Today's banking hearings in the House

[EVAY]

http://www.nytimes.com/2010/01/13/opinion/13intro.ready.html

[EVAY]

sorry guys, there is a screw up in this reference and I can't get the url site correctly referenced. I apologize.

The gist of the reference is that today's NYT has a list of questions that should be put before the bankers in today's hearing in the House of Representatives, and the experts who are recommending which questions should be asked keep referring to the policy of the fed in 2003-2004 when interest rates were shoved down to 1 or 2% as the primary driver of the housing bubble that resulted.

What I wanted comment on was the extent to which board members could agree or not that it was the Federal Reserve under Greenspan, more than any politician in any party, that was primarily responsible for the housing bubble and its consequent financial meltdown.

[EVAY]

okay, the reference is correct now...sorry for the earlier confusion.

[Marcus Bryant]

Well, sure. Without a compliant Fed all the greedy bankers (or whatever the MSM narrative is) could not have built their castles of sand. We're supposed to overlook the role of the Fed and the GSEs who used the implicit (now explicit) gov't backing in creating the latest credit and asset bubble.

All the Fed-Illuminati-NWO conspiracy mongers miss the obvious one. Many of those railing at Wall Street ignore/miss the real culprit.

[EVAY]

Well, sure. Without a compliant Fed all the greedy bankers (or whatever the MSM narrative is) could not have built their castles of sand. We're supposed to overlook the role of the Fed and the GSEs who used the implicit (now explicit) gov't backing in creating the latest credit and asset bubble.

All the Fed-Illuminati-NWO conspiracy mongers miss the obvious one. Many of those railing at Wall Street ignore/miss the real culprit.

What struck me about the Fed's role discussion is just that...it is so commonplace now to accept that interest rates should never have been allowed to get/stay so low for so long, but at the time folks just saw lots and lots of money-making potential out of it, plus it was ALWAYS used as a way to stimulate economic growth, making whatever administration was in power look better than it otherwise would look.

The last time the Fed tightened money in a significant way was during the GHW Bush presidency, and it cost him the presidency, I think. His demise was blamed on the economy going south, and that was blamed on the tax increases he allowed. Instead, I have always thought that Greenspan defeated GHW Bush, and upon reflection, learned just how much control he had. After that, he really just kept lowering and lowering, far more than he ever should have done, because he wanted whoever was president to keep reappointing him.

We also have to remember that the 2002-2003 time frame was just after 9/11 when the economy was in trouble, and the fed was using low interest rates to stimulate everything. It just never adjusted back up.

[Marcus Bryant]

The Fed failed to pull the punch bowl away as the party was getting started during the RE/credit bubble. With ballooning fiscal deficits as the result of two wars, the aftershock of 9/11 in the financial markets, the aftermath of the dot com bubble crash, the employment and wealth created in the construction & RE industries, the need for national income growth to cover entitlement spending, pressure from Wall Street, White House, Capitol Hill, the "financial media", Main Street (401(k)s and IRAs) etc....the Fed obeyed.

Americans seek a villain, but in many respects it is he who each of us see in the mirror every morning. We expect the government to "do something" about the economy and employment. We've gotten what we asked for. Of course, it makes for better copy to blame the "greedy" on Wall Street rather than the greedy on Main Street.

[EVAY]

The Fed failed to pull the punch bowl away as the party was getting started during the RE/credit bubble. With ballooning fiscal deficits as the result of two wars, the aftershock of 9/11 in the financial markets, the aftermath of the dot com bubble crash, the employment and wealth created in the construction & RE industries, the need for national income growth to cover entitlement spending, pressure from Wall Street, White House, Capitol Hill, the "financial media", Main Street (401(k)s and IRAs) etc....the Fed obeyed.

Americans seek a villain, but in many respects it is he who each of us see in the mirror every morning. We expect the government to "do something" about the economy and employment. We've gotten what we asked for. Of course, it makes for better copy to blame the "greedy" on Wall Street rather than the greedy on Main Street.

Fair enough.

One other point though...did you have the reaction during the horror story of the capital market collapse during the first quarter of '09 that the short sellers were destroying the remaining capital in the markets because it was the only way they were convinced they could make money? One of the questioners in the article refers to whether or not the short sellers should be more regulated...it seems to me that they must be...but I don't know how to do it and not screw up the markets more than they already are.

It is my conviction that the bottom of the capital markets is about where it is now... 10,000 plus for the Dow, 1,000 plus for the S&P, but that they went as low as they did on a combination of panic and short selling arbitragers.

[Marcus Bryant]

Something to consider - money and credit creation is "regulated" currently.

Of course the shorts jumped in, but much like bulls, there is a limit. Unfortunately, our entire financial and regulatory structure is biased towards the bulls, so that limit usually takes a while longer to reach.

The Fed was originally created to manage this boom-bust cycle, to smooth it out and avoid panics. Now it creates them and sets the stage for another.

In theory the Fed is removed from the political process and operates independently of everything. In reality it is the handmaiden of politicians, Wall Street, and the media, IMO.

[Winehole23]

It is my conviction that the bottom of the capital markets is about where it is now... 10,000 plus for the Dow, 1,000 plus for the S&PJust curious, why do you think so?


but that they went as low as they did on a combination of panic and short selling arbitragers.While I think QE and the bailout may have prevented or postponed a disorderly unwinding of risk, and encouraged a new securities bubble. I think stocks are overvalued. The Fed is propping up the banks and the banks are propping up Wall Street. The little guy is nowhere to be seen.

[SouthernFried]

It is my conviction that the bottom of the capital markets is about where it is now... 10,000 plus for the Dow, 1,000 plus for the S&P, but that they went as low as they did on a combination of panic and short selling arbitragers.

lol

[Marcus Bryant]

Or, shorts pay much more quickly when they're wrong rather than longs, or when longs think they're right.

[Marcus Bryant]

I think stocks are overvalued.

Not a bad bet given the fundamentals. The $ has to go somewhere, I suppose.

[Winehole23]

Short-selling has its place: identifying companies with competitive weaknesses or broken business models.

What good would reining in short sellers do? I can see regulating naked shorts, but otherwise, it seems like that's just picking on the bears for making good deals on crap securities.

It would make just as much sense to rein in long traders in an "irrationally exuberant" market, as to regulate the shorts in a declining one. Which is to say, it doesn't make much sense to me.

Just the same, I'd be curious to know why it makes sense to you, EVAY.

[Marcus Bryant]

We have an asymmetric regulatory structure for money, credit, and the financial markets. It is geared towards creating bubbles and maintaining them until they collapse on their own.

Shorts are up against a lot. Everyone hates them. They give the con men on Wall Street someone to point a finger at when everyone is pointing at them.

[Winehole23]

We have an asymmetric regulatory structure for money, credit, and the financial markets. It is geared towards creating bubbles and maintaining them until they collapse on their own......at which point the risk is socialized, if TBTFs are threatened.

[Marcus Bryant]

And so the Republic died when "life, liberty, and the pursuit of happiness" became exclusively measured in materialist terms.

[EVAY]

WH, the reason that I think that stocks are not overvalued now is because of the p/e expectations going forward. For example, although the trailing p/e for the Dow is around 18, it is only 13 or so on going forward basis. Similar stats are available for the S&P, even more so. Moreover, the expectations for future p/e's are based not on lower price values but on higher earnings expecations. American companies are pretty good, I think about figuring out how to make money. They have shed full-time labor costs like crazy, and the accompanying overhead cots with them. They are slow to rehire, and are doing more and more on a part-time basis, thus avoiding the overhead associated with full time employees. They are almost all doing a 'just-in-time-inventory' management.

This has nothing to do with how long the recession will last or whether or not it will be double-dipped. In fact, I think that the practices I mentioned above lend themselves to a longer recession than normal because companies are in such risk-averse modes they will not rehire permanent employees unless they just have to...and I don't think they will have to until a whole lot more folks are permanently employed than are now. Ergo, I think it will be a long, long, extremely slow recovery, and I actually think that is a good thing.
We need to break the boom-bust cycle and only employers slowing down and consumers continuing to deleverage their household debt will make for a stronger, more sustainable growth rate.

In any event, the p/e ratios are not out of sight by historical standards and are a little cheap based on future earnings expectations, and there is still a potload of capital needing a place to go. Solid earnings announcements over the next 18 months or so, reflecting the belt-tightening measure of the last 12-18 months, will give smaller investors (and buy side investors) some comfort to get back in. That's why I think that the market valuations are about right now.

BTW, the 'average' p/e of 15 is based on the economy of the 1950's. B-schools in America have not been very good about updating their pricing models or their risk models from that time in the American markets, which I would argue was uncommonly slow and steady. So, the p/e ratios may be sustainable at a rate higher than the historical average based on a much more dynamic economy in 2010 than existed between 1950-1960, when most of the basic financial-modelling data for American markets was established.

[EVAY]

Short-selling has its place: identifying companies with competitive weaknesses or broken business models.

What good would reining in short sellers do? I can see regulating naked shorts, but otherwise, it seems like that's just picking on the bears for making good deals on crap securities.

It would make just as much sense to rein in long traders in an "irrationally exuberant" market, as to regulate the shorts in a declining one. Which is to say, it doesn't make much sense to me.

Just the same, I'd be curious to know why it makes sense to you, EVAY.

After the 1987 'crash' some regulations were put in place to slow the rate at which shorters could impact the market. That had some influence, but what we saw in the spring of '09 was such a dramatically bigger phenomenon than was present in the '87 market, some greater reining in is due, I believe. The amount of wealth that was destroyed by the shorters in the spring made the markets so much harder to recover. They simply were not 'making the market' based on anything having to do with companies or their valuations. They were just selling to get some cash, and they came damn close to destoying the bulk of the weath in this nation.

The difference, to me, between the long and the shorts, and their respective exuberence, is whether or not smaller investors may be helped or may be wiped out.

The entire fiasco of the markets in 2008 and 2009 was instructive to me in becoming more accepting of regulations on capital markets in general. Simply to slow them down, so that we don't see the valuations going so far below the value of the companies they are purporting to represent...at lest not so precipitously.

You know, some of the bigger buy-side hedge funds have essentially done that themselves now, by having language in them that allows them to freeze sales of the funds to say, 20% per quarter. Some are even more stringent than that. Does it make the markets less liquid? Yes. Does it make them more stable? yes. I think I'm ready to take some of the stability to protect the country's wealth as a whole.

What I fear, I guess, is a hostile nation with lots buying/selling power being able to crash our economy in a month. You may think the fear unfounded. You may be right. But I think it is real.

[EVAY]

I don't think that short selling should be denied in full. I just want to slow it down.

[Winehole23]

What I fear, I guess, is a hostile nation with lots buying/selling power being able to crash our economy in a month. You may think the fear unfounded. You may be right. But I think it is real.And you may be right. That the market is firmly in the grip of caution and prudence and will remain so for a long time. This is one of the minyanville themes: the New Austerity. Attitudes and behaviors will change. The Panic of 2008 turned a lot of people into savers who never had been almost instantly.

Perhaps the US market has already adjusted its expectations of profitability, and will be content with sustained GDP growth that outperforms inflation only marginally for maybe a decade.

BTW, would you say the same holds for banks, bank holding companies and and institutional investors?

http://online.wsj.com/article/SB126297000478521751.html?mod=WSJ_latestheadlines

[Winehole23]

Not a bad bet given the fundamentals. The $ has to go somewhere, I suppose.There seems to be a conflicting view on the fundamentals here. EVAY suggests p/e ratios tell the tale. What say you?

[EVAY]

And you may be right. That the market is firmly in the grip of caution and prudence and will remain so for a long time. This is one of the minayanville themes: the New Austerity. Attitudes and behaviors will change. The Panic of 2008 turned a lot of people into savers who never had been almost instantly.

Perhaps the US market has already adjusted its expectations of profitability, and will be content with sustained GDP growth that outperforms inflation only marginally for maybe a decade.

BTW, would you say the same holds for banks, bank holding companies and and institutional investors?

http://online.wsj.com/article/SB126297000478521751.html?mod=WSJ_latestheadlines

No, I don't pretend to have a clue what banks are going to do. I was aghast today when Blankfein (Goldman Sachs guy) admitted under questioning that Goldman Sachs packaged assets that they knew to be sour into bond-like securities and sold them to investors - all the while that Goldman Sachs traders were "shorting" the very same securities. I mean, this is the kind of behavior that gives Boutons all sorts of ammunition against capitalists in general.

My expectation about institutional investors is that they will continue to shed dollar-denominated securities in anticipation of further dollar decline. I don't that's a hard thing to figure.

[Marcus Bryant]

How about the S&P? Not exactly close to the comforting historical average.

As for trailing v forward earnings, in this environment I'd go with what has happened versus what management or the sales side has to say.

Or, we're expecting people to buy stuff when they're out of work, lost their house or had their mortgage payment reset, exhausted their savings, tapped out their credit, etc...Sure, labor has been cut to the bone and is on the cheap in many areas. And that's supposed to result in earnings growth?

[Winehole23]

I was aghast today when Blankfein (Goldman Sachs guy) admitted under questioning that Goldman Sachs packaged assets that they knew to be sour into bond-like securities and sold them to investors - all the while that Goldman Sachs traders were "shorting" the very same securities. I mean, this is the kind of behavior that gives Boutons all sorts of ammunition against capitalists in general.No shit.


My expectation about institutional investors is that they will continue to shed dollar-denominated securities in anticipation of further dollar decline. I don't that's a hard thing to figure.Yikes.

[Winehole23]

Or, we're expecting people to buy stuff when they're out of work, lost their house or had their mortgage payment reset, exhausted their savings, tapped out their credit, etc...Sure, labor has been cut to the bone and is on the cheap in many areas. And that's supposed to result in earnings growth?In other words, the demand side is still weak because the little guy is still on the ropes?

[Marcus Bryant]

Something like that. Where's the growth going to come from? Europe? Asia? The US has been driving this train for a long time, and in the end had to borrow like mad to sustain it all.

[EVAY]

How about the S&P? Not exactly close to the comforting historical average.

As for trailing v forward earnings, in this environment I'd go with what has happened versus what management or the sales side has to say.

Or, we're expecting people to buy stuff when they're out of work, lost their house or had their mortgage payment reset, exhausted their savings, tapped out their credit, etc...Sure, labor has been cut to the bone and is on the cheap in many areas. And that's supposed to result in earnings growth?

Actually, it does result in earnings growth, because the revenues that DO come in are not eaten up in costs as rapidly. Labor and inventory costs are both way down.

The problem with going with 'what has happened' for a p/e ratio is that the trailing ratios are only based on the last 12 months, when they were so massively impacted by the dislocation of the recession. The earnings were almost non-existent, ( because the costs had not yet been shed but the revenues dried up over night) so the p/e's were higher than they will be going forward.

Future p/e's are not always a function of the marketing folks. They often reflect management's expectations that x amount of goods will be consumed, and if x is realistic (and I don't think many in management these days are wanting to disappoint the street, so I am expecting those projections to be extremely cautious and conservative),then management can project a pretty reasonable earnings growth because they have cut their costs. If they haven't, then they are out of business.

My references to trailing p/e is not for the historical average over the last 50 - 60 years. It is for the last 12 months.

[Marcus Bryant]

Yet those revenues are tied to a significant degree to consumer spending, or business spending based on future consumer spending (both significantly debt financed over the years). You trim your fixed and variable cost, but it's not like there's not downward pressure on pricing to get $ in the door. I wouldn't count on margin improvement and trimming the fat to provide that growth.

[Winehole23]

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/13/AR2010011304104.html?hpid=topnews

[Winehole23]

http://www.businessweek.com/news/2010-01-13/u-s-bank-chiefs-call-for-change-while-defending-own-practices.html

[Winehole23]

http://www.ft.com/cms/s/0/c7fe5e7a-00ac-11df-ae8d-00144feabdc0.html