As the Japanese discovered, once you’ve taken interest rates to zero, and your economic success is questionable, then you must try another tact. Step two for the Japanese was a tactic called quantitative easing, something the United States Federal Reserve is instituting today. Simply put, this policy can be defined as throwing as much money at the problem as needed. Millions? No. Billions? Not even close. Let’s try trillions.
Several weeks ago, the Fed announced they would be the purchaser of treasuries issued by the Treasury Department at the periodic auctions. In other words, if the world doesn’t buy our long-term paper, we’ll buy it ourselves. Historically speaking, from Rome to Britain, (and that includes us), that type of action has been tried and results in two unintended consequences. The first is total devaluation of one’s currency, and second, an inflationary spiral that is almost impossible to control. (Think of the Nixon and Carter years.)
At an alarming rate, the bond market has recently seen a selling of treasury bonds, including both the ten-year and thirty-year duration. People, institutions, and countries, do not want to hold paper of a country that’s headed toward currency devaluation and hyper-inflation. Unfortunately, as treasuries are being sold, interest rates are rising (remember the see-saw example.) This throws a monkey wrench into the Obama administration’s recovery plans for housing. Long-term treasuries have a direct influence on mortgage rates. Rising mortgage rates are the last thing Obama needs to make his housing plan (also questionable) work.
This is where Ben Bernanke comes in. In order to keep interest rates low, there has to be an overly large buyer of treasuries to drive prices up, and interest rates down. The only player in that game is not China, not some quant or hedge fund, and not the general public. The only player is the U.S. government. Ben knows he has to step up, but he also knows this vicious cycle we’ve embarked upon, has only one ending. Can you say Zimbabwe? *(Zimbabwe’s inflation rate has entered a zone where it is simply impossible to calculate the price of goods hour to hour.)
However, buy he will, and buy he must. The rational will be that they can fix it later. Unfortunately, history has proven that later never comes.
Till next time,
Bill
* The Times (South Africa) February 4, 2009
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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
Thursday, May 28, 2009
Wednesday, May 13, 2009
Pump and Dump
The robber barons of the late 1800’s, names such as Fisk, Gould, Carnegie, and Rockefeller, to name a few, were famous for touting the merits of the companies they owned. Their proclamations sent their stocks to stratospheric heights. However, what happened behind the scenes was a well orchestrated effort to sell their existing shares into the strength of the market, a strength created by their own publicity department. To add insult to injury, they would not only garner profits on the upside, but also short their own companies when the inevitable fall would come. This strategy, totally legal until securities laws were enacted in the 1930’s, was called pump-and-dump.
Unfortunately, the same scenario is happening today. For the past several weeks, the stock market has been led by companies that are fighting for their existence. These companies include banks, homebuilders, and highly leveraged real estate investment trusts. Their PR departments, their accounting departments, and even the Federal government, have been working overtime to paint a rosy picture of the “green chutes.” Sure, first quarter earnings results were positive. Never mind that accounting rules were changed, certain months were excluded, and losses simply ignored. The bank stress test resulted in passing grades for all, but never mind that government criteria was altered after objections from the participants.
With truth in knowledge comes understanding. Unfortunately, it’s too late for those suckered into the infamous pump. For the past eight weeks, insiders have been selling their shares. Most recently, several auto executives sold their last remaining shares of an American icon, GM ($1.15 – 5/12/09)
For those of you who walked into the classic pump, here comes what might be a classic dump. Look out below.
Fisk and the boys would have been proud.
Till next time,
Bill
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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
Unfortunately, the same scenario is happening today. For the past several weeks, the stock market has been led by companies that are fighting for their existence. These companies include banks, homebuilders, and highly leveraged real estate investment trusts. Their PR departments, their accounting departments, and even the Federal government, have been working overtime to paint a rosy picture of the “green chutes.” Sure, first quarter earnings results were positive. Never mind that accounting rules were changed, certain months were excluded, and losses simply ignored. The bank stress test resulted in passing grades for all, but never mind that government criteria was altered after objections from the participants.
With truth in knowledge comes understanding. Unfortunately, it’s too late for those suckered into the infamous pump. For the past eight weeks, insiders have been selling their shares. Most recently, several auto executives sold their last remaining shares of an American icon, GM ($1.15 – 5/12/09)
For those of you who walked into the classic pump, here comes what might be a classic dump. Look out below.
Fisk and the boys would have been proud.
Till next time,
Bill
>>>>>>>>>>>>>>>>>>>>>
A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
Friday, May 8, 2009
Fact vs. Fiction
Within the past twenty-four hours, we have been treated to two remarkable fairy tales. Unfortunately, I don’t foresee a happy ending to either situation.
First, the bank stress tests. In order to determine how they would fair, nineteen banks tested under the new (old) mark-to-model rules by factoring in continued unemployment and housing problems. In essence, the banks were asked if they have enough capital to ride out the storm. Absolutely, the banks replied. Maybe you need a little bit more capital, the government said. So, to meet the need, stock will be sold to the public. Everyone breathed a sigh of relief, CNBC started cheerleading, and the stock market was off to the races.
I could dispute, and be challenged, on many of the assumptions and the results and opinions. Fair enough. However, indisputable, is that every bank has made no adjustments for the impairment of good-will on their balance sheets. For example, Bank of America ($13.51 - 5/7/09) is still carrying good-will as though Merrill Lynch, Countrywide, and Bank of America had a value at the peak of the stock market in 2006-2007. Since good-will makes up the lions share of assets, what happens when the crunch comes again? Cash, stocks, bonds, etc., are real. Good-will, however, is an accounting creation with no tangible value. It is supposed to be tested annually, to see if good-will (carrying value), is less than fair value. If it is, then impairments are required to be taken (charged off.) Done correctly, we would get a true picture of a company’s value. But since accounting rules allow a great deal of discretion and judgment, we can expect a great deal of liberty to be taken by the banks.
Does anyone really believe the valuations of good-will? Well, some people must. These banks will more than likely write-off a series of impairment charges which will create a slow bleeding death, thereby manipulating reality. This doesn’t even take into consideration the dilution of capital raises, sales of some of their most profitable enterprises, the impending tsunami of commercial real estate foreclosures, and credit card write-offs.
The second fairy tale is unemployment. Hooray, hooray. Only 539,000 people lost their jobs in April, a slowing in downsizing. Jubilation. We’ve turned the corner. Not so fast. First, the seasonal adjustments somehow created 65,000 new jobs. Where? Next, the announced 60,000 people hired by the census bureau, which by definition, is part-time work. No problem, we need the employment numbers, just create it by calling the part-timers full-timers! So, 539,000 + 65,000 + 60,000 = 664,000 of potential unemployed people. Also, keep in mind, previous months figures have been adjusted. 30,000 more unemployed in February and 30,000 in March, bringing their totals to 681,000 and 699,000, respectively. Somehow, they came in just under that 700,000 magic number that spells crisis. Oh, to have a pencil with an eraser!
One other point, the Birth/Death Model. This model is making an assumption that businesses too new, or too small, to participate in the employment measure have created a certain number of new jobs. It is not researched, it is not fact, it is only a guess. Where are these jobs? By the way, in the numbers reported today, 226,000 jobs were supposedly created under the Birth/Death Model. Give me a break!
Wishing and hoping doesn’t change the truth. When it comes to banks and jobs, it’s just pure fiction.
Till next time,
Bill
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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
First, the bank stress tests. In order to determine how they would fair, nineteen banks tested under the new (old) mark-to-model rules by factoring in continued unemployment and housing problems. In essence, the banks were asked if they have enough capital to ride out the storm. Absolutely, the banks replied. Maybe you need a little bit more capital, the government said. So, to meet the need, stock will be sold to the public. Everyone breathed a sigh of relief, CNBC started cheerleading, and the stock market was off to the races.
I could dispute, and be challenged, on many of the assumptions and the results and opinions. Fair enough. However, indisputable, is that every bank has made no adjustments for the impairment of good-will on their balance sheets. For example, Bank of America ($13.51 - 5/7/09) is still carrying good-will as though Merrill Lynch, Countrywide, and Bank of America had a value at the peak of the stock market in 2006-2007. Since good-will makes up the lions share of assets, what happens when the crunch comes again? Cash, stocks, bonds, etc., are real. Good-will, however, is an accounting creation with no tangible value. It is supposed to be tested annually, to see if good-will (carrying value), is less than fair value. If it is, then impairments are required to be taken (charged off.) Done correctly, we would get a true picture of a company’s value. But since accounting rules allow a great deal of discretion and judgment, we can expect a great deal of liberty to be taken by the banks.
Does anyone really believe the valuations of good-will? Well, some people must. These banks will more than likely write-off a series of impairment charges which will create a slow bleeding death, thereby manipulating reality. This doesn’t even take into consideration the dilution of capital raises, sales of some of their most profitable enterprises, the impending tsunami of commercial real estate foreclosures, and credit card write-offs.
The second fairy tale is unemployment. Hooray, hooray. Only 539,000 people lost their jobs in April, a slowing in downsizing. Jubilation. We’ve turned the corner. Not so fast. First, the seasonal adjustments somehow created 65,000 new jobs. Where? Next, the announced 60,000 people hired by the census bureau, which by definition, is part-time work. No problem, we need the employment numbers, just create it by calling the part-timers full-timers! So, 539,000 + 65,000 + 60,000 = 664,000 of potential unemployed people. Also, keep in mind, previous months figures have been adjusted. 30,000 more unemployed in February and 30,000 in March, bringing their totals to 681,000 and 699,000, respectively. Somehow, they came in just under that 700,000 magic number that spells crisis. Oh, to have a pencil with an eraser!
One other point, the Birth/Death Model. This model is making an assumption that businesses too new, or too small, to participate in the employment measure have created a certain number of new jobs. It is not researched, it is not fact, it is only a guess. Where are these jobs? By the way, in the numbers reported today, 226,000 jobs were supposedly created under the Birth/Death Model. Give me a break!
Wishing and hoping doesn’t change the truth. When it comes to banks and jobs, it’s just pure fiction.
Till next time,
Bill
>>>>>>>>>>>>>>>>>>>>>
A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
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