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“Market Musings on a Monday….”

By Larry Doyle on January 12, 2009 at 10:05 PM in American Consumers, Banking Institutions, Current Affairs, Economic Stimulus, Economy, Insurance Policies & Industry

(bumped up by Susan)

With so many cross-currents in our economy and markets, it is little wonder that people feel overwhelmed and disoriented. The powers-that-be in Washington are in a period of transition with plenty of backroom dealing going on from both a political and economic standpoint. The financial markets remain challenged from a liquidity and valuation standpoint. Against these backdrops, I hope readers here at NQ are becoming more comfortable with our analysis of the economy, the markets, and the world of finance at large. Let’s dive into the issues and topics I find most compelling.

Earnings and Outlooks

On the equity front, the bottom line — that being earnings — is ultimately what drives prices. Time and time again we will hear analysts and money managers “talk their positions.” These individuals are either blinded by the big picture or talking the party line. In our piece on January 8th, “Time, Why You Punish Me?” I stated that “earnings expectations truly concern me.”

Fast forward to today and we see that Citigroup is leaking information into the market that their Q4 2008 earnings will be significantly worse than expected. Initially, Citi’s Q4 2008 earnings (why do we still use that term? They have not made money in so long. Wouldn’t it be better to merely call them losses and save ourselves the headache?) were expected to be -$4 billion. Citi is now leaking to the market that earnings will more likely be -$6 billion and that is only because they are recognizing a gain of $4 billion on the sale of a German retail banking business. Thus, ex that sale, Citi had a $10 billion operating loss for the Q4 2008.

Also in regard to Citi, it was no surprise to me that they were the one banking institution publicly supporting the principal reduction program known as a “Mortgage Cram Down” (highlighted here at NQ on both December 23rd, “Everything’s Negotiable“, and January 1st, “What’s a Mortgage Cram-Down?”)

Why am I not surprised? Simply because it is now plainly evident that government authorities (you know Tim Geithner is involved) are very likely heavily involved in managing this organization. I think there is a strong possibility that after a variety of Citi’s divisions are sold the balance of the institution is nationalized. We will watch this very closely.

Under the heading “misery loves company,” Citi’s banking analyst indicated today that Bank of America’s earnings will be moved down considerably for Q4 2008 and get this, the BofA dividend will be cut from .32 to .05 !!! OUCH!!!

We have highlighted extensively why the embedded losses in the banking system would inhibit credit from flowing.

“Where’s The Money?” on December 29th specifically addressed the extent of losses and expected chargeoffs in our banking system. Why do the mainstream media and politicians continue to pander to the public on this topic?

We typically do not see companies, analysts, or the general business media provide truly aggressive insights into earnings. I give singular credit to Mark Gongloff in today’s WSJ‘s “Ahead Of The Tape.” He writes, “we have seen earnings expectations from analysts generally overly optimistic.” Furthermore, Gongloff quotes Alan Ruskin of RBS Greenwich Capital in stating, “equity analysts tend to be too bullish about the economy.”

Alcoa’s earnings were just released and came in at -.28 versus an expectation of -.05. More of the same.

I am not stating that analysts are intentionally misleading investors, but based on my history and experience I merely think they need to “get their eyes checked.”

People and Information

From my perspective, all business ultimately is about the people and the information. Even in those industries dealing with hard products and commodities, you typically have a choice of people with whom to deal. In the world of Wall Street and finance it is ALL about the people and information. Given the speed with which information travels and markets react, everybody always wants to get the first call.

Against this backdrop, Bernie Madoff remains out on increased bail despite the protestations of victims of his scam and the public at large. The prosecutor tried to have his bail revoked after Bernie tried to send some family jewels and heirlooms overseas. The judge today increased Bernie’s bail but allowed him to remain under house arrest because he does not believe Bernie is a danger to the public or a flight risk.

What does the prosecutor truly want from Bernie? People and information. Who knew what, when did they know it, and what did they do with it? While approximately $40 billion in losses from this Ponzi scheme has already been acknowledged and recorded, the prosecutor still has not yet set a court date for dealing with Bernie. I think there are potentially more fish in this net. I would not be surprised if Bernie both placed and received money in dealing with other hedge funds. What a tangled web he wove. We have a close eye on this story.

I recently saw a survey in which upwards of 70% of responders felt that their financial planner or broker provided poor service in 2008. I am not defending these advisors, but when firms are going out of business and analysts are overly optimistic, the advisors likely feel as if they have been fed to the wolves. Regrettably, there are never enough good people providing outstanding long term service through well developed relationships. I always believed when business is good, stay close to your customers. When business is bad, stay closer to your customers!!

One constant complaint about the financial services industry is a lack of transparency. Whether it is the total lack of transparency in the hedge fund space, specifically with Bernie Madoff, or the perceived lack of transparency with the government bailouts, the public distrust has never been higher.

Specifically in regard to the transparency with the Federal bailouts, I thought you may find it beneficial to see exactly where funds have been committed and already allocated:

“Dollars and Sense” Interview With Sean D’Arcy

Also on the people front, we heard from our special guest last evening about the need for finding a truly honest insurance broker and financial planner and making them earn your business. For those who missed it, Sean D’Arcy was enlightening in addressing the following:

1. current regulation and risks within the insurance industry versus 20 years ago…the need to get rating agency reports from your broker…DO NOT BLINDLY BUY INSURANCE

2. the differences between a mutual company and a stock company….as a holder of insurance you are taking the credit risk of your provider. You will want to know the difference in risks and how they impact you.

3. the difference in term insurance versus whole life versus guaranteed premium universal life.

4. on the personal finance front, how should people handle their 529 plans…

5. how should people best position their assets to generate maximum financial aid for a college student…

6. what insurance product can a person purchase if they have $1000 or so to invest…

podcast2Our NQ internet radio show is taped, archived and now also in Podcast form and can be downloaded on iTunes!!

Remember, it’s all about the people and the information.

Trying to stay ahead of the curve for you here at NQ.

LD

  • rw

    thanks for providing this summation.

    And, “I think there is a strong possibility that after a variety of Citi’s divisions are sold the balance of the institution is nationalized.”

    divisions sold has been talked about before, but the remaining institution nationalized…wow. First the banking system, what’s next, utilities?

    • LD

      RW….again, that assessment is strictly my opinion and you know what they say about opinions.

  • TeakwoodKite

    LD, Thanks for the write up of what I thought was a very informative show and a real value to listen to.

    if one was considering the utilities I can recall many of them have been sold of, there was a recent article about LA selling of municipal infastructure.

    China Town.

  • snosandy

    Oy. I wonder where our 401K will end up.

  • AF catfish

    I missed the show, so glad you wrote it up. Always find your posts informative.

    “People and Information” – during the primaries a big player in the Democratic party/Hillary fundraiser wrote a long letter to party insiders explaining why she was not ponying up donations to Obama now that Hillary was out of the race. The writer of the letter said she had been very successful in the financial industry by studying the people in charge of the institutions in which she invested clients’ money. When the people around the institution’s leader are fishy, either the leader is clueless, which is a bad sign, or the leader is in cahoots, which is a bad sign. She’d decided Obama was a bad investment. (She and we may all turn out to be wrong about The One, and since we love our country we hope we’re wrong, but it was a fascinating letter and insight into the financial world.)

  • elise

    The WSJ says the analysts are overly optimistic, but then they wouldn’t say people are being deliberately mislead, would they? What exactly would “overly optimistic” mean unless they are delusional?

    This is slightly OT, but still relevant. We need a new car. We’ve had a few problems over the last six months or so and it has never had a single issue before. We’ve talked about it and agreed this is what we need to do. But, my husband is paralyzed due to the daily, bad economic reports and when I try to get him to buy something, he just can’t seem to make a decision. We lost some money in the market and the savings account is like a security blanket to both of us really.

    Everyone in our families spent less over the holidays than usual except my in-laws and the only investments they have are treasury bonds they have held for years.

    Obama especially, but all of Washington to some extent, has no reassurance to offer and we think if there is no hope offered from politicians, things must really be bad. So we spend less. When people spend less, the economy suffers even more. We haven’t spoken to anyone among our friends and family who think this “incentive” package will do anything but make everything worse.

    In fact, it makes us more nervous because we don’t believe anyone knows if it will work and will just increase the debt. There is no oversight or accountability and, like everything else in the government, we don’t have any confidence our opinions matter to anyone in Washington. People who have pretty much ignored what has been happening for the last few years are paying attention

    Some voted for Obama, some didn’t, but he isn’t going to have a honeymoon if what I’ve been hearing is an indication. We are angry. Period!

    • NoBamaNoWay

      word; why give bailout (taxpayer) money to people who have already shown that they can not be trusted to handle money? and these are people in the money business, who are supposed to *know* money.

      if there was a similar crisis in any other industry people would demand accountability and major changes. if bridges and buildings started falling down all over the place, nobody would support blindly throwing billions of dollars at civil engineering firms, without any accountability, or any guarantees that appropriate changes would be made to improve outcomes in the future.

      the whole “financial crisis” right now is nothing more than a massive fraudulent ponzi scheme (in many areas of gov’t and business) being exposed. the crooks at the top killed the goose that laid their golden egg when they sqeezed those at the bottom too tight. now they want us to cough up even more money, so that they can continue living in the manner they’ve become accustomed to.

      • Annie Oakley

        Exactly, and a wonderful analogy. How many of us, if we screw up our jobs get a bailout and no accountability? Yet the accepted solution is to pour trillions into the top of the food chain and hope it trickles down on the real economy. The excuse has been to make loans available (CNBC always claims “to meet payrolls”), even though the bailout money didn’t escape the finance world, and now the problem is that no one is left strong enough to be borrowing and expanding business. Now government will do a top-down, command stimulus, which will most likely wind up being the biggest pork-fest since the Medicare bill.

        Of all the people who were supposed to “know” money and understand the economy, none have been given a bigger free pass than the Fed itself. That’s what should be nationalized. As a private entity, it has sacrificed national well-being for private profit and this peasant wants their heads on pikes.

        Oops, sorry LD. Here I am preaching revolution again in your thread! But speaking of pikes, that judge was completely wrong about Madoff posing no threat to the public. His freedom under these circumstances is an affront to all the people in this country who expect that WE live under the rule of law, and if WE stole $50B, WE KNOW our arses would be in the slammer. The public perception of the state of corruption and decay continues to grow. All that liquidity jammed into the treasury phone booth doesn’t want to come out until that changes.

        • LD

          Annie….you are ALWAYS welcome on my posts!!

  • Arabella Trefoil

    After the Revolutionary War, there were many different political factions in play. No different from today. Let me see if I can get this right without oversimplifying.

    The Federalists believed that the elite should govern because they knew better than “the rabble” who were too ignorant to govern themselves. The Republicans of that day (Jefferson) believed in agrarian self-sufficiency. They did not support the growth of industry in the United States.

    Hamilton (a Federalist) came up with a scheme where the upper classes (merchants and business men) could retain the upper hand without upsetting the masses. Hamilton proposed the formation of the Bank of the United States, and the assumption of state debts.

    This action would link “the interest of the State in an intimate connection with those of the rich individuals belonging to it.” (Letter to Robert Morris.)

    From the get go, politics and finance have been braided together – in effect, inseparable.

    I just read Chernow’s “Alexander Hamilton” and am now reading Schlesinger’s “The Age of Jackson.”

    Interesting to see how Jefferson’s idea of an agrarian arcadia changed over time.

    • elise

      Jefferson had a strong dislike and suspicion of the Banking Industry. I don’t think that ever changed.

  • I’m a Linda too

    Thanks for another informative piece LD.

  • fiscalliberal

    LD – The Bernanke speach is available on the Federal Reserve website. I will be interested in your analysis and conclusions. As I listened to it there was a lot of financial jargon which needs to be interpreted. Especially the term international currency swaps and how that affects us.

    Regarding your current tome, I think we need to come to the understanding that there are ups and downs and a firm should not necessarily be punished for them.
    What we need to concentrate on (and punish) is the fraud that exists in the financial industry. As simple example is those mortgage loan officers and borrowing applicants who misrepresented their financil positions with stated and not verified income. That extends to banks that have vast Special Purpose Entities designed to take money off the bank balance sheet minimizing their need for adequate reserves. These need to be examined for fraud or incompetence. The result is the same, however the fraud needs to be recognized and accounted for in a punitive fashion so the free market lesson is learned.

    • LD

      Fiscal….thanks for your insights. Always deeply appreciated. I need to review the Fed’s website for Bernanke’s commentary.

  • mountainaires

    RGE Monitor – 2009 U.S. Economic Outlook

    RGE Lead Analysts | Jan 13, 2009

    http://www.rgemonitor.com/roubini-monitor/255009/rge_monitor_-_2009_us_economic_outlook

  • cathnealon

    LD
    I don’t know if this thread is for people like me, not savvy at all about finances but here goes. We invested with a firm about a year and a half ago that was recommended by my sister-in-law. We invested a small amount (probably to most people not over 60,000). Well, it’s diversified and we have lost about 10 grand in the past 2 quarters. My investor who is very nice says that he’s an optimist, to hang in there that the new administration is going to cut taxes, create jobs and will flood the economy with what is needed so people don’t lose all of their investment. I told him that is our money gets down to 0 then it’s all over. He said it won’t get down to 0 because it’s diversified. I am a average clerical hospital worker who really can’t afford to lose any more of this money. Should I exit now and just put it under a mattress or savings account?

    • LD

      Cath,

      Not knowing your personal situation, but based upon what you share I would offer the following points:

      1. What are your other assets and liabilities?

      2. Are you secure in meeting your monthly expenses based upon your employment?

      3. Do you have a cushion in savings away from these funds in case of emergencies, such as job loss, health situations and the like?

      4. What is your age and time horizon for employment?

      5. Are you building a retirment fund elsewhere?

      6. What is your risk profile?

      7. Are you losing sleep over these funds and their returns? I will say that if you have lost 10k on an initial investment of 60k, then that 16% loss over the last two quarters is not bad and reflective of what is most likely a balanced portfolio (balanced meaning split probably between equities which were down app 35-40%, bonds that were down anywhere from 0-20%, and some short term funds that were probably flat).

      8. How has the portfolio done in the first ten days of this year. If it is balanced it may actually be up 1-2% because certain parts of the bond market have been improving.

      9. Ultimately you need to address your short term needs along with your long term goals in the context of your comfort with risk.

      Your advisor should be able to address all of these questions with you so that the answer with what to do and how to do it becomes more apparent.

      Does this make sense as opposed to making a quick knee jerk reaction?

      Let me know what you think and I will try to provide more insights.

  • getfitnow

    Thanks, LD. Glad to know about the podcast. I’ll be able to listen now.

  • justsomeone

    fiscalliberal, “however the fraud needs to be recognized & accounted for in a punitive fashion…”On the last LD thread I left a comment about WIKI having a good synopsis of CDS & tried to call attention to the Commodity Modernization Act of 2001 (known as the “Enron loophole”) (the dynamic duo of Phil Graham & Bill Clinton teaming up again for more deregulation.) First they repeal Glass-Steagal, next they pass the Financial Services Modernization Act 1999, then they deregulated CDS & never forget the CRA (Clinton’s justification for all the rest) There’re aren’t going to be any meaningful prosecutions! Bush will be blamed cause the chickens came home to roost on his watch, plus he didn’t do a damn thing to correct Clinton/Graham’s madness + he peed away a fortune in Iraq. But where’s the “fraud”? they made it all legal!!!! LD, apologies, as this thread is suppose to be about insurance. I just have a difficult time enduring uninformed pleas for justice. Certainly Charlie Gasparino (CNBC) & I cannot be the only people that grasp the sequence & severity of what came down & who brought it down. The sheeple in this country were so fixated on Jennifer Flowers, Paula Jones, Monica Lewinsky, et al, no one paid a damn bit of attention to the massive deregulation going on in financials. Scandals always provide cover.

  • cathnealon

    LD
    Thanks so much for repsonding. The only asset I have is my home which I bought 15 years ago. We drive what are considered old cars now(2000, late 90′s models and which are paid for). We have no savings cushion but meet our montly expenses with no problem presently. We have 5 young adult children, 2 still in college that still live at home. The other 3 are married and/or living on their own but they have needed our help financially at times for car repairs, and emergency needs, etc. I do have a retiremnt fund through my work but my husband does not but just began that about 2 years ago. I am not losing sleep about this but when I saw the latest quarterly statement I got a little worried. Thanks for the info and will call advisor.

    • LD

      Cath…Best of luck with it. I hope those questions help frame an overall financial review so that your investment decisions become an extension of that.

      We will continue to provide insights on the economy and markets and please NEVER hesitate to ask anything. Remember, there are no bad questions.