Incompetent Bankers All Over The World

When bankers tell you they've fixed what ails their industry, it would be wise to wait until another shoe drops.  Irish banks are in more financial trouble:

Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse.

The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system.

How could bankers have missed these holes in their balance sheets?  Maybe they were trained by colleagues at other banks who can't tell the difference between assets and liabilities in their pension plans:

However, due to different accounting rules, some banks reported a net asset on their respective balance sheets for their plans in fiscal 2009, even though the plans were in a deficit position: the funded status of Bank of Montreal’s (BMO) plans was a deficit of CAD0.8 billion, but it reported a net asset of CAD0.6 billion; the funded status of UBS’s (UBS) plans was a deficit of CHF1.9 billion, whereas it reported them as a net asset of CHF2.6 billion; and the funded status of Mizuho Financial Group’s plans was a deficit of JPY158 billion, whereas it reported a net asset of JPY523 billion.

I used to peruse career sites for job listings with banks.  The jobs advertised invariably demanded applicants of the highest caliber with clearly defined qualifications.  It turns out that the people who fill these jobs have trouble discerning the difference between assets and liabilities . . . profits and losses . . . positive and negative numbers . . . numbers and letters . . . people and inanimate objects . . . and most importantly, truth and falsehood.

I have no such difficulties.  That's why HR managers and high-powered recruiters have screened me out as ineligible to work in a bank. 

Home Prices Getting More Realistic

The phantom recovery is finally peaking right about now.  Home price declines show the weakness of the housing market:

The market seems to have pulled the rug out from under housing industry hopes for a sustained early recovery.

After a five-month run-up in home prices starting last spring, prices have now fallen for four consecutive months, according to the S&P/Case-Shiller Home Price Index of 20 cities, a gauge of market values, released Tuesday.

Why is this good news?  It means renters like yours truly get closer to affording a house. 

Why is this bad news?  It makes existing homeowners more likely to default on their mortgages, thus pushing banks back to the brink of insolvency. 

On balance, it's mostly bad news.  It's funny how the Dow took this in stride and posted a tiny gain for today.  Program traders must be confident their algorithms will keep working as designed. 

Nota bene:  Anthony J. Alfidi is long puts against IYR at the time this post was published.

The Haiku of Finance for 03/30/10

Foreclosure fund cash
Just a drop in the bucket
Gee, thanks for nothing

Greece, Coming To A State Near You

I've never visited Greece, but it's always been someplace I've thought about traveling to see.  My problem is that I'm too cheap to pay for a vacation.  Well, I need worry no more.  It looks like Greek conditions have come to visit us:

California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.

Once these conditions become fully discounted by the bond markets, municipal issuers will face the same exorbitant costs that Greece now faces:

Greece continued to pay a stiff premium Monday to raise €5 billion ($6.71 billion) in its third syndicated bond offering of the year, a demonstration that the announcement last week of a possible European Union rescue package has done little to lower the troubled country's high cost of borrowing.

How did America get to become so much like Europe?  We don't have to look to conspiracy theories.  The inertia of material prosperity taught us for decades that we could live off the wealth accumulated by the hard work of our ancestors.  Now we realize too late that we learned a false lesson.  The only relevant question now is whether we can survive years of austerity without completely losing the American national character. 

Muni bond buyers, beware.  I own no California municipal bonds at this time. 

Why Are Most Stock Analysts So Dumb?

I've been asking the question above for most of 2009, and now the MSM is asking the same thing:

Judging from stock prices alone, one would think the economy was poised for a roaring comeback. But the federal government plans to unplug the economic life-support programs that stimulated production, kept interest rates low and placed a thick cushion under the real estate market.

Okay, they're not as explicit as I am, but they are giving a voice to a growing bearish chorus among analysts who had previously heralded the end of the Great Recession.  Some pros (like James Altucher of Formula Capital, whose negative assessment of a college education's value is an opinion I share) are still remarkably bullish.  Let's consider a big piece of contrary evidence.

Consumer spending is clearly not on a sustainable path.  Employment growth has not returned and recent growth in consumer spending is being funded by a massive dip in the savings rate rather than income growth.  Households are not repairing their balance sheets. 

Eventually you'll hear more of this from mainstream commentators.  By then it will be too late to capture whatever gains you've had in this rally. 

The Limerick of Finance for 03/28/10

The Maestro warns debt costs will rise
A mea culpa, we can almost surmise
Though junk bonds wtill rally
Traders' gains, they do tally
A bond bubble burst will surprise

Ford Minus Volvo Equals Geely

Okay, maybe my math isn't perfect, but this match of a prized brand to an upcoming carmaker makes more sense:

Zhejiang Geely Holding Group signed a binding deal Sunday to buy Ford Motor Co.'s Volvo Cars unit for $1.8 billion, representing a coup for the independent Chinese automaker which is aiming to expand in Europe.
(snip)

The price, which includes a $200 million note with the remainder to be paid out in cash, is far less than the $6.45 billion Ford paid for the Swedish automaker in 1999. The U.S. automaker has been trying to sell Volvo since late 2008 to focus its resources on managing its core Ford, Lincoln and Mercury brands.

Ford lost about $4.65B on Volvo, which they can amortize over several years to net out the tax liability on their current income.  Still, Ford's income tax expense last year was only $69mm, so it would take over 67 years to net the whole thing out at present earnings.  Given that Ford can't hope for much growth in a mature car market like the U.S., the tax loss benefits of this debacle are really very tiny. 

Geely comes out a big winner by grabbing a globally recognized brand for a song. 

Nota bene:  Anthony J. Alfidi has no position in the above-mentioned stocks at the time this post was published.

Greenspan Singing Like a Canary, But Off-Key

The Maestro sounds off about treasury yields:

Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates.

Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”

The problem is that he still hasn't owned up to his contribution to the federal government's insolvency.  His endorsement of Bush II's tax cuts and his own low interest rate policy made debt issuance into a mad scramble to see who among governments, banks, hedge funds, and homeowners could lever up the fastest.  Anyone who played that game turned out to be a big loser. 

Come on, Alan.  Think of how history will view you.  The least you can do now is admit that the U.S. government won't be able to pay its future bills because you allowed it to run up its credit card. 

China Admits It's In A Bubble

Well, now we've heard it from the horse's mouth.  Chinese leaders state that their economy has assumed bubble proportions:

“We have to closely monitor China’s asset bubbles,” Liu Mingkang, chairman of the China Banking Regulatory Commission, said yesterday at a conference in Beijing. Property prices have changed “quite a lot in the past five years,” he said.

This is in the context of further policy restrictions on lending to real estate developers.  China is trying to let the air out of this bubble slowly.  Good luck with that.  I'm just glad I trimmed my FXI holdings this month. 

Nota bene:  Anthony J. Alfidi is long FXI (with covered calls) at the time this post was published. 

Frontline Shows Confidence By Issuing Bonds

Frontline Ltd. (FRO) is a shipper I follow primarily because of its ship leasing spinoff, Ship Finance International (SFL).  FRO thinks its future is bright enough to support a bond issue:

Frontline said the proceeds from the sale will be used for general corporate purposes, financing the remaining equity investments in the company's newbuilding program and also will improve its ability "to react to attractive market opportunities."

FRO has some justification for its confidence.  Its net income has increased three years in a row (from 2006-08, although '09 numbers aren't final yet), impressive in light of the recession in most advanced countries and the collapse in 2008 of the Baltic Dry Index.  Pricing power for most shippers has only recently returned. 

That line in the article about reacting to attractive market opportunities probably means they're in the hunt for acquisitions.  That's not a surprising sentiment given the problems facing other shippers, but there's plenty of risk for FRO if that's really their intent.  Their long-term debt load as of 2008 was over 3.69 times its net income, so increasing this debt may pose a serious problem for the company if the global economy lapses back into recession. 

Nota bene:  Anthony J. Alfidi holds no position in FRO or SFL at the time this post was published. 

The No-Bailout Bailout

Is this a joke?  Do these Eurodudes really think this deal is going to work?

The joint eurozone and IMF bailout program comes with strict conditions and makes no money available right now.


It could be tapped only if Greece or other financially troubled eurozone members cannot raise funds from financial markets. It would require the unanimous agreement of the 16 eurozone countries to release the loan funds.

Requiring unanimous agreement is funny; Germany will probably still say no.  All this does is buy more time for remaining eurozone insiders to unwind any investments they have that will suffer when Greece collapses.  The markets have been put on warning that the EU is unable to force its members to abide by its criteria for membership. 

Playing "kick the can" must be a lot more fun when you can do it with other people's money.

My portfolio has no exposure to Europe at this time. 

Homeowner Mortgage Modification = FAIL

People shouldn't be surprised, but of course they are.  Modifying the payment schedules of people who never could afford to make mortgage payments anyway is having the expected result:

More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report.

For every insoluable market-based problem, there's an unworkable government program designed to solve it:

A government watchdog is criticizing the Obama administration for establishing a "meaningless" goal for its flagship mortgage assistance program.

The report issued late Tuesday by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, says the Obama administration is measuring the performance of the program by a questionable standard.

At the program's launch in February 2009, Obama officials said it would help 3 million to 4 million homeowners. But with only 170,000 borrowers completing the program so far, administration officials now emphasize that the plan's goal is to merely offer help to those millions.

I'll spare you the rest of that sad story.  This mortgage assistance program was designed by the same geniuses who've just delivered us health care reform.  Perhaps the new standard for determining the effectiveness of health care reform will be the number of patients doctors thought about treating but had to turn away.

DOT Spills The Beans On Transportation Stimulus

My faithful readers (yeah, all three of you) know my interest in transportation stocks.  Some modes of transport are more energy efficient than others when measured in fuel expended per ton-mile.  The U.S. Dept. of Transportation weighs in on how it prefers to spend stimulus money:

The Department of Transportation’s second-highest official told senators that DOT’s preference for freight shipping is keep goods on waterways and rail as much as possible, getting them away from trucks except for the final delivery.
(snip)

Committee Chairman Barbara Boxer, D-Calif., asked Porcari whether the concept of DOT’s discretionary “TIGER” grant program could work in the next multi-year surface transportation bill. That $1.5 billion pool of stimulus funds allowed DOT to send grants to multi-modal projects that cross state lines, instead of disbursing money under state-allocation formulas or for specific transport modes.

This preference isn't just a matter of achieving energy security by reducing America's dependence on foreign oil  This has implications for transportation companies as stimulus money spent on infrastructure acts as an indirect subsidy to rail and waterway carriers at the expense of long-haul truckers.

I'm watching these stocks:  Kirby Inland Marine (KEX) and Landstar System (LSTR).  KEX is one of the nation's leading inland barge operators.  LSTR has a huge netork of local intermodal connections that give it more flexibility than a typical trucking firm.  I bolded a line in the excerpt above because intermodal, multi-state operators will benefit mightily from transportation infrastructure spending.  Read my blog in the coming weeks and you'll hear more of what I have to say about these two stocks. 

The Haiku of Finance for 03/24/10

Wall Street divorces
Tie up preppie cash and stock
Time to lawyer up

Wall Street Bonuses Tied Up In Divorce

This makes me smile.  Preppies and trust fund babies (is there really a difference?) are finding that their ridiculous Wall Street bonuses are being clawed back after all - in divorce court:

Restrictions on U.S. executives’ bonuses are complicating divorce settlements, increasing legal bills and raising the prospect that some may have to transfer children out of private schools or sell second homes.
(snip)

Glenn Liebman, a certified public accountant in Woodbury, New York, said his clients used to be paid base salaries of $250,000 with cash bonuses from $3 million to $6 million, which went toward alimony and child support payments in a divorce. Those executives now may receive only a portion of their bonuses in cash and the remainder in stock that’s tied to share performance that may not vest for up to five years, Liebman said.

“Changes to compensation are creating a horror show when dealing with the other spouse’s budget and support package for children,” said Liebman, a partner at Klein Liebman & Gresen, LLC, which values businesses and assets.

Somebody call a waaaaaambulance!  Prissy little miss has to drop out of St. Alban's Prep and enroll in P.S. #139 because Mommy can't get her manicured paws on Daddy's bonus.  I have no sympathy for these dweebs because karma is finding a way to stick it to all of them for their arrogance.  Hey preppies, I'll be happy to buy your country club membership from you for a buck fifty if you're that hard up for cash.