donzelion

Holman Jenkins's Errors, Part 1

You gotta love Hover Institution, the masterminds who guided Russia into post-Communist collapse (reversed only after Putin expelled their coterie of advisers and created their own commodities/hot property bubble).

The sad thing though is that many bankers did recognize the problems, but once things advance too far, there's no way to correct for miscalculated risk: if you trade it away at value, you'll disclose just how bad your holdings are and get stuck with the rest of the mess. Once one has become Enron, it's too late to try to fix problems by restoring effective controls - you have no option but to boast about your unassailable balance sheet.

Meanwhile, your traders and personnel will demand exorbitant compensation only because they know that the game can't go on, and if it's dog food for dinner, at least they'll make sure they get a lifetime supply.

Bankers & Brokers Have Learned Nothing From the Current Crisis

Errr, that is, to "vote with their feet" (or walk away from the investment), not to walk with their feet. :)

On May 16 09:34 AM donzelion wrote:

>Diffused shareholders put so much faith in their
> ability to walk with their feet (provided they wait until as close
> to the end of the 11th hour as possible) that they skip out on actually
> holding management accountable (on the hope that they can move faster
> than all the other suckers out there). Crafty management will exploit
> such a tendency, the same way casinos exploit routine gambler errors.

Bankers & Brokers Have Learned Nothing From the Current Crisis

Actually, they learned a lot. From Enron, they learned that the "big lie" is most readily accepted if you really are "too big to fail" - even if you have the highest friends possible. From Andersen, they learned that it's better to outsource as much as possible, and instead of reminding employees to eliminate the evidence, set up a computer to do it automatically. From Chrysler/GM, they learned that sales is the least important part of selling products. From Disney and Apple (of Gil Amelio days), they learned that you can pay a CEO whatever you please - shareholders may gripe, but won't do anything.

The biggest lesson is the simplest: diffused shareholders are powerless against management. Diffused shareholders put so much faith in their ability to walk with their feet (provided they wait until as close to the end of the 11th hour as possible) that they skip out on actually holding management accountable (on the hope that they can move faster than all the other suckers out there). Crafty management will exploit such a tendency, the same way casinos exploit routine gambler errors.

Putting the REIT Maturity Crunch into Perspective

Gordon's points match my own observations: big block stores closing, anchor outlets weighing down rents like, well, anchors. Maybe the baby boomers will discover new sources of money from somewhere, but as incomes shrink and savings rise, I wouldn't expect much from commercial or residential for the next couple years. Financing situation looks a lot to me like the S&Ls of the 70s, which survived in zombie form well into the 80s. The speculators who made their money there were not retail investors, but insiders with special privileges. So it goes in real estate.

Weyerhaeuser's Reaction Indicates the End of the Rally Is Near

Author sees irrational exuberance. I see irrational desperation: traders and potential long investors are concerned about missing the bottom, because they've bought the gospel that 50-90% of returns from any market come from catching it. They're also overconfident about the ability of sell-stops to protect their assets should the market turn.

Weyerhauser is on a lot of radar screens, as analysts recall timber's performance during the 70s stagflation and look for proxies. Once it crossed their momentum thresholds, they all leaped in at once. It'll come back down to earth in months ahead...

Bank Stress Tests: How Credible Are They?

Spot on metaphor: if the tester is looking for relative levels of competence, they produce one type of test (e.g., college finals). If the tester is looking for proof of competence (e.g., the bar exam or medical boards), they produce a different one.

"I don't think there's an outcome here that is all that helpful."

Guess it depends on how one defines "helpful." So many trillions of dollars flowed around whether someone earned an A or a AAA in the bonds/mortgage-backed securities area, it's obvious that people will respond to grades. (Shucks, why not require that politicians and bank administrators post their high school/college grades publicly as a condition of earning their posts?)

The tests are "helpful" the same way cheery optimism "helped" in April/May '08 when politicos and bank managers went on record - ad nauseum - claiming that the "crisis is contained, the worst is over, the fundamentals are sound." That is, they help with short term projections of quarterly results for people trading on day-to-day outcomes. Like most college tests, they will not tell you who "learned the material" and will be able to make use of it during a lifetime.

Watch the Zombie Bank Lifeline

"The harm of Zombie Banks goes beyond simply tying up deposits in instutions that can’t lend."

Hamstrung banks would be a problem but nobody is stopping them from lending; indeed, the government is trying to push banks into lending. Rather, they're stopping them from lending through so-called "risk-free" derivatives and other opaque financial products. Perhaps the banks aren't able to grow market share and gain pricing power without relying upon such instruments, but then, that suggests there's something far worse about the industry as a whole.

My guess though is that the problem is one part banks, one part borrowers, and one part investors/brokers who arrange transactions that are utterly dependent on the ability to diffuse risks. Your recommended course - cutting down on the amount of insured holdings - is a prudent one, albeit my analysis is a bit different. Way I see it, one buys common shares to obtain a controlled exposure to a companies earnings: one cannot lose more than the shares one buys. Right now, the government bears greater risks by acting as unlimited guarantor - that's far more risk than any common shareholder would accept. If the system continues, it will poison the wells for all participants.

Dividend Aristocrats Will Continue to Outperform

Beg to differ with Whidbey. Historically, dividends were offered to lure investors to buy a stock when investors were squeamish about the integrity of the manager and skeptical about company financials. Hindsight lets us impute additional motives to investors, but nobody investing in dividend payers in 1930 knew which companies would continue to exist as dividend paying enterprises. Dividends have as much staying power as investors have skepticism about management.

Ultimately, the driving factors aren't so different from fees at mutual funds - a dividend payer may or may not be a better run company, just as a fund's stock picker may or may not be a smarter stock picker, but reasonable dividends/low fees translates into advantages that compound over time.

Despite Massive Layoffs Nationwide, These 28 Companies Are Hiring

For many major corporations, the pattern has been

(1) lay off personnel, then rehire some in a different position, or as a consultant (reducing long-term pension liabilities, changing vesting rights, and lowering health care liabilities)
(2) lay off personnel from one division, but give others the right to get first dibs on jobs in another division
(3) lay off personnel in union shops and relocate operations in "right-to-work" jurisdictions

Getting a clear picture of employment plans is about as straightforward as analyzing financials from banks with extremely complex financial products. An investor must be extremely cautious about drawing conclusions from any such hiring.

Buy British or Buy American?

The way I see it, when the pound collapsed last fall versus the dollar, fairly decent British companies went on sale for an additional 25% off. Since I lack any confidence in the USD long-term, getting a portion of my portfolio out of the country makes very good sense to me.

British equities are almost always more deeply integrated in their global operations than American companies (American companies try to avoid global taxation rules by incorporating in Britain - and then incorporating subsidiaries from the British subsidiary). While in theory, these separations are merely paper barriers, anyone who has been awake for the last 16 months might have learned that paper occasionally matters.

If you're looking for globalization to save the day, look to tightly integrated outfits like HSBC (JP Morgan is a fine bank, but where HSBC has integrated management staffs posted in nearly every member of the G20, JP Morgan normally has a couple of country representatives and no deep presence). Same principle applies with double strength for AT&T v. Vodafone.

In terms of BP v. XOM, I'd go with the dividend payer (esp. if the dollar is likely to decline relative to sterling).

As for other matchups, it's hard to pick a clear winner. There really is no British analogue to Wal-Mart - but Carrefour is an excellent European contender (which, it turns out, is also far more global than Wal-Mart, which is barely moving across N. America, let alone high-growth emerging markets).

Bank 'Stress Tests' Not So Stressful

"Think of these as sort of like the standardized tests that states put together to see if kids are meeting the "No Child Left Behind" standards."

That's actually a fantastic metaphor: the same way the "No Child Left Behind" numbers can be tweaked (e.g., a state can raise its results by dumbing down its state-issued test), the stress tests can be tweaked...only this time, by the banks themselves.

Once the banks pass the "stress-free tests," they'll have a tremendous hoopla about how they're not only profitable now, but everything is fixed this time (for real). Change the accounting rules so the banks can name whatever value for assets they wish, then change the sales rules so banks can sell a few really ugly, nasty things - and increase the spreads for accountholders v. borrowers (Wells had something like a 5% spread between rates given to accountholders and rates demanded from borrowers) - and you're off to the races.

Bank 'Stress Tests' Not So Stressful

"Think of these as sort of like the standardized tests that states put together to see if kids are meeting the "No Child Left Behind" standards."

That's actually a fantastic metaphor: the same way the "No Child Left Behind" numbers can be tweaked (e.g., a state can raise its results by dumbing down its state-issued test), the stress tests can be tweaked...only this time, by the banks themselves.

Once the banks pass the "stress-free tests," they'll have a tremendous hoopla about how they're not only profitable now, but everything is fixed this time (for real). Change the accounting rules so the banks can name whatever value for assets they wish, then change the sales rules so banks can sell a few really ugly, nasty things - and increase the spreads for accountholders v. borrowers (Wells had something like a 5% spread between rates given to accountholders and rates demanded from borrowers) - and you're off to the races.

The $650 Billion Leasing Industry Has Dramatically Changed

A truly fascinating treatment of an undertreated subject. Securitized leases are enormously important - and while the leasing industry may come in at $600 billion, I'd argue it's the seed for future purchases in most industries, and thus, an extension of almost all industrial sales in the big ticket area (factories lease a product for 2-3 years to test the supplier before going forward for the longhaul).

Worst problem with a lease: your accountant can analyze it, securitize it, repackage it, sell off the risk on it (buy insurance) - but no matter what, a lease is just a contract, with all the legal risks of any other contract. No matter what wizardry an algorithm can work, it cannot yet replace due diligence and knowing your customer. Hence, your conclusion is quite reasonable: we'll be heading back to the 'old ways' (albeit with new means of doing business in old ways).

Goldman and Morgan Stanley: Banks of Choice - Barron's

Hmmm...this seems a bit deceptive...
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A year ago, about a dozen financial heavyweights were scrapping for U.S. debt, equity and advisory business. Now there may be just three committed and deep-pocketed rivals: Goldman, Morgan Stanley and JPMorgan
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The advisory business does appear to be up for grabs (after all, those advisers did such a good job...didn't they?), but the debt/equity business seems to be undergoing a transition where the role of investment bank is no longer quite as essential.

It could be that Goldman + Morgan became "commercial banks" because they wanted to feed at the TARP trough and couldn't pass up "free money." It could also be that they correctly perceived a transition as "necessary" due to structural changes now underway that would destroy earnings in the old model. Since I can't tell which one is true, I'll invest when I get a Buffett-sized dividend on his Goldman stake.

Time to Bury the Rotting Carcasses of Dead U.S. Banks

Vibrant imagery like this should not be disposed of lightly:
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Beached whales tend to explode as they decompose, spreading a stinking mess all around unless swiftly disposed of. So too for dead banks.
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Perhaps, but what if those beached whales might be carrying a contagious pandemic virus? Keeping the corpses intact suddenly takes on wholly novel significance.

Ideally, one preempts systemic risk, but we're decades late for that. Problem is, true systemic risk carries massive, unknowable consequences:

For the Long Depression comes in the 1870s following global real estate bubbles and financial collapses, the Europeans sent their "huddling masses" to the U.S., and ultimately helped transform us into the global superpower we became in the next century.

For the Great Depression, the U.S. closed its doors, and most of the world put their masses into uniforms; one particular set of countries opted to blame one particular minority for causing everything, and the subsequent explosions reached a magnitude never before imagined.

"Creative destruction" is all well and good when its somebody else being creatively destroyed. But for the rest of us, it's prudent to try to put a firewall on the breadth of the destruction as best we can, before the bloodletting takes place.