Obama Socialism???

Typically, I regard partisan politics as a fool's errand--this country has been governed by a one party system for at least a decade. As far as I'm concerned, NPR and Rush Limbaugh are merely different entrees from the same shit smorgasbord. In fact, I don't believe it would be difficult to make a case for the interchangeability of Obama with McCain. There is a certain cruel, yet amusing, irony when that comes from talking to the vehemently political from either side. However, I must admit, that the far right, Hannity-watching, teabagging, Christian conservative is a personal favorite. Lately, I've encountered several of Dittoheads who are sincerely terrified that Obama/Hillary are secretly radical Socialists, pushing an agenda to turn the US into a communist state. I imagine this sort of thing originates on Fox and talk radio, and is, yet another, ploy to trick the Limbaugh faithful into supporting policies designed to cut their own throats (NAFTA, immigration, Patriot Act, Bankruptcy Reform, etc.)

Fortunately, I have reassuring news for my Lenin-fearing compatriots: Not only is capitalism alive and well, but you are about to see it expand in ways that you could have never envisioned. Recently, the Census Bureau released its Survey of State Government Finances for 20098, in which they reported that state revenues were down 15.7% over 2007. Yesterday, Corina Eckl, the fiscal director of the the National Conference of State Legislators stated, "Even if the recession is over, state budgets are in appalling conditions and are going to be that way for quite a while. For many states, revenue recovery is not even in the forecast.” The Rockefeller Institute of Government gave similar results in its State Revenue Flash Report:


Clearly, the risk of municipal debt default is increasing quarterly. So far, the federal government has stepped in and made emergency loans to bridge gaps, so that unemployment benefits and welfare benefits can be paid. Everybody expects this to continue and I believe that everybody is wrong. While I'm certain that some federal aid will be given, the criteria for distribution will be based on nature of the bondholders are. If GS holds much of your city's debt, you might get a pass, but if it's pension and retirement funds, you'll probably be invited to go pound sand. But don't get too concerned, when things look bleakest, capitalism will save the day.

What I'm talking about is privatization on a unprecedented scale and implemented with as much subtlety as prison rape. John D. Rockefeller wasn't fooling when he said, "Competition is a sin." It is every capitalist's wettest dream to own a monopoly in a product with inelastic demand, like water, education, sanitary sewers, police and fire protection, and many other service provided by our current "socialist" model. We've already had a taste of this with the deregulation of certain electric companies. There is nothing new about this idea. As the following video describes, CH2M HILL has already successfully privatized two cities in Georgia; Sandy Springs and Johns Creek. However, both of these communities are well heeled and they both approached CH2M HILL voluntarily. Moreover, I imagine that CH2M HILL is on its best behavior due to the enormous potential for growth. Any community that gets a CH2M HILL or equivalent rammed down their throats due to an inability to obtain financing will likely be put through the ringer.

The Key to a Successful Dildocracy

Mike Shedlock posted the following YouTube clip from Mark Dice which punctuates how ignorant the American public has become. Dice is an activist and founder of The Resistance, which is a group dedicated fighting the Illuminati and their New World Order. Personally, I don't subscribe to any elite conspiracy theory because they give the investment class entirely too much credit. Nevertheless, Dice's videos are hilarious, in a troubling sort of way:

The Recovery is Now Complete

According to the BLS, the recovery is now complete as evidenced by the trivial 11,000 increase in unemployment over last month. Thus, [100% x (11,000-111,000)/111,000]=91% difference, which is quite an improvement, to say the least. In other news, the Ministry of Plenty has announced the overproduction of shoes by 483,961,202 pairs for the second half of the Sixth Third Year Plan.

Sen. Bunning Tells You All You Need to Know.

Bunning's speech regarding Bernanke and the Fed's behavior is one of the more eloquent summaries of the extent to which our country has deteriorated. Of course, it's not going to make a damn bit of difference--Bernanke is in like Flynn.

Visit msnbc.com for breaking news, world news, and news about the economy

Bunning on Bernanke

Bringing Down the House

Speaking theoretically, because it seems to be impossible, if the American public grew a brain and realized that its representative republic had devolved into a corporate kleptocracy, how could they peacefully restore their sovereignty?

Forget about debtor's revolts, or coordinated bank runs. In both cases, I imagine that the Fed can print it faster than it could be removed. The answer is actually quite simple and pleasantly ironic: If the American people wish to reverse the usurpation of power by corporate entities, they should close their retirement savings accounts en masse. Why do I think this? According to the Wilshire Broad Markets Index, the total market capitalization for the NYSE, NASDAQ, and AMEX as of 8/31/09 is $12.04 trillion. Below you'll find The Investment Company Institute's latest mutual fund levels.


Note the $4.365 trillion in stock mutual funds and the $0.559 trillion in hybrid funds. If we conservatively assume the hybrid funds to be 50% invested in equities, the two sum to $4.644 trillion or 38% of the total stock market capitalization given by Wilshire. Mutual funds are primarily held by defined contribution plan participants (401k, 403b, etc), IRA participants, and retail investors seeking to augment their existing retirement plans, per the Investment Company Institute

Since we're talking about punching a permanent, $3-$5 trillion hole in the market, there would be resistance by Wall Street, fund management, and the US Government. However, the Fed and Treasury can't legally dump dollars into the equity markets like they can a bank.(Yes, I maintained a straight face while typing the previous sentence.) Fund operators would attempt to delay redemptions and use market circuit breakers to try to close the markets prematurely. As long as the dissenters were disciplined, such that every time that every time the market opened, a significant chunk of capitalization disappeared, I believe that the public could remind those in power precisely who it is that they work for.

Debtor's Revolt

Yves Smith of Naked Capitalism wants to stick it to the Man. Or at least that is what she says in A Shot Across the Bow (Debtors’ Revolt Watch). In the post, an embedded YouTube video by Rockerchic4God (aka Ann Minch) urges the audience to default on their credit card debt en masse, to protest unjustified rate hikes of up to 30% APR.


Let me make this clear, I believe that Minch is sincere and should be commended for attempting to stand up to an out-of-control, predatory industry. Unfortunately, her plan is fatally flawed due to the Federal Reserve subsidized securitization of revolving credit via the TALF program. TALF is essentially the bastard child of Geithner's PPIP concept, where retail debt is securitized and the Federal Reserve Bank of NY makes low interest, non-recourse loans for near 90-95% of the face value of the securitization to interested buyers. The buyer then pledges the newly purchased and likely overvalued securities as collateral for the loan. TALF has been accepting credit card debt since May and has potentially put the taxpayer on the hook for around $20.1 billion.
If any sort of organized default activity were to occur, the credit card companies would simply pile more debt into the TALF dumpster (The minimum loan amount is $10M and there is no maximum.) While I don't expect Ann Minch to know any of this, I find it difficult to believe that Smith is unaware of this. After all, she is an eminently qualified financial expert, just ask her:

Although I believe ideas should stand on their own merit, rather than on their author's credentials, I also recognize that readers want some assurance that they are not quoting a 13 year old or a dog. I have undergraduate and graduate degrees from Harvard. I have been working in and around the financial services industry since 1980 and have had over 40 articles published in venues such as The New York Times, Institutional Investor, The Daily Deal, U.S. Banker, Bank Mergers & Acquisitions, The Conference Board Magazine, BRW Magazine (Australia), and Boss Magazine (Australian Financial Review).

What Smith fails to mention in her bio is that she is also the President of Aurora Advisors, which is a financial management consulting firm serving Wall Street. Smith knows damn well that credit card lenders like JP Morgan Chase, Citigroup, and Bank of America (aka her potential and, perhaps, current clients) wouldn't be significantly impaired by Minch's debtor's revolt. The participants who would be harmed are the taxpayers, as usual, and the debtors. To be fair, Smith gives a half-assed warning about trashing your credit and statutes of limitations on the claims of creditors, but since she didn't look into the actual consequences to the debtor, it's fairly clear that's not where her sympathies lie.

In reality, if you walk away from a credit card debt, your account will go into collections after 30 days and your FICO score will be reduced dramatically. This may very will trigger drastic interest rate increases on your other cards. Eventually, the account will be sold at a deep discount to a collections agency that will harass you for payment for several months. Once they give up, they'll resort to legal means. You will be sued in civil court and if you fail to show up, a default judgement will be issued for the debt and the collector's legal fees and wage and asset garnishment will likely occur. If you insist on a trial, you won't have a leg to stand on, so the results will likely be the same, plus your legal fees. Don't underestimate the capacity of the civil courts, either. Every debt court that I've observed was a well-oiled machine in which default judgements were rendered at the pace of a standard auction.

Employers hate garnishment orders of any sort and view them as grounds for refusing employment. If you're already employed, they can't legally fire you for the garnishment resulting from a debt, but they can always manufacture another reason. In the video clip, Minch states that she is aware of the consequences, is judgement proof, and is willing to take the heat. From what I observed in the 4:28 minute clip, under no circumstances would I screw with Minch without the benefit of a concealed straight-razor and a good pair of track shoes. For the rest of us, this strategy probably makes sense only if you are planning on filing for bankruptcy and can pass the means test for debt discharge (Ch.7 vs Ch.13).

Is Smith hopelessly naive or is she shilling for the Man? I really don't know. Everybody is here for a reason (including myself) and I doubt it's bloggers who are punching Smith's meal ticket. In fact, in Smith's position, writing a blog critical of Wall Street would appear to be one of the dumber things she could do. Is it possible that the adoration of anonymous strangers is worth risking your livelihood for? Who knows? The take away here is that it hasn't gotten any wiser to allow others to critically think for you.

Jobless Recovery and the Newest Normal

If you are fortunate enough to be employed, I encourage you to take a long look at your last paystub. While it may be less than it was a year ago, what you see is still noteworthy, as it likely represents the most compensation that you will receive for a very long time. Welcome to the New Normal.

I'm certain that you've heard that consumer spending is responsible for 70% of the US GDP, ad nauseam. This figure is mostly worthless, without delving into the components of the consumer spending and earning. Zero Hedge had an excellent post titled, A Detailed Look At The Stratified U.S. Consumer, in which the debt levels and consumption patterns of the social classes are examined in detail. What ZH determined was that upper 10% held a disproportionate amount of disposable income relative to the middle and lower classes, which is made abundantly clear by the following ZH graphic:
Source: ZeroHedge
Thus, it was determined that the richest 10% accounted for 42% of consumption, the middle class (40%-90% net worth) accounted for 48% of consumption and lower class (0-40% net worth) were only responsible for only 12% of consumer spending:
Source: ZeroHedgeRelatively speaking, the spending of the upper, middle, and lower class is 3.5:4:1, respectively. Thus, from the perspective of Wall Street, the lower class has few redeeming qualities and in fact poses more of a liability, due to the fact that consumers are also workers. Since the lower class can't add substantially to the left side of the balance sheet, it stands to reason that their right side influence should be reduced. Obviously, this can be accomplished via outsourcing, but this is rarely as profitable as advertised, due to shipping and complications that arise from operating in the third world.

So, how can the third world be brought here? Immigration laws can go unenforced to maintain wage floors that are unlivable for legal workers. The threat of outsourcing and the reduction of workers' rights can be used to defeat any attempt at worker organization. All of this has been done flawlessly. Real wages in this country have stagnated over the last decade, regardless of what part of the boom/bust cycle we were in. However, the perfection of this scenario requires stratified, permanently high unemployment. If high unemployment can be maintained amongst the working class and moderate unemployment in the middle class, the employer take backs will be tremendous. Can it be done? I have every confidence:

Source: BLS, Datasets LNS14027659, LNS14027660, LNS14027689, and LNS14027662.

Maryland Bank Capitalization Data: 6/30/09 FDIC Call Report Data

On Thursday, the FDIC released the 6/30/09 Call Reports for the banks that it supervises.Below you'll find capitalization data for for all banks headquartered in Maryland for this period. Note that Bradford Bank failed on Friday, 8/28/09, but I've included their numbers for reference.

The FDIC evaluates capitalization ratios as follows:

However, in light of the fact that many of the recently failed banks could be considered adequately capitalized, these standards are of increasingly questionable utility. Nevertheless, the relevant ratio definitions are provided below:
1. Bank equity capital- Total bank equity capital (includes preferred and common stock, surplus and undivided profits).
2. Equity capital to assets (eqv)- Total equity capital as a percent of total assets.
3. Texas Ratio (TR)- (Non-performing assets+REO)/(Equity-Intangibles-Goodwill+Loan Loss Reserves). Note: Not an FDIC ratio, but the only metric provided that accounts for non-performing assets.
4. Tier one (core) capital- Tier 1 (core) capital includes: common equity plus noncumulative perpetual preferred stock plus minority interests in consolidated subsidiaries less goodwill and other ineligible intangible assets. The amount of eligible intangibles (including mortgage servicing rights) included in core capital is limited in accordance with supervisory capital regulations.
5. Core capital (leverage) ratio (rbc1aaj)- Tier 1 (core) capital as a percent of average total assets minus ineligible intangibles.
6. Total risk-based capital ratio (rbcrwaj)- Total risk based capital as a percent of risk-weighted assets as defined by the appropriate federal regulator for prompt corrective action during that time period.
7. Tier 1 risk-based capital ratio (rbc1rwaj)- Tier 1 (core) capital as a percent of risk-weighted assets as defined by the appropriate federal regulator for prompt corrective action during that time period.

Several loan performance metrics were included, which aren't used by the FDIC to assess capital adequacy, to give a handle on the impact of loan defaults on future income and are defined as follows:
8. Noncurrent assets plus other real estate owned to assets (nperfv)- Noncurrent assets as a percent of total assets. Noncurrent assets are defined as assets that are past due 90 days or more plus assets placed in nonaccrual status plus other real estate owned (excluding direct and indirect investments in real estate).
9.Noncurrent loans to loans (nclnlsr)- Total noncurrent loans and leases, Loans and leases 90 days or more past due plus loans in nonaccrual status, as a percent of gross loans and leases.
10.Net charge-offs to loans (ntlnlsr)-Gross loan and lease financing receivable charge-offs, less gross recoveries, (annualized) as a percent of average total loans and lease financing receivables.

Maryland Bank Capitalization Data: 6/30/09 FDIC Call Report Data

They Must Have Missed Bernanke's Memo

You'd think that Federal Reserve Bank would lay off of layoffs while their Chairman is campaigning for the position of Savior of Everything. Not so much:



Source: North Carolina Dept. of Commerce WARN

Grandpa's Green Shoots

Google has added the ability to search and retrieve certain scanned newspaper articles to its news timeline search feature, although the selection of newspapers is currently rather limited. Below are some of the Green Shoots that your grandparents had to contend with.

1. St. Petersburg, FL: 10/07/1932, The Evening Independent


2. Spokane, WA: 3/12/1931, Spokane Chronicle:


3. St. Petersburg, FL: 01/13/31, The Evening Independent:


4. St. Petersburg, FL: 09/28/1934, The Evening Independent:


5. St. Petersburg, FL: 11/06/31: The Evening Independent

AIG Chicanery of 8/5/09

On Friday, August 7th, AIG reported a return to profitability for Q2 2009 with an EPS of $2.30, following six successive quarters of loss. In a Friday press release, AIG attributed the positive earnings to a combination of the revaluation of assets due to accounting rule changes and agreements with the Federal Bank of NY to exchange debt for preferred shares in business units (ALICO/AIA) that are earmarked for future sale.

Common shares of AIG closed at $27.14 on Friday, for a gain of $4.61 or 20.5%. Personally, I have my suspicions regarding the validity of AIG's claims, but I'm in no position to make an educated assessment, as I have not delved deeply into their financial statements and have no intention of doing so. I don't trade AIG and until recently I excluded major TARP recipients from my trading radar, as a matter of course. If investors want to take AIG at its word, it's their prerogative.

What I do have a serious problem with is the events of Wednesday, August 5. On Wednesday, AIG opened at $13.64 and rocketed to a close of $22, constituting a one day gain of 62%. The stock's volume was 134M shares compared to 7.9M on the previous day representing a 17x increase, as indicated in the following chart (red emphasis is mine):

On Monday, 8/3, it was reported that Robert Benmosche was elected as the new CEO, but the stock showed little response. On Wednesday, 8/5, there was no news regarding AIG, nor were there any SEC filings. In fact, the most informative story on 8/5 was by the WSJ, titled: Why Is AIG Stock Up 63% Today? , in which the WSJ provided all sorts of implausible excuses for the runup. At least the WSJ acknowledged the runup, most business media ignored AIG stocks's second largest daily move in the last 25 years.

While the prospect of a one day gain of 62% sounds lucrative, it's not. Relatively speaking, it's chump change compared to the returns provided by the derivatives markets (relative return rates are above each bar):

Thus, if at 9:15AM on 8/5/09 you were holding 100 AIG HW August 25 calls, your position would be worth $600. Seven hours later, that same position could have been closed for $25,400 for a return of 4,133% and with the judicious use of trailing stops the return could have been closer to day's high of $3.00. This is the equivalent of dunking on Shaquille O'Neal, checkmating Gary Kasparov, and sleeping with God's wife, all in the same day. In other words, it can't happen. Yet, judging by the heavy options volume on 8/5, it very much did. I'm curious as to who made those OTM long call trades early on 8/5 and why we haven't heard from those who took the other side.

At the risk of appearing hyperventilatory, I believe that Occam's razor is readily applicable: AIG's 62% price runup on 8/5 can be attributed to the dissemination and systematic exploitation of insider information. The 1596% increase in volume clearly indicates that this can only involve large, institutional investors and that they are sufficiently secure in the SEC's impotence and the public's ignorance to make such a brazen move. Some might ask: Where are the cops? There aren't any and this is precisely the point that I'm trying to make. If you are trading in these markets, be aware of how far the House is willing to go press its advantage it and plan accordingly.

Constellation Energy Group's New Math

Constellation Energy (CEG) reported its Q2 earnings on 7/30 in an 8-K statement that is provided below. They reported adjusted quarterly earnings of $1.08/share, which is 40% lower than its 2008 adjusted Q2 earnings of $1.82/share. Under normal circumstances, a 40% profit reduction would be cause for alarm, but in light of the prior year, it bolsters the company's claims that they are on the road to recovery.

Unless, of course, you insist on using accounting. If you're incapable of "outside the box" thinking and require the use of GAAP, then CEG's Q2 earnings were $0.04/share and constituted a 95% reduction in year-over-year profit.

On page 4 of the 8-K, Shattuck and the Enronettes justify this distorting earnings by 27 times ($1.08 vs $0.04) as follows:

We present adjusted EPS because we believe that it is appropriate for investors to consider results excluding these items in addition to our results in accordance with GAAP. We believe such a measure provides a picture of our results that is more comparable among periods, since it excludes the impact of items such as impairment losses, workforce reduction costs or gains and losses on the sale of assets, which may recur occasionally, but tend to be irregular as to timing, thereby distorting comparisons between periods. However, investors should note that this non-GAAP measure involves judgment by management (in particular, judgment as to what is classified as a special item to be excluded from adjusted earnings). This non-GAAP measure is also used to evaluate management’s performance and for compensation purposes.

(Emphasis is mine.)
In other words, the non-GAAP earnings omit non-recurring charges in order to provide a picture of "normal" operations. In Constellation's case, the exception is the rule and a quarter without extraordinary charges would be an anomaly. Clearly, these figures are used being used to justify senior management's looting of the treasury and to deceive unwary investors. .

On the other hand, perhaps I'm being narrow-minded with respect to Constellation's accounting practices. Since I have a current $128 Constellation electric bill in front of me, I can't think of a better opportunity to practice some of Shattuck's "outside the box" methodology. Thus, I see no reason not to submit $4.74, which is a 27 time reduction that represents, in the judgement of Shortbus management, a truer picture of my power consumption.

No positions in CEG.

CEG_8k_2Q09

Old National Bank and the Brown Swan

Old National Bank (ONB) is a regional bank, headquartered in Evansville, IN, with assets totaling over $8B. As you may remember, ONB gained media attention in May, when it repurchased its TARP warrants from the Treasury for $0.21 on the dollar, giving the taxpayers a $4.6M haircut.

Monday, ONB reported 2009 Q2 non-GAAP earnings of $9.6M or $0.15/share, which was nearly double analyst expectations. $0.15/share for Q2 2009 is about half of what it earned in Q2 2008 and $4.6M of these profits were a one-time occurrence. Nevertheless, Wall Street didn't let such a triviality get in the way:

ONB closed at $11.47, which constituted a one-day gain of over 17%.That seemed like an unlikely return considering the quality of the news, or lack thereof. I converted the daily closing price differences for the prior year to their continuously compounded equivalents and tabulated the results below.

As you can see, the July 27th close was an extreme outlier (>3σ from the mean). Perhaps, the intrinsic value of ONB increased 17% in the course of minutes, but I'd wager that rampant speculation is a more reasonable explanation. Recently, there has been some discussion on the internet as to how a bubble can be spotted before it deflates. It would appear that periodically screening asset prices for this type of situation might be useful and merits further investigation.

The Economist: Modern Economics is Crap

The July 18th-24th edition of The Economist has declared that modern economic theory has been a dismal failure. They cite financial economics and macroeconomics as being particularly worthless, due to the fact that most economists missed the credit bubble and are now clueless as to how to get out of the resulting Depression. Per the article, Nobel laureate Paul Krugman recently described the last 3 decades of macroeconomics as, "spectacularly useless at best, and positively harmful at worst.”


I came to a similar conclusion on 4/17: :

I have to admit that my personal animosity towards economists and finance experts has grown exponentially over the last 6 months. As I delve more deeply into the causes and assumptions that lead to the crash, I find it analogous to peeling an onion, except each layer is made of stale excrement. The recurring theme is the confident assertion that a complex process (derivative pricing, MBS risk, etc) could be accurately modeled without accounting for all inputs. Intuitively, we know this is to be false, since weather forecasts aren't useful more than a few days out. Yet, the finance industry used this reasoning to justify huge risks by proclaiming that trees could, indeed, grow to the sky.

Now, after the gravy train has derailed, we are told that there is a pundit meritocracy that must be navigated in order to hear financial truth. To which, I call bullshit: the baby and the bath water are equally offensive. These clowns have profited from leading us down the garden path twice, now. (Remember the New Economy and the viability of profitless companies claptrap they fed us during the tech bubble?) If we were to send Paul Krugman to truck driving school, the impairment to the common good isn't so apparent. Would society be that much worse off by exiling the source of The Theory of Interstellar Trade and his kind to the open road? Perhaps logistically, but I'm willing to take the hit.

The article attributes economists' inability to foresee the bubble to flawed standard models and that is almost correct. Nearly a year later, I'm still incredulous when I read about how it is nearly impossible to spot a bubble^*. I'd wager that I can produce 50 people who foresaw this crisis, none of whom are economists and many lack college degrees. No model is required to see that $12/hour wage slaves don't belong in $250,000 homes or that "getting upside down" on a car loan is a hallmark of excess and unsustainable credit. The difference is perspective and common sense.

If economics has any hope of restoring its credibility, it must return to first principles. For one, the complexity of the systems that they are attempting to measure must be respected. There is a reason that long term weather forecasts aren't terribly useful. Secondly, new models based on novel ways to misuse the standard normal distribution aren't the solution. Instead, the limitations of statistical techniques should be accounted for early in any future modeling. If said models show flaws under duress, they must be abandoned, with no regard to their eloquence. The implied volatility "smile" of any option chain should have been a damning indictment of Black-Scholes. Lastly, step away from the computer. The economy isn't in there. Nor is it in New York or DC, for that matter. Get in the car and see what 15% unemployment looks like in Kalamazoo. Spend a month working in the service economy for $8/hour and see if your concept of rationality holds. You may be disturbed by what you find, but I can promise you that a bubble will never sneak up on you again.


* Yes, I believe there is currently a bubble in the equities markets.

The 401(k): Welfare For Wall Street.

It is my belief that the 401(k) plan has devolved into little more than cleverly disguised tax designed to subsidize the bond and equity markets. In 2006, after significant lobbying, the financial services industry essentially purchased the Pension Protection Act of 2006 from Congress. Two of the more offensive aspects of the law are automatic enrollment and automatic escalation.

Automatic enrollment allows your employer to withhold 401(k) contributions from your pay without your consent and with no liability for loss. Prior to the first involuntary withholding, the employer is supposed to provide written notice 30 days in advance of the first involuntary contribution. Typically, the default investment, a.k.a. the qualified default investment alternative (QDIA) is a hybrid or target-date mutual fund, which contains significant risk and have generally underperformed. It is very telling that the Department of Labor only allows money market or stable value funds as a QDIA for 120 days, demonstrating that this is a parasitic attempt to divert funds into the equities markets.

Automatic escalation is the practice of increasing an involuntary plan participant's contribution annually. The initial rate is 3% with a 1% increase in each subsequent plan year. The rationale given for automatic escalation is that 3% annual contributions will not generate sufficient retirement savings. In other words, since the involuntary participant has remained asleep the switch for a year, Wall Street might as well press the bet.

If nothing else, the PPA shows the dangers of being a passive participant in your retirement planning. For example, consider a 25 year old who was automatically enrolled on January 1, 2007. Assuming he was earning $45k/year, received a 5% raise annually, and was autoescalated in 1% increments in each subsequent year, his shares of his QDIA, the Fidelity Freedom 2040 Fund (FFFFX), would be worth $3,710 on June 1, 2009. Had he not been autoenrolled/autoescalated, he'd have $4372, which is about 15% more.

I have yet to see it proven that the 401(k) is the best means of retirement funding. Yet, the financial services industry and the government are willing to resort to deceptive and predatory practices to channel more of our discretionary income to Wall Street. Fidelity Investment's response to the PPA clearly indicates that deceit is intentional. In the response, Donna Hanlon suggests that the 30-day waiting period be replaced with a 5-day period because new hires might notice that their wages are being garnished:

Consequently, compliance with a thirty day advance notice advance notice requirement will require these plans to delay enrollment to the detriment of participants' retirement In automatic enrollment plans, this delay may highlight for participants the difference in net pay that participating in the plan entails, with the result that participants may be more motivated to opt out of participation, a consequence that is inconsistent with the policy choice underlying automatic enrollment.

The remainder of the comments provided by concerned parties are posted at the Department of Labor's site: http://www.dol.gov/ebsa/regs/cmt-defaultinvalt.html. I strongly encourage you to read them, since they provide a window into to actual motivations of the retirement fund industry. What I deduced is that nobody involved is terribly concerned with the welfare of the plan participants. If nobody is looking out for our best retirement interests, how long can we afford to remain oblivious?

Bank Failure Friday: 7/17/09

The FDIC reported four more bank failures yesterday::

1. Temecula Valley Bank, Temecula, CA
2. Vineyard Bank, Rancho Cucamonga, CA
3. BankFirst, Sioux City, SD
4. First Piedmont Bank, Winder, GA

Below are the capitalization ratios from the most current (3/31/09) FDIC data:

CIT: Too Cheap To Save

I've not been to MBA school, yet, as I'm awaiting the onset of senility to improve its palatability. Nevertheless, I'm certain that the concept that "It takes money to make money" is readily applicable to modern business. In other words, a company must invest its capital wisely in order to generate future returns. If you are a financial institution that's recklessly lent yourself into insolvency, I can't think of a better investment than the acquisition of a few Congressmen. JP Morgan, Citigroup, Goldman Sachs, Bank of America, Capital One, and Discover all understood this and were allowed to loot the Treasury. In fact, the smarter TARP recipients even kicked back a cut of their bailout booty as campaign contributions, in the time honored pimp/call girl tradition, which allowed them further privileges such as mark-to-myth accounting and unhindered NYSE market manipulation. Apparently, this concept was lost on CIT which explains why it wasn't in the taxpayers interest to save them. After all, CIT only lent to small business instead of companies like Discover, who provide the valuable service of streamlining taxpayer balance sheets with 29.99% late penalties.



From the FEC Campaign Disclosure Database.

Hair of the Dog for K Bank

If you look at the list of Maryland banks that I posted, you'll see that K Bank is one of the more poorly capitalized institutions in the area. K Bank, a regional entity located in the Baltimore metro area, has been afflicted with a portfolio of low quality real estate development loans. Per K Bank's most recent call report, liabilities have reached 94.4% of its total assets, 5.4% of its assets have reached non-accrual status, and 4.4% of assets are 30-89 days late, casting significant doubt on K Bank's ability to survive. In fact, the situation has become so dire, that the FDIC issued a Cease and Desist order on 3/10/09 accusing the bank of unsound practices.

I'm no MBA, but I would think it would behoove K Bank to concentrate on improving the quality of future loans. According to K Bank's website, I would be very wrong:

Failure Friday: More Bank Capitalization Data

In honor of Failure Friday, I have provided the following list of what I believe to be the most troubled banks in the FDIC system. The definitions and rating criteria can be found here and all data is from the most current call reports from 3/31/09. Enjoy.

Doomed

Maryland Bank Capitalization Data

Below is a list of Maryland banks and their associated capitalization ratios as of their most current quarterly report to the FDIC (3/31/09). The relevant ratios are defined as follows:

Tier 1 Capital: Tier 1 (core) capital includes: common equity plus noncumulative perpetual preferred stock plus minority interests in consolidated subsidiaries less goodwill and other ineligible intangible assets.

Risk-Weighted Assets: Assets that have been adjusted for potential default.(residential mortgage multiplier=0.5, commercial/industrial loan multiplier=1.0, cash and US treasuries=0.0, short-term credit,demand deposits=0.20)

1. Total Equity/Assets: Book value.
2. Texas Ratio=(Non-performing assets+REO)/(Equity-Intangibles-Goodwill+Loan Loss Reserves). Note that this is the only metric that accounts for non-performing assets.
3. Leverage Ratio=(Tier1 Assets/Total Assets)
4. Tier 1 Risk Based Capital Ratio=(Tier 1 Capital)/(Risk Weighted Assets)
5. Total Risk Based Capital Ratio=(Total Risk Based Capital)/(Risk Weighted Assets)


MD Banks

Dumbing It Down

At the The Cynical Economist, I found this clip of mathematician Arthur Benjamin advocating replacing calculus with statistics in the public school curriculum:


Benjamin's reasoning for foregoing calculus for the sake of statistics is that statistics is a more pragmatic topic, since risk assessment and odds estimation are daily occurrences. Let's see how it works out for us. Say we go out and measure some continuous quantity like the error in the volume of Foster's in a standard bottle. In the name of science, we are compelled to repeat the experiment often and when we're done we plot the relative frequencies vs. the measured errors:

What we find is that we have a bell curve given by a probability density function f(z). What we really want is the area under the curve for some increment, as this yields the probability that a member of the Foster's population will fall in the increment. How do we get this area? Had we taken calculus, we'd know to integrate f(z) over the interval [a,b] of interest to get the desired probability, F(z)=F(b)-F(a).

You're probably thinking: Wait a minute, for a normal distribution, there is no closed form solution that provide F(z) directly and this is true. Instead, numerical approximations must be employed and this doesn't require calculus. In fact, via a simple transformation, a common Z statistic table or Excel function normsdist() can be employed to simply look up the probabilities sought, without no regard for the underlying math. This is precisely Benjamin's point, to perform statistical calculations, calculus is unnecessary, which is true. The watered down versions of statistics provided by psychology, biology, and business departments prove this daily.

However, there is a significant difference between plugging numbers into a standard formula and comprehending how and why the formula works. To actually understand the formula and its limitations, a student typically needs to see its derivation. This why math and engineering undergrads are required to take mathematical statistics, which is rather calculus intensive.

Benjamin states that this current economic crisis would have been avoided if public schools taught statistics, as opposed to calculus. This is entirely wrong. It was the use of statistics, without the understanding of their limitations, that lead to the gross asset and risk mispricings that contributed to this crisis. Clearly, allowing the dumbed down version of statitistics to become the norm is only encouraging more misapplications of the discipline.

And We're Back

I'm back to my evil ways. After a 4 month hiatus, I have resumed wildassed speculative trading, primarily in equity options. In February, I'd closed out my options account in an attempt to force myself to focus on more sustainable strategies, such as value investing in equities. However, the casino-like aspects of the current market seem entirely inappropriate for any kind of long term strategy. Thus, in May, I opened a new account with an options brokerage that also allows me to trade futures and future options. I doubt I'll get into futures and I can't begin to imagine how to price futures options, but it's nice to know that a house full of 40,000 lb of frozen hog bellies is only a few mouse mis-clicks away.

The Clueless Recovery

Here is a riddle for you, what is the difference between the following Lloyd Blankfein (GS CEO) quotes?

"Some of Wall Street's biggest names have been proclaiming in recent weeks that the worst of the financial market turmoil is likely done. JPMorgan Chase's Jamie Dimon thinks it is "maybe 75 percent to 80 percent over," while Goldman Sachs' Lloyd Blankfein says "we're closer to the end than the beginning."

"The end is already in sight, in the sense we're talking about it, and we have some confidence we will reverse out of (the downturn). And that is what I think is making the markets cheerier than they have been for while, and which has surprised people."

The difference would be about a year. The first quote is from a FOXNews article published on 4/22/2008, while the latter was is from 5/10/2009 Reuters article. Anyone who believed Blankfein in 2008, got their heads handed to them in September. Nevertheless, it appears that the investing public didn't learn much the first second time (remember 2001) and is lining up to get a third helping of pain. Personally, I believe that Wall Street is running a pump and dump PR campaign in order to sell new equities that are desperately needed to maintain adequate capitalization of BAC, C, JPM, GS and the like.

OPEC called BS on the our pseudo-recovery in their May 2009 monthly report (bold type is mine):

Growth for the global economy in 2009 has been revised down further by 0.6 percentage points to now show a decline of 1.4%. The Euro-zone slipped deeper into recession; as a result the forecast has been revised down by 1.2 pp for a decline of 4.2%. Despite some positive signs, the US is still expected to decline at a rate of 2.8%, down 0.2 pp from the previous forecast. Growth expectations for China and India remain unchanged at 6.5% and 5.0% respectively. In general, it remains to be seen whether the current positive momentum is sustainable and whether the measures taken by central banks and governments will be enough to support an economic recovery.

Apparently, this is the only country where the banking stress test farce played well. The OPEC analysis of our financial system is surprisingly frank and bears no resemblance to the Green Shoot PR campaign being advertised in the US media (color is mine):

Despite those better-than-expected earnings in the banking sector, it remains to be seen whether these improvements in earnings are sustainable. Most of the earnings came from onetime actions like asset sales or accounting changes and/or potentially unsustainable trading income. Secondly, it has to be ensured that the need for new capital for the sector in general will not exceed the amount that is currently being considered appropriate. This has to be closely watched as well, as the accounting for asset-backed securities was recently changed in favour of US banks and there might be a danger that the values currently being reflected on the balance sheets might make further write-downs necessary. Thirdly it also remains to be seen whether the 19 banks of the SCAP are able to raise the amount of $75bn without any friction.

It is somewhat amusing that Green Shoot PR campaign can be debunked in one paragraph.. First, OPEC alludes to how AIG was used to backdoor the TARP process, by using CDSs to opaquely funnel money into the major investment banks. (I find it ironic that AIG CDS contracts were deemed sacred, while GM bond contracts are entirely negotiable.) Next, the silliness of letting banks test themselves and negotiate the results is questioned. Finally, the viability of the current pump and dump aspect of the Green Shoot campaign is doubted. Here, the analysts slip up due to their underestimation of the gullibility of the US public. Their concern regarding banks experiencing "friction" when raising new capital in the equities markets is unfounded--the American public has been lubricated more thoroughly than ever.

MR052009

The Geithner Comedy Tour

This week Treasury Secretary Geithner visited China in an attempt to restore confidence in the US financial system. China holds around $900B of US Treasury debt and has become increasingly alarmed with the Fed's policy of monetizing the debt. In Beijing, Geithner addressed a student audience at Peking University where he attempted to reassure the audience by stating, "Chinese assets are very safe." Per the UK Telegraph, "The comment provoked laughter from the audience of students."

I sincerely hoped the audience tipped Geithner at the end of his act. As you can see below, we need all the help that we can get.

Retardometrics

In a perfect world, we would all have numbers affixed to our foreheads providing an indicator of intelligence and lack thereof. Unfortunately, this is not only impractical, but would likely lead to discriminatory practices. Nevertheless, we have something known as The Consumer Confidence Index (CCI) which provides an aggregate public gullibility metric. Yesterday, The Conference Board reported May's CCI was 35% than that of April, indicating that the many of the 5000 households surveyed believed the government's Green Shoot PR campaign:


For certain, anyone within earshot of a teevee has heard the business media trumpeting the Green Shoot PR campaign. Any new economic indicator that is less negative is being proclaimed as positive and a confirmation that the recovery is at hand. (Considering all of the chicanery the government has condoned in the last six months, the accuracy of the most recent indicators is questionable.) The message is ubiquitous and apparently effective, demonstrating that the American public's appetite for propaganda is insatiable.

After all, didn't the teevee shill the following:

1. The Y2K non-apocalypse.
2. Electric deregulation
3. WMDs to justify the Iraq War.
4. 401k retirement plans in place of financial literacy.
5. The perpetual increase of housing prices and real estate speculation.
6. Consumption at the expense of saving.
7. Media consolidation
8. Diseases manufactured by the pharmaceutical industry, i.e. Restless Legs Syndrome.
9. A service economy based on truly unnecessary industries, instead of tangible good production.
10. Trade and immigration policies that led to a depressed standard of living in many parts of the country.

I would have thought that after seeing 40% of their retirement assets disappear, 30% of their home's value erode, 10% unemployment, an unprecedented $12T deficit, and the specter of massive tax increases, the public might start to question the MSM and whose interests it really serves. Apparently, the transient comfort provided by predatory optimism is preferable to reality. Thus, allow me to accomodate with the following inspirational excerpt from Time magazine titled, "Good Times Are Coming!," circa 2005:

Do we really consume too much and save too little? Fed data show that while debt has been rising, so has net worth, and debt as a percentage of net worth does not look overstretched. I am not unmindful of the risks. But I do think most of the analysis wildly oversimplified, particularly when the problem is identified as "imbalances," as though the economic system's natural state had been perturbed and until returned to balance it was out of whack.

My point is simple: this is just one of the things people are worrying about while the broad economic picture could hardly be better. General Electric just reported strong earnings and is confident of double-digit growth. IBM did the same. Citigroup chief financial officer Sallie Krawchek said recently on CNBC that it was "credit nirvana," the best environment they had seen in almost 15 years, and Citigroup raised its dividend another 10%.

Catastrophe Cometh

On May 12th, the New York Times published a story regarding the effects in the recession on the state of Social Security and Medicare. Significant deterioration of the financial health of these entitlement programs has raised questions as to their future viability and the need for reform. The NYT provided the following disturbing graphic which illustrates exactly how dire the situation has become:
As you can clearly see the future of Medicare and Social Security is very bleak. The Treasury's 2009 projections indicate that Medicare only has only 1.5 little rectangles remaining, while SS has experienced a 20% year-over-year little rectangle reduction. Compounding matters, the little rectangles are turning black, which is a classic economic indicator of doom DOOM. The administration has proposed that health care cost cutting measures are the solution for Medicare:

The Treasury secretary, Timothy F. Geithner, said the only way to keep Medicare solvent was to “control runaway growth in both public and private health care expenditures.” And he said Mr. Obama intended to do that as part of his plan to guarantee access to health insurance for all Americans. But if cost controls do not produce the expected savings, Congress is likely to find it difficult to preserve benefits without increasing taxes.

Using Austrian Polygonal Differential Analysis common sense on the following historical health care industry campaign contribution charts from OpenSecrets.org , the probability of future health care cost reductions fall somewhere in the range of notahopeinhell and 0.
In reality, the health care and insurance industries are taking a page from the TARP playbook, where the specter of crisis.is being used to justify corrupt legislation. The health care lobby graciously agreed to reduce cost growth (not level, but rate of change) by 1.5%, yielding a projected savings of $2T over the next ten years. In exchange for this triviality, the insurance industry will receive a massive subsidy in the form of artificial demand creation; legally mandated health insurance for all US citizens in 2013.

This was the masterstroke of Senate Finance Committee's chairman, Max Baucus. Chairman Baucus spent long hours at the Roundtable to Discuss Reforming America’s Health Care Delivery System "hammering out" out the particulars with representatives from Blue Cross, Aetna, and the Business Roundtable. And when I say "hammering out," what I mean is selling legislation and the public interest for campaign contributions:
Lifetime contributions to Sen. Max Baucus via Opencecrets.org.

Thank You For Being A Friend

Yesterday, someone (who thinks this blog should be funnier??) sent me a link to The Bing Blog, which is the creation of, the aptly named, Stanley Bing. In Bing's most recent post, Things That Will Survive, he declares that the current recovery is genuine and prognosticates about what the new growth will look like. Since Stanley Bing isn't actually a real person and doesn't seem to have much economic training, he's more apt to be correct than your standard, celebrity econotard. I won't regurgitate his post, but it gave me an idea: Wouldn't it be clever to post a series of predictions, so that in a year I can look back and see that, I too, can't differentiate my ass from third base.

Prediction I: This rally is an extended sucker's rally. This isn't much of a stretch considering that 70% of the GDP is consumer based and somewhere between 10-15% of these consumers are now jobless. However, I am reminded of a time when I was all in on fairly out of the money puts. At the time, the government and the MSM were lying about the state of the economy, despite obvious evidence to the contrary. The experts called the bottom and proclaimed that up was the only direction remaining. I spent weeks mentally willing the destruction of the stock market, to no avail. For a month, I questioned whether I'd arrived at a very wrong and expensive conclusion about the economy's direction. That month was March of 2008:

Thus, Spring of 2009 seems hauntingly familiar, except I hold no derivative positions. Sure enough, it charts similarly, as well. Increasing pricing on decreasing volume seems to be the portent of doom. (3/08-7/08, Thanksgiving 08-Feb 09). I am attempting to become a reformed speculator, but synthetically shorting crap like WYN @ 10 is so very, very tempting (-WYN HB, +WYN HV (protection), +WYN TB). We'll see if discipline prevails.

Prediction II: 401(k)/IRA redemptions and loans will be restricted. Over 5M Americans are unemployed and that's likely a conservative estimate. Moreover, many of the unemployed/underemployed have been so for months now. As the personal savings rate actually went negative during the bubble and the collective home equity piggy bank has been smashed, defined contribution funds are increasingly likely to be drained. Moreover, people are beginning to wise up to the fact that the 401(k) may well have been the greatest scam ever perpetuated by Wall Street, next to Donald Trump's hair. Thus, there has been a steady outflow of cash from equity mutual funds over the last year. If you compare the market capitalization of the NYSE to defined contribution plan/IRA equity assets, you'll discover the Evil Whose Name Can Never Be Spoken: Much of Wall Street is Main Street. While this topic could easily fill another 10 posts, if not an entire blog, let it suffice to say that DC plan redemptions en masse would cripple the stock market. Notice how Obama's campaign promise to ease penalties on 401(k) hardship redemptions has never been revisited. As the stock market goes, so does Wall Street, so this will not be allowed to happen

Prediction III: Municipalities will default in record numbers and won't get bailouts resembling what Wall Street received. Recently, I've been looking at the budgets of various local governments across the country. During the credit bubble, many ran deficits, not unlike their citizens. Unfortunately, municipalities generate revenue primarily through real estate tax, sales tax, and, less often, income tax, which are all falling at a significant rate. I expect that they'll attempt to issue more bonds, but at some point credit rating deterioration will induce unservicable rates. I don't expect significant federal assistance either, due to Wall Street's complete ownership of Congress and the Treasury. Instead, bankrupt cities will have privatization rammed down their throats, because little is more profitable than a monopoly on products with inelastic demand, like water and policing.

Prediction IV: Free markets will become even more farcical with consolidation. I don't think there is a company in existence that is interested in truly free trade. In practice, the phrase "free trade" has come to stand for using competition to decrease input costs, while attempting to reduce competitive forces affecting output prices. A developing nation's poverty will continue to be viewed as its greatest resource, to the detriment of American workers who insist on an "extravagant" standard of living. Wage and benefit claw backs will increase, while price fixing becomes even more blatant, as competing companies consolidate. In the last decade, we've seen little along the lines of anti-trust legislation or enforcement and I expect this to worsen. Within 5 years, I can envision the same style of collusion, demonstrated by the petroleum industry under Bush, to be adopted by producers of goods with low elasticity, like food, medicine, and energy.

Prediction V: This blog will not get any funnier. Truly humorous blogs are a rarity, while commonality is a staple here. Thus, never doubt my grave sincerity when I make proclamations like; the only asset class that is guaranteed to continually appreciate is Golden Girls memorabilia, which constitutes the basis for its use as a global currency standard. Really, I think I may have been mistaken for someone else.

So there you have it. In a year, I, hopefully, can look back at this post and say, "What a moron. I need to trade my computer in for an Etch-A-Sketch." In the mean time, I'll be working on my Canadian residency visa and hoarding Bea Arthur posters by the gross.

Fidelity Investment's Idea of Transparency

Apparently, it's acceptable to lie to potential investors so long as you tell them that you're lying.


Remember the good old days, when the word guaranteed meant that an outcome was certain.

Getting Back To What Got Us Here

On Thursday, the Senate defeated amendment (Amdt. 1014) to the Helping Families Save Their Homes Act of 2009 (S.896). The amendment proposed by Sen. Dick Durbin, IL, provided a mechanism for troubled homeowners to avoid foreclosure. Specifically, before a homeowner entered bankruptcy, they would first have to meet with the lender and give the lender the opportunity to offer a loan modification, such that the homeowner's debt/income ratio would be reduced to 31% or less. If the homeowner refused, the bankruptcy court would not be allowed to modify the loan. If the lender refused to offer a workout, the bankruptcy court would have the power to make the aforementioned modifications to the loan terms. In other words, the banks would be forced to offer legitimate workout plans that reduce principal, as opposed to the current, farcical loan modifications that we've seen consistently fail.

The amendment was defeated 45/51 with 3 abstentions, primarily due to intense lobbying by the American Banker's Association, the US Chamber of Commerce, and the Financial Services Roundtable. Per Bloomberg, Sen. Durbin responded:

"These bankers who brought us into this crisis are literally shunning and stiff-arming the people who are facing foreclosure,” said Senator Richard Durbin of Illinois, sponsor of the legislation and the chamber’s second-ranking Democrat.........Democrats led by Durbin had sought a compromise on the measure with JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., the American Bankers Association and Financial Services Roundtable. The lenders that scuttled the negotiations are “surviving today because of taxpayers’ dollars,” Durbin said. The three banks he named received $95 billion in U.S. aid.

The financial industry rationalized its position by claiming that Durbin's measure would destabilize the housing market. This logic makes little sense, because it's hard to envision anything more destabilizing to the housing market than a wave of foreclosures. The real goal of the banking industry is to make bankruptcy as unappealing as possible to troubled debtors, as demonstrated by the uber-sleazy Bankruptcy Reform of 2005.
Diana Olick of CNBC made a telling statement:

One insider very close to the process on the Hill tells me, "If you asked me four months ago, I would have said cram down was a lock."

Four months ago, bailouts were a fairly novel stench and the public was starting to realize that the financial industry controlled much of the government. Obama and Congress performed an impressive charade by publicly lambasting bank CEOs and the SEC, but Mario Cuomo is the only official to actually attempt to strike blood. Banksters even delayed making the campaign contributions, which are the fuel of our present democratic circumvention. As I've said before, this economic crisis was bought and paid for with campaign contributions. They were the root cause and have created a situation where a non-voting entity, like the ABA, has more political power than the electorate. Four months later, the contributions have brazenly resumed in earnest, no doubt the result of demographic studies that show that the American public has returned to its uneasy slumber. By allowing the continuation of corporate governance, it is clear that the Profit Gods will be appeased at our collective expense. This constitutes an unsustainable situation that I sincerely believe will end badly.