Wednesday, February 29, 2012

In The Words of Bastiat

When men of a certain propriety
By plunder, advance in society,
They fashion their cause
By a system of laws
And morals to cloak it in piety.

"...une loi qui la sanctionne, une morale qui la glorifie."

So said Frédéric Bastiat 162 years ago, and it has never been truer than today:

When plunder has become the livelihood of an agglomeration of men united by social ties, they soon make a law that condones it, and a morality that glorifies it.
Hat tip to Barry Ritholtz.

Tuesday, February 28, 2012

Dow 13,000

Whenever an index is bound
For a number exceedingly round,
The luster of Midas
Convinces insiders
It's time that their longs were unwound.

Ah, the enthralling power of round numbers; by itself, the Dow Jones Industrial Index hitting 13,000 for the first time since 2008 means nothing. It is neither fundamental - i.e., indicative of the economic prospects of companies, markets and industries - nor truly technical - i.e., indicative of the patterns of buying and selling behavior in stocks. But it does provide a convenient marker of how far the US stock market has come since its bottom (roughly double), as well as how far it has to go to reach the previous high of 14,164.53, set on Oct. 9, 2007. Still, most of those who make their living in the markets seemed to betray a certain exasperation with the whole hoopla, such as the market strategist who said: "No doubt (the market) has been overbought since the beginning of February, but in a powerful uptrend, price will continue higher for some time amid overbought conditions." Bloomberg's Margaret Brennan may have tweeted it best: "Dow closes above 13,000 for the 1st time since 2008. Can we stop talking about it now?" Now that the limerick is out, sure.

Greece: Select Company

Said Standard & Poor's: "It's preferred
You remember your bond is your word;
When changing the payments
You've promised to claimants,
'Selective default' is incurred."

Greece joined a select company indeed when it became the first euro-zone country to be given a default rating. Standard & Poor's cut the country's long-term rating from CC to "selective default," as it had promised to do if Athens amended the terms of its bonds to add collective action clauses. The Greek CAC effectively forces bondholders to accept a bond swap offering. The measure, which was approved by the Greek parliament last week, could potentially forces bondholders to take losses, but up to now the country has not missed any interest payments; hence, the "selective" qualifier. If a majority of bondholders accept the amended bonds, the rating agency has indicated that it will set Greece's rating at CCC.

Monday, February 27, 2012

A Gulf in Understanding

Said a man in the Strait of Hormuz:
"The price of the oil we use
More quickly reacts
To the threat of attacks
Than the efforts of drill platform crews."

Upon his return from a relatively unplugged vacation in the hills of eastern Quebec, Dr. Goose was struck by the gulf in perception between some US Republican politicians, who attribute recently higher oil and gasoline prices to the policies of President Obama regarding pipelines and offshore drilling, and petroleum analysts, who tend to cite disruptions in the existing supply in such places as the Persian Gulf. A reasonable interpretation would be that the President's actions regarding oil exploration are of little short-term impact, but his actions regarding global security and stability are critical.

Friday, February 17, 2012

The Doctor Is Out

Doctor Goose is on vacation during the week of President's Day - see you once again on February 27!

Thursday, February 16, 2012


Said a point guard who went un-recruited
By coaches who found him ill-suited:
"It's hard to surprise
Those skeptical guys
Like my really great Garden debut did."

By now, people all around the world have heard the amazing, come-from-nowhere story of the New York Knicks' Jeremy Lin; the Taiwanese-American pride of Palo Alto California, where he led the town's high school team to a state basketball championship. Considered too small for the big-time colleges, Lin ended up at Harvard, where he set Ivy League records. Passed up in the NBA draft, Lin sat on the bench for the Houston Rockets and the Golden State Warriors before being cut. Once on the Knicks, Lin got his chance when two of the teams regulars couldn't play; the rest is NBA record-setting history. This still-unfolding story has many meanings, one of which is that, in sports as well as investments, we overestimate our ability to predict winners based on simple formulas and models.

A Crude Iranian Conflict

If an outbreak of Persian hostility
Brings petroleum price volatility,
The economy's cooling
From trouble in fueling
The engine of upward mobility.

Tensions with Iran over its nuclear program have introduced a new round of uncertainty into global strategic affairs, but one thing is definite: if Iranian supply is taken off the market, rising oil prices would impinge on almost every aspect of the US economy. Higher gasoline prices would cause consumers to cut back on discretionary spending, as most have a limited ability to cut back on driving. Manufacturers would be hurt both from higher delivery costs as well as higher prices for plastics and other petroleum-based materials. Even many service industries maintain fleets of vehicles and would feel the effects of a Persian Gulf conflict. The one bright spot at this point is that the prospect of $4.50 gasoline, as in 2008, appears as yet remote.

Tuesday, February 14, 2012

Romancing The Fed

Said Bernanke, crimson with passion,
In fine professorial fashion,
"If liquidity's lacking,
With central bank backing
I'll try to inject some more cash in."

Who says there's no romance in monetary stimulus? Those outside of the Twitter econosphere may not know that the network was recently swept by a wave of #FedValentines, as the trend was hashtagged. It began with Penn economist Justin Wolfers, who tweeted: "Like fiat money, our love is built on trust." White House economic adviser Austan Goolsbee chimed in: "Roses are red, violets are pink, don't listen to gold bugs – no one cares what they think." My personal favorite belonged to the FT's Alan Beattie: "I'd like to borrow you overnight and then hold you to maturity." Not to be outdone, Dr. Goose contributed: "If you're not ready for a liquidity injection, I'll understand."

Happy Valentine's Day to economists everywhere, and all the nerds at heart!

Monday, February 13, 2012

MF Global: An Arresting Question

Said the trustee: "It's funny perhaps,
In this great MF Global collapse,
That there aren't any 'collars',
Despite all the dollars
Misplaced by those capable chaps."

Francine McKenna, a former Price Waterhouse Coopers auditor who writes on auditing issues for Forbes as well as her blog "Re: The Auditors", says that it's remarkable that the investigation of the missing $1.2 billion in MF Global customer funds is not leading to any arrests, and those involved have not opted for an escape to Switzerland. Could this be a case of "plausible deniability" on the part of top management? Managers at the bankrupt company moved a lot of money around on Hallowe'en, evidently in an attempt to make it through the weekend, probably in the hope that a friendly takeover would allow its return. Instead, the firm was shut down, but without any paper trail linking top management to the missing customer funds.

Hat tip to Jesse's Café Américain.

Friday, February 10, 2012

Q&A at the Mortgage Fraud Settlement Negotiations

"Pray tell us: what must we do,
That the Feds and the states will not sue?"
"In dollar terms: 25,200,000,202."

The Obama administration and 49 US state attorneys general have announced a $25 billion settlement of mortgage foreclosure fraud charges with the five biggest mortgage loan origination banks. The five firms - Ally Financial Inc./GMAC Mortgage, Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. - will underwrite benefits to certain mortgage borrowers that are modest in their individual impact but may provide a marginal impetus to the housing and mortgage markets. The benefits include principal reduction for those at imminent risk of default; refinancing eligibility for some "underwater" borrowers; and $2,000 cash payments to some whose homes were foreclosed during the last three years. However, the largest impact of the settlement is not on homeowners but on the banks, from which a significant legal risk has been removed. Banks are not completely out of the woods yet, though; bondholders can still sue to have the mortgage originators buy their bad loans back.

Thursday, February 9, 2012

Time To Invest?

Said a broker, in recommendation,
At a client's undue hesitation:
"Throughout time, we deduct,
Sh^t has always been f#cked;
Pray be bold in your risk allocation."

In times like these, after a prolonged economic slump, isolated indicators may offer glimmers of hope; an improving jobs number here, more manufacturing there. And yet, the economy as a whole is not clearly improving. At such times, investors may become paralyzed by the conflicting data, waiting for all the stars to align and thereby missing a rocket launch to the moon. Investors may need the equivalent of a "snap out of it!" delivered with a bracing slap. Here to meet this pressing need is Joshua Brown, the investment advisor and blogger known as the "Reformed Broker". Urging investors to "Get Your Shit Together," Mr. Brown says:

I have no idea when this secular bear market and the attendant economic malaise will truly be over - but I know for a fact that if you're not planning for its end you're going to miss your chance.

Wednesday, February 8, 2012

Leveraging One's Education

A student had trouble believing
That the newspaper wasn't deceiving
In ascribing a sign
Of reversing decline
To his borr'wing to learn basket weaving.

Citing the latest Federal Reserve statistics that show consumer debt up in December, the Wall Street Journal sees "a sign that the credit freeze is thawing." Indeed, household debt rose at a seasonally adjusted 9.3% annual rate, following a 9.9% rise in November. But - is this a good thing? Two considerations rate mention. First: we're trying to exit a huge financial crisis brought about by excessive borrowing, so any conclusions based on consumer debt trends should at least consider what an optimal level of borrowing would be, and whether we are still above it. Second, the largest component of December's increased consumer debt comprised student loans, which is certainly a bad thing. Student loans have been growing faster than they can be repaid, in part because federal and state programs will fund unlimited amounts with no credit underwriting; there is no assessment of the likelihood of the student and program of study generating sufficient loan repayment in the future. This must change.

Monday, February 6, 2012

It's The Improving Economy, Stupid

For the typical President wannabe,
The election's about the economy;
So what's there to do
For the wannabe who
Is afraid how much better it's gonna be?

This is the dilemma faced by US presidential contender and former Massachusetts governor Mitt Romney. Having put some distance between himself and Newt Gingrich, the nearest Republican contender, Mr. Romney has now pivoted to the general election, in which his key issue is President Obama's "failed stewardship of the economy", particularly where "job creation" is concerned. Only, what if the economy (and particularly the private sector) begins creating actual jobs? The latest BLS data show that this has now happened, and Mr. Romney's response is that job creation occurred "in spite of the President's policies." This may be the best he could do under the circumstances, but it seems a dangerous road to go down. After all, if jobs can grow in spite of the President's policies, the voters may ask, what do we need you for?

Sunday, February 5, 2012

Good Employment Numbers, But…

"A DC elite that obstructs
More stimulus misses the crux
That, despite fewer jobless,"
Said Krugman, "It's obvious
The US economy sucks."

The Giants won the Super Bowl and last Friday's employment report shows the most jobs created since the 2008 crash, so everything's fine, right? Not so fast, says Paul Krugman. Although "for once, falling unemployment was the real thing, reflecting growing availability of jobs rather than workers dropping out of the labor force," any recovery cannot be self-sustaining while we have "a sharp fall in household formation — econospeak for lots of young adults living with their parents because they can’t afford to move out." This is one of the chief impediments to a housing recovery. Unfortunately, Krugman maintains, many in the economic elite are quick to call for austerity at the first sign of positive news, and seem to direct their vigilance against an inflation that has failed to materialize for the last three years. So, a little good news could become bad news if it leads to more such economically retrograde behavior.

None of this, however, should spoil the Giants' victory celebration - congratulations to Coach Tom Coughlin, Eli Manning & company!

The Real Super Bowl XLVI

Said a Patriot, flanked by his lady:
"Though my Giant opponent is shady,
And I may lack for planning
Or adequate Manning,
I've a trophy wife, just like Tom Brady."

Days before the kickoff of Super Bowl XLVI, US Presidential contender Newt Gingrich tried to rally his supporters for the next 46 primaries in the race for the Republican nomination. Though out-organized and outspent by the frontrunner Mitt Romney, Mr. Gingrich hopes that his persuasive powers will win the day. On the evidence of another commanding Romney win in this weekend's Nevada primary, however, money and organization appear likely to carry the election in the next XLV contests.
As for today's Super Bowl XLVI: Go Giants!

Friday, February 3, 2012

Little Interest in Saving

Said Bernanke, waxing inventive
On another recession preventive:
"Though our savings must grow,
I'm keeping rates low,
So look for another incentive."

Federal Reserve Chairman Ben Bernanke is making life very easy for Jerry Stiller.  Mr. Stiller (pictured) is the lovable alte kocker who, as spokesman for Capital One Bank, brays happily that his client pays checking account interest "up to five times the national average."  Mr. Bernanke, testifying before the House Budget Committee on Thursday, noted that the fragile state of the US economic recovery dictates that the Fed hold rates to near zero through the end of 2014.  Corroborating the Chairman's testimony, the Capital One website promises to quintuple Dr. Goose's locally average checking account rates to a winning 1.00%. For the foreseeable future, it all adds up to little interest in saving.

Thursday, February 2, 2012

Facebook Valuation Formula

Facebook is valued at plenty
By Wall Street's high-tech cognoscenti,
Based on 1 billion friends
Times $5 each, then
Times the IPO multiple, 20.

Facebook filed its Form S-1, announcing its intention to make an initial public offering of stock in the near future; millions paused their Farmville games long enough to glean some hitherto unpublished "fun facts" about the social network, which is 28% owned by its founder, Mark Zuckerberg. Soon to be traded under the ticker symbol "FB", Facebook had 2011 revenue of $3.7 billion, a 47% operating margin and a cash balance of $3 billion. The company's social impact has been much greater, according to The Wall Street Journal:

In just eight years, Facebook has become the world's social bazaar, where friends gossip, play games and swap 250 million photos per day. It has also emerged as a potent political tool, helping to topple regimes across the Middle East last year.
Of course, there are skeptics, many of whom made their snarkiness felt on Twitter. Josh Brown, aka @ReformedBroker, suggested this risk disclosure: "Our business model may prove unsustainable if people realize how little time on earth they actually have." As for the IPO's $100 billion valuation, Wharton economist @JustinWolfers offers this formula: "Facebook valuation for dummies. 1 billion users. FB earns $5/year serving ads to each. NPV = annual profit x20. =$100b!" As they say, good ideas were meant to be stolen (thank you, Justin)!

Wednesday, February 1, 2012

Newt's Non-Concession

Said Gingrich: "It's not contradictory,
In defeat, to forego valedictory;
One may not give up now,
Having taken a vow
To have and to hold out for victory."

Mitt Romney won commandingly in the Florida Presidential primary Tuesday night, capturing 46% of the vote and all of the state's 50 delegates.  However, you wouldn't know it from second-place finisher Newt Gingrich, who, with 32% of the votes and no delegates, gave what sounded a lot like a strident victory speech.  In the glow of his primary night defeat, Gingrich pledged to supporters that, upon his inauguration, he would repeal health care reform, Dodd-Frank financial reform and the Sarbanes-Oxley corporate governance reform, as well as sign a host of executive orders including a pledge to end "antireligious bias." Thankfully, he saved lunar colonization for another day.

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