Where Have I been?

It has been a while since my last post. Sorry. This is a journey and mine took a pretty substantial turn. As I had stated some time ago, I run an Investment Advisor. Over the past few months I have taken a pretty hard look at what I am doing and the value that I have been offering. By my own admission, given my current position I have not created the value to my investors that I had expected. Because it is my responsibility and duty to act in a manner which is in my client's best interest I ran into a conflict of interest that was very difficult to admit. Is it my fiduciary responsibility to recommend that my clients go somewhere else if I feel that another firm can do a better job than I can? Wow, that is tough. The short answer is that I feel it is my responsibility. That is what I have done. Yes it cost me my job in its current form, but I am in the process of creating something much more complete for my clients and future clients that we can all be proud of. Details will be forthcoming. I do hope to continue these posting but I will have to let the compliance department sniff out what I have to say since they gotta cover there tails.

Another rate cut. Where to go now?

Assuming the trend hold true, here is a look at the performance from several sectors following the recent rate cuts. I thought the rate cuts were supposed to help financials and the consumer. The following set of charts are provided by The Bespoke Investment Group




Sometimes I gotta wonder if anyone really knows what is going on and much less how to run/fix it correctly. My gut is that it just kinda works itself out naturally. Isn't that the premise of capitalism?

via Bespoke: Sector Relative Strength

Below we highlight the relative strength of each to the ten S&P 500 sectors over the last year. In each chart, rising lines indicate periods where the sector is outperforming the S&P 500. Charts with red shading indicate that the sector has underperformed the S&P 500 over the last year. Finally, in each chart we have also included red dots which indicate the three Fed rate cuts since August.

Of the ten sectors, only two (Consumer Discretionary and Financials) have underperformed in the last year, and neither of these sectors have seen any noticeable benefit from the three Fed rate cuts. Interestingly, the three sectors which have been the most positively impacted are Consumer Staples, Health Care, and Utilities, which are all defensive in nature. This implies that at this point in the easing cycle, investors are not too optimistic that the Fed rate cuts will boost the economy.

Fed caught in the corner

I have been wondering when this would finally play out. In each of the last few Fed statements a strengthening concerning inflation has been stressed. Along with this an increasing concern about the economy, financials (CDOs, SIVs, MBSs and who knows what else has yet to be disclosed), credit, homeowners. What's a Fed to do? On one hand lowering key rates (100bp now) is supposed to help the aforementioned economy, financials, homeowners, etc (we have yet to see any real help). On the other hand if inflation is a growing concern lowering key rates will only make the inflation front worse. If the market needs liquidity (pumping cash into the system) how can this be accomplished given the implications increased liquidity will have on inflation. I think the market was disappointed today because the action and the accompanying Fed statement effectively stated that we are boxed in a corner and therefore will do nothing (25bp was seen as nothing).

Below is the text of the Fed statement copied directly from the Federal Reserve website.

Press Release

Release Date: December 11, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

Did Bill Gross really say that?

I have a lot of respect for "Bond King" Bill Gross. Every month he puts together a nice commentary laced with mild humor, puns, and so on. I highly recommend reading his comments and acting accordingly. Of course, he is the bond king and a bond king does love a net lowering of interest rates and the associated flight to safety.

Enjoy, if you can.

Investor Outlook, December 2007
Bill Gross

The woven tangled web of subprimes has claimed more than its share of victims in recent months. Homeowners by the hundreds of thousands, to be sure, but also those that created, packaged, insured, distributed, and ultimately bought what should have been labeled "junk mortgages," but which by a masterstroke of marketing genius were given a more respectable imprimatur. "Skim milk masquerades as cream," warned Gilbert & Sullivan a century ago and sure enough, modern day subprimes packaged into financial conduits with noms de plume such as "SIVs" and "CDOs" pretended to be AAA rated cubes of butter. Financial institutions fell for the charade hook, line, and sinker and now we all suffer the consequences. Defaults are rising, the dollar’s sinking, and good Lord—even Google’s stock price is going down. Something must really be wrong here........continue reading by clicking the article title.

The Shadow Knows

or if you wish to just sit back and listen, click here The Shadow Knows audio

Here comes the govt to the rescue

I have to vent for a minute. The proposed government bailout of US subprime borrowers is just the latest example of the disregard of risk in the system. Now, I truly feel sorry for those new homeowners who were encouraged to enter into mortgages they could not afford. I will refrain from really sharing my viewpoint on the entire chain of people and entities involved in this credit mess. Suffice it to say that the reason I did not buy a house at these favorable rates a few years ago was due to the fact that I was not in the position to afford the mortgage if rates were to reset higher, which I was pretty sure they would. Also, the valuations were too high. The point is that I took the responsible approach and did not buy that which I could not afford. Fast forward to a day ago when the government introduced a plan to freeze these adjustable rates for the next five years. Are you kidding me. I cannot believe I was so naive as to think our government would let us get what we deserve.

This proposed bail out is an insurance policy I didn't know I had. If I had know the government would be there to bail me out of a mortgage I could not afford, you bet I would be living in a house well above my means. Welcome back moral hazard (taking above normal risks because I now have insurance). We saw the markets rally and carry trades put back on (rally in AUS$ and selling in JPY Yen). This is evidence of a moral hazard with regards to risk. I can now take on extra monetary risk because if we begin to experience stress on the system, the government will dive in and bail us out. This can work for a while. Once the government's bail out efforts don't work, watch out, it will get real ugly real fast.

The Wall Street Journal reports:

Battle Lines Form
Over Mortgage Plan

By MICHAEL M. PHILLIPS, SERENA NG and JOHN D. MCKINNON
December 7, 2007; Page A1

WASHINGTON -- In unveiling a plan to help more than one million struggling homeowners, the Bush administration and the mortgage industry have embarked on a controversial project: picking winners and losers from the rubble of the subprime-mortgage meltdown.

Under the deal, formally released yesterday, the industry would voluntarily help as many as 1.2 million homeowners who are heading for trouble paying their subprime mortgages but aren't yet lost causes. For some homeowners, loan-servicing companies will agree to freeze mortgages at their low introductory rates. In other cases, credit counselors or loan servicers will walk mortgage holders through refinancing processes.

The deal won't provide relief to many subprime-mortgage holders: These include borrowers who are now in foreclosure, have already refinanced their homes or are more than 60 days delinquent on more than one payment over the past year. In some cases, people with good credit scores will be excluded. Also left out are those deemed able to afford the higher interest rates scheduled to replace their introductory rates over the next two years.

The initiative could help stabilize falling home prices and rising foreclosure rates, buoy the mortgage market and provide a modicum of comfort to investors watching the housing crisis bleed into the broader economy.

But it also sets what promises to become a battle line as the subprime crisis plays out over the coming election year. Some critics, especially Democrats, say the plan doesn't go far enough to protect vulnerable homeowners against foreclosure. Others, including some homeowners, as well as those who have watched from the sidelines as home prices have soared in recent years, charge that the plan amounts to a bailout for financially reckless borrowers.

I pity the fool

I have always had a positive bias for some gold in a portfolio, especially as a hedge against inflation. Minyanville has developed a unique "indicator" to suggest where gold is headed. This is hilarious, this is a must watch.

Mr. T and the price of gold

Winners and Losers

To the major financial institutions it is a simple as, did we win or did we lose; Bottomline. At the end of the day, given all the risk, profits, explosive toxic financial paper, marked to theory debt instruments it is very simple. After the S%*t hit the fan, did we come out ahead. Unfortunately, for the smaller investor and the once new home owner the actual financial and emotional fallout is much more damaging. This post on Bloomberg gives us the first signal who "won" and who "lost".



Citi's Losses `Greatly Exceeded' Profits for Subprime (Update1)

By Gonzalo Vina and Sebastian Boyd

Dec. 4 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, lost more money than it made from financial instruments based on U.S. subprime mortgages, a senior company executive said in a meeting at the British Parliament.

William Mills, chief executive officer of Citigroup's markets and banking division in Europe, said his bank had suffered ``reputational damage'' from the fallout even though the New York-based company had made ``adequate disclosures'' to customers who were trading subprime-related securities including collateralized debt obligations.

``Our losses greatly exceeded the profits we made in this field over several years,'' Mills said at a hearing of the Treasury Committee today.

Citigroup has been without a CEO since Charles O. ``Chuck'' Prince III quit last month after the bank announced $8 billion to $11 billion of writedowns on mortgage investments. That may cut fourth-quarter profit by up to $7 billion, the bank said. The company is searching for a new CEO and the candidates include Vikram Pandit, head of Citigroup's subprime division.

``The end buyers of these instruments were sophisticated institutions that were given the opportunity to review the documents associated with them,'' Mills said. ``We've taken our fair share of losses on this.''

Jeremy Palmer, who runs UBS AG's investment banking unit in Europe, the Middle East and Africa, told the committee Switzerland's biggest bank probably also lost more than it made.

`We Made Money'

Gerald Corrigan, the managing director in charge of risk management at Goldman Sachs Group Inc., said that his bank had fared better than Citi.

``On balance, we probably made money,'' Corrigan told lawmakers. ``We have had a measure of success in hedging some of our exposure.''

Corrigan said that disruptions akin to the subprime crisis could happen again even if bankers devote ``relentless energy'' towards preventing them.

``It is the nature of things, sad but true, that these periodic disruptions will occur,'' he said. ``We have to be honest enough to recognize that as hard as we work at this, sometime in the future another surprise will occur.''

``Mistakes were made, there is no question about that,'' said Corrigan.

Deutsche Bank probably made more money from marketing CDOs than it lost, said Charles Aldington, chairman of its London unit.

The committee has also called Hector Sants, CEO of the Financial Services Authority, Chancellor of the Exchequer Alistair Darling, banking industry lobbying groups and Bank of England Governor Mervyn King.