The Great Pizza Bailout

Last night I turned on the television shortly before falling asleep. During a commercial break, something caught my eye, and my ear. Domino's Pizza unveiled a new ad campaign aptly titled, "Super Big Taste Bailout". Then it happened again on my ride to work this morning a local BMW dealership was promoting a "stimulus event" on the radio. I just noticed this in the last two days, but it says a great deal about the current crisis. Has bailout bonanza has gotten so out of control that it is now being used as a marketing campaign?

The Domino's offering is free pizza everyday for a year, along with other specials. Until last night, I thought the $5 foot long was the great deal of the recession.

So far during this recession, McDonald's has done extremely well. On the other hand, Domino's has not boded as well. In September and October of 2008, I think it would have been abhorrent to have an ad campaign based on the economy. Lehman had just imploded, and blood was in the street. Half a year later have we grown compliant with the crisis? Or, has the 24 hour news cycle desensitized us from the crisis?

The bailouts and the ongoing crisis is a circus. The populist backlash coupled with the numerous bailouts has created much uncertainty. As the list of bailouts grows longer, the more criticism accompanies the logic behind it. The Chinese and Russians are calling for a new international reserve currency. The Chinese, being our nation's largest creditor is worried about the stability of the dollar. It is a reasonable worry. I am alarmed about our government debasing our currency on ill thought bailouts, and unprecedented spending. Too bad the average American has no idea that they are being hoodwinked. Well, at least there is the possibility of free pizza everyday for a year. The Great American Pizza Bailout may prove to be more effective for Domino's than any of the government's numerous plans for the nation's macro environment.

Is It Over Yet?

No.

The Great Deleveraging has provided us a wide array of plans and bailouts. From the unread stimulus pushed through the Congress to the Bush Administration's TARP legislation. The theme of this crisis of confidence is the government sponsored bailout. We can only hope they will read and debate the 2010 budget titled ,"A New era of Responsibility", in true Democratic form. Simply, it has been scary out there. The banks failed and our financial markets are in disarray. The consumer, our saving grace is more, or as over leveraged as our banking system. Our debt growing by the day, and our debtors are starting to get scared. But, don't worry the government will come up with a plan to save the day. FDR's great "brain trust" did it during the depression, right? Well, no they didn't. Their plans actually prolonged the contraction. Well these are different times, and there are some different plans. TARP, the Stimulus, the Fed $300 billion Treasuries buy out, the most recent Treasury plan, the housing plan (insert Rick Santelli rant here), the Great Auto Bailout, and the Budget are just a few of the plans that are supposedly going to save our over leveraged economy. Will they work?

Finally, Tim Geithner released a plan that didn't send the markets plunging. Martin Wolf of the Financial Times column today, "Successful Bank Rescue Still Far Away" provided a sober view of the Geithner Plan. This plan, though better than the last couple thrown out there by Treasury, still has many holes in it. Thus, the market has responded much better to this plan than any other of Geithner's comments and plans. There are still many problems with paper, and this plan leaves many uncertainties. Only time will tell, and hopefully it treats us well.

Last night I was watching the talking heads on CNBC prior to the Presidential Press Conference. Many of the guests were bullish, but I remain a bear. This is due to the current political environment. The markets are trading to more political news lately, and there is good reason for that. The Congress is leading a populist hoards wielding torches and pitchforks. This will do more to harm our system, if we let it spiral out of control. It only leads to distrust during a period when we need cooperation of both the private and public sector to unfreeze credit. The current AIG bonus fiasco is a prime example of this. The Congress passing a 90% tax against those bonuses and then all bonuses from corporations receiving TARP money undermines our legal system. Ours is a system that is base on contractual law, and the current actions by the Congress undermine their own function in the larger system.

There are many issues here, and the recent bear market rally has brought a ray of sunshine to a cavernous Wall Street. It will not last, but hopefully we can learn from the lessons of the past. The Geithner plan does include the private sector, which adds to optimism. However, there are still many problems to deal with.

The stimulus plan is based on outdated models and theories. A current article by four economists John Cogan, John Taylor (both from Stanford), Tobias Swik, and Volker Wieland (of Goethe University) measures the results of Keynesian multiplier applied by the President's economic team against that of a neo-Keynesian model that factors in may other factors left out by the outdated Keynesian model. The results will baffle you by Q4 2012 Percentage increase in GDP by the Obama model is 1.55, while the other predicts 0.40. Keep in mind that the both models have the fed funds rate at zero through 2010. Yes, that is right 2010. With Helicopter Ben running the printing presses, we may have to deal with some wild inflation.

I just hope that our Professor President doesn't think he can out smart the economic system. According to A story from the weekend's Chicago Tribune looked into President Obama's connection to the University of Chicago. The quote that caught my eye, and let's hope it isn't correct (per Steven Leavit Freakonomics) :

"Obama comes from the tradition that thinks you can get your way on social justice and economic issues without affecting productivity very much — and that’s simply living in a dream world. … [Obama and his economics team] are very smart, but the problem is these high-I.Q. guys always think they can square the circle; they always believe they can beat the system with a cleverer system, and they always fail."

The Largest Earnings Decline on Record

It's official... we've hit the largest S&P earnings decline on record, for those of you that think the market is overreacting, look at this chart, which shows how, from a YoY / moment-in-time earnings stand point, we've never seen it so bad. Not only is this the worst YoY drop on record, but earnings themselves haven't seen such low figures since the 40s. This isn't prices, this is earnings. Interesting times!

I Wipe My _____ With the Dow

Get one for all your loved ones here

Back in Action

I've been moving. A public thank you to the Surly Supply Sider and the Aggregator for keeping this blog alive during my relocating.

Calling a Bottom

A devoted reader of financial news will have noted the new bear market pastime: calling a bottom. Conventional wisdom holds that a market bottom is the ultimate Catch-22: so long as there is any widely recognized possibility of recovery, we haven't achieved the psychological conditions necessary to halt the market's decline. Total capitulation requires the Dantean abandonment of all hope. Thus, if people are calling a bottom (presumably as a buy signal), then the market cannot have bottomed. Given that a Google news search for "market bottom" returns 33,059 responses, we've got a while to go. See you at S&P 500: 666, which is both the mark of the beast and an alleged technical bottom. Maybe a bottom occurs when we abandon conventional analytical methods in favor of consulting the Book of Revelations?

Moral Hazzard and the Political Class

It has occurred to me in the past 6 months that Moral Hazard and credit markets work in tandem. Credit is the cornerstone of modern civilization. Without the evolution of the credit markets and the systems to utilize it, we would still be in the dark ages. The words used in an earlier post of Historian Naill Ferguson, "credit makes the world go round". Nevertheless, the current crisis, which I refer to as the "Great Deleveraging", has shown us once again that credit is also the fuel for a speculative mania. History is full of examples of this. The Dutch Tulip mania, the South Sea Bubble, the Mississippi bubble, Dot com Bubble, US/UK Housing bubbles, and the commodities bubble of ’08 are a few examples of speculative bubbles in recent history. Cheap credit creates bubbles, which in turn promote moral hazard. Much, but not all, of the current crisis is rooted in this cycle of boom and bust. But what about moral hazard created by the public sector, could it infect the private sector? Yes it can, and the current crisis has many of its roots in policy enacted by quasi-government institutions, and the US congress. Through out the market history of the US, the government has used financial crises as a spring board for more control over the private sector. The products of these historical seizures of power have manipulated the current market, and contributed the bubble and current crisis. The argument that the current contraction is due to the "free market" philosophy is intellectually dishonest. How can the market be free when there are so many actors manipulating it from Congress to the Federal Reserve. Financial crises in the 20th century led to the institution of more government interaction in the market, and led to the creation of moral hazard.

The over leveraging created by cheap credit, was a product of the post 9-11 moves by the Federal Reserve. Through much of this crisis, many of the talking heads have not touched on this. They also have not touched on the other two quasi-government institutions Fannie and Freddie that led to this massive example of moral hazard. These two institutions working in tandem have created the foundation for the current speculative bubble in housing. Members of the political class in an effort to expand home ownership endorsed this. It was a program of social engineering, and not at all economically feasible. Expanding the home ownership to those that could not afford it is not good business, and now we are paying the price for this experiment. After all, the road to hell is paved with good intentions.

Why has this not been mentioned too much in the mainstream media? I believe it has to do with shifts in political power in the United States. In our history, large shifts in political power usually couple with populist movements. Mr. Obama demonstrated this in both his primary and his election victories. It is much easier to invoke a populist rhetoric when in an economic crisis. One can always invoke the image of the “fat cat” in times of duress. This has been a tool of the Political class through much of our history. It provides a window to further the power and grasp of the political class over the people. The government in the aftermath of crisis created the institutions at the foundation of this crisis of confidence. The reality of the situation is that everyone is to blame. Just as the most recent post on this blog stated, “we are all responsible”. It is much easier to place the blame on “the other”. This has been a tool of totalitarian regimes through out the ages to increase their power. The government is using this tool as we speak to expand the power over the private sector. Congress currently is seeking to create a systemic risk regulator. Led by Barney Frank, this legislation would provide oversight to institutions that the government deems systemically significant. According to an op-ed in the WSJ today Peter Wallision argues:

"designation as a systemically significant company will in effect be a government declaration that that company is too big to fail. The market will understand -- as it did with Fannie and Freddie -- that loans to such a company will involve less risk than loans to its competitors. Counterparties and customers will believe that transactions with the company will generally be more secure than transactions with other firms that aren't similarly protected from failure."

Is this creating more institutions that will lead to much more of the same? Will moral hazard be created again by government back institutions, like it was with he CDO's that are at the center of this crisis? I believe it will. Wallison also mentions that the crisis was not created by the failure of institutions, but by an external event (mortgage backed CDO's). So all this will do is create more government control in the private sector, and possibly create another mass example of moral hazard created unknowingly by the political class.

The Panic of 1907 led to the creation of the Federal Reserve System and the 13th Amendment. The Congress created the Pujo hearings to investigate the crisis, and to attack the savior of crisis J.P. Morgan. These hearings also led to the 13th Amendment, which allowed the Congress to impose a Federal Income Tax. Fannie and Freddie were creations of the “New Deal”. The element of fear associated with a contraction or market panic, created the environment that spawned these quasi-federal institutions. The political class used the image of "the other" to expand their own power through populist rhetoric.

Now we sit at a turning point. Once again, a bubble inflated, and burst. There is a contraction in our economy, and people are scared. Our new President addressed a joint session of Congress for first time and fueled the flames of populism. He laid out his plan for the future. One in which the federal government has more impact in our lives. He proclaimed that, “only the Federal government has the resources to pull us out of the recession”. His new budget is, “a vision for America – as a blueprint for our future”. Once again, a crisis is the tool to expand the power of the political class and the bureaucracy. Remember that the first rule of the bureaucracy is to preserve and expand the bureaucracy. Mr. Obama’s rhetoric sounds a lot like central planning, but has only been addressed by a minority in the media.

Throughout the history of the modern United States we have fought with the beast of central planning. It aims to destroy the individual, which is the base of this great nation from society. Instead, it creates a society that clings to the teat of the state. With that, we become slaves, dependant on the state for every aspect of our daily lives. Eventually what we know as a bastion of innovation and freedom will disappear. The land of plenty will turn to a land of breadlines.

The current crisis is a complex one. I brought up the quasi-government institutions because they were the foundation of this Great Deleveraging we are experiencing. The private sector and the individual consumer are also to blame. The easy credit created a wave of mania, which infected every facet of our economy. The private sector underwrote loans that were not feasible. Consumers were just as high on the euphoria of cheap credit and used their homes, as ATM’s to consume even more. This contraction was much larger than normal, but in a capitalist system it is a normal occurrence. People act irrationally on both the way up in the business cycle and on the way down. However, once again the Political Class has taken an opportunity to grab more power. They are trying to grab the reins of the system from the people, and to place more of the private sector under their control.

Will we learn from the last attempt to control human nature through social engineering. It doesn't work. The current mortgage crisis was an attempt to achieve social justice, and it backfired. the 1992 Housing Bill set quota's for low incomed people. The Political Classes attempts in the past, to correct the flaws of human nature, have led to inefficient institutions and intellectual dishonesty. Remember the Great Society? Those programs failed miserably, and destroyed the neighborhoods it intended to help. The landscape of the urban north is still scarred by these policies. The promotion of low income home ownership coupled with the loose monetary policy by the Fed in the wake of 9-11 they created one hell of a bubble. Their future attempts will only create much of the same. Central planning is not efficient, If you are not convinced that this is their motive, remember the words of Rahm Immanuel, “a crisis is a terrible thing to waste”. Slowly we are walking down the road to serfdom. In the words of Friedrich Von Hayek, “We shall not grow wiser before we learn that much that we have done was very foolish”.

You Did This

This article illustrates nicely the visible effects of the current economic slowdown. It's one of a spate of recent articles which paint a shocking picture of how bad things have gotten. Whereas the last depression was characterized by bread lines and multitudes of jobless men lining the streets, this one will see Senior Structured Credit Directors serving lattes.

Secondly, this maudlin and inaccurate article by Bob Greene is the type of thing I fear we're going to see more often. The rise of "reverse mortgages" bears witness to the fact that the elderly, like people of every other age, were using their homes as ATMs. Like many others, older people withdrew home equity to finance consumption. In addition, any competent financial advisor knows that it's inappropriate for someone nearing or in retirement to have a substantial portion of their net worth in the equity market. Those who did were greedy, foolish, or both. Thus, we're asked to shed tears for a bunch of people who lived through a depression but did not learn any lessons about the fragility of financial institutions or the impermanence of paper gains. More generally, though, it continues a worrisome trend: carving out groups of people who aren't responsible for the current problems.

Guess what? We're all responsible. Old, young, rich, poor, hedge fund manager, retail investor. The greed of the subprime borrower who wanted a house she couldn't afford is the same as the greed of the institutional investor who chased yield by buying that mortgage (and thousands of others) securitized by a greedy investment bank and stamped "Triple A" by a ratings agency greedy for fees. Grandma, while certainly less culpable than Bernie Madoff, got a little bit greedy and now has to eat cat food until she dies.

I'm not showing callous disregard for the plight of anyone in the current downturn. It sucks, big time, but that's what happens when we have to collectively pay the piper after more than a decade of debt-financed asset bubbles. Maybe we'll learn our lesson next time... though if the fate of the people who survived the last financial catastrophe of this magnitude is any indication, I doubt we will.

Cartastrophe!

In case you haven't noticed, there is a legitimate problem with the car industry as a whole. Not only are the Detroit dynasties dying slow deaths, but purchases are grinding to a halt. These graphs have been floating around for about a year. In a business of such fixed costs (especially in America), variables can't move around with the amount of volatility they are moving with now. The model just doesn't support it, especially from the lending side.

Rand Illusion

According to one of a number of sources, Ayn Rand's Atlas Shrugged has been flying off the shelves a little more often during the troubling times of these days. At first I was intrigued because I didn't understand, but the problem was that I thought way too much of people and that had I thought them to be dumber, it would make much more sense.

Those in a position of opulence have turned to the book for a verification to their resentment towards having to pay higher taxes in an Obama administration, bailouts etc. Admittedly the pay cap was bad, but this is about much more. The idea that anyone is "going Galt" is ridiculous. First of all, the entire financial crisis is a result of self-interest: people buying second homes, borrowing against all of their equity; self-interested C.E.O.s undermining shareholders by not fully recognizing risk; Politicians abusing urgency for their own personal interest. However the truth is that even though much of our problems do result because of self-interest, Ayn Rand's work (and specifically Atlas Shrugged) doesn't just promote "selfishness", it proposes that one should behave in such a manner so long as the act does not require that another sacrifice their own self-interest.: "I swear by my life and my love of it that I will never live for the sake of another man, nor ask another man to live for mine."

And this second part is exactly what most people aren't remembering when they're standing on their front lawns hands-next-to-holsters telling you to get off their property. By taking on too much risk, both people and banks have hurt themselves. In general, if you were not the brightest individual and I didn't know you and you came to me and said that you were going to go off to a commune by yourself so you could live life more ethically pure I would say, "go on ahead, have fun!". But if you've read the book, you know what the differences are. Firstly, our society is moving towards a more "socialist" (if you even want to call it that) route as a result of the financial crisis, not vice versa. Secondly, no one has disappeared. And lastly, people calling for a slow-down in work are gonna stay at home, use heat/gas, electricity, and keep going to Wal-mart for supplies. That's hardly "going Galt".

Now I'm no Objectivist. I've read much of her work, though. What bothers me is that there are so many conversations I hear of two parties debating Ayn Rand, and how often neither of them are even remotely familiar with the underlying philosophy. The good news is that some people have a sense of humor about this stuff. Here's the clip from the Colbert Report.

The Colbert ReportMon - Thurs 11:30pm / 10:30c

The Word - Rand Illusion

Colbert Report Full Episodes
Political Humor

Rap Battle
NASA Name Contest

Have We Seen Bottom?

Yesterday, the three main US indices had significant gains. The S&P gained 6.37%, while the DJI gained 5.8%. Much of this pop came from Citi's CEO claiming that it was profitable the first two months of the year, and On that news Citi jumped 38%. GE also popped.

There is much uncertainty in the market to declare a bottom. Libor rates are creeping upward, on fear that the government bailouts will not solve the crisis. The Libor OIS spread has increased to the highest level since Janurary 9. The anticipation of the Treasury Departments new plan to handle toxic assets, will most likely lead to some loss of ground in the coming week. According to Bloomberg, the Treasury may use capital injections to provide incentive for banks to sell their toxic assets. We will see if the carrot and stick works this time to spur trading of mortgage-backed debt.

Have we reached bottom? I think not. The market will still have to test lows at least once more. Nevertheless, it sure was nice to see green in the Obama Bear Market.

An Options Play For the Obama Era

There has been much talk about Organized Labor since the election of President Obama. Much of this talk centers on the Card Check legislation currently lobbied for by the Labor Unions. The policy is an attempt to dismiss voting by secret ballot when forming a union. Recently, unions have been lobbying the Treasury Dept. in order to combat opposition from large Institutions taking money from TARP.

Yesterday Citi downgraded Wallmart to "hold" from "buy" (WMT) due to the pending labor legislation. The next couple of months will provide a great environment for an options play.

Time For Credit Cards

Through much of this malaise in the markets, we have heard much about the leverage of the nation's largest banks. In fact, many acted like hedge funds, or at the very least tried to emulate Goldman Sachs, and failed miserably. I have referred to the past 6 months as the Great Deleveraging, and great it has been. In my opinion, very little attention has been paid to consumer leverage. All crises have many factors that converge at a single moment in time to create a perfect storm. The current crisis is not an exception. It like all bubbles is a crisis of credit.

The most interesting aspect of this crisis is how much the average consumer is leveraged. What better way to look at it, then to look the market for credit cards. We saw it with the housing boom. Now, it is going to be credit cards. Meredith Whitney discusses this in her op-ed in the WSJ, "Credit Cards Are the Next Credit Crunch". Currently there is roughly $5 trillion in credit-card lines outstanding in the U.S. In fact, companies are attempting to shrink these credit lines. American Express is paying certain customers $300 to pay off their balances and close their account. According to a piece by James Surowiecki in the New Yorker:

"This is a pretty startling change of direction for the lords of plastic. For decades, they’ve been deluging Americans with come-ons (in 2007, 5.2 billion offers for new cards were sent out), so much so that, as of 2006, there were nearly 1.5 billion charge cards in circulation. And these cards did not go unused: between 2000 and 2006, even as Americans’ real income was essentially stagnant and their savings rate negligible, credit-card borrowing rose by about thirty per cent. Our willingness to spend beyond our means served the credit-card companies well: their profits jumped forty-five per cent between 2003 and 2008. But while making borrowing easier boosted the companies’ profits, it also increased the risks they faced, risks that started to hit home once the economic slowdown began. According to Fitch Ratings, credit-card chargeoffs—debts that companies determine they will not be able to collect—rose to almost 7.5 per cent in December, up forty per cent from a year earlier. And, as unemployment continues to rise, so, too, will the number of people who are unable to pay their bills."

It may be time to buy puts on the credit card companies, but there there is good news. At least the U.S. Consumer is not as leveraged as Icelanders. According to a current article by Michael Lewis, Icelanders have debts around 850% of GDP. This is in comparison of Americans, which have debts near 350% of GDP. It may be schadenfreude, but I will take it.

There is no doubt that credit is the most important aspect of our financial system. In the words of Naill Ferguson, "credit makes the world go round". However, when credit spirals out of control, and institutions and consumers act as irrationally as street junkies do. Maybe the best thing to do is sit back and evaluate our mistakes. Instead of making haste decisions that create another bubble.

The Short Squeeze: Obama's Speech

In case you don't have more than 10 minutes to listen to Congress give an earth-shattering applause and standing ovation to, "I ask Congress to move quickly on legislation that will finally reform our outdated regulatory system".

What About the Banks?

I do not like Paul Krugman. The economic theories and systems he supports are the foil of my own. His column yesterday in the Times warned of moral hazard created by government policies aimed to shore up the toxic assets. It surprised me, after all he is the one of the Champions of the Keynesian Multiplier and the Stimulus package.

"Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued."

Sounds like moral hazard to me. Who would have thought?

I find it interesting that we have a stimulus bill that has been passed by the Congress, and a massive Budget will be passed soon. But there is no plan for the banks. The Treasury Secretary Geithner has not provided any solution. There was talk about a plan that emulates the Swedish solution with a bad bank. I don't believe that using Sweden as a model is the right solution. After all, the Swedish economy is equivalent to the state of Ohio.

What is clear is that there has been no progress in solving the problems in the banking sector. The longer we sit idle, the more we will be looking at a "lost decade". There has been no leadership from both the private and public sector. The populist sediment that has arisen against bankers has hurt the prospects of leadership from the private sector. But this is what I believe is missing in the current crisis, and what will help cure the credit anorexia. In the panic of 1907, many of the factors were the same. J.P. Morgan literally locked all of the bank and trust leaders in his library until they found a solution. Where is our J.P. Morgan in this crisis? Is he too scared to step forward?

Is it wrong to let some of these banks fail? Or could we start selling off assets in these companies? AIG and Citi for instance have many profitable divisions that could be sold off. Is the mantra, "too big to fail" going to be the theme of the "Great Deleveraging". The readers of the Freakonomics voted it as the new six word motto for the United States.

Bad Policy, Bigger Government

Excellent article from Charles Krauthammer (click the title of this post). The correlation between crisis and bad policy is close to 1, as is the correlation between crisis and bigger government.

"The markets' recent precipitous decline is a reaction not just to the absence of any plausible bank rescue plan, but also to the suspicion that Obama sees the continuing financial crisis as usefully creating the psychological conditions -- the sense of crisis bordering on fear-itself panic -- for enacting his "Big Bang" agenda to federalize and/or socialize health care, education and energy, the commanding heights of post-industrial society. Clever politics, but intellectually dishonest to the core."

This will go down as one of history's great bait-and-switches. In the way that Mr. Bush used the catastrophe of 9/11 as a means by which to pursue an unbridled expansion of government involvement into American life, it is clear that Mr. Obama intends to use the financial catastrophe to pursue more of the same. 12 (or 16) consecutive years of the federal Leviathan growing larger and larger will be ruinous to the financial and cultural health of our nation. God save us all.

Slippin & Slidin

After this morning's news of the UK cutting rates to 0.5% and the Eurozone slashing to 1.5%, I almost felt surprised that they both weren't already at 0. And even though the February unemployment numbers are looking a little better than even this blog predicted, the U.S. markets tanked.

Now I know that 300 points should be a walk in the park, but when the starting point is under 7000 for the dow, 300 points is more like 4%, which should raise more than just a few hairs. Perhaps the bottom will be soon, but fear fuels the fire, as we all know. According to the WSJ article (after the jump), one of the big trades now is the Citigroup capital structure arbitrage trade, shorting commons and long preferreds, (cap structure arbitrage is what it sounds like: arbitraging different parts of the capital structure based on a theory of differing values within those structures, a pairs trade of sorts. i.e. convertible arb is a kind of cap structure arb, you can also do it with preferreds, junior vs. senior debt, CDS vs. debt, etc. - this can get very sophisticated, traders invloving 4 or 5 different forms of securities for one firm).

Auditors at GE are warning of bankruptcy, and even the stable firms like Wells Fargo and JP Morgan are getting credit rating cuts. Time to buy Wal-mart and McDonald's perhaps. The only good news is that it was 63 degrees today in Chicago. Wish I had more for you guys.

Blue-Chip Dollar Store

In case you haven't heard, Citigroup, the falling empire of the heralded Sanford I. Weill has hit 99c a share. While the banter seems to be circling around the big C, they do not sit lonesome in the realm of big companies with not so big price tags. The Big Picture posted a list of other Blue Chip bargains (maybe not such a bargain in terms of value, though). Among the penny stocks include AIG, E*Trade, Fannie, Freddie, and UniSys. A whole bunch more a listed in the 1-3 dollar range, and technicals have not indicated a bottom.

The Future of Energy

My morning ritual of reading the WSJ op-ed's, always brings my first thoughts of the day (I will try not to use this source too often). Today, my thoughts lay with petroleum and renewable energy. Oil is not gone, and will not be in my lifetime. It is too efficient, and our entire infrastructure is dependent on it. But, the current rhetoric coupled with the memory of the high prices from the commodity bubble of '08 have brought energy back to the forefront of political debate.

Robert Bryce's op-ed provides a look into the current proposals from the Obama Administration and the realities of wind and solar.

Vaclav Smil's of the University of Manitoba piece, "Moore's Curse and the Great Energy Delusion", looks at the slow process of transition of energy sources through the history of Industrial man.

Why hasn't the political class mentioned nuclear power? It is clean and efficient source of energy. It also solves another problem for humanity. A problem that is more of a threat than global warming. This threat is nuclear weapons. The vast amount of nuclear weapons that are still in active service in Russia and the United States can destroy our species many times over. Why not harness these weapons into power? Our governments spent large amounts of treasure on developing horrific weapons to protect us under the veil of mutually assured destruction. Why not use them to produce energy? It seems like it would provide a reasonable return on investment.

Nothing is F*ed Here, Dude.

Third-party estimates for February employment numbers put us at losing another 700K jobs this past February, which means that the velocity in job losses has only gotten worse. Considering what this means as far as future consumption->production->investment spending, we're still not near a bottom, economically speaking. No one can say with certainty where this will end, but more and more people are starting to use the term "double-digits".

The Odds of a Depression

Robert Barrow of Harvard and the Hoover institution published an op-ed today in the WSJ on the odds of a Depression occurring following a stock market crash. The piece was based on research looking in to the historical linkages between depressions and stock market crashes worldwide.

The definition used by Barrow is a decline in per-person GDP or consumption by more than 10%.
Conclusions:
- 20% chance of a "minor depression" (10% or more)
- 9% chance of a "major depression" (25% or more)

The prediction markets at intrade have the odds at 13.9%. It should be noted that the bid is 14 and the ask is 19. The charts show that the prediction market for a Depression occurring in the fiscal year of '09 has declined since reaching its peak on February 24th.

What is it that led to that spike?

Japan Lending Through Gov-Backed Bank

Reported by the NYT today, Japan is doing something about the staggering export situation facing the country. Since even Toyota is bleeding red ink, the government has decided to circumvent the lack of lending from the U.S. banking industry and has started a program to lend to struggling exporters: "About $5 billion of Japan’s foreign currency reserves will be used to finance a government-backed bank that will be charged with making dollar-denominated loans".

It would appear that the country will have nothing to do with a zombie banking industry. Applause all around.

Car Industry Stalls

I couldn't help myself. Some info from Ritholz & Co. over at the big picture.

The data on vehicle sales continues to be nothing short of abysmal:

* GM’s sales fell 53%
* Ford’s sales dropped 48%
* Toyota’s declined 40%
* Volkswagen U.S. fell 18%;
* Nissan sales dropped 37%
* Mercedes-Benz posted a 21% decline
* BMW’s total car sales fell about 24%
* Honda sales dropped 40%

Hyundai Motor was the sole automaker to post a month over month sales gain (down 1.5% year over year).

Did I Say 3.8?

Because the revisions to the Q4-08 GDP estimate was a whopping 2.4% lower than the first Q4 release. Now it's 6.2% annualized GDP contraction, with expectations to see "similar weakness" in the first quarter of 2009, putting us well on our way to realizing an actual 6.2% contraction. I guess I'm pretty new to this whole economic analysis thing, but that sounds more like a re-write than a revision. Read about it at the Financial Times.

Feel the Burn

Remember 1996? The Chicago Bulls set the record for the most wins in a season, the Menendez brothers killed their parents with shotguns, and David Foster Wallace's Infinite Jest was published. I wasn't even in high school yet, so at the time I was more concerned with the price of a happy meal than the S&P. But thanks to today's drop, we get to relive the joy of pre-"irrational exuberance" stock markets. Three cheers all around. Some are calling it The Lost Decade, and Niall Ferguson has coined it as The Great Repression. My personal favorite: GDII. It sounds like a movie sequel.

Unfortunately, heads will be rolling rather than credits. Unemployment continues to rise, everything else under the sun continues to fall, and the market isn't expecting good news for quite some time. The Dow and the S&P have now been officially halved since their peaks back in late October 2007. Enjoy your worries.

Rahmbo: The New #2

When Eisenhower picked Nixon as his VP nominee, scandal erupted shortly thereafter concerning Nixon's campaign contributions. Eisenhower kept him on board, and Nixon went on to change the way the vice presidency works. Nixon expanded the office of the vice president, providing more influence and power to a position that changed the meaning of the vice presidency forever. As vice president, Nixon spearheaded foreign relations, and held National Security meetings in the presidents absence. In the Bush 43 administration, Cheney took this to a whole new level.

Chief of Staff is usually a more temporary role. Typically this office is held for no more than 2-3 years. It's tiring, and you have to answer to the president. But Rahm Emanuel is set to do even more with this role than any CoS in history. It also sounds like he'll be around for a while. According to the tagged New Yorker article, Emmanuel was picked for the job as early on as the beginning of August. He has Washington experience, was a top ranked congressman, and is unanimously understood as someone who can "get things done". Though we normally don't talk about politics here, Emanuel is definitely someone to keep an eye on for the future. He will undoubtedly be in positions of power for years to come, and has already accomplished great feats at such speed that his performance is being compared to Roosevelt's first 100 days in real-time.

The speculation that Rahm is Obama's #2 is important because of the differences between this position and that of the vice presidency. Chief of Staff is less in the limelight, and has much more direct supervisory power, which is a fine trade off considering his past grants him a certain level of influence in congress. Also, the fact that he is already doing so much with this position is alarming considering that it is most likely not the peak of his career. It many not be often mentioned, but both Rumsfeld and Cheney were chief of staffs in the Ford administration.

A Note on the Pay Cap

I don't want to get in to a micro-economic debate here, but the pay cap business is a little ridiculous. You don't need an education in micro-economics to understand that if you pay them less here, they'll go there. Substitutable goods. OK.

But frankly this is just plain-stupid: a relatively costly publicity move. If only it were limited to CEOs. But 5 top executives and the 20 highest paid employees of every major firm will be given total incentive to jump ship. The bill also encourages executives who haven't taken government money to refrain from doing so, at the peril of the business they are managing, because a direct result will be a 66% cut in their pay. Allowing them then to reward employees with unrestricted stock is a joke, and the industry has all too many options for those at banks i/r/t leaving: consulting firms, trading firms, hedge funds & asset management firms, etc. At smaller banks, the bill constrains specifically the highest paid employee, which is most likely the most valuable employee. At larger firms, the top employees (usually highly skilled and very high-earning traders and bankers) are getting the shaft. This bill is taking dying institutions and turning them in to zombies. Bad idea.

Yokoso Disappointment - Japan's Surprise

So much news gets filtered through agents of the financial markets that stories have a shelf-life which can only be measured in minutes. For example, people have already forgotten about Dick Fuld and James Cayne, who worked tirelessly for their entire lives with the same firm to achieve what ended up being infamy as the respective captains went down with their ships. The U.S.'s Q4 GDP contraction was forgotten as the UK announced a bigger contraction, which was forgotten as the Eurozone matched the Brits' 1.5% year end drop.

But when Japan announced a contraction of 3.3%, analysts had to double check that first the country hadn't mistakenly reported the annualized number as quarterly. Japan has remained a bit under the radar as far as the global recession is concerned, partly due to the differences in the country's currency fluctuations (the Yen behaves differently from other major currencies like the USD GBP and EUR, due in part to the carry trade as well as a number of other reasons that aren't directly related to this discussion), but heads should have turned after the past few months' export numbers reported absurdly poor levels. Even though it is well-known that Japan relies heavily on exports for GDP, there wasn't much buzz for the upcoming GDP release.

Which is why it may have been so shocking to so many to see the release. Japan, being the second largest developed market economy (according to GDP, excluding Eurozone) as well as the only developed market economy in Asia (a geographic region of particular interest to emerging-market and general investors alike) should be up in front as far as global economic indicators are concerned. Yet, unsurprisingly, Wall Street seems to have forgotten yesterday's news. I protest that we all stay focused here, because Japan is going to be an important area of discussion in the near future.