Banking Reform

June 25, 2010Leave a comment

Stayed up way too late watching the Senate banking committee debate resolutions to correlate the language of the House and Senate banking bills. Finally went to bed at 1:30 AM MDT, and they were still going at it in Washington, where it was 3:30 AM. Although pundits like to describe political conflict as a disagreement along party lines, there are other subtler alliances that cross party lines. Democratic members of the 12 person Senate conference who were on the Banking Committee would align with banking members of the Republican Party on an amendment vote, while Democratic members on the Agricultural (Ag) Committee would align with a ranking member of the Ag who was a Republican, thus creating a difference in approach between Banking members and Ag members, regardless of party.

CNN money has a good summary of the reform bill that will probably go before the full House and Senate before July 4th. Although proprietary derivatives trading restrictions on Wall Street firms was included in the bill, a 3% provision was included in the language, allowing these firms to trade derivatives as long as it does not exceed 3% of their capital, which most firms except for Goldman Sachs will not exceed.

What surprised me is the lucidity of members of the Senate at that time in the early morning, having spent 18 hours debating various language and amendments. To pull an “all-nighter” at 20 years old is one thing – many of these Senators are in their fifties, sixties and seventies. Very impressive. What befuddles an ordinary person like myself is why, after 18 months of wrangling over the development of the bills’ language, does it have to come down to an endurance test? The lawmaking process in a democratic republic is messy, almost as ugly as open abdominal surgery – and many of these lawmakers probably felt like MASH surgeons this morning as the sun came up.

Federal Reserve for Kids

June 24, 2010Leave a comment

Eight times a year, the Federal Reserve Bank publishes its Beige Book, a summary of economic conditions around the country. The Federal Reserve branch at St. Louis publishes a lot of current and historical information on the economy for adults but they also provide some educational tools for grade schoolers.

Our grandchildren will look back on these years as the “old days” and this past decade has had some memorable events – an election decided by the Supreme Court, 9/11, two wars, Katrina, the banking meltdown, the oil spill. The St. Louis Fed features a timeline of banking, credit and policy events for the past three years. You can also download a PDF of the timeline so that, 10 years from now, you’ll have notes when you tell your stories. The grandkids will think you know everything.

Small Cap Breakout

June 23, 2010Leave a comment

From a March 6, 2010 WSJ article: “Finance professors Eugene Fama and Kenneth French have found that one in eight small growth stocks typically becomes large each year—and that these small stocks on the cusp of becoming big generate giant annual returns of as much as 62% on average.”

What’s a small cap stock? Investopedia gives these approximations:
Mega Cap – Market cap of $200 billion and greater
Big Cap – $10 billion and greater
Mid Cap – $2 billion to $10 billion
Small Cap – $300 million to $2 billion
Micro Cap – $50 million to $300 million
Nano Cap – Under $50 million

The Russell 2000 index of small cap stocks uses the same range, $300M to $2B. However, AOL’s stock screener classifies small cap as $250M to $1B. Market Watch’s screener is one of the few that allows a precise range of values, rather than selecting from a list of values, but does not have as much screening criteria as some sites. The screening tool at Yahoo Finance lists values for market cap which apparently follow AOL’s criteria for small screen stocks, with market cap gradations at $500M,$1B, then jumping to $10B.

At Yahoo, I ran a screen for stocks with a market cap between $500M and $1B, sales greater than $500M, a P/E ratio of 10 to 20 and a 5 year estimated EPS growth rate greater than 50%, or 10% a year. That criteria produced some companies just under $1B market cap that I wish I had invested in several months ago. While small cap stocks have risen a few percent this year, some of these stocks have risen 20 to 50%. Small cap stocks usually lead the way out of a recession and even though they have had a good run the past twelve months, there is probably more to come.

There seems to be an eternal debate and much research into this question: do growth funds and ETFs produce better returns than value funds and ETFs? It depends on the time period that one looks at. Here is a short 2007 article on the small cap value vs. growth.

Non-Manufacturing Index

June 22, 2010Leave a comment

Each month, the Institute for Supply Management (ISM) surveys purchasing managers around the country about changes in inventories, orders, sales and employment. If there is no change from the previous month, the index reads 50. Anything greater than 50 is a positive. ISM publishes two composite indexes each month, one for manufacturing (PMI) and one for non-manufacturing (NMI), which represents more than 80% of the economy.

In January of this year, the non-manufacturing index squeaked into the positive zone with a 50.5 reading, followed by a 53 reading in February. In May, the NMI rose to 55.4, and a key component of that composite, the Business Activity Index, rose to 61, a level not seen since 2006. The indexes are calculated in such a way that they reflect the dispersal of either positive or negative activity throughout the economy, so a reading of 61 indicates that improvement is spreading ever wider through a variety of companies.

Employment is usually the last horse out of the gate when coming out of a recession and this time is no different. However, for the first time in 28 months, the Employment Index portion of the composite index broke into positive territory at 50.4.

This recession has a greater gravitational pull than the more recent ones at the beginning of this decade and the early nineties. Pulling against this recovery are home foreclosures, commercial real estate debt coming due, European sovereign debt problems, China’s monetary support of its own exports and a lack of lending to small businesses. But the rockets are firing.

Constitutional Authority

June 21, 2010Leave a comment

At first glance, right wing Minnesota congresswoman MIchele Bachmann and the editors of the British publication Financial Times seem to have little in common. Ms. Bachmann is noted for her strident and combative opinions which she shares often with the viewers of right wing talk TV. She befriends only those facts which she judges won’t bite her.

The editors of the Financial Times are more measured and sedate in their tone, as befits a British financial newspaper. They admit and weigh facts which might counter their editorial position. Both have shown support for Joe Barton, a Texas congressman who apologized to the CEO of the British oil company BP for the “shakedown” he received from the Obama administration. To the casual reader, this might seem like one more tiff in a political cock fight but the disagreement is a deeper one, a fundamental difference in opinion about the authority vested in the Executive branch by the Constitution.

To illustrate the “anti-shakedown” perspective, I’ll quote from the more lucid Financial Times (FT) editorial. The FT writes “While the US has pulled back from some of its more populist rhetoric, the decision to extract $20bn from BP was unwise. Congressman Joe Barton may have been lambasted for describing the deal as a “shakedown” but he was close to the mark. Much as one may sympathise with the plight of gulf fisherman, and wish them to be recompensed swiftly, it was unnecessary to bully BP into coughing up without the protection of the normal judicial process. This smacks of confiscation. It will stoke up similar populist demands in future crises and it make it hard for the US – the biggest owner of foreign assets in the world – to resist other nations’ extrajudicial imposts.”

The police functions of the executive branch are well established in the Constitution of this country. A corporation like BP is an agent of capital, a legal shell for the accumulation and deployment of capital, and it is well within the legal authority granted by the Constitution to the President to escrow or arrest for a limited time a portion of that capital which the corporation represents. Although BP has publicly admitted responsibility for the damages, it demonstrated an obstructionist attitude when it initially refused to release video of the blow out so that an independent assessment of potential damage could be made. BP has demonstrated a similar obstructionism in paying what appear to be legitimate claims. BP’s capital will have its day in court. The $20bn of BP’s capital has not been expropriated by the US but is in escrow, a financial safekeeping familiar to anyone who has closed on a house.

The Apologizer

June 19, 2010Leave a comment

In a Congressional hearing this week, Joe Barton, a Republican congressman from Texas, apologized to Tony Hayward, the CEO of BP, the company whose well continues to spew oil and gas into the Gulf of Mexico. Joe felt that the Obama administration had been too hard on BP.

Will Joe apologize to Jeffrey Skilling, the former CEO of Enron currently serving a 24 year sentence in a suburb of Denver? Enron collapsed in 2001, wiping out billions of dollars in employee pensions as well as the company’s stock and bonds. Skilling insists he did nothing wrong and perhaps Barton feels that Skilling has received harsh treatment at the hands of government proscecutors.

After Skilling, Joe Barton may apologize to Bernie Madoff, serving a life sentence for bilking investors and charitable organizations out of billions. Joe may feel that the government was too hard on this old man.

Joe may be previewing the Republican theme for the upcoming November elections: “Vote Republican. We kiss ass.”

Defense Spending

June 19, 2010Leave a comment

The conservative philosophy believes that government’s roles should be few. Conservatives are often accused of being for Big Government in defense spending at the expense of programs for social welfare. That government has a role in national defense is one recognized by both conservatives and liberals. In defense spending, some conservatives do think that bigger is better. During the 80s, conservative philosophy routinely touted 25% of the Federal budget as a minimum target for defense spending.

After the Vietnam war, the Carter administration reduced the size of spending on the military from 30% of federal spending to 23% of spending (2010 Budget, PDF p. 127). By 1987, the Reagan administration had bumped up defense spending to 28% of outlays but in dollar amounts, Reagan’s administration doubled the amount of spending on defense. (p.127)

After the collapse of the USSR in the late 1980s, George H.W. Bush’s administration reduced military spending to 22% of total spending. Continuing the reduction, the Clinton administration held defense spending to under 20% of federal spending. If conservative philosopy shows a predisposition to a strong defense, liberal philosophy shows an equal or more passion for strong social spending. From 1973 to 2000, social programs grew from 48% of federal spending to 62% of spending. Democrats touted this increased spending on public welfare as the “peace dividend” while the Republicans attempted to curtail a trend that in time could cripple the federal budget.

After 9-11, defense and homeland security spending increased but, during Bush’s tenure, did not exceed 21% of federal spending. (p. 129 – 130) As a surprising comparison, the Bush administration spent less than the Carter administration on national defense.

Spending on social programs continued to eat up ever more federal dollars. By 2008, it had grown to 66% of federal spending and by 2014 is estimated to be almost 70% of total spending. Interest on the national debt, which had hovered around 15% of spending during the nineties, dropped down to 7% in the early 2000s and below 4% after the credit crisis in 2008, as interest rates plummeted and investors worldwide flocked to the safety of U.S. debt. In essence, we have been spending our “interest dividend” on social programs. 2014 estimates of this country’s interest payments are almost 12% of total spending, heading back to the percentages of the late 80s and 90s. Social spending or military spending will have to be cut to make up for the additional percentage of spending in interest payments. The more probable scenario is a reduction in both types of spending and higher taxes in the coming years.

The Decline of the Dollar?

June 5, 2010January 27, 2017Leave a comment

The U.S. dollar index went up again Friday, approaching $90, as investors fled once again to the safety of the dollar. The five year chart shows that the dollar is nearing 5 year highs.

The Euro fell below $1.20 on Friday and some are predicting that it could reach parity with the dollar in a few months. During May, a lot of investors bought an ETF that tracks the Euro, FXE, thinking that the Euro had found bottom, only to be surprised as the Euro continued to fall.

For investors who want to bet on the dollar’s decline Power Shares offers an ETF that gains in value when the dollar’s value declines. The ticker symbol is UDN and sells for about $24.

In the past few months the normal inverse relationship between gold and the dollar has changed. They are now moving in the same, not opposite, directions. UUP below is a bullish ETF linked to the dollar. GLD is a gold ETF.

What that says to me is that the world’s investors have lately been treating the US dollar as though it were gold – a very disturbing trend. There is a limited quantity of gold while the dollar is nothing but paper promises from the U.S. government. However, in the short term, the dollar index could break $100 if the world’s economy seems like it is starting to head into a double dip recession.

Immigration Amendments

May 1, 2010Leave a comment

Two days ago, I reviewed the recent Arizona immigration bill. Regardless of your opinion of the intent of the bill, it was a flawed legislative effort.

Yesterday, the Arizona House passed HB2162 to correct some of problems in the Senate bill 1070. The text of 2162 can be found here. “Lawful contact” is replaced with “lawful stop, detention or arrest“. “reasonable suspicion” is now preceded with “in the enforcement of any other law or ordinance of a county, city or town or this state where reasonable suspicion exists.”

When Colorado considered passing a seat belt law making it a primary offense not to wear a seat belt, there was a furor among the residents at the prospect that police officers might be stopping drivers because they couldn’t see whether a driver had a seat belt on. The law was changed so that drivers could be ticketed for not wearing seat belts but only when they were stopped for some other violation.

Although a traffic offense and an immigration law are not comparable, the principle is the same – that the primary offense cannot be that a police officer thinks you “could be” breaking the law.

A law enforcement official “may not solely consider race, color or national origin” has been changed to “may not consider race, color or national origin” by removing “solely”, a blatant gaffe in the original text.

There are many other changes which indicate the lack of review, research and foresight in the crafting of the original text.

Innocent Investor

A helpful understanding