of a criminal-type enforcer?

2010-02-03T13:36:00.000-08:00

Michael Sklaire, shareholder at the big law firm of Greenberg Traurig, tells the Corporate Crime Reporter that SEC enforcement chief Robert Khuzami is adopting criminal prosecution policies that derive from his experience at the Justice Department.

Repubs blast Obama budget, Pres. hits back

2010-02-01T09:50:00.000-08:00

The House Republican caucus responded to Obama's budget, blaming him for exploding deficits.

Obama heard the critique at last Friday's Q&A with House Repubs, and he punched back hard.

The black-ops outfit for the Fed

2010-01-29T08:51:00.000-08:00

Bloomberg News columnist David Reilly says the New York Fed, a quasi-governmental body, is like a "a black-ops outfit for the nation’s central bank."

The New York Fed orchestrated the bailout of AIG counterparties. Its "impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs," he says.

Fixing health care fixes our budget

2010-01-27T13:14:00.000-08:00

The Center for Economic Policy Research has an interactive calculator that lets you see what projected U.S. budget deficits would be if we had the same per-person health care costs as other countries.

(The U.S. spends twice what other major nations do, per person, on medical costs, according to the OECD.)

The left-leaning CEPR's chart shows that if we spent what other nations do, our budget problems go away.

Deleveraging? What deleveraging?

2010-01-26T09:42:00.000-08:00

McKinsey says deleveraging still has a long way to go.(Registration required)

Hussman: Time for the economy to put up

2009-09-08T13:39:00.000-07:00

Put up or shut up. That's the question now for the economy, says John Hussman.

Hussman says the next 12 to 16 weeks are critical in gauging whether this recovery is for real.

"Essentially, we have now entered the window in which growth – not simply slowing of deterioration – is required to support the idea of an economic recovery. The next 12-16 weeks will be the first hurdle on that front," he says.

SEC penalties: Stiff, or flacid?

2009-08-11T08:17:00.000-07:00

In a borderline puff piece for the SEC, the WSJ calls the agencies penalties "stiff."

Odd, but at the same time, a federal judge is saying the penalties are a joke. He's holding up the BofA settlement with the SEC (over disclosure of the Merrill bonuses.)

The WSJ story, by Kara Scannel, doesn't even mention the BofA settlement was held up.

Retail stocks poised for rebound--CNBC

2009-08-06T15:18:00.000-07:00

Cost-cutting and tight inventory management have retailers poised for some earnings surprises, according to CNBC.

The retailing stocks have been strong for sure. We added XRT on 5-8-09 (personal Roth) and 5-14-09 (personal taxable).

Business Roundtable compares health costs, outcomes. U.S. fails

2009-07-31T13:54:00.000-07:00

The Business Roundtable says other developed nations (governments and business combined), spend 63% per capita of what the U.S. does--and their populations are healthier.

... in 2006, the United States – including employers, employees, retirees and the
government – spent far more on health care per capita than did either group of competitors: $828 more per capita than G-5 countries and $1,654 more per capita than BIC countries. Both gaps areadjusted for per capita GDP differences and have expanded significantly since 2004.

Krugman--Why a free market in health care doesn't work

2009-07-31T09:59:00.000-07:00

Paul Krugman says the idea that a free market in health care is accepted economic theory is bunk.

One of the most influential economic papers of the postwar era on this topic, he says, is Kenneth Arrow’s 1963 paper, Uncertainty and the welfare economics of health care."

Rolling Stone story on Goldman Sachs

2009-07-06T14:18:00.000-07:00

Check it out here.

Mixed signals for the "underwear indicator"

2009-06-10T12:37:00.000-07:00

During a recession, underwear is among the first things that people stop buying—because hardly anybody actually sees them, CNBC reports. This creates pent-up demand, and so when underwear sales level off and increase, it should signal an uptick in consumer demand.

According to the underwear indicator, an old favorite of Alan Greenspan, there needs to be a return to 2 to 3 percent annual growth in sales in order to claim a recovery.

However, consumer research group Mintel predicted underwear sales will see a continuing decline of 2.3 percent this year and no recovery until 2013.

Schapiro builds her legacy, thanks to WaPo

2009-06-03T23:08:00.000-07:00

Mary Schapiro builds her legacy, with the help of a Washington Post puff piece:

Still weighing heavily on the SEC is how the Madoff fraud went undetected. Schapiro calls the SEC's record in the case a "failure," despite complaints from some enforcement personnel about that characterization.

Note to Mary (and the WaPo): Finra, the organization you headed, had full authority over Madoff's activities, certainly prior to 2006 when his firm registered as an RIA. (To be fair, no whistleblower tipped Finra off, as happened with the SEC, at least as far as we know.)

Honestly, can anyone think of a truly penetrating article the Post has ever done on the SEC?

NW Mutual buys gold ...

2009-06-01T11:40:00.000-07:00

From Bloomberg:

Northwestern Mutual Makes First Gold Buy in 152 Years (Update1)

By Andrew Frye

June 1 (Bloomberg) -- Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time in 152 years to hedge against further asset declines. ...

Read the story here.

India market soars

2009-05-18T09:58:00.000-07:00

India stocks vault 17 percent on election euphoria

A change in political leadership is seen as good for business.

Radio Netherlands story here.

AP story (no link available):

Trading on Indian stock market halted as election euphoria pushes index up 17.3 percent

ERIKA KINETZ
AP News

May 18, 2009 07:45 EST

India's stock market surged an unprecedented 17 percent, forcing trade to close for the day, after the Congress Party's definitive victory in national elections set the scene for long-delayed economic reforms.

Within seconds of trading, the Bombay Stock Exchange's benchmark Sensex vaulted 2,110.79 points, or 17.3 percent, to 14,284.21, triggering the historic shutdown Monday. Infrastructure, banking and real estate companies led gains.

After month-long elections that ended on the weekend, the Congress Party alliance unexpectedly captured 261 seats in India's 543-seat Parliament — one of the most crushing electoral victories in nearly two decades of fractious coalition politics.

Putting to rest fears of an unwieldy coalition, the victory raised hopes of a revival in foreign direct investment and economic growth, as well as tax reform and significant infrastructure spending.

The near collapse of India's once powerful communist parties — which lost more than half their parliamentary seats — paves the way for long-awaited economic reforms, many of which the Left had blocked over the last five years.

The Congress party now has more room to ease restrictions on foreign investment in insurance, retailing and banking. The government may also sell some of its stakes in state-run oil, banking, and fertilizer companies. The nation's pension regulator could get proper legal standing, which would encourage greater investment. And some steps might be taken to loosen hidebound labor laws, like allowing contract labor, analysts and business groups say.

Citigroup economist Rohini Malkani said the result would likely revive India's investment growth, which was a key driver of the nation's four-year boom that's now waning in the face of the global slump.

"The big question - is it a game changer? Can India get back to the high growth, high valuation of recent years? This event probably does open up meaningful possibilities, but there's a lot to do, and there could be a lot in the way," she said in a report.

Trading has never before been halted due to an upward swing in stock prices, according to the Bombay Stock Exchange.

The last time trading circuit breakers, which are designed to temper wild market movements, were triggered was January 22, 2008, when the Sensex plunged on fears of a U.S. recession.

The National Stock Exchange, India's smaller second exchange, was also closed after its Nifty 50 index gained 651.5 points, or 17.7 percent, to 4,323.15.

Angel Broking managing director Dinesh Thakkar said investors, many of whom had been sitting on cash, welcomed the end to uncertainty.

"We will see lots of reforms and spending on infrastructure," said Thakkar, who predicts a long bull run for the market.

"Compared to other emerging markets, we had underperformed by 25 to 30 percent because politics in India were unstable," he said. "Now that there is no event risk and there is a strong government, we will catch up."

In their euphoria, Indian traders shrugged off news of weak company earnings from the region, which dragged other Asian markets down Monday. Japan's benchmark Nikkei 225 stock average fell 226.33 points, or 2.4 percent, to 9,038.69.

Despite the high sprits, even within India there are headwinds to change. Congress is unlikely to curtail costly social welfare programs which have added to the budget deficit.

The global financial crisis has already slowed the pace of some reform, as Indian authorities look with fresh skepticism on the wisdom of U.S.-style markets and regulation.

Source: AP News

TPM has the rundown on another "Pecora" committee

2009-05-02T06:53:00.000-07:00

An update from TPM on Congressional moves to look into the financial crisis and how it happened.

David Leonhardt--why no bank debt cram downs?

2009-04-30T14:58:00.000-07:00

NYT mag columnist David Leonhardt says the idea of making bank bondholders pay is finally getting some traction. An argument for bailing out the bondholders, however, is that it could create another post-Lehman-failure freeze.

Obama's interview with NY Mag's David Leonhardt

2009-04-30T13:20:00.000-07:00

Obama tells the NYT that he doesnt' support a Glass-Steagall approach for regulatory reform: "Canada would indicate that good, strong regulation that focuses less on the legal form of the institution and more on the functions that they’re carrying out is probably the right approach to take."

IMF: U.S. banks halfway thru write-offs

2009-04-23T14:16:00.000-07:00

Here's the IMF stability report, which estimates that U.S., European and Japanese financial sectors face losses of $4.1 trillion between 2007 and 2010. The fund says the banks are about halfway through writing off what they will need to. And it says U.S. and European banks will need to raise $875 billion in capital by next year to get back to where they were before the financial crisis.

Pelosi calls for Pecora-type commission

2009-04-17T13:42:00.000-07:00

House speaker Nancy Pelosi said she wants a a Pecora-type commission to examine the causes of the financial crisis.

"We're going to have a commission ... even if it is only in the House of Representatives," Pelosi said, according to a report in The San Francisco Chronicle.

According to the Chronicle, the Pecora Commission was a bipartisan investigative body established by the U.S. Senate in 1932 to examine the causes and abuses of the Wall Street crash of 1929. Its recommendations lead to the creation of the SEC.

Failures all around ...

2009-04-12T07:23:00.001-07:00

"We have failed bankers giving advice to failed regulators on how to deal with failed assets."-- William Black, former deputy director at the former Federal Savings and Loan Insurance Corp., in an interview with Barron's.

Kevin Phillips: There's good news and bad news

2009-04-08T13:36:00.000-07:00

Good news and bad news from Kevin Phillps, blogging at Talking Points memo:

Although "there is probably no need to fear a second coming of nineteen-thirties Depression economics ... World War Two ushered in American global ascendancy. ... [The crisis today is] ushering in the reverse: a global realignment in which the United States loses the global economic leadership."

Posen on the bankrupt bank cover up

2009-04-06T14:53:00.000-07:00

Adam Posen on what's really going on with the banks: "A number of major American banks have lost huge amounts of money, and clearly have insufficient capital if they are not literally insolvent. Why else would they be pushing so hard to change the accounting rules to avoid showing what they really have on their books instead of raising private capital? Why else is the US government taking so long to perform "stress tests" and trying to get expectations of overpayment for some of the bad assets on the banks' books before the test results are out? In short, the US government is looking to shovel capital into the banks without sufficient conditions, hiding rather than confronting the actual situation."

WSJ: Why Asia looks strong

2009-04-01T08:43:00.001-07:00

Blogger note: We've been buying EWH, EEM, EWM, ECH, and looking to add EWZ.

The WSJ today notes how these foreign markets are doing better than others, and possibly why.

Other fund managers say they see reasons to favor shares in the U.S. and Asia over Europe. The logic is that the massive U.S. government response to the crisis will gain traction, leading to a bounce in some of the Asian exports that fell off a cliff last year.

What is more, "Asian companies and economies have the balance sheet to survive this thing," says Stephen Auth, chief investment officer for global equities at Federated Investors, who oversees $28 billion.

Breeden gets it

2009-03-26T16:13:00.000-07:00

Former SEC chairman (under Bush I) Richard Breeden testified to the Senate Banking committee today. His comments were some of the best, on-point statements on how we got into this financial crisis.

Since his stint at the SEC Breeden, has become a work-out specialist (Worldcom) and private equity investors. So his thoughts are worth listening to.

Some snippets:

"... the disasters we have seen did not arise due to lack of resources for the Federal Reserve, the SEC or any of the other agencies that didn’t perform as well as they needed to do."

"Many people are today pointing at “gaps” in the regulatory structure, including “systemic risk authority”. If the Fed hasn’t been worried about systemic risk all these years, then
people really should be fired. The problems we have experienced grew in plain sight of all our regulators. For the most part, we lacked adequate leadership at major regulatory agencies, not legal jurisdiction. ... Oversight of derivatives and swap markets is probably the major exception where firms like AIG were operating far outside of anyone’s oversight authority. That is a good reason to refuse to bail out swap counterparties of AIG in my opinion."

"Rather than simply calling for more authority for people who didn’t use the authority they already had, we need to reexamine why our regulators missed so many of the risks staring them 5
in the face."

"It is frankly almost incomprehensible how few directors of firms requiring taxpayer assistance have been forced to step down, even after investors and taxpayers lost billions because directors didn’t act prudently."

"Over time our governance standards have come to be weaker than those of many other countries, and our commitment to accuracy in accounting and disclosure has slipped considerably. The SEC’s enforcement program in recent years has not been as effective as the times demanded, with too many smaller cases and not enough focus on the largest problems".

"Transferring SEC accounting, disclosure or enforcement programs to the Fed would be a recipe for utter disaster."

"Overstating the value of assets is NEVER in investor interests, and if the system doesn’t require accurate values to be disclosed investors will simply

withdraw from the market due to lack of confidence.... in general the people who try to blame mark to market for the problems of insolvent institutions are simply wrong."

"There is no single person, and no single agency, that can be omniscient about risk. ... This can create inefficiency. More importantly, it can create systemic risk because if the regulatory “czar” proves wrong, every part of the system will be vulnerable to damage."

WSJ spins for Geithner

2009-03-23T06:56:00.000-07:00

The WSJ today (here, here and here), after being leaked details of the new government buyout plan for troubled assets at banks (as did other media), neglects to raise the key issue that's already been raised with the new public-private buyout plan: Is the deal a huge giveaway to private interests? And isn't it just the original TARP, just repackaged? That program died 'cause it was a giveaway and would not have done anything to build banks' balance sheets.

The NYT, too, neglected to ask the key question about the new plan, even though their columnist Paul Krugman has been critical. The Washington Post, too, failed to have anything prepped in the way of substantive criticism.

Pathetic.

(Bloomberg, though, gets it: It report's Krugman's critique, and quotes Dino Kos, managing director at Portales Partners LLC in New York and former executive vice president at the New York Fed, who says: “The big question is what is the incentive for the banks to sell? What is the incentive for a hedge fund to pay a price close to where the banks have it marked at?”

The Treasury is spinning this public-private deal as doing two things: 1) avoiding overpayment if bureaucrats ran the program, and 2) avoiding having the taxpayers take all the risks.

But the risks being taken on by private investors would be small--the loans to finance the assets are backed by taxpayers, who then share the profits equally (?) with the private investors. And, the overpayment problem is isn't a problem for government-owned banks: If we overpay, the dollars just go into a bank we own already. Plus, banks are unlikely to sell troubled assets at less than what they're marked down to already (because that would cause losses for the selling banks), hence this program is not likely to create real steals for investors and taxpayers. Assuming anything is sold under this plan, the prices will be too high and the taxpayers will take the loss.

Rally firms up with some leadership

2009-03-14T09:04:00.000-07:00

Market update:

Earlier this week, I wondered if this was a fool's rally, lead only by financials.

Strike that. On Thursday and Friday, 3-12 and 3-13, healthcare stocks lead the way. Consumer staples is also showing some strength. These are the leaders we would expect to see in a new sustained rally. ... I may start nibbling on pullbacks (VDC, VHY, IHE, IHI). These are ETFs I dumped in the past few weeks.

Maybe that was the low we saw March 6???

The CNBC Buffett interview

2009-03-11T11:10:00.001-07:00

Here's the transcript. Goes faster than listening for 3 hours.

Technician Jeff DeGraaf--we're extremely oversold

2009-03-10T17:06:00.000-07:00

CNBC speaks with Jeff DeGraaf, ISI Head Of Technical Analysis Research:

Not since 1931 has the S&P been so far below its 200-moving day average, DeGraaf says, meaning the market is extremely oversold.

And new lows on the S&P has been contracting over the past several months, CNBC says, citing DeGraaf: "Even though we're 140 points below where we were in October, the number of stocks making those lows is about half. That's a bullish divergence."

Continuing, "These are good conditions but they don’t mean anything without a spark. On Tuesday we got the spark, DeGraaf says."

DeGraaf likes Sprint (S) and Morgan Stanley (MS).

Fool's Rally? Maybe

2009-03-10T10:44:00.000-07:00

Market update:

Market's are up strongly in midday trading. A market bottom? Normally I'd expect a fool's rally, but yesterday, there seemed to be a flood of bad news, a sense of foreboding, and although I didn't post my thoughts here, there did seem to be a smell of a market bottom.

I'm still doubtful. The rally today is being led by financials. The problems in banking and insurance are not yet over.

Later update, 4 pm PT: Today's action saw relatively weak rallies in consumer goods, healthcare, some tech sectors, Asia and large-cap growth--all areas where I would expect market leadership to come from. Commodities made little headyway as well, with materials being an exception (but not by much). Bottom line: Doesn't look like a rally yet.

John Authers of the FT captures the mood today, writing about the lack of confidence yesterday. (sub required)

Grantham: "Invest when terrified"

2009-03-10T10:43:00.000-07:00

Money manager Jeremey Grantham on how to invest when you're terrified. He suggests moving in with large chunks of money.

Save us from rewarmed failures

2009-03-09T10:58:00.000-07:00

Recent reports have it that Annette Nazareth, former head of the SEC's division of markets and trading (its new name), was to be Tim Geitner's No. 2 at Treasury, but withdrew due to fears of her failed tenure at the SEC.

I'ts about time. Failures should be put to pasture. Nazareth is a classic see-no-evil regulator, captured by industry interests.

What does this tell us about Geithner?? Remember, Geithner was head of the NY Federal Reserve, which was supposed to regulate banks.

From the NY Times today:

The Treasury’s staff problems took another turn for the worse in recent days, when the administration’s preferred candidate for the No. 2 spot at Treasury, Annette L. Nazareth, withdrew her name from consideration.

Administration officials said Ms. Nazareth, a former top official at the Securities and Exchange Commission, did not have tax problems. Rather, administration officials were worried that political opponents would seize on her years as an S.E.C. commissioner and, before that, the agency official in charge of overseeing the markets. The S.E.C. has been harshly criticized for its lax enforcement.

Bill Gross on nationalization, and why he's conflicted

2009-03-09T10:26:00.000-07:00

In his most recent market outlook, Pimco's Bill Gross speaks out against nationalization:

Question: What do you think about nationalizing the banks?

Gross: I think Roubini, Dodd and Greenspan haven’t thought this one through. The U.S. isn’t Sweden, and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.

But Gross is one of those creditors who doesn't want to lose any money. Pimco, in its 1Q09 Market Outlook, says it will retain a "substantial overweight" to agency mortgage-pass-throughs issued by Fannie Mae and Freddie Mac, because of expected government support "associated with the [government] conservatorship" of those entities.

So conservatorship is OK, nationalization is not. I'm not real clear what the difference is. But the current "conservatorship" policy keeps us in much the same boat that got us in trouble with Fannie and Freddie--socialization of risk, with privatization of the profits.

Bill Gross and his investors are privatizing the profits.

KC Fed president: Nationalize 'em

2009-03-08T08:34:00.000-07:00

Thomas Hoenig, head of the Federal Reserve Bank of Kansas City, just called for nationalizing insolvent banks.

Regulators admit mistakes--except SEC, Finra

2009-03-05T13:02:00.000-08:00

How come regulators from the OTS can admit mistakes and not use the "not-our-job excuse," while everyone--and I mean everyone-- at Finra and the SEC duck responsibility for failed brokerage firms?

Gross: Stocks no good for the long run

2009-02-26T13:33:00.000-08:00

Bill Gross exchanges emails with consultant and TV talking head Peter Cohan. Gross tells Cohan:

"Global growth rates -- low, low, low -- asset classes will be readjusted for that outlook. That is -- stocks will be more of a subordinated income vehicle as opposed to a 'stocks for the long run' growth vehicle."

Health care sector craters

2009-02-26T13:13:00.001-08:00

One of the relative bright spots in the market was the healthcare sector. (VHT, IHE, IHI). No more. The stocks got whacked today, breaking near term support.

There are really no places to invest. High holdings of cash recommended (about 35% in recommended list, plus 20-30% in TIPs)

According to Marketwatch:

Shares of managed-care companies extended their declines as the Obama administration's proposed budget would put in place vast reductions in payments to private insurers through the Medicare Advantage program and would implement a bidding process for insurers. Humana dropped the most, losing 20% in recent trade.

The WSJ Health Blog says:

Health insurers’ stocks are taking a beating today as investors digest the Obama budget proposal’s push to cut federal payments to insurers that run private Medicare Advantage plans.... Humana, United and Coventry are among the biggest players in Medicare Advantage, which helps explain why their stocks are taking the biggest hits.

I'm sitting on the sidelines in healthcare now. This is still a sector to watch when the bull market returns.

Why we need to nationalize the banks

2009-02-25T22:39:00.000-08:00

THE must read treatise on why we need to temporarily nationalize the banks ... from lessons learned in the Japanese banking crisis. None of the prescriptions are new, or apparently even much debated among those in the know. The treatise is from a 1998 book by Adam Posen, "Restoring Japan's Economic Growth."

Hussman: deep bear could take SP500 to 500

2009-02-24T15:34:00.000-08:00

John Hussman's lastest missive this week: "To achieve a valuation trough similar to deep historical extremes, the S&P 500 would have to approach the 500 level." If we don't go down that low, the most likely outcome over the next decade is 9-11% per year returns, on average.

Marcel Ospel the most hated man in Switzerland

2009-02-24T09:05:00.000-08:00

Bloomberg reports on how the Swiss blame Ospel for destroying their banking industry.

Market meltdown? Look out below ...

2009-02-23T14:28:00.000-08:00

The S&P 500 index today undercut its last major downside test of 11-20-08, 747.78 intraday, by today hitting 742.37 and closing at 743.33. (The intraday low on 11-21-08 was 741.02, but the market rallied that day to close at 800.) ... Market action looks droopy this time (bad), not the kind of panic sell-off culminating in the 11-21-08 rally. Several sectors earlier last week confirmed a breakdown: EFA, VAW, VDC and IDU. (Blooger note: I raised cash last week, selling VDC and EFA among others.) The Dow Jones industrial average, filled with losers like Citi and GM, also earlier confirmed new lows, but this antiquated index is of little value (see a story from CNBC on this today. The DJIA is an old, established measure, and is routinely pimped by the WSJ, owned by Dow Jones, which owns and profits from the DJIA index.) ... A rally henceforth should be judged for quality (we need up volume, major price moves and leadership from some sectors.) Otherwise, it's likely to be a rally to sell into.

Health one of few good sectors--Marketwatch

2009-02-16T09:05:00.000-08:00

Marketwatch interviews some health-care sector fund managers about this relatively strong sector.

Dean Kartsonas, manager of Federated Capital Appreciation Fund says other defensive sectors are stuggling. Telecoms are under attack from cable operators, while consumer staples have suffered as consumers shift to lower-priced brands.

To make money, short Cramer and Mad Money

2009-02-10T22:13:00.000-08:00

Barron's finds that Jim Cramer's picks have been rising versus the market for several days in advance of his show, while his sells have been falling. Hence, the best way to use his advice is to short his picks for a month or so as they revert to trend.

Ray Dalio of Bridgewater-Barron's interview

2009-02-10T22:06:00.000-08:00

Ray Dalio says to stock up on gold and T bonds, baby.

Blankfein backs fair value accounting

2009-02-09T21:45:00.000-08:00

Lloyd Blankfein, CEO of Goldman Sachs, says: 'If more institutions had properly valued their positions and commitments at the outset, they would have been in a much better position to reduce their exposures."

Blankfein lays out 7 errors made by financial institutions leading to the crisis in this FT column. Last, and perhaps most important: They didn't properly value their assets.

GAO: Don't blame commodity speculators

2009-02-09T09:23:00.000-08:00

I missed this. The GAO says speculators didn't cause the commodity run-up last year. In a January 2009 report, the GAO said "the fact that the studies generally did not find statistical evidence of such a relationship appears to suggest that such trading is not significantly affecting
commodity prices."

Madoff whistleblower's inside the SEC story

2009-02-05T19:22:00.000-08:00

Here's how the Bernie Madoff whistleblower Harry Markopolos got a deaf ear from the SEC. Some of this has been reported in a Dec. WSJ piece, but his testimony provides more details. And SEC officials are not commenting at all, even to Congress. From the 2-4-09 House testimony by Harry Markopolos:

My first submission to the SEC was coordinated through Ed Manion, CFA, a member of the Boston Regional Office with 25 years of industry experience. Mr. Manion was a former trader at the Boston Company and a portfolio manager at Fidelity serving alongside Peter Lynch. He has been with the SEC for 15 years and, in my opinion, was the only person in the Boston Regional Office with the proper industry background to comprehend fully the size, scope and danger of the Madoff Ponzi scheme. Mr. Manion is a Chartered Financial Analyst (CFA) and is highly respected in Boston’s financial district and is considered the go-to person for securities fraud cases in Boston. We would call Ed “the SEC’s hit-man,” because when the SEC brought Ed in, people often ended up in jail via SEC criminal referrals to the DOJ. Throughout the past 9 years, Ed Manion was the only SEC staff member who ever truly understood the Madoff scheme

... SEC securities lawyers did not want to hear from a non-lawyer SEC staffer like Mr. Manion with 25 years of trading and portfolio management experience. As much as Boston’s financial community looks up to and respects Ed Manion, that’s how much the SEC looked down upon and ignored Mr. Manion’s repeated requests for SEC enforcement action against Mr. Madoff. Without Mr. Manion’s continued encouragement, I would have stopped the Madoff investigation after my October 2001 SEC Submission. Every time I threatened to quit the investigation, Mr. Manion would tell me I had a duty to the public to keep going no matter how badly the odds were stacked against us. I believe that the SEC would fire him if he were to testify before Congress about his role and that of the SEC during the past 9 years; but if the proper protections could be worked out in advance to safeguard his career and guarantee him another 3 years until his government retirement, I recommend that the Committee speak with him. I owe him much thanks for his dedication to the effort of sharing Mr. Madoff’s alleged fraud to the appropriate authorities within the SEC.

Late 1999 – 2000

I started the Madoff investigation in late 1999 and early 2000 as a result of Frank Casey,

Senior Vice-President of Marketing for Rampart Investment Management Company, Inc., telling me about the fantastic returns of one Bernard Madoff (hereafter referred to as BM).

...I spent hours writing my eight-page 2000 SEC Submission and arranged with the Boston SEC’s Ed Manion to meet with the Boston Regional Director of Enforcement (DOE), Attorney Grant Ward in May 2000. Given Mr. Ward’s position and my understanding of his mandate, I was shocked by his financial illiteracy and inability to understand any of the concepts presented in that submission. Mr. Manion and I compared notes after the meeting and neither of us believed that the Boston Region’s DOE had understood any of the information presented. Little did I know that over the next several years I would come to understand that financial illiteracy among the SEC’s securities lawyers was pretty much universal with few exceptions.

2001

In 2001, the Boston SEC’s Ed Manion and I spoke often of the lack of follow up to my May 2000 SEC Submission. Immediately after 9-11, Mr. Manion called me, convinced that my work had somehow fallen through the cracks and never made it to the responsible parties in the New York Regional Office. In October 2001 or thereabouts, I resubmitted my original 8-page report, wrote an additional 3 pages and included 2 pages entitled “Madoff Investment Process Explained.” The New York Regional Office never contacted me after either my May 2000 or October 2001 SEC Submissions. To my mind, the mathematical analysis provided compelling proof that an investigation was required. Yet, none was conducted to my knowledge.

2002

My records for 2003 & 2004 are non-existent due to my leaving my former employer at the end of August 2004 and not taking a copy of my e-mail archives with me. I am sure I worked on the case, but I don’t have any supporting documentation at this time.

... In late October, most likely on October 25, 2005, I met with Mike Garrity, Branch Chief, of the SEC’s Boston Regional Office. Mr. Ed Manion, CFA felt that Mr. Garrity was a conscientious, hard-working Branch Chief who would give me a fair and impartial hearing that might be what was needed to get this case re-submitted to the SEC’s New York Office. Ed Manion scheduled an appointment for me with Mr. Garrity and I thought that perhaps the third time submitting this case would turn out to be the charm.

I met with Mr. Garrity for several hours and found him to be very patient and eager tomaster the details of the case. Unlike my disastrous May 2000 meeting with that office’sDirector of Enforcement, Attorney Grant Ward, I found Mr. Garrity to be interested and fully engaged in my telling of the scheme. Some of the derivatives math was difficult for him to understand, so I went to the white board and diagrammed out Madoff’s purported strategy and its obvious failings until he understood it. A few of the more difficult concepts required repeated trips up to the white board but at the end of our meeting, it was clear that Mr. Garrity understood the scheme, it’s size, and it’s threat to the capital markets.

Mr. Garrity promised to follow up and he was true to his word. About a week or so later,

Mike Garrity called me back telling me that he did some investigating and found some irregularities but that he couldn’t tell me what they were, only that he was in contact with the New York Regional Office and wanted to put me in touch with a Branch Chief there for follow on investigation. He also said that I would have to identify myself as “the Boston Whistleblower” when I called because he wanted to protect my identity to the extent possible.

Perhaps the most impressive thing about Mr. Garrity was his willingness to think outside of the box. He was able to imagine the impossibility of Madoff’s returns and understand that BM’s returns were too good to be true and this obviously concerned him. He told me that if BM were located within the New England region, he would have had an inspection team inside BM’s operation the very next day.

On Friday, November 4, 2005, Mr. Garrity sent me the names and contact information for

Doria Bachenheimer and Meaghan Cheung. (Branch Chief). I called the latter and revealed my identity, and e-mailed her a revised 21-page report. I then e-mailed my thanks to Mike Garrity and informed him that I would be working the case with New York. On Monday, November 7, 2007, I sent Ms. Cheung the report which the Wall Street Journal has now posted on-line less everything past Attachment 1. This report further detailed BM’s fraud.

My experience with New York Branch Chief Meaghan Cheung was akin to my previous

discussions with Attorney Grant Ward, and demonstrated to me an SEC failure in providing appropriate personnel to understand the case I was submitting. Ms. Cheung also never grasped any of the concepts in my report, nor was she ambitious enough or courteous enough to ask questions of me. Her arrogance was highly unprofessional given my understanding of her responsibility and mandate. When I questioned whether she understood the proofs, she me that she had my report and that if they needed more information they would call me. She never initiated a call to me. I did follow-up. I was the one always calling her . She was unresponsive and mostly uncommunicative when I did call, demonstrating a lack of interest and acumen for this area of investigation.

In December 2005, I decided that the third time was not a charm and that the SEC was,

once again, not going to pursue the Madoff case. I also decided that if I was going to continue my investigation and attempt to involve the authorities, I should ensure my personal safety in case of possible efforts to silence me and end my investigation. I decided that I should go to the press. I went to Pat Burns, communications director at Taxpayers Against Fraud, an educational group that supports the False Claims Act, for advice and assistance on how to have my Madoff case materials investigated by the press. Mr. Burns put me in contact with John Wilke, senior investigative reporter for the Wall Street Journal’s Washington Bureau. Mr. Wilke and I would become friends over the course of the next three years. Unfortunately, as eager as Mr. Wilke was to investigate the Madoff story, it appeared that the Wall Street Journal’s editors never gave their approval for him to start investigating. As you will see from my extensive e-mail correspondence with him over the next several months, there were several points in time when he

was getting ready to book air travel to start the story and then would get called off at the last minute. I never determined if the senior editors at the Wall Street Journal failed to authorize this investigation.

On March 3, 2006, I had a 5-minute call with NY Branch Chief Cheung (Conversation

memo e-mail to Frank Casey and Neil Chelo, Friday, March 3, 2006, 3:23 pm). When I

mentioned that my derivatives expertise would be needed to break the case open, she dismissed me by saying that the SEC’s Washington Headquarters had Ph.D.’s in an economics analysis unit with derivatives expertise. When I pointed out that the SEC likely didn’t have any Ph.D.’s on staff with derivatives trading experience who truly understood how these financial instruments worked because a true derivatives expert couldn’t afford to work for SEC pay, she ignored me.

She was in “listen only mode.” A trained investigator would have kept me on the phone for as long as possible, asking me as many open-ended questions as possible in order to advance their investigation. But as is typical for the SEC, too many of the staff lawyers lack any financial industry experience or training in how to conduct investigations. In my experience, once a case is turned into the SEC, the SEC claims ownership of it and will no longer involve the investigator. The SEC never called me. I had to call the SEC repeatedly in order to try to move the case forward and with little to no response. This may go a long way in explaining the SEC’s long and consistent history of regulatory failures.

In the 2006 case materials you will see long strings of e-mails between myself, Neil

Chelo and Frank Casey as we pushed the investigation forward because we felt that the SEC was not doing any work to advance the case. At the time, the SEC’s reputation was slipping in the press, due to reports of its failure to investigate the Pequot insider-trading investigation.

... Perhaps the biggest breakthrough during the year was my September 29, 2006 telephone call to Matt Moran, Esq., Vice President of Marketing, for the Chicago Board Options Exchange. Mr. Moran confirmed to me that several OEX Standard & Poor’s 100 index options traders were upset and believed that BM was a fraudster. Mr. Moran said he couldn’t talk to either the Wall Street Journal. or the SEC without permission but that if these organizations went through proper channels and got permission from Lynn Howard, the CBOE’s Public Relations Head, then the CBOE staff and traders would be able to cooperate with an investigation and answer questions.

This was exciting news! Unfortunately, neither the Wall Street Journal. nor the SEC wereinclined to even pick up a phone and dial any of the leads I had provided to them. It is a sickening thought but if the SEC had bothered to pick up the phone and spend even one hour contacting the leads, then BM could have been stopped in early 2006. One hour of phone calls was the difference between almost 3 more years of fraud and untold billions of additional investor losses. That’s how close we were and how far we were from busting this case wide open in 2006.

2007 was apparently a tough year for BM. Frank Casey got a hold of key May 2007offering documents from Prospect Capital, a San Francisco based firm that was marketing the “Wickford Fund LP,” which promised to deliver a swap that paid out between 3 to 3 ¼ times whatever BM’s returns were less borrowing costs and management fees. Here I am using BM fund and Fairfield Sentry, a Greenwich, CT feeder fund interchangeably. This was a clear signal that BM was running low on new funds to keep his Ponzi scheme afloat.

In order to keep paying out funds to existing investors, a Ponzi operator must ensure that

new funds are continually coming in the door to offset the outflow of payments to old investors. Creating a leveraged swap product was a sign that the inflow of new dollars was insufficient to keep the scheme going and that BM needed to create additional incentives sufficient to attract new money.

In a June 29, 2007 e-mail document submission to New York SEC Branch Chief,

Meaghan Cheung I forwarded these offering documents to her office and copied Ed Manion of the Boston SEC Office. I also included updated April 2007 performance data from Fairfield Greenwich Group. The interesting thing about the performance data was that BM was noticeably stepping down his stated returns. If you look closely at the data, you will see that he went from double-digit returns from 1991 – 2000, but that all subsequent years returns were in single digits, a clear sign that he needed to cut back on the payouts to old investors in order to conserve cash and keep the scheme going. How the SEC could look at the same data we did and not arrive at the same conclusions that we did is hard to fathom. One would have to seriously question their industry experience and investigative expertise to have missed the red flags contained in the June 29, 2007 SEC Submission.

... Now Wickford Fund was allowing this same investor to invest her $1 million and borrow an additional $2 million so that she could now invest a full $3 million with BM. Nothing is free in finance and you can be sure there is a bank lending this investor the $2 million dollars she is borrowing and charging a profitable interest rate for providing this service. Wickford Fund LP is even happier to do this because they now get to charge 3 times as much in management fees because the investment amount is now $3 million and not $1 million. BM is also happier because instead of receiving $1 million, he’s taking in $3 million and cheating not only the investor but the bank that is lending the investor the additional $2 million. This leveraged performance return line as provided on the graph not only does not exist for any asset class but any student of biology will recognize it as denoting a growth curve for natural organisms such as for population. How can any capital market return over any length of time only go up and never down? How did socalled due diligence “professionals” at the Madoff feeder funds miss this? How did the SEC’s staff miss this? If a picture says a thousand words, then this picture said “FRAUD” a thousand times over.

In retrospect, perhaps I should have explained every single page to the SEC’s New York

Office. But, I was dismissed and ignored making any further attempts to explain on my part impossible. I do not know whether the cause was political interference or incompetence but the result was a refusal to look and an unwillingness to grasp even the simplest explanations for the red flags present in the “Wickford Fund LP” offering documents. Every phone call to Meaghan Cheung made me feel diminished as a person, so I consciously chose to e-mail her so that I didn’t have to undergo unpleasant and unsatisfying telephone calls.

2008

2008 was a strange year for everyone in global finance and our team was no exception.

Because of market turbulence all of us were busy with other matters and let our BM investigation drop by the wayside with one exception which occurred in April. A good friend of mine, a University of Chicago Ph.D. in finance, Mr. Rudi Schadt, Oppenheimer Funds’ Director of Risk Management, ran into a fellow University of Chicago Ph.D., a Mr. Jonathan Sokobin who was the SEC’s new Director of Risk Assessment in Washington. Mr. Schadt, who was familiar with my work in the field of risk management, put Mr. Sokobin in touch with me in late March 2008.

Mr. Sokobin asked that I call him, which I did a couple of days later. I wanted to give him a heads-up on some new emerging risks that I saw looming over the horizon. After our call, I felt that I had established my bona fides as a risk expert and felt comfortable enough to send him my updated, 32-page, December 22, 2005 SEC Submission along with a short 4 paragraph e-mail. I tried calling back a few times but never got through and gave up. I never heard from Mr. Sokobin again. At this point I truly had given up on the BM investigation.

... For those who ask why we did not go to FINRA and turn in Madoff, the answer is simple: Bernie Madoff was Chairman of their predecessor organization and his brother Peter was former Vice-Chairman. We were concerned we would have tipped off the target too directly and exposed ourselves to great harm. To those who ask why we did not turn in Madoff to the FBI, we believed the FBI would have rejected us because they would have expected the SEC to bring the case as subject matter experts on securities fraud. Given our treatment at the hands of the SEC, we doubted we would have

been credible to the FBI.

###

SEC GC cites executive privilege

2009-02-05T15:20:00.000-08:00

One of the most amazing and pathetic performances ever by SEC staff at a Congressional hearing--yesterday top SEC officials were grilled by House members over the Madoff fraud. They ducked questions, citing ongoing investigations.

At one point, acting SEC general counsel Andy Vollmer cited exectutive privilege, in part. Rep. Gary Ackerman (D-N.Y.) and Rep. Paul Kanjorski (D-Pa.) are quizzing Vollmer on where he gets off. Check it out:

ACKERMAN: ... Mr. Vollmer, I believe you were the one who thought that your people didn't have to testify here today. I don't know where you got that, but some of us think otherwise. Maybe -- maybe you could tell us. How did they miss all this?

VOLLMER: We're as committed as each of you...

ACKERMAN: That's not the question! We give you credit for being committed.

VOLLMER: Perhaps -- perhaps you could let me answer.

ACKERMAN: Perhaps you can try to answer.

VOLLMER: And what we -- what we're asking...

ACKERMAN: No, no. We're asking. You have to tell us things. You're forgetting what the -- what this procedure is. You're not coming here to ask.

VOLLMER: Let's let...

ACKERMAN: We're asking you! How did you screw up?

VOLLMER: ... the inspector general's process works. It's a process Congress set up to identify the facts that we all need to make these judgments. Let's let the system work that Congress created. There will be some recommendations. There will be time for this committee to look at the facts and to think of the recommendations themselves.

ACKERMAN: Tell that to the people who...

VOLLMER: And that's the appropriate way...

ACKERMAN: ... have lost their whole lives that they have time.

VOLLMER: ... to proceed in this matter.

ACKERMAN: People don't have time. We need to tell them something...

VOLLMER: And the other thing that matters...

ACKERMAN: ... instead of lecturing us, Mr. Vollmer.

VOLLMER: ... is that there law enforcement proceedings going on. There are personal rights at stake. There are the -- there is the integrity of the investigations to protect.

ACKERMAN: We wouldn't be in this mess if you people did your job.

VOLLMER: That's why we've asked the committee to bear with...

ACKERMAN: No, we're asking you. We are asking you.

VOLLMER: ... these investigations to allow them to proceed.

ACKERMAN: Could you cite whatever authority you're citing, and have cited?

VOLLMER: I'd be delighted. I'd be happy to do that. I'd be happy talk with...

ACKERMAN: Because you have a right not to answer our questions under the Constitution...

VOLLMER: ... your lawyers.

ACKERMAN: ... Fifth Amendment procedure.

I'm not a lawyer. I'm a citizen, though.

VOLLMER: I'd be happy to talk lawyer...

ACKERMAN: I'm a frustrated citizen.

VOLLMER: ... happy to give the references to you or to your lawyers.

ACKERMAN: I'm listening. Give us the references.

VOLLMER: There's a very important opinion from Attorney General Robert Jackson in 1941, where he explained the need to discharge the constitutional and statutory obligations of the executive branch in connection with law enforcement in civil litigation...

ACKERMAN: Are you citing executive branch immunity, Mr. Vollmer?

VOLLMER: ... in response to requests for information from the Congress.

ACKERMAN: Are you citing executive branch immunity, Mr. Vollmer?

VOLLMER: There are various protections at...

ACKERMAN: Are you citing executive branch privilege, Mr. Vollmer?
VOLLMER: I would like to let you allow me to answer your question.

ACKERMAN: It's a yes or no question, sir. Either you are or you are not.

VOLLMER: Well, no, it is not.

There are a variety of reasons and privileges and protections. One of them is executive branch protections. There's a deliberative process protection.

They stem from the same desires that you have. And we're asking that you allow those processes to work.

ACKERMAN: We are out of patience. And the question, obviously, is a yes or no question. Either you're citing executive privilege immunity, or you're not doing that.

VOLLMER: I just explained, there are a variety...

ACKERMAN: You know, if you're citing your Fifth Amendment privilege, you don't make a speech.

VOLLMER: ... and that's one of them, was the executive privilege.

ACKERMAN: You are -- was that a "yes," you're citing executive privilege immunity?

VOLLMER: In part, it is, yes.

ACKERMAN: I'm sorry?

VOLLMER: I said, yes, it is in part.

KANJORSKI: Have you inquired of the Justice Department or someone else that they have analyzed that position for this hearing today, and they found that the Securities and Exchange Commission, requested by Congress to discuss a very important pending piece of legislation is being established to protect hundreds of thousands, perhaps millions of people, that you have a right, representing the executive branch, the president of the United States, to stand on that authority?

Have you posed that question to the attorney general or...

VOLLMER: No.

KANJORSKI: Then, this is on your interpretation?

VOLLMER: This is the position of the agency.

KANJORSKI: And you're the general counsel for the agency. I assume you make the legal determinations for the agency.

VOLLMER: No. The commission makes the decisions for the agency...

KANJORSKI: So, this question has been passed through...

VOLLMER: ... (inaudible) from a variety of sources, and the general counsel's office is one of those...

KANJORSKI: So, this has been passed through the new director, or chairman, of the commission and the members of the commission. And they...

VOLLMER: (inaudible).

KANJORSKI: ... agree and have instructed you to instruct this panel not to respond to the questions of Congress, because of executive privilege, and maybe other privileges contained in the 1941 Supreme Court case. Is that correct?

VOLLMER: The commission supports this position.

ACKERMAN: That wasn't the chairman's question.

VOLLMER: Yes, I -- the answer to that specific question is "no."

ACKERMAN: The answer is "no." So, you're acting on your own volition.

VOLLMER: I didn't say that, no. And I would disagree with that.

ACKERMAN: You know, most of us speak English, and we're having a hard time getting an answer from you.

This is not the -- this was not discussed by the commission, but it's the commission's position. Is that what you just said? Do you divine that?

VOLLMER: The commission's approved taking this position.

ACKERMAN: The commission has voted the position that you will cite executive privilege, and not testifying before this committee and answering its questions.

VOLLMER: I couldn't say that to you honestly, because the specific reasons...

ACKERMAN: Obviously.

VOLLMER: ... weren't discussed and given by the commission. But the basis is that we were...
ACKERMAN: Your value to us is useless (ph).

VOLLMER: ... (inaudible) and accommodation. And we've tried to be accommodating...

ACKERMAN: Your value to the American people is worthless.

VOLLMER: ... with you. And...

ACKERMAN: Your contribution to this proceeding is zero.

VOLLMER: ... we ask that you take into account the concerns that have been well settled over many years. And we'd ask you to take those into account.

ACKERMAN: Our economy is in crisis, Mr. Vollmer.

We thought the enemy was Mr. Madoff. I think it's you.

You were the shield. You were the protector. And you come here and fumble through make-believe answers that you concoct, and attribute it to executive privilege that you've not consulted with executive branch on.

Mr. Chairman, I'm through.

###

Are we all damned? (Krugman)

2009-02-03T14:30:00.000-08:00

Paul Krugman raises a term used by (an old economist?) Edgeworth ... "Damnification." Lower spending and increased saving in a zero-rate environment cuts national income. Deleveraging causes falling asset prices. So increase saving and cutting debt kills everyone's balance sheet.
Paul Krugman:

In a famous 1958 paper my old teacher Jagdish Bhagwati described the conditions for “immiserizing growth” — a situation in which an expansion in an economy’s production, by driving down the price of its exports, actually reduces its real income. It was a classic demonstration that sometimes individually rational actions can make everyone (at least in one national economy) worse off — although I prefer the terminology of Edgeworth, who noticed the possibility more than a century ago, and talked of nations being “damnified” by their expansion.

I bring this up because the key feature of our current economy, I believe, is that we’re being damnified on multiple fronts.

The paradox of thrift is the best-known example: when everyone tries to save more in an economy in which interest rates are up against the zero bound, everyone’s income falls, and we’re worse off than before. The paradox of deleveraging has gotten currency, too: everyone tries to shrink their balance sheet, and the result is plunging asset prices, which leave everyone worse capitalized than before.

But there’s at least one more form of damnification that has me really worried: the paradox of deflation. An individual company or worker can preserve a business or a job by accepting a lower price; but when everyone does it, we get debt deflation — a rising real burden of debt, which weighs on the economy — and also start to have deflationary expectations built into lending and investment decisions, which further depresses the economy. And once you’re in a deflationary trap, it’s very hard to get out.

Consumer staples take a dive ...

2009-01-30T13:34:00.000-08:00

This is a bit worrying ... The consumer staples sector sold off big time today, breaking through a small trading range and hitting lows not seen since Nov. 20-21.

According to the Investor's Daily site: Proctor & Gamble (PG) was off 5% after it lowered its full-year outlook. It added that sales this quarter and possibly for the rest of the year may fall. The company is often thought of as recession-resistant.

2-5-09 Update: Yesterday, a weak rally in consumer staples. Today, another loss, and falling relative strength. (I sold some VDC, IYK today.) Charts on many of the individual issues don't look good, save for a couple retail drug stocks, CVS and WAG. Makes sense--health care is looking strong and these drug retailers look good. (Sam Stoval of S&P recently highlighted the retail drug sector.) Several other sectors also look better, inlcluding large cap growth and technology--two areas that have just perked up.

Should the Fed be the super regulator?

2009-01-26T07:58:00.001-08:00

This Wash. Post story raises some issues about the Fed, and a bill in the House that would make the Fed the overseer of systemic risk.

Did Thain take on NEW toxic mortgages?

2009-01-23T13:37:00.000-08:00

Did John Thain let Merrill wade deeper into mortgage-related losses? According to the New York Times:

After Merrill appeared to be safely in Bank of America’s arms, Merrill’s traders began buying risky mortgage assets, thinking that the market had bottomed out, according to two people familiar with the firm’s trading. Merrill also began to run up losses on equity derivatives and other instruments, they said.
By the end of 2008, Merrill had lost an additional $5 billion in the markets, marking the first time since Mr. Thain’s arrival that the firm’s losses had moved beyond the mortgage investments that predated his tenure.

But the WSJ says that Thomas Montag, the head of global sales and trading brought in by Thain, was just promoted. The paper said both Montag and Thain have maintained that the recent losses stemmed largely from old positions that Merrill inherited from previous management.

1-26-09 Update: In a response to the controversy, Thain said most of the losses were incurred on "almost entirely legacy positions" and that Merrill was completely transparent about the losses.

Group of 30 report could portend regulatory changes

2009-01-18T09:23:00.000-08:00

A Group of 30 report, whose co-author is Obama adviser Paul Volcker, calls for limiting the size of banks, prohibiting large banks from engaging in hedge funds, limiting their proprietary trading, and making them retain pieces of CDOs they underwrite. Large insurance companies and brokerage firms need oversight by an appropriate regulator, the report said. Money markets should be reogranized as special banks with government insurance, with no more "amortized cost pricing," meaning no more stable NAVs.

The report called for higher capital requirements, " given the demonstrable limitations of even the most advanced tools for estimating firmwide risk."

And regulators will need good luck to ensure this recommendation: "In all cases, countries should explicitly reaffirm the insulation of national regulatory authorities from political and market pressures."

A Washington Post story is here.

Coming full circle on the TARP

2009-01-18T07:18:00.000-08:00

A story in the Wash. Post. lays out what the Obama administration is thinking about the credit crisis. Buy bad assets through a "bad bank" is one option, and requiring private investors to match terms of bailouts is the other.

Re buying bad assets, the Post hits what has, I think, been the nub of the problem:

The difficulty is that banks think their assets are worth more than investors are willing to pay. If the government sides with investors, the banks will be forced to swallow the difference as a loss. If the government pays what the banks regard as a fair price, however, the markets may ignore the transactions as a bailout by another name.
Most economists favor an approach in which the government would pay market prices, and then help the banks cover the losses through a program of capital injections.

Did Tim Geithner's Fed miss the Citigroup mess?

2009-01-14T16:23:00.000-08:00

With all the attention paid to the SEC and its screw-ups, it's easy to forget that the Federal Reserve, and the New York Fed (and its president Tim Geithner) in particular, were responsible for overseeing Citigroup.

An excellent Propublica story runs down the history of the Fed's oversight and Citi's troubles, apparently getting most of its story from prior press reports. The Fed, similar to Finra's secret brokerage exam reports, is completely opaque. Can't risk scaring the public, after all.

Gross: "We have met Mr. Ponzi, and he is us"

2009-01-10T07:51:00.000-08:00

Bernie Madoff is just one of many Ponzi schemes, says Bill Gross:

"Aaa subprimes structured like a house of straw; Aaa monoline insurers built like a house of sticks; Aaa credits like AIG, FNMA, and FHLMC where only a huff and a puff [and] dependent upon asset price appreciation for their survival. Ponzi finance. ... Municipalities with begging bowls now extended for over a trillion of Federal taxpayer dollars, based their budgets and their own handouts on the perpetual rise in home prices, the inevitable upward slope of sales taxes, and the never-ending increase in employment and personal income taxes. To add injury to insult, they conveniently “balanced” their books with a host of accounting tricks ... [A]uto companies that siphoned sales dollars to make labor peace instead of research and design expenditures; hedge funds that preposterously billed investors for 2% and 20% of nothing; a President and politicians who thought they could fight a phony war for free and distract the nation’s attention from $40 trillion of future social security and health care liabilities. Ponzi, Ponzi, Ponzi."

How to invest?

Gross: "[S]hake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first. ... [T]o think California or NYC would be allowed to fail is, well – unthinkable. Municipal bonds then, selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential." TIPs "can benefit if and when the government’s efforts to reflate begin to take hold."

Obama team posts economic analysis of stimulus

2009-01-10T07:21:00.000-08:00

Obama's economic team posted its analysis of the stimulus package being discussed, of around $775 billion. They say it will create 3.7 million jobs and boost GDP by 3.7% by the 4Q of 2010.

Top fund manager in '08: How'd he really do it?

2009-01-07T22:18:00.000-08:00

A WSJ story, “Why Forester Finished First,” reports that Tom Forester, manager of Forester Value fund (FVALX), was up by 40 bps in 2008.

But the story doesn't exactly say how he did it. It says he held up to 30% of his fund in cash. But that kind of cash allocation alone wouldn't have avoided the rout without some fancy market timing.

An October 2008 note from Morningstar says Forester was up 11.5% through September, by avoiding large stakes in financials and loading up in consumer staples and health care.

Yes, sector selection is important.

But it also looks like this fund missed the rally from 2003.

Swing-for-the-fence guys look great during bull runs. Super conservative deep-value guys like Forester look great in times like these.

Is it possible to get most of the best of both worlds in one manager???

Fed may target inflation to deflect deflation

2009-01-07T08:25:00.001-08:00

I think the FT gets it right in its story's lede on the latest Fed minutes--the U.S. is establishing a de facto inflation target to shore up the public expectations of positive inflation, and so make it less likely that a deflationary dynamic could take hold.

Paul Krugman and others have been warning about how monetary policy may no longer be effective, and how important inflation expectations may be in encouraging spending and boosting demand, and hence snapping us out of a depression/deflation problem.

Notice how the WSJ buries the inflation target news at the bottom of its story.

My 2008 investment performance

2009-01-06T21:59:00.000-08:00

Market recap 2008 (and some from 2007 and before).

For the year, my four real-money personally managed accounts, which use ETFs, lost 24.55%, 21.03%, 25.51% and 23.92% (including commissions and account fees). The S&P 500 index (with dividends) lost 37%. Accounts are held at Foliofn, with results calculated by Foliofn using the “Mid-Weighted Dietz Method” to calculate returns on a daily basis and a “Unit Value Method” to calculate the aggregate performance returns over various periods of time. (Don't ask me to explain!) This is a time-weighted measure, which accounts for cash flows into and out of accounts and produces a comparable measure with other portfolios or funds.

All in all, my results weren't as horrific as the market overall—which they could have been, because my style is aggressive growth. Together with performance from 2004-2007, these results further my belief that average investors, by paying attention to the market's subplots--and using ETFs, sector funds and style-pure mutual funds--may well be able to temper some of the downside while capturing the bulk of the market's upside. The key is to not attempting to time the market so much as avoid areas that aren't working over time. (Note, few active managers can beat the market on a risk-adjusted basis over time. Hence my focus on trying to stay fully invested in styles and sectors that are performing relatively well.)

How did I do during the last bull run? Not badly, at least compared to the S&P 500. In a taxable account (account No. 2 below), for which I have data back through 2004, my results were as follows:

Acct. No. 2 ... S&P 500 (with dividends)
2004: 18.55% versus 10.88% for the S&P 500
2005: 8.35% versus 4.91% for the S&P 500
2006: 17.43% versus 15.79% for the S&P 500
2007: 10.79% versus 5.49% for the S&P 500

To review 2008, first let's go back to October 2007, as the U.S. equity market peaked. After the peak, I thought I saw a buying opportunity in large cap growth and foreign stocks, both areas that were doing relatively well. But on Nov. 21, I noted on this blog that most styles and sectors had fallen below their 200-day moving average lines—not a good sign. Still, after Asian markets rallied, I cautiously guessed in a Dec. 29, 2007 post that now was a time to buy.

Not a great call. Everything got hammered in 2008.

By the end of January 2008, after a nasty market drop to start the new year, I called it for what it was--a bear market, noting that Treasury bond ETFs had relative strength ratings of 90 from Investor's Business Daily (outperforming 90% of all stocks). Commodity-related ETFs also looked like they were holding up.

On Jan. 29 I wrote: “It's probably a time to lighten up on equity market exposure, which we have been doing over the past several months in both model and real-money accounts. ... The severity of the correction that has taken every heretofore strong style and sector down below 200-day moving average lines and left them there with no strong rebound, together with the attendant bad economic news, points to a possibly severe downturn.”

Not a bad call. The problem, it seems, is actually following your own advice.

While I had healthy amounts of cash and inflation-protected Treasuries (TIPs) going into the September 2008 meltdown, I was still exposed to large growth, foreign stocks, and energy and materials ETFs. That cost me. These areas ended up being some of the hardest-hit victims of the September and October sell-off. (FYI, some of my current holdings in energy and material ETFs are remnants—I ran out of rallies to sell into. And during the collapse, there were no rallies. I have recently added to these sectors as they sold off after signs of recent strength.) Meanwhile, the TIPs holdings helped, but TIPs also sold off, going from above 105 before the September/October crash, to below 95. That was good performance relative to the stock market, but still a drain on absolute performance.

As of November and December 2008, the market looks to have made some kind of bottom. How so? Volatility has dropped, chart patterns have tightened up, and many styles and sectors have broken above their 50-day moving averages as well as their two-month trading ranges (over the period from November through December), all on decent up volume. This is no guarantee of a bottom, to be sure, as this “cheap” market could still get “ridiculously cheap” (a distinct possibility, given the serious economic situation we are in following historic bubbles in stocks and real estate). But, the risk of missing a powerful rebound rally—or the start of a new bull—is too great to be out. As I wrote in late November: “There is no uptrend [which I normally like to see]. But this has got to be a buying opportunity. Major risk now is missing a bear-market rally.” Remember, there were major bear-market rallies in 1932 and 1975, after severe declines.

As of year-end, I've cut cash and bond holdings, and increased equity exposure, focusing on consumer staples, health care and regional banks, and I've also added global telecoms and utility ETFs as well as high-yield and emerging market bond funds. I continue to have sizable stakes in TIP and CMF (a Calif. muni ETF) in several accounts. As I noted earlier on this blog, such bond weightings are probably still too conservative. That said, it is again worth noting that we may well be headed down to super cheap levels on equities, akin to 1982, which may require something like another 30% loss overall.

So, I'm a bit skittish, but betting on at least another investable rally in this secular bear.

Style and sector breakdowns are as follows for two representative accounts, during critical stages of the 2008 market:

Asset Allocation
Acct. No. 1, IRA account
2008 performance: -21.03%

12/31/07: Cash 30%; JKE 22%; IWR 20%; EFA 11%; EPP 6%; TIP 2%; FXI 2%; and 1% each for GSG; IDU; IYM and IXP.
08/31/08: Cash 16%; TIP 40%; IYM 12%; IGE 5%; JKE 5%; IWR 5%; GSG 5%; EFA 5%; SLV 3%; ILF 2%; and 1% each for DBA and IDU.
12/31/08: Cash 6%; TIP 31%; VDC 17%; TLT 7%; VHT 7%; EFA 5%; IYM 4%; IGE 4%; IXP 3%; IHE 3%; VDE 3%; KRE 3%; IAT 2%; SLV 2%; DVY 2%; EMB 2%; and 1% each for HYG; EEM; EWM; and IDU.

Asset Allocation
Account No. 2, taxable account
2008 performance: -23.92%

12/31/07: Cash 11%; EFA 28%; JKE 20%; EPP 9%; EWC 5%; GSG 4%; EWY 4%; FXI 4%; IGE 4%; IGM 4%; IYJ 4%; IXP 4%.
08/31/08: Cash 12%; TIP 41%; IYM 13%; GSG 9%; IWF 6%; EFA 6%; IGE 5%; EWC 5%; UDN 4%.
12/31/08: Cash 5%; CMF 32%; VDC 9%; VHT 8%; KRE 7%; IBB 5%; EEM 5%; IDU 5%; VAW 5%; IYK 4%; EFA 4%; EWM 4%; VDE 4% IXP 4%.

Are commodities still in a bull market?

2009-01-03T10:33:00.000-08:00

In a July post, I disagreed that commodities were in a bubble.

Well ... I was wrong about that, at least through the rest of the year.

As I write this on Jan. 1, 2009, oil and material ETFs are breaking out of bases and showing some short-term relative strength. I still feel we might be in a longer term bull market in commodities, which has been interrupted savagely by the financial crisis and heavy selling of any liquid asset by speculators.

I could, of course, be wrong again. But I've been adding to some materials and energy stock ETFs.

Jan 7, 2008 update: Today, I got back into DBA, the agricultural commodity ETF. (Blogger note: exchange traded notes like DBA, unlike ETFs that hold stocks, are unsecured obligations of the issuer. They are contracts so they have credit risk, like an individual stock, unrelated to moves in, say, commodities. If the issuer fails, you might lose all your money. So don't overdue it.)

The Aftermath of Financial Crises

2009-01-02T13:17:00.000-08:00

John Mauldin reports on some research about what happens in the aftermath of financial crises.

No link is available, but subscribe to his newsletter free, here.

He cites, professors Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, who wrote a a recent paper entitled "The Aftermath of Financial Crises."

From Mauldin's letter:

There are very real differences between normal business-cycle recessions and a recession brought on by a financial crisis. The latter are much more severe. Sadly, we are in the latter type.

Reinhart and Rogoff had done an earlier paper on financial crises and their aftermath, just in developed countries, and now they have expanded their research to include developing countries as well. What they have found is that there is not that much difference in general between developed and developing economies after a crisis. (About which I will comment later, but first let's look at their work.) Quoting:

"In our earlier analysis, we deliberately excluded emerging market countries from the comparison set, in order not to appear to engage in hyperbole. After all, the United States is a highly sophisticated global financial center. What can advanced economies possibly have in common with emerging markets when it comes to banking crises? In fact, as Reinhart and Rogoff (2008b) demonstrate, the antecedents and aftermath of banking crises in rich countries and emerging markets have a surprising amount in common.

(Blogger note, the very same point is made by Paul Krugman in his re-released 1999 book, "The Return of Depression Economics.")

"... Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment."

(Mauldin, continuing:)
... As long-time readers know, I believe you must be very careful when using average numbers of past performance of investments or economic data. While they can be useful in helping to determine direction, using them as an absolute predictor of future patterns can be quite misleading.

Bears who called the crisis ... and the 2008 Scoreboard

2009-01-02T07:54:00.000-08:00

--The WSJ interviews a few bears who called the crisis, including Jeremy Grahtham:

--WSJ blog post on other cassandras who got it right.

--WSJ blogger Justin Lahart also recalls why the doomsayers were dismissed: "A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them," and anything smelling of regulating capital flows, like mortgage originations, was discounted.

--2008 Investment Scoreboard, from the WSJ. From the FT: "For the year, the S&P 500 dropped 38.5 per cent, (Blogger note: I believe this is sans dividends. With dividends, the S&P was off 37%) marking its worst run since a marginally higher drop of 38.6 per cent in 1937. The Dow lost 33.8 per cent, its worst annual decline since the index fell 52.7 per cent in 1931."

Hedge fund index: "Whoops ..."

2008-12-30T21:38:00.000-08:00

The FT reported (Dec. 22) that the Credit Suisse/Tremont hedge fund index had to re-report returns for its market neutral category, turning what had been a small gain YTD to a 40% loss.

Whoops.

A link to the story isn't available, but check out CS/Tremont's rather oblique press release on the topic. They don't mention Madoff, nor the remarkable turn-around, just the feeder funds (Kingate Global/Fairfield Sentry) that have now been valued at zero.

FT in a later update also said Morningstar had marked down Madoff-related assets, but not readjusted its indexes.

Krugman: We're turning Japanese ...

2008-12-18T23:46:00.000-08:00

Paul Krugman and Greg Mankiw are talking about the "liquidity trap," an era of zero interest rates that makes monetary policy ineffective.

Japan has struggled with this problem. The solution is unclear, but reinstating inflationary expectations may be in order. I.e, no more talk about price stability.

Says Krugman: "Seriously, we are in very deep trouble. Getting out of this will require a lot of creativity, and maybe some luck too."

Schapiro is tough regulator?

2008-12-18T17:35:00.000-08:00

The press coverage today of Obama's pick of Mary Schapiro to be SEC chairman is downright fawning. Hasn't anyone noticed all the scandals coming out of Wall Street during Schapiro's watch at Finra/NASD?

See my thoughts at InvestmentNews.

Madoff scandal: Did regulators look the other way?

2008-12-14T08:32:00.000-08:00

One question still outstanding in the Bernie Madoff scandal is, where were the regulators?

Madoff was turned in by his own sons. There's no indication that Finra or the SEC uncovered any problems from their exams of Madoff's broker-dealer.

“People who examined the [broker-dealer] have to look at the trading ... to make sure no front running and other things” are going on with the related hedge fund, said Peter Chepucavage general counsel at Plexus Consulting LLC in Washington and a former SEC staffer. “There's a real question about how long this went on.”

Is it possible regulators may have trusted Madoff too much?

Chepcavage thinks so.

Madoff was instrumental in developing the OTC market and was a “major force at the NASD,” now known as Finra, Mr. Chepcavage said.

“He was the go-to guy at the SEC” for issues related to market making, he said.

Was Bill Miller just lucky?

2008-12-14T08:01:00.000-08:00

The WSJ says Bill Miller's Value Trust lost 58% over the past year, 20 percentage points worse than the S&P 500: "These losses have wiped away Value Trust's years of market-beating performance. The fund is now among the worst-performing in its class for the last one-, three-, five- and 10-year periods, according to Morningstar."

Efficient market guru's are no doubt saying something on the order of "I told you so:"

It's a sign of our populist period when ....

2008-12-13T09:19:00.000-08:00

... when UAW president Ron Gettelfinger is on TV winning the spin war with Congressional Hooverite Republicans, who seem to care only about busting unions and supporting foreign car companies.

Weird? Fed thinks about issuing its own debt

2008-12-10T13:04:00.000-08:00

I'm not sure why the Fed may want to issue government bonds, a role reserved now for the Treasury Dept. This WSJ article hints the Fed and Treasury may have policy differences. And the Fed is limited to creating cash reserves, which may cause inflation. And financing bailouts by printing money may bugger up its intermediary banks, and make controlling rates more difficult.

Ben Edwards has cancer, report says

2008-12-10T08:49:00.000-08:00

The St. Louis Business Journal reports that Ben Edwards has terminal cancer.

In a Q&A, Edwards says he was diagnosed a year ago.

The story gives a nice rundown of Edwards' career, and discloses that Ben never sold his AGE stock that converted into Wachovia, causing big losses.

As for his sucessor CEO Bob Bagby, Ben says Bagby "wasn’t the person for the job."

Corp. bonds a steal?

2008-12-09T19:19:00.000-08:00

John Authers of the FT says bonds are priced to break even, even in a 1930's Depression scenario. Citing Deutsche Bank, Authers says high-yield bonds are priced for a 50% default rate, and an "inconceivable" default rate is priced into investment grade bonds.

(Blogger note: OK, OK. I'm biting. Just bought some EMB, the iShares JPMorgan USD Emerging Markets Bond Fund (EMB); and looking at HYG, the iShares iBoxx $ High Yield Corporate Bond Fund.)

Just let the CDS market die

2008-12-09T19:12:00.000-08:00

Just let the CDS business die, says John Dizard, writing in the FT

CDS's have been proven useless for supporting capital raising, discovering prices and as a risk-management tool, Dizard says.

"Risk management with CDS was largely about what the bankers called 'reg cap arb' (regulatory capital arbitrage), or making big spreads and bonuses by scamming the regulators whose employers, the taxpayers, now have the bill."

Uncle Sam: Pay me for T-bills!

2008-12-09T19:07:00.000-08:00

Interest rates T-bills turned negative on Tuesday.

Here's a FT story.

The FT reports that the implied yield for three-month bills briefly traded at negative 0.01 per cent – the first time that has happened since 1940, citing traders.

(Blogger note: The FT said in Tuesday's print edition that a T-bill issue on Monday sold for a zero-percent rate, first time that happened since 1934. Not sure if that jives with the 1940 date cited above. .. But clearly, we're in a Treasury security "bubble". ... I've been selling TIP and TLT.)

World Bank, IEA, say commodity, oil boom is over

2008-12-09T18:58:00.000-08:00

The FT asks if the super-cycle in commodities is over. It says commodities booms historically last about 10 years, the period oil prices have been rising in this latest cycle. (Blogger note: Other commodity prices took off about five years ago.) However, many disagree that the boom is over.

The World Bank thinks the commodities boom has ended.

For the first time in more than 20 years, the U.S. Energy Information Agency projects virtually no growth in U.S. oil consumption through 2030. One reason, though, is assumed higher prices as the economy recovers.

Fannie, Freddie risk pros gave warnings

2008-12-09T18:40:00.001-08:00

Congress uncovers internal emails at Freddie and Fannie, and finds that credit risk officers at the firms warned their bosses about subprime:

Washington Post story.

WSJ story.

Heebner bullish on financials

2008-12-08T08:18:00.000-08:00

Ken Heebner, manager of CGM Focus fund, is sure banks and insurers will recover this year, according to this WSJ story.

It looks like Heebner loaded up too early on the big banks beginning last fall and paid the price.

The story says he had a great year in '07, though, and Heebner is known as a shrewd stock picker.

Still, one wonders why these usually brilliant managers seem to jump in so early as soon as bad news begins to unfold. This is a chart of Citigroup vs. the SP 500 and EFA, from 12-1-07 thru 10-11-07, right before the big drops in bank stocks began last year. Note the clear underperformance of C versus the broad indexes. No reason to buy it then, imo. Sure, it looks like a possible base and a bottom, but the relative strength of C and other banks sucked.

Pensions lobby to cut funding requirements

2008-12-08T08:11:00.001-08:00

Corps. are always looking for an excuse to cut pension funding. This is the latest effort/excuse. And run inflated return assumptions. Or, when all else fails, dump their pension obligations on us taxpayers.

Yet more bulls ...

2008-12-07T17:49:00.000-08:00

Bill Miller of Legg Mason, Steve Leuthold of Leuthold Group and Paul Desmond, president of Lowry's Reports have turned bullish, the WSJ says (story by E.S. Browning).

Tim Hayes, Ned Davis's chief investment strategist, tells the Journal: "We aren't quite ready to make the call yet [but] everything has been following the script for a bottom."

Hussman: We're not the next Japan

2008-12-04T15:53:00.000-08:00

The U.S. has been Japan for the last decade, John Hussman says.

Valuations in Japan took 20 years to come down. Here, "the price/peak-earnings multiple of the S&P 500 has plunged from a high of 34 to a recent trough of about 9," he said.