Goodbye, So Long, Farewell...

After over a year, I'm bringing this blog to a close. I hope you have enjoyed reading it as much I have loved writing it. I have also enjoyed the comments and feedback I have received. However, it's time to get back to the real world now.

I've decided focus my efforts on financial planning and investment advisory. I believe that people's long-term financial health in integral to their well-being. I specialize in intelligent wealth management, partnering with clients to develop a comprehensive financial plan, implementing the customized proposal and engage in continual monitoring and review to ensure our strategy remains on track.

The reason for this is that during my career, I witnessed too many investors being taken advantage of by salespeople whose interests were not aligned with their client. Many times it was adversarial. That model is dying, and should have died a long tine ago.

If anyone wants to find out more (or wants to give me a referral!), please feel free to drop me an email at bondguy1824@gmail.com.

Thank you very much.

PS: If you are looking for some tremendous insight to the markets, please click on this link. http://mksense.blogspot.com

the right thing

Now that the government has stepped in and backstopped all markets, it is time for Congress to pass regulations that will allow the markets to function on a more normal basis. In April 1998, when Travelers and Citicorp merged, dooming Glass-Steagal regulations, they replaced it with basically nothing. We need regulations that are flexible, helpful, and provide adequate protections. Let's hope that the momentum we have now isn't forgotten after election day.

Lost in the Shuffle

I've watched and listened to a lot of the financial media this week (too much, probably). Here's a few observations about things that have gotten lost in the shuffle. On the media itself, I have to give CNBC credit for breaking much of the big financial news of the week. As a trader, I should be glued to that channel. As an investor, if all I watched was CNBC, I'd be jumping out the window. That is why I am keeping an eye and ear on Bloomberg and Fox Business. Fox is talking about the the real economy (doing OK as a reality check) and Bloomberg has an international focus (doing worse than here).

That brings me to my next point. Lost in the shuffle is that international markets, especially emerging markets, are getting killed. Russia has shut down their stock markets. Closed, not operating. Russia made it worse with all of this Georgia nonsense. Pundits should not be surprised in light of this move and the situation in other markets that the price of gold is up $100 in the last two days. In the vast majority of the world, gold and other hard assets are the only option for those involved in the financial markets.

Lost in shuffle of all of the action by the Fed and Treasury is the culpability of Congress. I think it was summed up by Harry Reid yesterday when he said, "I don't know what to do". It was probably the most accurate statement he ever made. Instead of trying to legislate a solution, Congress is going on a break for the election. Hopefully what won't get lost in the shuffle is the cheap political trick that the Congressional leadership is engaged in. They need to act now to stem systemic financial risk by giving the government the tools to help fix the problem.

There is more, but I will end it here

Reality Sets In

Not much to say about today. Many of the pundits said that the last hour in the equities market was the capitulation trade that everyone is waiting for in this market. Even a broken clock is right twice a day. The Fed meets tomorrow amidst the hue and cry for rate cuts. If they are going to do it, it better be big, meaning in excess of 50bps. Otherwise, we are back to watching the Fed ,meeting after meeting, trying to devine what they will do next. Not that I thing it will do very much. Rates have come down 325bps in the past year and even accounting for the lag time, rates that matter to people and companies, mortgages and borrowing costs haven't done very much. Banks don't have any capital to lend, and even if they did, the only ones that want to borrow are doing so out of desperation.

I went back and checked this blog, reviewing the numerous entries screaming for transparency in the credit markets. Here we are a year+ later and the books are still as opaque as ever. This is the real problem. Things will not get better until all involved come clean about where they have their crap marked. When I couldn't find a price for something and didn't have a reasonable (not a black box model) basis for where I had something marked, I marked it at ZERO. Of course, I wasn't levered 40 to 1.

The good news is that we are finally seeing the beginnings of the resolution. While I was genuinely sorry to see Lehman go (they were my first employer, starting in 1981 right on through to 1994), they had the chance to do the right thing. I learned my lesson; I have some of their wallpaper stock now. The faster the rest of them go, the better in the long run. We may need a RTC-like vehicle to unwind all of this. Congress should start on this now. The longer it goes, the worse it gets.

A "Gross" Miscarriage of Justice

Enough is enough! How many more decades is Bill Gross going to get a free pass to go on national television and talk up his book? Is it because the media is so afraid that he won't dispense his wisdom to them anymore? Is it that the media doesn't really understand the bond market? Is it both? (probably). The bottom line here is that if Bill Gross was an equity fund manager, he would be in jail right now. Stop treating him like the altruistic oracle soothsaying from his fixed income Delphi.

A Few Quick Musings...

Merrill effort to "lance the boil" shouldn't be surprising. If they survive, and they will, the question is in what form, this will be seen as the bottom for Merrill re: this crisis. As any good trader does when a position is foisted upon him/her, the position is evaluated and quickly as possible, dumped. Perhaps if Mr. Thain inherited the CDO position at 22, he might have been more inclined to keep it. Perhaps not. As the new guy in town, Mr. Thain has had a free shot to do whatever he wants, but that window only stays open for so long. Merrill isn't Goldman Sachs and if he didn't know it before, he knows it now. They shouldn't try to be, either. Fortunately for Merrill and Thain, the company has a lot of assets it has accumulated over the years that it can offload to others. Even at depressed prices, these assets are at much higher levels than what Merrill paid for them; look at its stake in Bloomberg for example. When the CDO position increases in value over time, and it will because Lone Star isn't paying $6.7 billion looking for a tax writeoff, Thain can either say: 1) Oops, I made a mistake. Here is my resignation.; 2) We are taking Merrill in a new direction and CDOs are no longer part of our core business. It was necessary to get them off the books so that we can focus on returning to our roots. I think choice 2 is more likely, of course, as it is what Merrill does best.

Next up is the Treasury weighing in on speculation in the commodity markets. Their verdict, along with a raft of other so-called experts, is that speculation is non-factor in the run up in commodity prices. It is hard to believe, to say the least. The value of every commodity, save potatoes and wine (good news for me on both counts) has shot skyward. This, according to the aforementioned raft, is solely due to supply and demand factors. Now I sat through all the microeconomics courses and understand that the cost at the margin determines the price at the physical commodity (otherwise, oil would be $10/barrel as it costs the Saudis $2 to pump it out of the ground), but there is more going on here than the physical commodity market. I agree completely that it is supply and demand driving prices, but it is the supply of futures contracts, not commodities, that is the problem.

The pundit world says that the futures market in its present form is necessary for hedging , price discovery, speculation, etc. Up to a point that is true. However, when the futures market usurps the cash market as the primary driver of value, then it has gone too far and changes need to be made (The same could be said about the fixed income market, where derivatives have dwarfed the cash market, exacerbating the problem there). Not to sound paranoid, but it is in the best interests of the participants to perpetuate this fantasy regarding prices. The reason is that everybody wins and losers are the non-professionals and commodity consumers (most people in the world). The thought is that there is an open ended supply of futures, so prices will be constrained by the physical commodity level. The problem occurs when a bunch of new participants get involved, funds, hedge funds, ETFs, etc., that have no stake in the physical commodity price. Right now, money has been pouring into this space at a torrid pace, causing a one-way movement. Couple that with easing of market entry and low margin requirements and you are left with situation that currently exists in that market. Changes, especially in relation to margin requirements, need to be made.

It's Too Late To Privatize...

To change things up a bit, I'll start with the conclusion. Fannie Mae and Freddie Mac should have went the way of Sallie Mae years ago. Alas, it is too late to do that now. First and foremost, let's forget about what might have been. That's in the past and shouldn't be dwelt upon. That leaves two other options. The first is to leave them as a they are now, some kind of public-private hybrid. However, that model is what created the problem. This isn't the UK or a Commonwealth country. We don't have Crown Corporations. If it wasn't for the Treasury and Fed, FNM and FRE common equity would be worthless. They should be worthless. If the common equity went to zero, there would be very little hue or cry about stockholder bailouts or moral hazard. The government would just take over the debts and wind down the two organizations to the size they should be. Note to common stockholders: this is what is going to happen so you might as well bail out of FNM and FRE now.



It didn't have to be that way. Fannie and later Freddie were set up to make sure that there was enough liquidity in the mortgage market so that it would function smoothly. Somewhere along the way, they became more like the investment banks that were profiting so handsomely off Fannie and Freddie securities. They even became publicly traded corporations to make them look like investment banks. Congress, with one notable exception, went along with this charade, fuelled by the political contributions that these two entities pumped into the legislators. This is not to say that the functioning of Fannie and Freddie were not without critics. The commercial banks complained vehemently to anyone that would listen that Fannie and Freddie were engaged in unfair competition given their, implied or otherwise, government backing. The Wall Street Journal has written a steady stream of editorials questioning their practices and their raison d'etre.

As a bond trader for the past 20+ years, we always listened to the party line about implied government obligation, the Treasury credit line, etc. of the agencies. But, it was always assumed that when push came to shove, the government would step with explicit backing. That push came Monday. The government should just take the next step , at this point, and take Fannie and Freddie completely.

What gets lost in the hype of this situation is that, in all likelihood, the government will come out ahead on this whole deal, it probably won't cost anything, and have the ancillary benefit of stabilizing the market. The only problem is the matter of the stockholders. Get over it. Take your lump and move on.

The final point is that, no matter what happens, Fannie and Freddie can't go back to what they were doing. They need to return to their roots, become more Ginnie Mae-like (granted, Ginnie Mae's mandate is much more restrictive, but you haven't heard of any significant problems surrounding them).