jgonion

Proposed Solution for Toxic Assets Plaguing Banks

Why share the profits 50/50 when a bank could have 100% of the profits by simply over-valuing the asset?

This just gives the bank incentive to inflate the book value of the asset.

An Alternate Solution to the 'Bad Bank' Problem

It's difficult to know where to start...

This proposal seems fixated on the concept of returning money to the treasury, and claims that this somehow eliminates the exposure of US taxpayers. However, it doesn't actually return money to the Treasury, returning money to the Treasury would be bad for the economy, and it doesn't eliminate the exposure of the US taxpayers, it increases it.

1. From a risk standpoint: Under this proposal, the government borrows money from the troubled banks, paying them 10% interest. Some banks will not participate, either because they don't want to, or because they don't have enough cash. So nothing changes. For banks that participate, the taxpayer exposure to TARP is still there. Now the bank owes the government money, and the government owes the bank money (whether in the form of TARP or an equity stake). Banks will have less cash on hand to deal with their financial woes, increasing the chances that they will not survive (i.e. increasing the risk to taxpayers). On the other hand, the bonds are marketable in bankruptcy, so the government is locked into its 10% obligation even if the bank fails. The taxpayer pays twice: Once for TARP (or loss of equity), again for the new bond in the hands of a receiver.

2. From an economic standpoint: The economy runs on money supply. During recessions, the government lowers interest rates to help increase the availably of money, which stimulates the economy. This proposal *removes* money from the economy by having the government borrow money from an already troubled financial industry. Removing money supply hurts the economy, it doesn't help it. The last thing you want to do at this point is return money to the Treasury. The time for that is after the recession has ended and businesses are growing again.

3. From a taxpayer standpoint: The proposal *guarantees* that the taxpayer will pay for all tainted assets (good and bad) in the form of interest payments, and get nothing in return. Some (5-20%) of the tainted assets will actually be good, and the banks will reap the profits. The taxpayer would be better-off if the government simply purchased all of the tainted assets and collected on the good ones. 5-20% of the value of the tainted assets would be returned to the taxpayer, rather than a 100% obligation on the part of the taxpayer.

John Hussman: Applying Ockham's Razor to the Current Crisis

John,
It's true that we need to address the cause of the problem and not merely the symptoms. The cause of the problem is not people's fear of financial instability. This is a relatively recent phenomenon, caused by layoffs and bank failures. The problem has been caused by the bank's failure to lend, which was caused by the opaque debt structures on their balance sheets.

As you point out, you can't fix the financial system if you can't read a balance sheet. This is precisely the problem: Financial institutions can't read their balance sheets because of the opaque and questionable securities that are on them.

Yet, you object to removing the offending organ:

> an ill-considered idea to purchase distressed assets directly from
> financial institutions, the Treasury somewhat inadvertently
> discovered what we had strongly argued from the beginning –
> that providing capital directly to financial institutions was the
> most effective use of TARP funds.

OK, so the banks can borrow money from the Fed, but they *still* don't know what's on their balance sheets, and are therefore have incentive to use the money to increase shareholder equity against the big unknowns on their balance sheet, rather than lend the money.

The cause of the problem is that the banks have stopped lending, pulling vast amounts of money out of the economy. A review of the economic data clearly shows this process beginning back in 2006 (you can check the Fed's G20 data), long before there was any fear of financial instability.

You're right, we need to fix the cause of the problem. It's not foreclosures which, while huge from an individual perspective, are a drop in the bucket of the larger economy. As long as the banks can't evaluate their own balance sheets due to the opaque debt on them, they can't lend in a fiscally responsible manner.

I assure you that getting the bad debt off of the books of the banks is not ill-considered, but was in fact thought through very carefully. The problem is that it was unpopular to a broader (and largely uneducated in economic matters) public that doesn't want to help the people that got us into this mess. But that's just rhetoric. We still need to clear-up the balance sheets off the banks so that they can be properly valued and begin lending again.

Resumption of lending will inject far more capital into the economy than the government (read taxpayers) can do on their own.

There is an well-written primer on the subject at:

seekingalpha.com/artic...

John Hussman: Based on Okun's Law Obama's Stimulus Plan May Fall Short

With regard to Okun's rule of thumb, the key words are "is accompanied by", not "causes". This article appears to make the assumption that unemployment somehow *causes" a reduction in DGP: ("underestimates the economic impact of job losses").

On the contrary, unemployment is a lagging indicator of economic activity. Unemployment typically begins to rise *after* the economy slows, and usually continues to increase after the economy has turned around (Usually peaking 18 months *after* the bottom of economic activity.)

So rather than worrying about the "economic impact of unemployment", we should be worrying about the job losses that will be caused (18 months from now) by the downturn in economic activity.

'Bad Bank' - Bad Idea

This article does an even better job of explaining it:

seekingalpha.com/artic...

'Bad Bank' - Bad Idea

Reader Beware

The so-called "bad bank" is often misunderstood. It may appear on the surface that the purpose of the proposal is to help the banks and saddle taxpayers with bad debt. - And this would be true.

It may also appear that we are encouraging more consumer debt and irresponsibility instead of helping the economy. This would be false.

Consider that the health of the economy is inextricably tied to money supply. This is why the Fed lowers interest rates during recessions (raising the money supply to push the economy into growth) and increases them during inflationary periods (reducing money supply to prevent it from growing too fast). The more money supply there is, the faster the economy grows. Money supply is the gas-pedal for the economy.

Currently, the banks of we world have decided to be irresponsible and have gotten into a bad situation. Loans have been packaged into opaque securities that the banks have invested in. Because the securities are opaque, nobody can sort-out how many of the loans are good and bad. Performing and non-performing loans are mixed together. Thus, the securities are no longer marketable. Even though they have value, nobody can tell what that value is, and so they can't be sold, effectively giving them zero-value to the bank holding them.

This situation causes the banks to be unable to determine how much money they really have, since they can't sell these opaque debt securities. This uncertainty has caused the banks to stop lending, and may banks are writing-off these securities as having zero-value.

It turns-out that lending makes-up a large portion of money supply. The effect on the economy is the same as if taxes or interest rates were raised very high: Money supply decreases, slowing the economy.

Allowing the banks to go bankrupt will not increase money supply, it will reduce it further by making credit less available.

It's easy to equate lending with (possibly irresponsible) consumer debt. The truth is that much lending is to businesses. Some examples: A ship-breaking yard that must borrow money in order to purchase a derelict ship before it can break it down, sell the scrap, and pay-back the bank.

Another example are businesses that import iron to manufacture a product. They will get a loan to pay for the iron (picture a huge freighter full), manufacture products, sell them, and pay-back the bank. The stores that purchased large amount of the product may get a loan to pay for it, sell the product nationwide, and then pay-back the bank.

This is why this credit crunch is so devastating to the economy. Yes, there are people losing their homes in droves, but what hurts the economy far more is the unavailability of credit. Banks that feel they are on the verge of bankruptcy aren't going to loan money. This causes 2 problems: Businesses cannot get loans to continue business, and creditworthy consumers have a harder time getting car loans, etc. So not only are businesses suffering because they cannot get credit, they are suffering because their customers cannot get credit to buy products.

Fact: The taxpayers of the world are going to shell-out a ton of money to get out of this crisis whether the banks fail or not. However, if the banks fail, credit becomes even less available, and the money-supply shrinks, causing the economy to shrink. That's bad. We're talking Great Depression.

A "bad bank" would buy-up the opaque debt at a discounted rate, taking it off of the books of the banks. This allows the banks to get a clear picture of their balance-sheets, and (hpoefully) lend money in a manner consistent with their financial health, which they would have a clear picture of. Freeing-up credit will increase money-supply, make it easier for businesses to operate, and easier for consumers to purchase goods. Getting 20-cents on the dollar for something they can't sell (opaque debt securities) beats holding on to it and writing it off completely.

And it's not like these opaque securities represent 100% bad debt. Since nobody can tell what's in them, they have no marketable value. The government may also be in a position to make the debt securities transparent through governmental authority, something that private industry simply cannot do.

Alternatively, we could let the banks fail, and the government could go into the lending business (issuing credit cards, car loans, etc). Since most governments of the world have a hard-time picking their nose without causing a huge screwup, I don't think we cant that.

The boys over at the Fed believe that this will cost the government (which means you and me, really) less money than the any other alternative. Whether this is true or not remains to be seen, but in uncertain situations you are forced to put your best foot forward.

Our taxes are going to be going up in the future because of this situation. There is no avoiding it. So since we can't avoid it, we should minimize it.

Allowing the banks to fail, which reduces available credit, which reduces the money supply, which slows the economy, and which makes the problem worse, is not the direction *I* would want to take. Since I'll be paying for this in the long run through higher taxes, I'd prefer the bill to be as small as possible.

Will Apple Record Another Halt-Trading Big Beat?

Andy,

You certainly deserve congratulations for your accuracy last quarter, and you have undoubtably put an equal amount of diligence into preparing the numbers you present here, which we all appreciate.

However, the ego and hubris that you deliver along with the estimates is unbecoming somebody who has a clear talent for analysis. What matters is that your estimates are accurate. That others are wrong is irrelevant. You are a fine Apple analyst in your own right. You don't elevate yourself any further by slamming the other analysts. It seems childish and it weakens your overall message. In investment, win by making money from your skills. Nobody has to lose in order for you to win. (In case you're wondering, I'm not one of the analysts you smeared, I'm simply an individual investor and Apple shareholder.)

Stick with the analysis. You're actually quite good at it.

How the iPhone and Poor Management Contribute to Apple's Downfall

While this piece is eloquently presented, I don't think it was well thought-out. For starters, Apple has not "chosen" subscription accounting. Rather, it has chosen to make new features available to customers free of charge. When a company makes this choice, subscription accounting is mandated by the Sarbanes-Oxley Act. (i.e. it's the law)

Secondly, let's not forget that Apple discloses both GAAP and non-GAAP financial results, that show their financial status both with an without subscription accounting. Both the analysts and individual investors use this information when making investment decisions.

Non-GAAP numbers are no secret, and subscription accounting is not the reason Apple stock price has fallen. For anybody who has been living in a cave for the past year, the world-wide economy is down and the entire Consumer Discretionary sector (to which Apple belongs) has fallen with it. This is normal for this sector during a recession.

Sometimes things just happen, and some people feel the need to (attempt to) lay blame. Recessions occur every 7-10 years. You can blame Apple, the Financial sector, Capitalism, the United States, or Human Nature. Regardless, when the economy turns-around (whenever that might be) Apple stock prices will benefit, along with the rest of the Consumer Discretionary sector. It's simply a normal part of investing.

ECRI: Economic Recovery Not on the Horizon

Reader Beware:

It's important not to read too much into the ERCI indexes for the purposes of investing. These so-called "leading" indexes do in fact lead the indexes that are believed to be "coincident" with changes in economic activity. However, the leading indexes typically lag stock market activity, making them of dubious predictive value for investment purposes.

Readers can explore this relationship by downloading the ERCI data from:

www.businesscycle.com/.../

... and comparing it to weekly S&P quotes from:

finance.yahoo.com/q/hp...

Seven Ways to Play Both Oil Scenarios

This piece considers two scenarios to why OPEC as not cut production as if they are the only two possibilities: Either the OPEC states are short on cash, or they are already maxed-out on production.

Consider the fact that OPC's oil-fields were developed back in the 70's, giving OPEC the lowest cost-of-production of any oil-producing state. Far from running out of cash, this pricing power gives OPEC the ability to keep oil prices low, which will hurt other oil-producing ventures far more than it hurts OPEC. For example: Oil-sands, Shale-oil, and even domestic oil production that has yet to amortize exploration & development costs have far higher costs of production than OPEC does.

So why would they want to cut production and increase prices? Even though prices may go up, this does not balance fewer barrels of oil shipped. Raising prices by lowering production gives OPEC less revenue while also helping their competition (who have higher production costs) to be profitable.

Among other things, OPEC is a collection of savvy businessmen that understand how the oil markets work very well. Coming out of this global recession, the worse financial shape non-OPEC members are in, the better positioned OPEC will be, and they know it.

Why isn't OPEC reducing production? It's simply bad business.

Despite Oil's Slippery Slope, Consider USO

Reader Beware -

With the futures markets for oil trading in contango, investments in futures-based ETP's are penalized for the degradation of the forward-month contract price, on top of any up/down movements in oil prices.

Until the oil futures start trading in backwardation, investors can get exposure to oil through UOY/DOY ETN's which will not suffer the contango-tax that comes from rolling futures contracts in this market.

One caution, the volumes are pretty-low, but since oil is a very liquid market (no pun intended), these funds track surprisingly well for having such low trading volume.

How Accurate Is the January Barometer?

January Myth Debunked:

Take a good hard look at the numbers presented in this piece. It is true that the January return correlated with the rest of the year 72.5% of the time 50/69 years (0% return in 1986 has no direction).

I propose another predictor of the market. It will always go up. Looking at the numbers above you will notice that this simple predictor is also correct 50/69 years (72.5% of the time).

From this, it should be clear that a positive return in January has zero predictive value.

Now, let's look at negative returns in January. These correctly predict the direction of the market 52% (13/25 down Januaries) of the time. I can't help but notice that flipping the Nickel in my pocket will achieve a similar prediction rate.

So, let's recap: A positive return in January tells you nothing, and a negative return in January tells you nothing.

Reader Beware...